Section 1: 10-K (10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]
For the fiscal year ended: December 31, 2019
[ ]
For the transition period from __________ to __________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-35021
EVANS BANCORP, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
New York
16-1332767
One Grimsby Drive, Hamburg, New York
(Address of principal executive offices)
14075
(Zip Code)
(716) 926-2000
Registrant’s telephone number (including area code)
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
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
X
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
X
No
Indicate by checkmark 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
X
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
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
X
X
If an emerging growth company, indicate by check mark 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 Act).
Yes
No X
On June 30, 2019, the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $177 million, based upon the
closing sale price of a share of the registrant’s common stock on NYSE American, LLC.
As of March 5, 2020, 4,942,802 shares of the registrant’s common stock were outstanding.
Page 1 of 124
Exhibit Index on Page 121
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the registrant's 2020 Annual Meeting of Shareholders, to be held on April 23 2020,
which will be subsequently filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this
Report relates, are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.
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TABLE OF CONTENTS
INDEX
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II
MARKET FOR REGISTRANT’S COMMON EQUITY RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Item 9A.
Item 9B.
CONTROLS AND PROCEDURES
OTHER INFORMATION
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 15.
Item 16.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
SIGNATURES
PART IV
3
5
14
22
22
22
22
23
26
27
53
54
118
118
118
119
119
119
119
119
120
122
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PART I
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K 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
“will,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “look to,” “goal,” “target” and similar expressions
identify such forward-looking statements. These forward-looking statements include statements regarding the business plans, prospects,
growth and operating strategies of Evans Bancorp, Inc. (the “Company"), 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 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 (“FASB”) 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 the financial performance and/or condition of the Company’s borrowers; 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 Annual Report on Form 10-K including the risk factors described in Item 1A, as well as in the
Company’s periodic reports filed with the Securities and Exchange Commission. 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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Item 1.
BUSINESS
EVANS BANCORP, INC.
Evans Bancorp, Inc. (the “Company”) is a New York business corporation which is registered as a financial holding company under the
Bank Holding Company Act of 1956, as amended (the “BHCA”). The principal office of the Company is located at One Grimsby Drive,
Hamburg, NY 14075 and its telephone number is (716) 926-2000. This facility is occupied by the Office of the President and Chief Executive
Officer of the Company, as well as the Administrative and Loan Divisions of Evans Bank. The Company was incorporated on October 28,
1988, but the continuity of its banking business is traced to the organization of the Evans National Bank of Angola on January 20,
1920. 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 Company’s common stock is traded on the NYSE American, LLC under the symbol “EVBN.”
At December 31, 2019, the Company had consolidated total assets of $1.5 billion, deposits of $1.3 billion and stockholders’ equity of $148
million.
The Company’s primary business is the operation of its subsidiaries. It does not engage in any other substantial business activities. The
Company operates two direct wholly-owned subsidiaries: (1) Evans Bank, N.A. (the “Bank”), which provides a full range of banking
services to consumer and commercial customers in Western New York; and (2) Evans National Financial Services, LLC (“ENFS”), which
owns 100% of the membership interests in The Evans Agency, LLC (“TEA”), which sells various premium-based insurance policies on a
commission basis. At December 31, 2019, the Bank represented 99% and ENFS represented 1% of the consolidated assets of the
Company. Further discussion of our segments is included in Note 19 to the Company’s Consolidated Financial Statements included under
Item 8 of this Annual Report on Form 10-K.
On December 19, 2019, the Company announced that it had entered into a definitive Agreement and Plan of Reorganization (the
“Agreement”) with FSB Bancorp, Inc. (“FSB”), a Maryland corporation and the parent holding company of Fairport Savings Bank (“FSB
Bank”), under which FSB would be acquired by the Company (the “Merger”). Subject to the terms and conditions of the Agreement, upon
the consummation of the Merger, FSB stockholders will have the right to receive, subject to possible adjustment, for each share of common
stock, par value $0.01 per share, of FSB (“FSB Common Stock”), either (i) 0.4394 shares of common stock, par value $0.50 per share, of
Evans (“Evans Common Stock”), or (ii) $17.80 in cash, at the election of such holder. All such elections are subject to adjustment on a pro
rata basis, so that approximately 50% of the aggregate consideration paid to FSB stockholders will be cash and approximately 50% will be
Evans Common Stock. As of December 19, 2019 total consideration to be paid was valued at approximately $35 million.
As of September 30, 2019, FSB reported $325 million of assets, including $277 million of loans (predominantly residential real estate loans)
and $24 million of investment securities, and $293 million of liabilities, including $233 million of deposits.
The Merger is subject to customary closing conditions, including, among others, (1) approval of the Agreement and the Merger by the
stockholders of FSB, (2) receipt of required regulatory approvals, (3) the absence of any law or order prohibiting the consummation of the
transactions contemplated by the Agreement, (4) the effectiveness of the registration statement for the Evans Common Stock to be issued
in the Merger, and (5) the approval of the listing on the New York Stock Exchange American of the Evans Common Stock to be issued in the
Merger.
Evans Bank, N.A.
The Bank is a nationally chartered bank that has its headquarters at One Grimsby Drive, Hamburg, NY, and a total of 15 full-service banking
offices in Erie County, Niagara County, and Chautauqua County, NY.
At December 31, 2019, the Bank had total assets of $1.4 billion, investment securities of $130 million, net loans of $1.2 billion, deposits of
$1.3 billion and stockholders’ equity of $145 million, compared with total assets of $1.4 billion, investment securities of $134 million, net
loans of $1.1 billion, deposits of $1.2 billion and stockholders’ equity of $127 million at December 31, 2018. The Bank offers deposit
products, which include checking and negotiable order of withdrawal (“NOW”) accounts, savings accounts, and certificates of deposit, as
its principal source of funding. The Bank’s deposits are insured up to the maximum permitted by the Deposit Insurance Fund of the Federal
Deposit Insurance Corporation (“FDIC”). The Bank offers a variety of loan products to its customers, including commercial and consumer
loans and commercial and residential mortgage loans.
As is the case with banking institutions generally, the Bank’s operations are significantly influenced by general economic conditions and
by related monetary and fiscal policies of banking regulatory agencies, including the Federal Reserve Board (“FRB”) and FDIC. The Bank
is also subject to the supervision, regulation and examination of the Office of the Comptroller of the Currency of the United States of
America (the “OCC”).
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The Evans Agency, LLC
TEA, a property and casualty insurance agency, is a wholly-owned subsidiary of ENFS. TEA is headquartered in Hamburg, NY, with
offices located throughout Western New York. TEA is a full-service insurance agency offering personal, commercial and financial services
products. For the year ended December 31, 2019, TEA had total revenue of $10 million.
TEA’s primary market area is Erie, Chautauqua, Cattaraugus and Niagara Counties, NY. Most lines of personal insurance are provided,
including automobile, homeowners, boat, recreational vehicle, landlord, and umbrella coverage. Commercial insurance products are also
provided, consisting of property, liability, automobile, inland marine, workers compensation, bonds, crop and umbrella insurance. TEA also
provides the following financial services products: employee benefits, life and disability insurance, Medicare supplements, long term care,
annuities, mutual funds, retirement programs and New York State Disability.
TEA purchased the assets of Richardson and Stout, Inc. (“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.
Other Subsidiaries
In addition to the Bank and TEA, the Company has the following direct and indirect wholly-owned subsidiaries:
Evans National Holding Corp. (“ENHC”). ENHC, a wholly-owned subsidiary of the Bank, operates as a real estate investment trust that
holds commercial real estate loans and residential mortgages, providing additional flexibility and planning opportunities for the business of
the Bank.
Evans National Financial Services, LLC (“ENFS”). ENFS is a wholly-owned subsidiary of the Company. ENFS's primary business is to
own the business and assets of the Company’s non-banking financial services subsidiaries.
Frontier Claims Services, Inc. (“FCS”). FCS is a wholly-owned subsidiary of TEA and provides claims adjusting services to various
insurance companies.
MMS Merger Sub, Inc. (“MMS”). A Maryland corporation and wholly owned subsidiary of Evans Bancorp, Inc., was newly formed for the
purposes of effectuating the anticipated merger with FSB Bancorp, Inc. MMS has no assets or operations.
The Company also has two special purpose entities: Evans Capital Trust I, a statutory trust formed in September 2004 under the Delaware
Statutory Trust Act, solely for the purpose of issuing and selling certain securities representing undivided beneficial interests in the assets
of the trust, investing the proceeds thereof in certain debentures of the Company and engaging in those activities necessary, advisable or
incidental thereto; and ENB Employers Insurance Trust, a Delaware trust company formed in February 2003 for the sole purpose of holding
life insurance policies under the Bank’s bank-owned life insurance (“BOLI”) program.
The Company operates in two operating segments – banking activities and insurance agency activities. See Note 19 to the Company’s
Consolidated Financial Statements included under Item 8 of this Annual Report on Form 10-K for more information on the Company’s
operating segments.
MARKET AREA
The Company’s primary market area is Erie County, Niagara County, northern Chautauqua County and northwestern Cattaraugus County,
NY. This primary market area is the area where the Bank principally receives deposits and makes loans and TEA sells insurance.
MARKET RISK
For information about, and a discussion of, the Company's "Market Risk," see Part II, Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risk" of this Annual Report on Form 10-K.
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COMPETITION
All phases of the Company’s business are highly competitive. The Company competes actively with local, regional and national financial
institutions, as well as with bank branches and insurance agency offices in the Company’s primary market area of Erie County, Niagara
County, northern Chautauqua County, and northwestern Cattaraugus County, NY. These Western New York counties have a high density
of financial institutions, many of which are significantly larger and have greater financial resources than the Company. The Company faces
competition for loans and deposits from other commercial banks, savings banks, internet banks, savings and loan associations, mortgage
banking companies, credit unions, and other financial services companies. The Company faces additional competition from non-depository
competitors such as the mutual fund industry, securities and brokerage firms, and insurance companies and brokerages. In the personal
insurance area, the majority of TEA’s competition comes from direct writers, as well as some small local agencies located in the same towns
and villages in which TEA has offices. In the commercial business segment, the majority of the competition comes from larger agencies
located in and around Buffalo, NY. By offering the large number of carriers which it has available to its customers, TEA has attempted to
remain competitive in all aspects of its business.
As an approximate indication of the Company’s competitive position, the Bank had the sixth most deposits in the Buffalo, NY metropolitan
statistical area according to the FDIC’s annual deposit market share report as of June 30, 2019 with 3% of the total market’s deposits of $46
billion. By comparison, the market leaders, M&T Bank and KeyBank, had 80% of the Buffalo, NY metropolitan statistical area deposits
combined. The Company attempts to be generally competitive with all financial institutions in its service area with respect to interest rates
paid on time and savings deposits, service charges on deposit accounts, and interest rates charged on loans.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both federal and state laws and regulations that are intended to protect
depositors and customers. Additionally, because the Company is a public company with shares traded on the NYSE American, it is subject
to regulation by the Securities and Exchange Commission, as well as the listing standards required by NYSE American. To the extent that
the following summary describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory
and regulatory provisions. Any change in the applicable law or regulation, or a change in the way such laws or regulations are interpreted
by regulatory agencies or courts, may have a material adverse effect on the Company's business, financial condition and results of
operations.
Bank Holding Company Regulation (BHCA)
As a bank holding company registered under the BHCA, the Company and its non-banking subsidiaries are subject to regulation and
supervision under the BHCA by the FRB. The FRB requires periodic reports from the Company, and is authorized by the BHCA to make
regular examinations of the Company and its subsidiaries.
The Company is required to obtain the prior approval of the FRB before merging with or acquiring all or substantially all of the assets of, or
direct or indirect ownership or control of more than 5% of the voting shares of, a bank or bank holding company. The FRB will not approve
any acquisition, merger or consolidation that would have a substantial anti-competitive result, unless the anti-competitive effects of the
proposed transaction are outweighed by a greater public interest in meeting the needs and convenience of the public.
Subject to various exceptions, the BHCA and the Change in Bank Control Act of 1978, together with related regulations, require FRB
approval before any person or company acquires “control” of a bank holding company. Control is conclusively presumed to exist if an
individual or company acquires 25% or more of any class of voting securities of the bank holding company. Rebuttable control is
presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of the bank holding company’s voting
securities.
The FRB also considers managerial, capital and other financial factors in acting on acquisition or merger applications. A bank holding
company may not engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in any non-
banking activity, unless such activity has been determined by the FRB to be closely related to banking or managing banks. The FRB has
identified by regulation various non-banking activities in which a bank holding company may engage with notice to, or prior approval by,
the FRB. However, a bank holding company that meets specified criteria may elect to be regulated as a financial holding company and
thereby engage in a broader range of nonbanking financial activities. The Company has made such an election.
The FRB has enforcement powers over financial holding companies and their subsidiaries, among other things, to enjoin activities that
represent unsafe or unsound practices or constitute violations of law, rule, regulation, administrative orders, or written agreements with a
federal bank regulator. These powers may be exercised through the issuance of cease and desist orders, civil monetary penalties or other
actions.
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Under Regulation Y, a bank holding company must serve as a source of financial and managerial strength for its subsidiary banks and must
not conduct its operations in an unsafe or unsound manner. Additionally, Regulation Y requires a bank holding company to give the FRB
prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration
paid for any repurchases in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The FRB may oppose
the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or
regulation. There is an exception for bank holding companies that are well-managed, well capitalized, and not subject to any unresolved
supervisory issues. To date, the Company has qualified for this exception. As another example, a bank holding company may not impair its
subsidiary bank’s soundness by causing it to make funds available to non-banking subsidiaries or their customers if the FRB believed it
would not be prudent to do so.
Bank holding companies and their subsidiary banks are also subject to the provisions of the Community Reinvestment Act
(“CRA”). Under the terms of the CRA, the FRB (or other appropriate bank regulatory agency, in the case of the Bank, the OCC) is required,
in connection with its examination of a bank, to assess such bank’s record in meeting the credit needs of the communities served by that
bank, including low and moderate-income neighborhoods. Furthermore, such assessment is taken into account in evaluating any
application made by a bank holding company or a bank for, among other things, approval of a branch or other deposit facility, office
relocation, a merger or an acquisition of bank shares.
Supervision and Regulation of Bank Subsidiaries
The Bank is a nationally chartered banking corporation, primarily subject to supervision, examination and regulation by the OCC. The FDIC
has certain backup regulatory authority as the deposit insurer. These regulators have the power to enjoin “unsafe or unsound practices,”
require affirmative action to correct any conditions resulting from any violation or practice, issue an administrative order that can be
judicially enforced, direct an increase in capital, restrict the growth of a bank, assess civil monetary penalties, and remove a bank’s officers
and directors.
The operations of the Bank are subject to numerous statutes and regulations. Such statutes and regulations relate to required reserves
against deposits, investments, loans, mergers and consolidations, issuance of securities, payment of dividends, establishment of branches,
and other aspects of the Bank’s operations. Various consumer laws and regulations also affect the operations of the Bank, including state
usury laws, laws relating to fiduciaries, consumer credit and equal credit, fair credit reporting, and privacy of non-public financial
information.
The Bank is subject to Sections 23A and 23B of the Federal Reserve Act and Regulation W thereunder, which govern certain transactions,
such as loans, extensions of credit, investments and purchases of assets between member banks and their affiliates, including their parent
holding companies. These restrictions limit the transfer from its subsidiaries, including the Bank, of funds to the Company in the form of
loans, extensions of credit, investments or purchases of assets (collectively, “Transfers”), and they require that the Bank’s transactions
with the Company be on terms no less favorable to the Bank than comparable transactions between the Bank and unrelated third
parties. Transfers by the Bank to any affiliate (including the Company) are limited in amount to 10% of the Bank’s capital and surplus, and
transfers to all affiliates are limited in the aggregate to 20% of the Bank’s capital and surplus. Furthermore, such loans and extensions of
credit are also subject to various collateral requirements. These regulations and restrictions may limit the Company’s ability to obtain funds
from the Bank for its cash needs, including funds for acquisitions, and the payment of dividends, interest and operating expenses.
The Bank is prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property or
furnishing of services. For example, the Bank may not generally require a customer to obtain other services from the Bank or the Company,
and may not require the customer to promise not to obtain other services from a competitor as a condition to an extension of credit. The
Bank is also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors,
principal stockholders or any related interest of such persons. Extensions of credit: (i) must generally be made on substantially the same
terms (including interest rates and collateral) as those prevailing at the time for, and following credit underwriting procedures that are not
less stringent than those applicable to, comparable transactions with persons not covered above and who are not employees, and (ii) must
not involve more than the normal risk of repayment or present other unfavorable features. The Bank is also subject to certain lending limits
and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary
penalties on the Bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of the Bank or the
imposition of a cease and desist order.
As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by, insured
institutions. It may also prohibit an insured institution from engaging in any activity the FDIC determines by regulation or order to pose a
serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against insured institutions under certain
circumstances. The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines
after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC.
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Deposit insurance premiums are based on quarterly average total assets minus average tangible equity. The FDIC imposes a risk-based
premium system that determines assessment rates based on an insured institution’s ranking in one of four risk categories based on their
examination ratings and capital ratios. In addition, all FDIC-insured institutions have been required to pay assessments to the FDIC to fund
interest payments on bonds issued by the Financing Corporation (“FICO”), a mixed-ownership Federal government corporation established
to recapitalize the Federal Savings and Loan Insurance Corporation. These assessments were discontinued when the interest payments
were fully funded for the FICO bonds, which matured in 2019.
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with: (i) the default of a commonly
controlled FDIC-insured depository institution, or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured
institution in danger of default. “Default” is defined generally as the appointment of a conservator or receiver, and “in danger of default” is
defined generally as the existence of certain conditions indicating that, in the opinion of the appropriate banking agency, a “default” is
likely to occur in the absence of regulatory assistance.
In addition to the foregoing, federal regulators have adopted regulations and examination procedures promoting the safety and soundness
of institutions by specifically addressing, among other things: (i) internal controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate exposure; (v) asset growth; (vi) ratio of classified assets to capital; (vii) minimum
earnings; and (viii) compensation and benefits standards for management officials. FRB regulations, for example, subject to an exception
for highly rated holding companies, generally require a bank holding company to give the FRB prior notice of any redemption or repurchase
of the bank holding company’s equity securities, if the consideration to be paid, together with the consideration paid for any repurchases
or redemptions in the preceding year, is equal to 10% or more of the company's consolidated net worth. The Federal Reserve Board has
broad authority to prohibit activities of bank holding companies and their non-banking subsidiaries which represent unsafe and unsound
banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities
conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution.
Dividends paid by the Bank have been the Company's primary source of operating funds and are expected to be for the foreseeable future.
Capital adequacy requirements serve to limit the amount of dividends that may be paid by the Bank. Under OCC regulations, the Bank may
not pay a dividend, without prior OCC approval, if the total amount of all dividends declared during the calendar year, including the
proposed dividend, exceed the sum of its retained net income to date during the calendar year and its retained net income over the
preceding two years. As of December 31, 2019, approximately $32 million was available for the payment of dividends without prior OCC
approval. The Bank’s ability to pay dividends is also subject to the Bank being in compliance with regulatory capital requirements. At
December 31, 2019, the Bank was in compliance with these requirements.
Because the Company is a legal entity separate and distinct from the Bank, the Company's right to participate in the distribution of assets of
the Bank in the event of the Bank's liquidation or reorganization would be subject to the prior claims of the Bank's creditors. In the event of
a liquidation or other resolution of an insured depository institution, the claims of depositors and other general or subordinated creditors
are entitled to a priority of payment over the claims of unsecured, non-deposit creditors, including a parent bank holding company (such as
the Company) or any shareholder or creditor thereof.
The OCC and other federal banking agencies have broad enforcement powers, including the power to impose substantial fines and other
civil and criminal penalties, and to appoint a conservator or receiver for the assets of a regulated entity. Failure to comply with applicable
laws, regulations and supervisory agreements could subject the Company or its subsidiaries, as well as officers, directors and other
institution-affiliated parties of these organizations, to administrative sanctions and potential civil monetary penalties.
Capital Adequacy
The Company and its subsidiary bank are required to comply with applicable capital adequacy standards established by the federal banking
agencies. In July 2013, the Federal Reserve Board, the OCC, and the FDIC approved final rules (the “Capital Rules”) establishing a new
comprehensive capital framework for U.S. banking organizations. These rules went into effect as to the Company and the Bank on January
1, 2015, subject to phase-in periods for certain components and other provisions. The capital standards applicable to the Company have
been fully phased-in. However, legislation enacted in May 2018 required the FRB to raise the threshold of its “small holding company”
exception to the applicability of holding company capital requirements to $3 billion of consolidated assets. That change became effective in
August 2018. Consequently, holding companies with less than $3 billion of consolidated assets, including the Company, are generally not
subject to the Capital Rules unless otherwise directed by the FRB. The Bank remains subject to the Capital Rules.
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Basel III and the Capital Rules. The Capital Rules generally implemented the Basel Committee’s December 2010 final capital framework
referred to as “Basel III” for strengthening international capital standards. The Capital Rules substantially revised the risk-based capital
requirements applicable to bank holding companies and their depository institution subsidiaries. The Capital Rules revised the definitions
and the components of regulatory capital, and addressed other issues affecting the numerator in banking institutions’ regulatory capital
ratios. The Capital Rules also addressed asset risk weights and other matters affecting the denominator in banking institutions’ regulatory
capital ratios.
Among other matters, the Capital Rules: (i) introduced a new capital measure called “Common Equity Tier 1” (“CET1”) and related
regulatory capital ratio of CET1 to risk-weighted assets; (ii) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital”
instruments meeting certain revised requirements; (iii) mandated that most deductions/adjustments to regulatory capital measures be made
to CET1 and not to the other components of capital; and (iv) expanded the scope of the deductions from and adjustments to capital as
compared to the previous regulations.
Pursuant to the Capital Rules, the minimum capital ratios were as follows:
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets as reported on the consolidated financial statements (known as the “leverage ratio”).
The Capital Rules also introduced a new “capital conservation buffer,” composed entirely of CET1, on top of the minimum risk-weighted
asset ratios described above, which was designed to absorb losses during periods of economic stress. Banking institutions with a ratio of
CET1 to risk-weighted assets above the minimum but below the capital conservation buffer face constraints on dividends, equity and other
capital instrument repurchases and compensation based on the amount of the shortfall. The capital standards applicable to the Bank
include an additional capital conservation buffer of 2.5% of CET1 on top of the minimum risk-weighted asset ratios, effectively resulting in
minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-
weighted assets of at least 8.5% and (iii) Total capital to risk-weighted assets of at least 10.5%.
The Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that
mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss
carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such
category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
In addition, the Capital Rules include certain exemptions to address concerns about the regulatory burden on community banks. For
example, banking organizations with less than $15 billion in consolidated assets as of December 31, 2009 are permitted to include in Tier 1
capital trust preferred securities and cumulative perpetual preferred stock issued and included in Tier 1 capital prior to May 19, 2010 on a
permanent basis, without any phase out (subject to a limit of 25% of Tier 1 capital). Also, community banks were able to elect on a one time
basis in their March 31, 2015 quarterly filings to opt-out of the onerous requirement to include most accumulated other comprehensive
income (“AOCI”) components in the calculation of common equity Tier 1 capital and, in effect, retain the AOCI treatment under the current
capital rules. Under the Capital Rules, the Bank made a one-time, permanent election to continue to exclude AOCI from capital.
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The Federal Deposit Insurance Act (the “FDIA”) establishes a system of regulatory remedies to resolve the problems of undercapitalized
institutions, referred to as the prompt corrective action. The federal banking regulators have established five capital categories (“well-
capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized”) and must take
certain mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to institutions which are
undercapitalized, significantly undercapitalized or critically undercapitalized. The severity of these mandatory and discretionary
supervisory actions depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the
FDIA requires the banking regulator to appoint a receiver or conservator for an institution that is critically undercapitalized. The federal
regulators have specified by regulation the relevant capital levels for each category, which are printed below.
“Well-Capitalized”
CET1 ratio of 6.5%
Leverage Ratio of 5%,
Tier 1 Capital ratio of 8%,
Total Capital ratio of 10%, and
Not subject to a written agreement, order, capital directive or regulatory
remedy directive requiring a specific capital level.
“Adequately Capitalized”
CET1 ratio of 4.5%
Leverage Ratio of 4%,
Tier 1 Capital ratio of 6%, and
Total Capital ratio of 8%.
“Undercapitalized”
CET1 Ratio of less than 4.5%
Leverage Ratio less than 4%,
Tier 1 Capital ratio less than 6%, or
Total Capital ratio less than 8%.
“Critically Undercapitalized”
Tangible equity to total assets less than 2%.
“Significantly Undercapitalized”
CET1 Ratio of less than 3%
Leverage Ratio less than 3%,
Tier 1 Capital ratio less than 4%, or
Total Capital ratio less than 6%.
For purposes of these regulations, the term “tangible equity” includes core capital elements counted as Tier 1 Capital for purposes of the
risk-based capital standards plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all
intangible assets with certain exceptions.
An institution that is classified as well-capitalized based on its capital levels may be classified as adequately capitalized, and an institution
that is adequately capitalized or undercapitalized based upon its capital levels may be treated as though it were undercapitalized or
significantly undercapitalized, respectively, if the appropriate federal banking agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment.
An institution that is categorized as undercapitalized, significantly undercapitalized or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking regulator. Under the FDIA, in order for the capital restoration plan to
be accepted by the appropriate federal banking agency, a BHC must guarantee that a subsidiary depository institution will comply with its
capital restoration plan, subject to certain limitations. The BHC must also provide appropriate assurances of performance. The obligation
of a controlling BHC under the FDIA to fund a capital restoration plan is limited to the lesser of 5.0% of an undercapitalized subsidiary’s
assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from
increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except in
accordance with an accepted capital restoration plan or with the approval of the FDIC. Institutions that are significantly undercapitalized or
undercapitalized and either fail to submit an acceptable capital restoration plan or fail to implement an approved capital restoration plan may
be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized,
requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository
institutions failing to submit or implement an acceptable capital restoration plan are subject to appointment of a receiver or conservator.
The Company’s regulatory capital ratios under risk-based capital rules in effect through December 31, 2019 are presented in Note 22 to the
Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
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In an effort to reduce regulatory burden, legislation enacted in May 2018 required the federal banking agencies to establish an optional
“community bank leverage ratio” of between 8% to 10% tangible equity to average total consolidated assets for qualifying institutions with
assets of less than $10 billion of assets. Institutions with capital meeting the specified requirement and electing to follow the alternative
framework would be deemed to comply with the applicable regulatory capital requirements, including the risk-based requirements and
would be considered well-capitalized under the prompt corrective action framework. The federal regulators issued a final rule, effective
January 1, 2020, that set the elective community bank leverage ratio at 9% tier 1 capital to average total consolidated assets.
Regulation of Insurance Agency Subsidiary
TEA is regulated by the New York State Department of Financial Services. As of the date of this report, TEA meets and maintains all
licensing and continuing education requirements required by the State of New York.
Monetary Policy and Economic Control
The commercial banking business is affected not only by general economic conditions, but also by the monetary policies of the
FRB. Changes in the discount rate on member bank borrowing, availability of borrowing at the “discount window,” open market
operations, the imposition of changes in reserve requirements against member banks’ deposits and assets of foreign branches and the
imposition of, and changes in, reserve requirements against certain borrowings by banks and their affiliates are some of the instruments of
monetary policy available to the FRB. These monetary policies are used in varying combinations to influence overall growth and
distributions of bank loans, investments and deposits, and this use may affect interest rates charged on loans or paid on deposits. The
monetary policies of the FRB have had a significant effect on the operating results of commercial banks and are expected to continue to do
so in the future. The monetary policies of these agencies are influenced by various factors, including inflation, unemployment, and short-
term and long-term changes in the international trade balance and in the fiscal policies of the United States Government. Future monetary
policies and the effect of such policies on the future business and earnings of the Company cannot be predicted.
Consumer Laws and Regulations
In addition to the laws and regulations discussed herein, the Bank is also subject to certain consumer laws and regulations that are
designed to protect consumers in transactions with banks. These laws and regulations include, but are not limited to, the USA PATRIOT
Act of 2001, the Bank Secrecy Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited
Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate
Settlement Procedures Act, Federal Financial Privacy Laws, Interagency Guidelines Establishing Information Security Standards, the Right
to Financial Privacy Act, and the Fair and Accurate Credit Transactions Reporting Act. These laws and regulations regulate the manner in
which financial institutions must deal with customers when taking deposits or making loans to such customers.
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Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (“TCJA”), which represents one of the most significant overhauls to the United States federal tax code since
1986, was signed into law on December 22, 2017. The most significant impact of the TCJA has been on the Company’s marginal federal tax
rate in 2018 and beyond, which decreased from 35% to 21%. The change in the corporate tax rate resulted in a $2.1 million expense related to
the remeasurement of the Company’s deferred tax asset as of December 31, 2017. Approximately $0.6 million of the $2.1 million expense is
associated with deferred taxes related to unrealized gains on available-for-sale investment securities and the unamortized actuarial losses on
the Pension Plan and the SERPs which were originally created through other comprehensive income (“OCI”). The Company reclassified the
$0.6 million charge related to deferred tax expense for items originally recorded through OCI from OCI to retained earnings per ASU 2018-02,
“Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” released in February 2018 and early adopted by
the Company for the period ended December 31, 2017.
Other significant aspects of the TCJA that have a direct impact on the Company include:
· The Company is active in the historic rehabilitation tax credit (“HTC”) market. Before TCJA, HTC’s were allowed for 20% of
qualified rehabilitation expenses (“QRE”) in the year the property is placed in service. For properties owned before December 31,
2017 on which construction was started by June 22, 2018 and completed by December 22, 2019, the old rules still apply. The
Company has two remaining projects that fit these criteria. For all other projects, the HTC for 20% of QRE will now be taken over a
5 year period rather than all in the first year. This delay in cash flows to investors has negatively impacted the pricing on
HTC’s. The Company earned less than $0.1 million and $1.2 million in net income on HTC investments in 2019 and 2018,
respectively, and had historic tax credit investments valued at $1.2 million as of December 31, 2019 and 2018.
· The TCJA limits the deductibility of executive compensation. The TCJA expands the definition of “covered employees” for
purposes of Section 162(m) of the Internal Revenue Code to include the CFO, CEO, and the three most highly compensated
officers for the tax year and, once designated as a covered employee, an individual is a covered employees for all future
years. Previously, if a covered employee retired, the individual would no longer be considered “covered” in retirement and
therefore post-retirement payments to that individual would not be limited by Section 162(m). This change impacts the SERP for
one of the Company’s executive officers, who elected to receive his benefit in a lump sum payment. In August 2018, the IRS
issued Notice 2018-68, which provided guidance with respect to the amendments made to Section 162(m) and provided a transition
rule applicable to certain outstanding arrangements (referred to as the “grandfather rule”). Notice 2018-68 defines the term
“written binding contract” for purposes of grandfathering. Remuneration is grandfathered if it is payable under a written binding
contract that was in effect on November 2, 2017, and not materially modified after that date, only to the extent the corporation is
obligated under applicable law to pay the remuneration under the contract if the employee performs services or satisfies the
vesting conditions. Therefore, for the executive in question, the Company is treating the vested portion of the SERP benefit on
November 2, 2017, as subject to the grandfather rule of the new Section 162(m) so that vested portion of the SERP benefit is
outside the scope of Section 162(m) and therefore deductible. Any increase in the executive’s SERP obligation after November 2,
2017 will be subject to the Section 162(m) limits on deductibility.
· The TCJA allows for 100% deduction of the cost of qualified property acquired and placed in service after September 27, 2017 and
before January 1, 2023. This benefit is scheduled to phase out in full by 2027. Management expects that this will allow the
Company to deduct capital expenses in full in the year of acquisition rather than over a period of time (3-7 years). This is expected
to delay tax payments for the Company but is unlikely to have a material effect on results of operations.
· The TCJA repeals the 50% deduction for entertainment, amusement, or recreation activities and disallows employer deductions for
meals provided for the convenience of the employer. The impact of this change has not been material to the Company.
AVAILABLE INFORMATION
The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those
reports filed or furnished by the Company pursuant to Section 13(a) or 15(d) of the Exchange Act are available without charge on the
Company's website, www.evansbancorp.com - SEC filings section, as soon as reasonably practicable after they are electronically filed with
or furnished to the SEC. The Company is providing the address to its Internet site solely for the information of investors. The Company
does not intend its Internet address to be an active link or to otherwise incorporate the contents of the website into this Annual Report on
Form 10-K or into any other report filed with or furnished to the SEC. In addition, the SEC maintains an internet site that contains reports,
proxy and information statements, and other information regarding issuers that file electronically with the SEC on its website, www.sec.gov.
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Item 1A.
RISK FACTORS
The following factors identified by the Company's management represent significant potential risks that the Company faces in its
operations.
The Company’s Business May Be Adversely Affected by Conditions in the Financial Markets and Economic Conditions Generally
The Company’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of
outstanding loans and the value of collateral securing those loans, is highly dependent upon the business environment in the markets
where the Company operates, in Western New York and in the United States as a whole. A favorable business environment is generally
characterized by, among other factors, economic growth, efficient capital markets, low inflation, high business and investor confidence, and
strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by: declines in economic growth,
declines in housing and real estate valuations, business activity or investor or business confidence; limitations on the availability or
increases in the cost of credit and capital; increases in inflation or interest rates; natural disasters; or a combination of these or other
factors.
Economic conditions in the United States remained positive in 2019, which included national and local unemployment rates of 3.5% and
4.5%, respectively, as of December 31, 2019. Although conditions in Western New York and the United States are currently good, a
slowdown of the economy could occur in the future. The last recession ended in 2009 and has been followed by 126 months of economic
expansion. In the post-World War II era, the average period of economic expansion has been 57 months. This could indicate that we are in
a longer than normal period of economic expansion and that there is increased risk of recession. Even though the Company is a community
institution servicing a local market, in a global economy, any deteriorating conditions in other parts of the world could affect the United
States economically. Such conditions could materially adversely affect the credit quality of the Company’s loans, and therefore, the
Company’s results of operations and financial condition.
Commercial Real Estate and Commercial Business Loans Expose the Company to Increased Credit Risks
At December 31, 2019, the Company's portfolio of commercial real estate loans totaled $743 million, or 61% of total loans outstanding, and
the Company's portfolio of commercial and industrial (“C&I”) loans totaled $251 million, or 20% of total loans outstanding. The Company
plans to continue to emphasize the origination of commercial loans as they generally earn a higher rate of interest than other loan products
offered by the Bank. However, commercial loans generally expose a lender to greater risk of non-payment and loss than one-to-four family
residential mortgage loans because repayment of commercial real estate and C&I loans often depends on the successful operations and the
income stream of the borrowers. Commercial mortgages are collateralized by real property while C&I loans are typically secured by
business assets such as equipment and accounts receivable. Commercial loans typically involve larger loan balances to single borrowers
or groups of related borrowers compared to one-to-four-family residential mortgage loans. Also, many of the Company's commercial
borrowers have more than one commercial real estate or C&I loan outstanding with the Company. Consequently, an adverse development
with respect to one loan or one credit relationship can expose the Company to a significantly greater risk of loss compared to an adverse
development with respect to a one-to-four-family residential mortgage loan. Commercial real estate loans in non-accrual status at December
31, 2019 were $7.2 million, compared with $14.6 million at December 31, 2018. C&I loans in non-accrual status were $4.8 million and $1.7
million at December 31, 2019 and December 31, 2018, respectively. Increases in the delinquency levels of commercial real estate and C&I
loans could result in an increase in non-performing loans and the provision for loan losses, which could have a material adverse effect on
the Company’s results of operations and financial condition.
Continuing Concentration of Loans in the Company's Primary Market Area May Increase the Company's Risk
Unlike larger banks that are more geographically diversified, the Company provides banking and financial services to customers located
primarily in western New York State (“WNY”). Therefore, the Company's success depends primarily on the general economic conditions in
WNY. The Company's business lending and marketing strategies focus on loans to small and medium-sized businesses in this geographic
region. Moreover, the Company's assets are heavily concentrated in mortgages on properties located in WNY. Accordingly, the
Company's business and operations are vulnerable to downturns in the economy of WNY. The concentration of the Company's loans in
this geographic region subjects the Company to the risk that a downturn in the economy or recession in this region could result in a
decrease in loan originations and increases in delinquencies and foreclosures, which would more greatly affect the Company than if the
Company's lending were more geographically diversified. In addition, the Company may suffer losses if there is a decline in the value of
properties underlying the Company's mortgage loans which would have a material adverse impact on the Company's operations.
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In the Event the Company's Allowance for Loan Losses is Not Sufficient to Cover Actual Loan Losses, the Company's Earnings Could
Decrease
The Company maintains an allowance for loan losses in order to capture the probable losses inherent in its loan portfolio. There is a risk
that the Company may experience significant loan losses which could exceed the allowance for loan losses. In determining the amount of
the Company's recorded allowance, the Company makes various assumptions and judgments about the collectability of its loan portfolio,
including the creditworthiness of its borrowers, the effect of changes in the local economy on the value of the real estate and other assets
serving as collateral for the repayment of loans, the effects on the Company's loan portfolio of current economic indicators and their
probable impact on borrowers, and the Company's loan quality reviews. The emphasis on the origination of commercial real estate and C&I
loans is a significant factor in evaluating the allowance for loan losses. As the Company continues to increase the amount of these loans in
the portfolio, additional or increased provisions for loan losses may be necessary and would adversely affect the results of operations. In
addition, bank regulators periodically review the Company's loan portfolio and credit underwriting procedures, as well as its allowance for
loan losses, and may require the Company to increase its provision for loan losses or recognize further loan charge-offs. At December 31,
2019, the Company had a gross loan portfolio of $1.2 billion and the allowance for loan losses was $15.2 million, which represented 1.24% of
the total amount of gross loans. If the Company's assumptions and judgments prove to be incorrect or bank regulators require the
Company to increase its provision for loan losses or recognize further loan charge-offs, the Company may have to increase its allowance for
loan losses or loan charge-offs which could have an adverse effect on the Company's operating results and financial
condition. Additionally, there can be no assurances that the Company's allowance for loan losses will be adequate to protect the Company
against loan losses that it may incur.
Changes in Interest Rates Could Adversely Affect the Company's Business, Results of Operations and Financial Condition
The Company's results of operations and financial condition are significantly affected by changes in interest rates. The Company's results
of operations depend substantially on its net interest income, which is the difference between the interest income earned on its interest-
earning assets and the interest expense paid on its interest-bearing liabilities. Because the Company's interest-bearing liabilities generally
re-price or mature more quickly than its interest-earning assets, an increase in interest rates could result in a decrease in its net interest
income.
Changes in interest rates also affect the value of the Company's interest-earning assets, and in particular, the Company's securities
portfolio. Generally, the value of securities fluctuates inversely with changes in interest rates. At December 31, 2019, the Company's
securities available for sale totaled $128 million. Net unrealized gains on securities available for sale amounted to $0.5 million, net of
tax. Decreases in the fair value of securities available for sale could have an adverse effect on stockholders' equity or earnings.
The Company also is subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the
average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and
mortgage-related securities, as borrowers refinance to reduce borrowing costs. Under these circumstances, the Company is subject to
reinvestment risk to the extent that it is unable to reinvest the cash received from such prepayments at rates that are comparable to the rates
on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers
to repay adjustable rate loans.
The FRB reduced the targeted federal funds rate a total of 0.75% during 2019. These actions have begun to put pressure on the Company’s
net interest margin due to the re-pricing of the variable rate loan portfolio. There is risk that further margin compression could have a
material adverse effect on the Company’s results of operations and financial condition.
The Company May Be Adversely Affected by the Soundness of Other Financial Institutions
Financial services institutions are interrelated as a result of counterparty relationships. The Company has exposure to many different
industries and counterparties, and routinely executes transactions with counterparties in the financial services industry. As a result,
defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally,
could lead to losses or defaults by us or by other institutions and impact our business. Many of these transactions expose us to
credit risk in the event of default of our counterparty or customer. In addition, our credit risk may be further increased when the collateral
held by us cannot be relied upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due
to us. Any such losses could materially and adversely affect our results of operations.
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The most important counterparty for the Company, in terms of liquidity, is the Federal Home Loan Bank of New York (“FHLBNY”). The
Company uses FHLBNY as its primary source of borrowed overnight funds and also has several long-term advances with FHLBNY. At
December 31, 2019, the Company had a total of $10 million in borrowed funds with FHLBNY. The Company has placed sufficient collateral
in the form of commercial and residential real estate loans at FHLBNY. As a member of the Federal Home Loan Bank System, the Bank is
required to hold stock in FHLBNY. The Bank held FHLBNY stock with a fair value of $1.6 million as of December 31, 2019.
There are 11 branches of the FHLB, including New York. If a branch were at risk of breaching risk-based capital requirements, it could
suspend dividends, cut dividend payments, and/or not buy back excess FHLB stock that members hold. FHLBNY has stated that they
expect to be able to continue to pay dividends, redeem excess capital stock, and provide competitively priced advances in the
future. Nonetheless, the 11 FHLB branches are jointly liable for the consolidated obligations of the FHLB system. To the extent that one
FHLB branch cannot meet its obligations to pay its share of the system’s debt; other FHLB branches can be called upon to make the
payment.
Systemic weakness in the FHLB could result in higher costs of FHLB borrowings, reduced value of FHLB stock, and increased demand for
alternative sources of liquidity that are more expensive, such as brokered time deposits, the discount window at the Federal Reserve, or
lines of credit with correspondent banks.
A Decline in the Value of the Company’s Deferred Tax Assets Could Adversely Affect the Company’s Operating Results and Regulatory
Capital Ratios.
The Company’s tax strategies depend on the ability to generate taxable income in future periods. The Company’s tax strategies will be less
effective in the event the Company fails to generate anticipated amounts of taxable income. The value of the Company’s deferred tax assets
is subject to an evaluation of whether it is more likely than not that they will be realized for financial statement purposes. In making this
determination, management considers all positive and negative evidence available, including the Company’s historical levels of taxable
income, the opportunity for net operating loss carrybacks, and projections for future taxable income over the statutory tax loss carryover
period. If the Company were to conclude that a significant portion of deferred tax assets were not more likely than not to be realized, the
required valuation allowance could adversely affect the Company’s financial position, results of operations and regulatory capital ratios. In
addition, the value of the Company’s deferred tax assets could be adversely affected by a change in statutory tax rates.
Strong Competition Within the Company's Market Area May Limit the Company’s Growth and Profitability
Competition in the banking and financial services industry is intense. The Company competes with commercial banks, savings institutions,
mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms,
and financial technology companies operating locally within the Company's market area and elsewhere. Many of these competitors
(whether regional or national institutions) have substantially greater resources and lending limits than the Company does, and may offer
certain services that the Company does not or cannot provide. The Company's profitability depends upon its continued ability to
successfully compete in this market area.
Expansion of the Company’s Branch Network May Adversely Affect its Financial Results
The Company cannot assure that the opening of new branches will be accretive to earnings or that it will be accretive to earnings within a
reasonable period of time. Numerous factors contribute to the performance of a new branch, such as suitable location, qualified personnel,
and an effective marketing strategy. Additionally, it takes time for a new branch to gather sufficient loans and deposits to generate income
sufficient to cover its operating expenses. Difficulties the Company experiences in opening new branches may have a material adverse
effect on the Company’s financial condition and results of operations.
The Company Operates in a Highly Regulated Environment and May Be Adversely Affected By Changes in Laws and Regulations
The Company and its subsidiaries are subject to regulation, supervision and examination by the OCC, FRB, and by the FDIC, as insurer of
its deposits. Such regulation and supervision govern the activities in which a bank and its holding company may engage and are intended
primarily for the protection of the deposit insurance funds and depositors. Regulatory requirements affect the Company's lending
practices, capital structure, investment practices, dividend policy and growth. These regulatory authorities have extensive discretion in
connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a bank, the
imposition of deposit insurance premiums and other assessments, the classification of assets by a bank and the adequacy of a bank's
allowance for loan losses. Any change in such regulation and oversight could have a material adverse impact on the Bank, the Company
and its business, financial condition and results of operations.
Additionally, the Consumer Financial Protection Bureau (the “CFPB”) has the authority to issue consumer finance regulations and is
authorized, individually or jointly with bank regulatory agencies, to conduct investigations to determine whether any person is, or has,
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engaged in conduct that violates new and existing consumer financial laws or regulations. Because we have less than $10 billion in total
consolidated assets, the FRB and NYSDFS, not the CFPB, are responsible for examining and supervising our compliance with these
consumer protection laws and regulations. In addition, in accordance with a memorandum of understanding entered into between the CFPB
and U.S. Department of Justice, the two agencies have agreed to coordinate efforts related to enforcing the fair lending laws, which
includes information sharing and conducting joint investigations, and have done so on a number of occasions.
Noncompliance with applicable regulations may lead to adverse consequences for the Company. A successful regulatory challenge to an
institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the
required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and
restrictions on expansion. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in
private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of
operations.
The Company also faces a risk of noncompliance and subsequent enforcement action in connection with federal Bank Secrecy Act (the
“BSA”) and other anti-money laundering and counter terrorist financing statutes and regulations. The federal banking agencies and the
U.S. Treasury Department’s Financial Crimes Enforcement Network are authorized to impose significant civil money penalties for violations
of those requirements and have recently engaged in coordinated enforcement efforts against banks and other financial services providers
with the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. If the Company violates these laws
and regulations, or its policies, procedures and systems are deemed deficient, it would be subject to liability, including fines and regulatory
actions, which may include restrictions on its ability to pay dividends and the necessity to obtain regulatory approvals to proceed with
certain aspects of its business plan, including its acquisition plans. Any of these results could have a material adverse effect on the
Company’s business, financial condition, results of operations and growth prospects.
Lack of System Integrity or Credit Quality Related to Funds Settlement Could Result in a Financial Loss
The Bank settles funds on behalf of financial institutions, other businesses and consumers and receives funds from clients, card issuers,
payment networks and consumers on a daily basis for a variety of transaction types. Transactions facilitated by the Bank include debit
card, credit card and electronic bill payment transactions, supporting consumers, financial institutions and other businesses. These
payment activities rely upon the technology infrastructure that facilitates the verification of activity with counterparties and the facilitation
of the payment. If the continuity of operations or integrity of processing were compromised this could result in a financial loss to the Bank,
and therefore the Company, due to a failure in payment facilitation. In addition, the Bank may issue credit to consumers, financial
institutions or other businesses as part of the funds settlement. A default on this credit by a counterparty could result in a financial loss to
the Bank, and therefore to the Company.
Financial Services Companies Depend on the Accuracy and Completeness of Information about Customers and Counterparties
In deciding whether to extend credit or enter into other transactions, the Company may rely on information furnished by or on behalf of
customers and counterparties, including financial statements, credit reports, and other financial information. The Company may also rely
on representations of those customers, counterparties, or other third parties, such as independent auditors, as to the accuracy and
completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information
could cause the Company to enter into unfavorable transactions, which could have a material adverse effect on the Company’s financial
condition and results of operations.
Loss of Key Employees May Disrupt Relationships with Certain Customers
The Company’s business is primarily relationship-driven in that many of the key employees of the Bank and TEA have extensive customer
relationships. Loss of a key employee with such customer relationships may lead to the loss of business if the customers were to follow
that employee to a competitor. While management believes that the Company’s relationships with its key business producers are good, the
Company cannot guarantee that all of its key personnel will remain with the organization. Loss of such key personnel, particularly if they
enter into an employment relationship with one of the Company’s competitors, could result in the loss of some of the Company’s
customers. Such losses could have a material adverse effect on the Company’s business, financial condition and results of operations.
Future FDIC Insurance Premium Increases May Adversely Affect the Company’s Earnings
The Company is generally unable to control the amount of premiums that it is required to pay for FDIC insurance. If there are additional
bank or financial institution failures or other similar occurrences, the FDIC may again increase the premiums assessed upon insured
institutions. Such increases and any future increases or required prepayments of FDIC insurance premiums may adversely impact the
Company’s results of operations.
17
Table of Contents
The Company is a Financial Holding Company and Depends on Its Subsidiaries for Dividends, Distributions and Other Payments
The Company is a legal entity separate and distinct from its banking and other subsidiaries. The Company’s principal source of cash flow,
including cash flow to pay dividends to the Company’s stockholders and principal and interest on its outstanding debt, is dividends from
the Bank. There are statutory and regulatory limitations on the payment of dividends by the Bank, as well as the payment of dividends by
the Company to its stockholders. Regulations of the OCC affect the ability of the Bank to pay dividends and other distributions and to
make loans to the Company. If the Bank is unable to make dividend payments and sufficient capital is not otherwise available, the
Company may not be able to make dividend payments to its common stockholders or principal and interest payments on its outstanding
debt.
Because the Nature of the Financial Services Business Involves a High Volume of Transactions, the Company Faces Significant
Operational Risks
The Company relies on the ability of its employees and systems to process a high number of transactions. Operational risk is the risk of
loss resulting from the Company’s operations, including but not limited to, the risk of fraud by employees or persons outside of the
Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of
the internal control system and compliance requirements, and business continuation and disaster recovery. This risk of loss also includes
the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory
standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. In the event of a
breakdown in the internal control system, improper operation of systems or improper employee actions, the Company could suffer financial
loss, face regulatory action and suffer damage to its reputation, any of which could have a material adverse effect on the Company’s
financial condition or results of operation.
The Company’s Information Systems May Experience an Interruption or Breach in Security
The Company relies heavily on communications and information systems to conduct its business. As a financial institution, we process a
significant number of customer transactions and possess a significant amount of sensitive customer information. As technology advances,
the ability to initiate transactions and access data has become more widely distributed among mobile phones, personal computers,
automated teller machines, remote deposit capture sites and similar access points. Any failure, interruption, or breach in security or
operational integrity of our communications and information systems, or the systems of third parties on which we rely to process
transactions, could result in failures or disruptions in the Company’s customer relationship management, general ledger, deposit, loan, and
other systems. There can be no assurance that failures, interruptions, or security breaches of the Company’s information systems will not
occur or, if they do occur, that they will be adequately addressed. Unauthorized third parties regularly seek to gain access to nonpublic,
private and other information through computer systems. If customers’ personal, nonpublic, confidential, or proprietary information in the
Company’s possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage, and
financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who are not
permitted to have the information, either by fault of the Company’s systems, employees or counterparties, or where such information is
intercepted or otherwise inappropriately taken by third parties. The occurrence of any failures, interruptions, or security breaches of the
Company’s information systems could, among other consequences, damage the Company’s reputation, result in a loss of customer
business, subject the Company to additional regulatory scrutiny, result in increased insurance premiums, or expose the Company to civil
litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results
of operations.
In addition, as cybersecurity and data privacy risks for banking organizations and the broader financial system have significantly increased
in recent years, cybersecurity and data privacy issues have become the subject of increasing legislative and regulatory focus. The federal
bank regulatory agencies have proposed enhanced cyber risk management standards, which would apply to a wide range of large financial
institutions and their third-party service providers, and would focus on cyber risk governance and management, management of internal
and external dependencies, and incident response, cyber resilience and situational awareness. We may become subject to new legislation
or regulation concerning cybersecurity or the privacy of personally identifiable information and personal financial information or of any
other information we may store or maintain. We could be adversely affected if new legislation or regulations are adopted or if existing
legislation or regulations are modified such that we are required to alter our systems or require changes to our business practices or privacy
policies. If cybersecurity, data privacy, data protection, data transfer or data retention laws are implemented, interpreted or applied in a
manner inconsistent with our current practices, we may be subject to fines, litigation or regulatory enforcement actions or ordered to
change our business practices, policies or systems in a manner that adversely impacts our operating results In addition, increased cost of
compliance with cybersecurity regulations, at the federal and state level, could have a material adverse effect on the Company’s financial
condition and results of operations.
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Table of Contents
The Potential for Business Interruption Exists Throughout the Company’s Organization
Integral to the Company’s performance is the continued efficacy of our technical systems, operational infrastructure, relationships with
third parties and the vast array of associates and key executives in the Company’s day-to-day and ongoing operations. Failure by any or
all of these resources subjects the Company to risks that may vary in size, scale and scope. This includes, but is not limited to, operational
or technical failures, pandemics, ineffectiveness or exposure due to interruption in third party support as expected, as well as the loss of key
individuals or failure on the part of key individuals to perform properly. Such events could affect the stability of the Company’s deposit
base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property
damage, result in loss of revenue, cause the Company to incur additional expenses, or disrupt our third party vendors’ operations, any of
which could result in a material adverse effect on the Company’s financial condition and results of operations. In late 2019, the novel
coronavirus (COVID-19) was identified as a public health issue and has since spread throughout the United States, which may cause
temporary office or branch closures and other business disruptions. Although the Company has established disaster recovery plans and
procedures, the occurrence of any such events could have a material adverse effect on the Company.
Environmental Factors May Create Liability
In the course of its business, the Bank has acquired, and may acquire in the future, property securing loans that are in default. There is a
risk that the Bank could be required to investigate and clean-up hazardous or toxic substances or chemical releases at such properties after
acquisition by the Bank in a foreclosure action, and that the Bank may be held liable to a governmental entity or third parties for property
damage, personal injury and investigation and clean-up costs incurred by such parties in connection with such contamination. The Bank
may in the future be required to perform an investigation or clean-up activities in connection with environmental claims. Any such
occurrence could have a material adverse effect on our business, financial condition, and results of operations.
Anti-Takeover Laws and Certain Agreements and Charter Provisions May Adversely Affect Share Value
Certain provisions of the Company’s certificate of incorporation and state and federal banking laws, including regulatory approval
requirements, could make it more difficult for a third party to acquire control of the Company without approval of the Company’s board of
directors. Under federal law, subject to certain exemptions, a person, entity or group must notify the FRB before acquiring control of a bank
holding company. Acquisition of 10% or more of any class of voting stock of a bank holding company, including shares of the Company’s
common stock, creates a rebuttable presumption that the acquiror “controls” the bank holding company. Also, a bank holding company
must obtain the prior approval of the FRB before, among other things, acquiring direct or indirect ownership or control of more than 5% of
the voting shares of any bank, including the Bank. There also are provisions in the Company’s certificate of incorporation that may be used
to delay or block a takeover attempt. Taken as a whole, these statutory provisions and provisions in the Company’s certificate of
incorporation could result in the Company being less attractive to a potential acquiror and thus could adversely affect the market price of
the Company’s common stock.
Damage to the Company’s Reputation Could Adversely Impact our Business
The Company’s business reputation is important to its success. The ability to attract and retain customers, investors, employees and
advisors may depend upon external perceptions of the Company. Damage to the Company’s reputation could cause significant harm to its
business and prospects and may arise from numerous sources, including litigation or regulatory actions, failing to deliver minimum
standards of service and quality, compliance failures, unethical behavior and the misconduct of employees, advisors and
counterparties. Negative perceptions or publicity regarding these matters could damage the Company’s reputation among existing and
potential customers, investors, employees and advisors. Adverse developments with respect to the financial services industry may also,
by association, negatively impact the Company’s reputation or result in greater regulatory or legislative scrutiny or litigation against the
Company. Preserving and enhancing the Company’s reputation also depends on maintaining systems and procedures that address
known risks and regulatory requirements, as well as its ability to identify and mitigate additional risks that arise due to changes in
businesses and the marketplaces in which the Company operates, the regulatory environment and client expectations. If any of these
developments has a material effect on the Company’s reputation, its business could suffer.
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Table of Contents
Mergers and Acquisitions, Including the Company’s Proposed Acquisition of FSB, Involve Numerous Risks and Uncertainties
Acquisitions involve a number of risks and challenges, including the expenses involved; integration of branches and operations acquired;
the outflow of customers from the acquired branches; competing effectively in geographic areas not previously served; managing growth
resulting from the transaction; and dilution in the acquirer’s book and tangible book value per share.
On December 19, 2019, the Company announced that it had entered into a definitive Agreement and Plan of Reorganization with FSB,
pursuant to which FSB would be acquired by the Company. The Company’s proposed Merger with FSB involves numerous risks and
uncertainties, including:
• Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently
anticipated or cannot be met. Before the transactions contemplated by the merger agreement, including the mergers, may be
completed, various approvals must be obtained from bank regulatory authorities. The regulatory approvals may not be
received at all, may not be received in a timely fashion, or may contain conditions on the completion of the mergers that are not
anticipated or cannot be met. If the consummation of the Merger is delayed, including by a delay in receipt of necessary
regulatory approvals, the business, financial condition and results of operations of the Company may be materially and
adversely affected.
• Failure of the Merger to be completed, the termination of the Agreement, or a significant delay in the consummation of the
Merger could negatively impact the Company. The Company has incurred and will incur substantial expenses in connection
with the negotiation of the Agreement and the completion of the Merger. If the Merger is not completed or is delayed, the
Company would have to recognize these expenses without realizing the expected benefits of the Merger. If the consummation
of the Merger is delayed, the business, financial condition, results of operations and stock price of the Company may be
materially adversely affected.
• The Company will be subject to business uncertainties and contractual restrictions while the Merger is pending. Uncertainty
about the effect of the Merger on employees, customers, suppliers and vendors may have an adverse effect on the Company’s
business, financial condition and results of operations. The pursuit of the Merger and preparation for integration of FSB’s
business may place a burden on the Company’s management and internal resources. Any significant diversion of
management’s attention away from ongoing business concerns and any difficulties encountered in the transition and
integration process could have a material adverse effect on the Company’s business, financial condition and results of
operations. In addition, the Agreement restricts the Company from taking certain actions without FSB’s consent while the
Merger is pending. These restrictions could have a material adverse effect on the Company’s business, financial condition and
results of operations.
• Litigation against FSB, the Company or their boards of directors could prevent or delay the completion of the Merger. While the
Company believes that any claims that may be asserted by purported stockholder plaintiffs related to the Merger would be
without merit, the results of any such potential legal proceedings are difficult to predict and could delay or prevent the Merger
from being competed in a timely manner. Moreover, any litigation could be time consuming and expensive, could divert
management’s attention away from regular business, and any lawsuit adversely resolved against FSB, the Company or their
boards of directors could have a material adverse effect on the Company’s business, financial condition and results of
operations.
•
If the Merger is completed, FSB stockholders will receive Company common stock in exchange for their shares of FSB common
stock. If those stockholders sell substantial amounts of Company common stock in the public market following completion of
the mergers, the market price of the Company’s common stock may decrease. These sales might also make it more difficult for
the Company to sell equity or equity-related securities at a time and price that it otherwise would deem appropriate.
• The Company’s current stockholders will have a reduced ownership and voting interest after the Merger and will exercise less
influence over management.
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Table of Contents
If Regulators Impose Limitations on the Company’s Commercial Real Estate Lending Activities, Earnings Could Be Adversely Affected
In 2006, the federal bank regulatory agencies issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk
Management Practices” (the “CRE Guidance”). Although the CRE Guidance did not establish specific lending limits, it provides that a
bank’s commercial real estate lending exposure may receive increased supervisory scrutiny where total non-owner occupied commercial real
estate loans, including loans secured by apartment buildings, investor commercial real estate and construction and land loans, represent
300% or more of an institution’s total risk-based capital and the outstanding balance of the commercial real estate loan portfolio has
increased by 50% or more during the preceding 36 months. The Company’s non-owner occupied commercial real estate level equaled 352%
of total risk-based capital at December 31, 2019. Including owner-occupied commercial real estate, the ratio of commercial real estate loans
to total risk-based capital ratio would be 460% at December 31, 2019. If the Company’s regulators were to impose restrictions on the
amount of commercial real estate loans it can hold in its portfolio, or require higher capital ratios as a result of the level of commercial real
estate loans held, the Company’s earnings would be adversely affected.
The Company Is Required to Transition From the Use of LIBOR
In 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates the London Interbank Offered Rate
(“LIBOR”), announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the
administrator of LIBOR after 2021. LIBOR will be discontinued on December 31, 2021. At this time, no consensus exists as to what rate or
rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-
based securities and variable rate loans, subordinated debentures, or other securities or financial arrangements, given LIBOR's role in
determining market interest rates globally. Regulators, industry groups and certain committees (e.g. the Alternative Reference Rates
Committee) have published recommended fallback language for LIBOR-linked financial instruments, identified recommended alternatives for
the LIBOR (e.g. the Secured Overnight Financing Rate), and proposed implementations of the recommended alternatives in floating-rate
financial instruments. At this time, it is not possible to predict whether these specific recommendations and proposals will be broadly
accepted. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely
affect LIBOR rates and the value of LIBOR-based loans and securities in the Company’s portfolio and may impact the availability and cost
of hedging instruments and borrowings. The Company has material contracts that are indexed to LIBOR and is monitoring this activity and
evaluating the related risks. If the Company is required to implement substitute indices for the calculation of interest rates, it may incur
expenses in effecting the transition, and may be subject to disputes or litigation over the appropriateness or comparability to LIBOR of the
substitute indices, which could have an adverse effect on the Company’s results of operations. Additionally, since alternative rates are
calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition may change
the Company’s market risk profile, requiring changes to risk and pricing models.
EMPLOYEES
As of December 31, 2019, the Bank had 250 employees, TEA had 61 employees, and FCS had 4 employees. The Company had no direct
employees. Management believes that the Company’s subsidiaries have good relationships with their employees.
21
Table of Contents
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
At December 31, 2019, the Bank conducted its business from its administrative office and 15 branch offices. The Bank’s administrative
office is located at One Grimsby Drive in Hamburg, NY. The administrative office facility is 26,000 square feet and is owned by the
Bank. This facility is occupied by the Office of the President and Chief Executive Officer of the Company, as well as the Administrative and
Loan Divisions of the Bank. The Bank also owns a building on Sunset Drive in Hamburg, NY that houses its Operations Center and a
50,000 square foot building on Main Street in Williamsville, NY that was purchased in 2019 and is currently being renovated and will
become the Company’s new administrative office facility in 2020.
The Bank has 15 branch locations. The Bank owns the building and land for five locations. Of the remaining branch locations, nine are
leased by the Bank and one is leased by TEA.
TEA operates from a 10,000 square foot office located at 6834 Erie Road, Derby, NY, which is owned by the Bank. TEA has eight retail
locations. The Bank owns three of the locations and leases two of the locations, and TEA owns one location and leases two locations.
Item 3.
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 financial statements.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
22
Table of Contents
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II
Market Information. The Company’s common stock is listed on the NYSE American under the symbol “EVBN.”
Holders. The approximate number of holders of record of the Company’s common stock as of March 4, 2020 was 1,149.
The amount and type (cash or stock), if any, of future dividends will be determined by the Company’s Board of Directors and will depend
upon the Company’s earnings, financial conditions and other factors considered by the Board of Directors to be relevant. The Bank pays a
dividend to the Company to provide funds for: debt service on the junior subordinated debentures, a portion of the proceeds of which were
contributed to the Bank as capital; dividends the Company pays; treasury stock repurchases; and other Company expenses. As discussed
above under “Item 1A. Risk Factors,” the Company is dependent upon cash flow from its subsidiaries in order to fund its dividend
payments. There are various legal limitations with respect to the Bank’s ability to supply funds to the Company. In particular, under
Federal banking law, the approval of the FRB and OCC may be required in certain circumstances, prior to the payment of dividends by the
Company or the Bank. As of December 31, 2019, approximately $32 million was available for the payment of dividends without prior OCC
approval. See Note 22 to the Company’s Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K
for additional information concerning contractual and regulatory restrictions on the payment of dividends.
23
Table of Contents
PERFORMANCE GRAPH
The following Performance Graph compares the Company's cumulative total stockholder return on its common stock for a five-year period
(December 31, 2014 to December 31, 2019) with the cumulative total return of the NYSE American Composite Index and NASDAQ Bank
Index. The comparison for each of the periods assumes that $100 was invested on December 31, 2014 in each of the Company's common
stock and the stocks included in the NYSE American Composite Index and NASDAQ Bank Index and that all dividends were reinvested
without commissions. This table does not forecast future performance of the Company's stock.
Index
Evans Bancorp, Inc.
NASDAQ Bank
NYSE American - Composite Index
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
100.00
100.00
100.00
109.01
108.84
90.59
137.64
150.17
100.23
186.55
158.37
118.83
147.65
132.75
104.85
12/31/19
187.47
165.11
119.23
In accordance with and to the extent permitted by applicable law or regulation, the information set forth above under the heading
"Performance Graph" shall not be deemed to be "soliciting material" or to be "filed" with the SEC under the Securities Act or the Exchange
Act, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically request that such information be
treated as soliciting material or specifically incorporate it by reference into such a filing.
24
Table of Contents
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Issuer Purchases of Equity Securities
Period
October 2019:
October 1, 2019 - October 31, 2019
November 2019:
November 1, 2019 - November 30, 2019
December 2019:
December 1, 2019 - December 31, 2019
Total:
Total Number of
Shares
Purchased
Average Price
Paid per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
-
-
-
-
- $
- $
- $
- $
25
-
-
-
-
Table of Contents
Item 6.
SELECTED FINANCIAL DATA
Balance Sheet Data
Assets
Interest-earning assets
Investment securities
Loans and leases, net
Deposits
Borrowings
Stockholders' equity
Income Statement Data
Net interest income
Non-interest income
Non-interest expense
Net income
Per Share Data
Earnings per share - basic
Earnings per share - diluted
Cash dividends
Book value
Performance Ratios
Return on average assets
Return on average equity
Net interest margin
Efficiency ratio
Efficiency ratio (Non-GAAP) *
Dividend payout ratio
Capital Ratios
Tier 1 capital to average assets
Equity to assets
Asset Quality Ratios
Total non-performing assets to
total assets
Total non-performing loans and
leases to total loans and leases
Net charge-offs (recoveries) to
average loans and leases
Allowance for loan and lease losses
to total loans and leases
2019
As of and for the year ended December 31,
2016
2017
2018
(in thousands, except for per share data)
2015
$
1,460,230
$
1,388,207
$
1,295,633
$
1,100,709
$
939,107
1,373,488
130,308
1,211,356
1,267,440
23,755
148,453
1,304,256
133,789
1,141,146
1,215,058
24,472
131,646
1,214,806
149,152
1,051,296
1,051,229
108,869
118,342
1,030,113
97,205
928,596
939,974
49,689
96,748
873,450
98,758
761,101
802,982
32,151
91,256
31,804
13,720
32,698
7,843
1.85
1.82
0.72
21.44
0.87 %
8.82 %
3.80 %
71.83 %
71.83 %
38.92 %
$
$
35,248
11,252
35,096
8,272
1.93
1.90
0.76
22.50
0.80 %
8.74 %
3.67 %
75.48 %
74.03 %
39.38 %
9.49 %
8.79 %
10.45 %
9.72 %
1.09 %
1.71 %
1.28 %
2.07 %
0.02 %
0.12 %
1.48 %
1.66 %
$
$
$
$
52,055
18,082
47,820
17,014
3.47
3.42
1.04
30.12
$
$
48,107
15,227
43,293
16,356
3.40
3.32
0.92
27.13
$
$
42,017
13,003
38,594
10,479
2.21
2.16
0.80
24.74
1.17 %
12.08 %
3.82 %
68.18 %
67.21 %
29.97 %
10.33 %
10.17 %
0.99 %
1.17 %
(0.03) %
1.24 %
1.20 %
13.20 %
3.77 %
68.36 %
66.87 %
27.06 %
9.73 %
9.48 %
1.37 %
1.64 %
0.06 %
1.28 %
0.89 %
9.11 %
3.80 %
70.15 %
68.50 %
36.20 %
10.11 %
9.13 %
1.06 %
1.29 %
0.07 %
1.32 %
* The calculation of the non-GAAP efficiency ratio excludes amortization of intangibles, gains and losses from investment securities, merger-related expenses
and the impact of historic tax credit transactions.
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Consolidated
Financial Statements and Supplementary Data,” of this Report on Form 10-K for further information and analysis of changes in the
Company's financial condition and results of operations.
26
Table of Contents
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This discussion is intended to compare the performance of the Company for the years ended December 31, 2019 and 2018. The review of
the information presented should be read in conjunction with Part I, Item 1: “Business” and Part II, Item 6: “Selected Financial Data” and
Item 8: “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Management's Discussion and Analysis
comparing the results for the year ended December 31, 2018 to the results for the year ended December 31, 2017 can be found in Item 7 of
our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 28, 2019, which is hereby
incorporated by reference.
The Company is a financial holding company registered under the BHCA. The Company currently conducts its business through its two
direct wholly-owned subsidiaries: the Bank, and the Bank’s subsidiaries, ENL and ENHC; and ENFS and its subsidiary, TEA. The
Company does not engage in any other substantial business. Unless the context otherwise requires, the term “Company” refers
collectively to Evans Bancorp, Inc. and its subsidiaries.
Summary
Net income in 2019 was $17.0 million, a 4% increase from 2018 net income of $16.4 million. The primary driver of the increase in the
Company’s net income during 2019 was higher net interest income resulting from strong growth in the Company’s commercial loan portfolio
and improved net interest margin, partially offset by an increase in deposit interest expense. Net interest income was $52.1 million in 2019,
an 8% increase from 2018, reflecting an increase in average loans in 2019 of 8% compared with 2018, while net interest margin was 3.82%
and 3.77% in 2019 and 2018, respectively.
Provision for loan losses was $0.1 million and $1.4 million in 2019 and 2018, respectively. The decrease in provision for loan losses during
2019 compared with the prior year primarily reflects improved asset quality of impaired loans, including the successful restructure and
payoff of a single commercial construction loan of $8 million, and a decrease in net loan charge-offs due to a single commercial loan
recovery of $0.7 million, offset by loan growth and an increase in criticized loans. Non-performing loans as a percentage of total loans
decreased from 1.64% at December 31, 2018 to 1.17% at December 31, 2019.
Non-interest income was $18.1 million and $15.2 million in 2019 and 2018, respectively. The largest component of the Company’s non-
interest income, insurance service revenue, was $10.7 million in 2019, an increase of $1.3 million from 2018. The increase in insurance
service revenue compared to 2018 largely reflected the R&S acquisition, which was effective July 1, 2018, and revenue growth in various
business lines including employee benefits and commercial and personal insurance commissions. Deposit service charges were $2.6
million in 2019, an increase of $0.4 million from 2018. The increase in non-interest income during 2019 also reflects a $0.9 million loss on an
investment in a historic rehabilitation tax credit during 2018. There were no significant historic tax credit transactions during 2019.
Non-interest expense was $47.8 million, an increase of $4.5 million from 2018. Salaries and benefits expense, the largest component of non-
interest expenses, increased $2.2 million compared to 2018 due to an investment in talent in the form of salaries and benefits expenses
related to an insurance agency acquisition and for new and existing employees that management believes are critical to the Company’s
growth strategy. The Company has also made a significant investment in technology, including more sophisticated ATM cards, online
banking activity and software costs, resulting in a n increase in technology expenses of $0.7 million in 2019 when compared with
2018. Professional services expenses in 2019 were up $1.3 million compared to 2018, largely due to atypical legal and accounting costs,
including those related to merger-related activities.
Strategy
The Company’s goal is to continue to increase market share and achieve scale while improving profitability and returning value to
shareholders. The Company’s biggest strength and earnings driver is commercial and small business lending. The Company expects to
continue to focus on building on this competitive advantage by adding personnel in this area. Management has also bolstered its biggest
driver of non-interest income, TEA, through both agency and talent acquisition as well as building out its employee benefits and financial
services businesses. In addition, management intends to continue to develop strategies to deepen existing customer relationships with
tailored product sets that reward the Company’s most loyal customers.
27
Table of Contents
The Company’s strategies are designed to direct tactical investment decisions supporting its financial objectives. While the Company
intends to focus its efforts on the pursuit of these strategies, there can be no assurance that the Company will successfully implement
these strategies or that the strategies will produce the desired results. The Company’s most significant revenue source continues to be net
interest income, defined as total interest income less interest expense. Net interest income accounted for 74% of total revenue in 2019. To
produce net interest income and consistent earnings growth over the long-term, the Company must generate loan and deposit growth at
acceptable margins within its market area. To generate and grow loans and deposits, the Company must focus on a number of areas
including, but not limited to, sales practices, customer and employee satisfaction and retention, competition, evolving customer behavior,
technology, product innovation, interest rates, credit performance of its customers and vendor relationships.
The Company also considers non-interest income important to its continued financial success. Fee income generation is partly related to
the Company’s loan and deposit operations, such as deposit service charges, as well as to its financial products, such as commercial and
personal insurance sold through TEA. Improved performance in non-interest income can help increase capital ratios because most of the
non-interest income is generated without recording assets on the balance sheet. The Company has and will continue to face challenges in
increasing its non-interest income as the regulatory environment changes.
The Company has focused its efforts on targeted groups in its community such as (1) smaller businesses with smaller credit needs but rich
in deposits and other service needs; (2) middle market commercial businesses; (3) commercial real estate lending; (4) retail customers; and
(5) municipal customers. The overarching goal is to cross-sell between our insurance, financial services and banking lines of business to
deepen our relationships with all of our customers. These efforts contributed to the strong growth in the commercial loan portfolio, core
deposits, and insurance agency revenue during fiscal 2019.
The Company strives to provide a personal touch to customer service and is committed to maintaining a local, community-based
philosophy. The Bank has emphasized hiring local branch and lending personnel with strong ties to the specific local communities it
serves.
The Bank serves its market through 15 banking offices in Western New York. The Company’s principal source of funding is through
deposits, which it reinvests in the community in the form of loans and investments. Deposits are insured up to the maximum permitted by
the Deposit Insurance Fund of the FDIC. The Bank is regulated by the OCC.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The Company’s Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles
(“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 Consolidated Financial Statements and
Notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial
Statements. Accordingly, as this information changes, the 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.
The most significant accounting policies followed by the Company are presented in Note 1 to the Consolidated Financial Statements
included in Item 8 of this Annual Report on Form 10-K. These policies, along with the disclosures presented in the other Notes to the
Consolidated Financial Statements contained in this Annual Report on Form 10-K and in this financial review, provide information on how
significant assets and liabilities are valued in the Company’s Consolidated Financial Statements and how those values are determined.
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.
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.
28
Table of Contents
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of probable losses in the Bank’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 consolidated balance
sheets.
Management’s methodology and policy in determining the allowance for loan losses can be found in Note 1 to the Consolidated Financial
Statements included in Item 8 of this Annual Report on Form 10-K. The activity in the allowance for loan losses is depicted in supporting
tables in Note 3 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K
Goodwill and Intangible Assets
The amount of goodwill reflected in the Company’s Consolidated Financial Statements is required to be tested by management for
impairment on at least an annual basis. The test for impairment of goodwill in an 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. As of December 31, 2019, TEA had $10.5 million in goodwill. The banking reporting unit does not
have any goodwill. All of the goodwill stems from the acquisition of various insurance agencies, not the purchase of diverse companies in
which goodwill was subjectively allocated to different reporting units. Therefore, a total market capitalization reconciliation was not
performed because not all of the reporting units had goodwill.
Management valued TEA, the reporting unit with goodwill, using cash flow modeling and earnings multiple techniques. The fair value
determined in the impairment test was substantially higher than the carrying value for TEA. Management’s methodology for testing
goodwill for impairment can be found in Note 6 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form
10-K.
The Company amortizes acquired intangible assets with definite useful economic lives over their useful economic lives utilizing the straight-
line method. The Company had $2.0 million in intangible assets, net of accumulated amortization, as of December 31, 2019, primarily related
to acquired customer relationships which are amortized over a 7-year period and a trade name which is amortized over a 5-year period. On a
periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible
assets may be impaired.
For further discussion of the Company’s accounting policy for goodwill and other intangible assets, see Note 1 to the Consolidated
Financial Statements included in Item 8 of this Annual Report on Form 10-K.
29
Table of Contents
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
Net Income
Net income of $17.0 million in 2019 consisted of $16.0 million related to the Company’s banking activities and $1.0 million related to the
Company’s insurance agency activities. The total net income of $17.0 million was a 4% increase from $16.4 million in 2018. Earnings per
diluted share for 2019 of $3.42 were 3% higher than the earnings per diluted share of $3.32 for 2018
Net Interest Income
Net interest income, the difference between interest income and fee income on earning assets, such as loans and securities, and interest
expense on deposits and borrowings, provides the primary basis for the Company’s results of operations.
Net interest income is dependent on the amounts and yields earned on interest earning assets as compared to the amounts of and rates
paid on interest bearing liabilities.
30
Table of Contents
AVERAGE BALANCE SHEET INFORMATION
The following table presents the significant categories of the assets and liabilities of the Company, interest income and interest expense,
and the corresponding yields earned and rates paid in 2019, 2018, and 2017. The assets and liabilities are presented as daily averages. The
average loan balances include both performing and non-performing loans. Interest income on loans does not include interest on loans for
which the Bank has ceased to accrue interest. Available-for-sale securities are stated at fair value. Interest and yield are not presented on a
tax-equivalent basis.
2019
2018
2017
Average
Interest
Average
Interest
Average
Interest
Outstanding Earned/
Yield/ Outstanding Earned/
Yield/ Outstanding Earned/
Yield/
Balance
Paid
Rate
Balance
Paid
Rate
Balance
Paid
Rate
(in thousands)
(in thousands)
(in thousands)
ASSETS
Interest-earning assets:
Loans, net
Taxable securities
$ 1,188,436 $ 60,193
5.06 % $ 1,105,426 $ 53,282
4.82 % $
961,876 $ 44,379
4.61 %
130,535
3,537
2.71 %
121,670
3,253
2.67 %
100,836
2,466
2.45 %
Tax-exempt securities
12,157
313
2.57 %
27,784
650
2.34 %
35,128
837
2.38 %
Interest bearing deposits at banks
32,166
697
-
2.17 %
20,062
427
-
2.13 %
6,699
0.99 %
66
-
Total interest-earning assets
1,363,294 $ 64,740
4.75 %
1,274,942 $ 57,612
4.52 %
1,104,539 $ 47,748
4.32 %
Non interest-earning assets:
Cash and due from banks
Premises and equipment, net
Other assets
Total Assets
13,988
11,960
61,823
-
13,932
10,483
58,891
13,545
10,957
49,055
$ 1,451,065
$ 1,358,248
$ 1,178,096
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW
Regular savings
Time deposits
$
126,628 $
540
0.43 % $
115,193 $
317
0.28 % $
93,881 $
206
0.22 %
595,605
5,248
0.88 %
572,921
3,707
0.65 %
536,862
2,593
0.48 %
286,181
6,151
2.15 %
246,588
4,392
1.78 %
160,440
2,088
1.30 %
Other borrowed funds
Junior subordinated debentures
10,000
11,327
173
565
1.73 %
4.99 %
30,981
11,330
543
535
1.75 %
4.72 %
26,491
11,327
397
426
1.50 %
3.76 %
Securities sold U/A to repurchase
4,279
8
0.19 %
6,166
11
0.18 %
10,703
21
0.20 %
Total interest-bearing liabilities
1,034,020 $ 12,685
1.23 %
983,179 $
9,505
0.97 %
839,704 $
5,731
0.68 %
Noninterest-bearing liabilities:
Demand deposits
Other
Total liabilities
255,125
21,119
$ 1,310,264
235,998
15,143
$ 1,234,320
208,898
14,512
$ 1,063,114
Stockholders' equity
140,801
123,928
114,982
Total Liabilities and Equity
$ 1,451,065
$ 1,358,248
$ 1,178,096
Net interest earnings
Net interest margin
Interest rate spread
$
52,055
$
48,107
$
42,017
3.82 %
3.52 %
31
3.77 %
3.55 %
3.80 %
3.64 %
Table of Contents
The following table segregates changes in interest earned and paid for the past two years into amounts attributable to changes in volume
and changes in rates by major categories of assets and liabilities. The change in interest income and expense due to both volume and rate
has been allocated in the table to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in
each.
2019 Compared to 2018
Increase (Decrease) Due to
2018 Compared to 2017
Increase (Decrease) Due to
(in thousands)
Volume
Rate
Total
Volume
Rate
Total
Interest earned on:
Loans
Taxable securities
Tax-exempt securities
Interest-bearing deposits at banks
Total interest-earning assets
Interest paid on:
NOW accounts
Savings deposits
Time deposits
Other borrowed funds
Total interest-bearing liabilities
$
4,122 $
2,789 $
6,911 $
6,851 $
2,052 $
8,903
239
(396)
262
45
59
8
284
(337)
270
543
(173)
229
244
(14)
132
787
(187)
361
4,227 $
2,901 $
7,128 $
7,450 $
2,414 $
9,864
34 $
189 $
223 $
52 $
59 $
152
770
(607)
1,388
989
265
1,540
1,759
(342)
184
1,366
-
930
938
245
349 $
2,831 $
3,180 $
1,602 $
2,172 $
111
1,114
2,304
245
3,774
$
$
$
Net interest income increased by $3.9 million, or 8%, to $52.1 million in 2019 from $48.1 million in 2018. As indicated in the preceding table,
this increase primarily resulted from increased loan volume and higher loan yields, partially offset by increased time deposit balances and
higher savings and time deposit rates. Overall, the increased volume of interest-earning assets and interest-bearing liabilities positively
impacted net interest income by $3.9 million, while the rates earned and paid on those respective assets and liabilities had a positive impact
of less than $0.1 million.
The total commercial loan portfolio average balance, including commercial real estate and C&I loans, increased $69 million, or 8%, from a
$901 million average balance in 2018 to a $970 million average balance in 2019. Consumer loans, including residential mortgages and home
equity lines of credit, increased 6% from a $218 million average balance in 2018 to a $232 million average balance in 2019.
On the funding side, total average deposits increased $93 million, or 7%, year over year to $1.3 billion in 2019. The Company has continued
to be successful in attracting new deposit customers, with most of that success coming from growth in commercial demand deposit
products, municipal savings deposits, and consumer deposits. Commercial deposits increased as the Company was able to attract new core
customers and some current commercial customers maintained higher cash balances. The Company invested in its government banking
program in an effort to enhance another opportunity to acquire core deposits. Brokered time deposits are utilized as an additional funding
source for loan growth. The Company offered competitive rates for time deposits as a way to raise funds for loan growth and fix interest
rates for a portion of its deposit portfolio. Consistent with the industry wide trend, rising interest rates in recent years led to a shift in the
Company’s deposit mix, as consumer preferences move toward term products with higher rates, resulting in a decrease in consumer savings
deposits and an increase in consumer time deposits. Average time deposits grew $40 million, or 14% in 2019, consisting of a $20 million
increase in retail time deposits and a $20 million increase in brokered time deposits. Average savings deposits grew $23 million, or 4%, in
2019, as increases of $28 million in commercial savings deposits and $21 million in municipal savings deposits, were partially offset by a $26
million decrease in consumer savings deposits which largely funded the growth in retail time deposits. Average demand deposits grew $19
million, or 8%, in 2019, including increases of $13 million in commercial deposits, and $8 million in retail deposits. Average NOW deposits
increased $11 million, or 9%, in 2019, predominantly the result of new product offerings and a $4.5 million increase in municipal deposit
balances.
32
Table of Contents
Net interest spread, or the difference between yield on interest-earning assets and rate on interest-bearing liabilities, decreased from 3.55%
in 2018 to 3.52% in 2019. The yield on interest-earning assets increased 23 basis points to 4.75% in 2019, while the cost of interest-bearing
liabilities increased 26 basis points to 1.23% over the same time periods. The increase in interest-earning asset yields is primarily the result
of the impact of a higher average target federal funds rate in 2019 on the Bank’s variable rate loan portfolio. Most of the Bank’s variable
rate loan portfolio is tied to the Bank’s prime rate, which increases correspondingly with increases in the targeted overnight federal funds
rate. The increase in the cost of interest-bearing liabilities is the result of a competitive deposit market in which the Company increased
promotional pricing on certain deposit products, primarily time deposits. The rate paid on average time deposits increased from 1.78% in
2018 to 2.15% in 2019. Average time deposits were 28% of total interest-bearing liabilities in 2019, compared with 25% in the prior year
period.
The Company’s net interest margin increased from 3.77% in 2018 to 3.82% in 2019, reflecting higher yielding loan balances. Several factors
could continue to put pressure on the Company’s net interest margin in the future, including reductions of the targeted federal funds rate
and increased pricing competition for loans and deposits.
The Bank regularly monitors its exposure to interest rate risk. Management believes that the proper management of interest-sensitive funds
will help protect the Bank’s earnings against changes in interest rates. The Bank’s Asset/Liability Management Committee (“ALCO”)
meets monthly for the purpose of evaluating the Bank’s short-term and long-term liquidity position and the potential impact on capital and
earnings of changes in interest rates. The Bank has adopted an asset/liability policy that specifies minimum limits for liquidity and capital
ratios. This policy includes setting ranges for the negative impact acceptable on net interest income and on the fair value of equity as a
result of a shift in interest rates. The asset/liability policy also includes guidelines for investment activities and funds management. At its
monthly meetings, ALCO reviews the Bank’s status and formulates its strategies based on current economic conditions, interest rate
forecasts, loan demand, deposit volatility and the Bank’s earnings objectives.
Provision for Loan Losses
The Company’s provision for loan losses of $0.1 million in 2019 was down from $1.4 million in 2018 primarily due to improved asset quality
of impaired loans including the successful restructure and payoff of a single commercial construction loan of $8 million, and a decrease in
net loan charge-offs due to a single commercial loan recovery of $0.7 million, offset by loan growth and an increase in criticized loans. The
ratio of non-performing loans to total loans was 1.17% at December 31, 2019 compared with 1.64% at the end of 2018. The Company records
a specific reserve on impaired loans and a higher reserve percentage on criticized loan balances, or those loans risk-rated special mention or
worse, which are collectively evaluated for impairment. At December 31, 2019, criticized loans that were collectively evaluated for
impairment totaled $36.8 million, compared with $20.1 million at December 31, 2018. Overall, total loans collectively evaluated for impairment
increased $76 million to $1.2 billion at the end of 2019 from $1.1 billion as of December 31, 2018 resulting in additional provision due to the
loan growth qualitative factor. There was not a material impact on the provision due to any changes in qualitative factors related to
economic factors as the economy remained on a steady growth path with relatively low unemployment in the Company’s primary market
area throughout 2019.
A description of how the allowance for loan losses is determined along with tabular data depicting the key factors in calculating the
allowance is set forth in Notes 1 and 3 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report
on Form 10-K.
33
Table of Contents
Non-accrual, Past Due and Restructured Loans
The following table summarizes the Bank’s non-accrual and accruing loans 90 days or more past due as of the dates listed below. See Note
3 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information
about the Company's non-accrual, past due and restructured loans.
Non-accruing loans and leases:
Mortgage loans on real estate:
Residential mortgages
Commercial and multi-family
Construction-residential
Construction-commercial
Home equities
Total mortgage loans on
real estate
Commercial and industrial loans
Consumer and other loans
Total non-accruing loans
and leases
2019
2018
At December 31,
2017
(in thousands)
2016
2015
$
1,438
5,659
-
1,575
890
9,562
4,834
-
$
1,463
5,945
-
8,636
1,253
$
1,226
8,938
-
-
1,119
$
17,297
11,283
1,694
-
1,749
9
862
1,874
-
4,178
1,261
8,175
3,106
17
$
1,400
3,574
-
4,187
1,058
10,219
5,312
14
$
14,396
$
18,991
$
13,041
$
11,298
$
15,545
Accruing loans 90+ days past due
-
-
674
722
497
Total non-performing loans
and leases
Total non-performing loans and
leases to total assets
Total non-performing loans and
leases to total loans and leases
$
14,396
$
18,991
$
13,715
$
12,020
$
16,042
0.99 %
1.17 %
1.37 %
1.64 %
1.06 %
1.29 %
1.09 %
1.28 %
1.71 %
2.07 %
Non-performing loans decreased $4.6 million from $19.0 million at December 31, 2018 to $14.4 million at December 31, 2019. The decrease in
2019 was primarily driven by the restructuring and payoff of one large commercial loan relationship of $8.6 million that was in nonaccrual
status during 2018, offset by loans previously in accruing status that moved to non-accrual status during 2019. Non-performing loans
included $14.4 million of non-accruing loans at December 31, 2019 compared with $19.0 million at December 31, 2018. There were no
accruing loans categorized as 90 days past due at December 31, 2019 and 2018.
The Company had $8.3 million in loans that were restructured and deemed to be a troubled debt restructuring (“TDR”) at December 31, 2019
with $4.0 million of those balances in non-accrual status, compared with $17.6 million and $12.9 million, respectively, at December 31,
2018. The decrease in TDR loans reflects the restructuring and payoff of the non-accruing construction loan discussed above. Any TDR
that is placed on non-accrual is not returned 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 restructurings were completed in an effort to maximize the
Company’s ability to collect on loans where borrowers were experiencing financial difficulty. Modifications made to loans in a troubled
debt restructuring did not have a material impact on the Company’s net income for the years ended December 31, 2019 and 2018. The
reserve for a TDR is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate or upon
the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent. This reserve methodology is used because all
TDR loans are considered impaired.
34
Table of Contents
The following table presents the Company’s TDR loans as of December 31, 2019 and 2018:
Commercial and industrial
Residential real estate:
Residential
Construction
Commercial real estate:
Commercial and multi-family
Construction
Home equities
Consumer and other loans
Total TDR loans
Commercial and industrial
Residential real estate:
Residential
Construction
Commercial real estate:
Commercial and multi-family
Construction
Home equities
Consumer and other
Total TDR loans
December 31, 2019
(in thousands)
Total
Nonaccruing
Accruing
Related Allowance
$
2,052
$
328
$
1,724
$
1,815
-
3,632
-
738
21
449
-
3,075
-
175
-
1,366
-
557
-
563
21
$
8,258
$
4,027
$
4,231
.
$
26
-
-
-
-
-
21
47
December 31, 2018
(in thousands)
Total
Nonaccruing
Accruing
Related
Allowance
$
2,282
$
275
$
2,007
$
154
1,617
-
4,164
8,753
756
23
266
-
3,571
8,637
122
-
1,351
-
593
116
634
23
$
17,595
$
12,871
$
4,724
$
14
-
-
716
-
23
907
35
Table of Contents
Allowance for Loan and Lease Losses
The following table summarizes the Bank’s allowance for loan and lease losses and changes in the allowance for loan losses by categories:
BALANCE AT THE BEGINNING
OF THE YEAR
CHARGE-OFFS:
Residential mortgages
Commercial and multi-family
Home equities
Commercial and industrial loans
Consumer and other loans
TOTAL CHARGE-OFFS
RECOVERIES:
Residential mortgages
Commercial and multi-family
Home equities
Commercial and industrial loans
Consumer and other loans
TOTAL RECOVERIES
NET CHARGE-OFFS
PROVISION FOR LOAN
AND LEASE LOSSES
BALANCE AT THE END OF YEAR
RATIO OF NET CHARGE-OFFS
(RECOVERIES) TO AVERAGE
NET LOANS AND LEASES
OUTSTANDING
RATIO OF ALLOWANCE FOR
LOAN AND LEASE LOSSES TO
TOTAL LOANS AND LEASES
2019
2018
2017
(in thousands)
2016
2015
$
14,784
$
14,019
$
13,916
$
12,883
$
12,533
(13)
(33)
(22)
(301)
(156)
(525)
-
2
-
797
42
841
316
(86)
(262)
(27)
(203)
(113)
(691)
-
-
1
41
12
54
-
(127)
(1)
(791)
(66)
(985)
-
-
3
323
24
350
-
-
-
(360)
(47)
(407)
2
59
3
151
16
231
(66)
(139)
-
(799)
(43)
(1,047)
2
44
-
126
9
181
(637)
(635)
(176)
(866)
75
15,175
$
1,402
14,784
$
738
14,019
$
1,209
13,916
$
1,216
12,883
$
(0.03) %
0.06 %
0.07 %
0.02 %
0.12 %
1.24 %
1.28 %
1.32 %
1.48 %
1.66 %
36
Table of Contents
At December 31, 2019 the Company had net loan recoveries of $0.3 million compared to net loan charge-offs of $0.6 million in 2018. The
ratio of net loan charge-offs to average net loans outstanding was 0.06% in 2018 compared with net loan recoveries of 0.03% in 2019.
During 2019 a $0.7 million recovery was recognized as a previously charged-off commercial loan paid off. The largest charge-off in 2018 was
a $0.3 million partial charge-off of a commercial real estate loan. The loan was charged-off when it was determined that the non-accruing
loan was no longer collectible and the value of the collateral supporting the loan was appraised lower than the outstanding loan balance.
An allocation of the allowance for loan losses by portfolio type over the past five years follows:
Balance at
12/31/2019:
Percent of
loans to total
loans:
Balance at
12/31/2018:
Percent of
loans to total
loans:
Balance at
12/31/2017:
Percent of
loans to total
loans:
Balance at
12/31/2016:
Percent of
loans to total
loans:
Balance at
12/31/2015:
Percent of
loans to total
loans:
(in thousands)
$
1,071
13 % $
1,121
14 % $
950
12 % $
769
13 % $
909
14 %
9,005
61 %
8,844
60 %
7,409
59 %
7,890
59 %
7,135
59 %
Residential
mortgages*
Commercial
mortgages*
Home equities
397
6 %
345
6 %
347
7 %
348
7 %
371
8 %
Commercial
loans
Consumer
loans**
4,547
20 %
4,368
20 %
5,204
22 %
4,813
21 %
4,383
19 %
155
- %
106
- %
109
- %
96
- %
85
- %
Unallocated
-
- %
-
- %
-
- %
-
- %
-
$
15,175
100 % $
14,784
100 % $
14,019
100 % $
13,916
100 % $
12,883
- %
100 %
* includes construction loans
** includes other loans
Commercial mortgages comprised 59% of the allowance for loan losses, and correspondingly, the commercial mortgage portfolio made up
the largest proportion, or 61%, of the total loan portfolio as of December 31, 2019, as compared with 60% of the allowance and 60% of the
total loan portfolio at December 31, 2018. The decrease in the percentage of the allowance attributed to commercial mortgages reflected the
decrease in impaired loans within the commercial real estate portfolio.
C&I loans comprised 30% of the allowance for loan losses despite being only 20% of the loan portfolio as of December 31, 2019. C&I loans
have the highest historical loss experience compared to the other portfolio segments and this is reflected in the allowance allocated to the
different portfolio segments. Therefore, C&I loans have the highest allowance allocation as a percentage of the portfolio segment when
compared with the other portfolio segments.
Overall, the ratio of the allowance for loan losses to total loans decreased from 1.28% at December 31, 2018 to 1.24% on December 31,
2019. The decrease is a reflection of loan growth and a sustained level of low charge-offs. The non-performing loans to total loans ratio
decreased from 1.64% at the end of 2018, to 1.17% at the conclusion of 2019.
The Company maintains a robust loan review process to ensure that specific credits are appropriately graded and reserved. Management
believes that the allowance for loan losses is reflective of a fair assessment of the current environment and credit quality trends.
Non-Interest Income
Total non-interest income increased by $2.9 million from $15.2 million in 2018 to $18.1 million in 2019. The primary factor driving the
increase was revenue growth in insurance services fees of 14%, or $1.3 million to $10.7 million. Insurance revenue remains the largest
component of non-interest income at 59% of total non-interest income. TEA is a source of diversification in the earnings of the Company
and helps generate income not directly impacted by difficult credit or interest rate environments. The largest contributors of the increase in
insurance income from 2018 were commercial and personal lines revenue of $0.4 million and $0.3 million, respectively. TEA’s increased
insurance service and fee revenue reflected a full year of revenue from the R&S agency which was acquired during
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2018. Employee benefit revenue increased $0.3 million from 2018 as well as profit sharing and insurance claims services revenue each
contributing $0.1 million to the increase in revenue during 2019.
Deposit service charges increased $0.4 million, or 18% to $2.6 million from 2018. This increase reflects newer service offerings, including
overdraft protection for small business customers.
The Company is actively engaged in the community by financing historic rehabilitation projects in Buffalo and enhances its yield by
investing in related tax credits. When a project is completed, the Company recognizes tax benefits with a related reduction in the
investment. The impact on non-interest income from historic tax credit investments was a $0.9 million loss in 2018. There were no
significant historic tax credit transactions in 2019. The 2018 loss on historic tax credit investments was more than offset by corresponding
income tax benefit. For further discussion of the Company’s accounting for historic tax credit transactions, see Note 13 to the Consolidated
Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Non-Interest Expense
Total non-interest expense increased $4.5 million, or 10%, from $43.3 million in 2018 to $47.8 million in 2019. The largest increases in non-
interest expense in 2019 when compared with 2018 were salaries and employee benefits, which increased $2.2 million, or 8%, professional
services which increased $1.3 million, or 52% and technology and communication expenses, which increased $0.7 million, or 22%.
Offsetting those increases was a reduction in FDIC insurance expense of $0.6 million, or 58% as a result of lower assessment rates resulting
from improved financial ratios and the application of the FDIC’s small bank assessment credit.
The increase in salaries and employee benefits stems from the addition of new employees as part of the Company’s planned growth
strategy, merit increases, higher incentive compensation and severance costs. The increase in professional services expenses was largely
due to atypical legal and accounting costs, including merger-related activities and costs associated with a cyber incident and related
matters. Technology and communications expenses increased due to higher software costs, volume related ATM card fees and online
banking activity.
The efficiency ratio expresses the relationship of operating expenses to revenues. The Company's GAAP efficiency ratio, or non-interest
operating expenses divided by the sum of net interest income and non-interest income, was 68.2% in 2019 compared with 68.4% in 2018.
The Company’s non-GAAP efficiency ratio, which excludes amortization expense, gains and losses from investment securities, merger-
related expenses and the impact of historic tax credit transactions was 67.2% in 2019 compared with 66.9% in 2018.
Taxes
Income tax expense for the year was $5.2 million, representing an effective tax rate of 23.5% compared with an effective tax rate of 12.2% in
2018. Income tax expense in 2018 included a tax benefit relating to historic tax credit transactions in addition to the benefit of a change in
estimate of when certain state historic tax credits will be taxable for federal purposes. Excluding these items, the effective tax rate was 22.2%
in 2018. For further discussion of the Company’s income taxes, including a reconciliation from the statutory rate to the actual rate for 2019
and 2018, see Note 13 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
FINANCIAL CONDITION
The Company had total assets of $1.5 billion at December 31, 2019, an increase of $72 million, or 5%, from $1.4 billion at December 31,
2018. Net loans of $1.2 billion at the recent year end were $70 million, or 6%, higher than at December 31, 2018. Total investment securities
decreased $4 million from $134 million at December 31, 2018 to $130 million at December 31, 2019, and deposits increased by $52 million, or
4%, to $1.3 billion as of the end of 2019. Stockholders’ equity was $148 million at the conclusion of 2019, a $17 million, or 13% increase from
$132 million at the previous year end.
Securities Activities
The primary objectives of the Bank’s securities portfolio are to provide liquidity and maximize income while preserving safety of
principal. Secondary objectives include: providing collateral to secure local municipal deposits, the investment of funds during periods of
decreased loan demand, interest rate sensitivity considerations, supporting local communities through the purchase of tax-exempt
securities and tax planning considerations. The Bank’s Board of Directors is responsible for establishing overall policy and reviewing
performance of the Bank’s investments.
Under the Bank’s policy, acceptable portfolio investments include: United States Government obligations, obligations of federal agencies
or U.S. Government-sponsored enterprises, mortgage-backed securities, municipal obligations (general obligations, revenue obligations,
school districts and non-rated issues from the Bank’s general market area), banker’s acceptances, certificates of deposit, Industrial
Development Authority Bonds, Public Housing Authority Bonds, corporate bonds (each corporation limited to the Bank’s
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legal lending limit), collateralized mortgage obligations, Small Business Investment Companies (SBIC), Federal Reserve stock and Federal
Home Loan Bank stock.
In regard to municipal securities, the Company’s general investment policy is that in-state securities must be rated at least Moody’s Baa (or
equivalent) at the time of purchase. The Company reviews the ratings report and municipality financial statements and prepares a pre-
purchase analysis report before the purchase of any municipal securities. Out-of-state issues must be rated by Moody’s at least Aa (or
equivalent) at the time of purchase. The Company did not own any out-of-state municipal bonds at December 31, 2019 or December 31,
2018. Bonds rated below A are reviewed periodically to ensure their continued credit worthiness. While purchase of non-rated municipal
securities is permitted, such purchases are limited to bonds issued by municipalities in the Company’s general market area. Those
municipalities are typically customers of the Bank whose financial situation is familiar to management. The financial statements of the
issuers of non-rated securities are reviewed by the Bank and a credit file of the issuers is kept on each non-rated municipal security with
relevant financial information.
The Company has not experienced any credit troubles in its municipal bond portfolio and does not believe any credit troubles are
imminent. Aside from the non-rated municipal securities to local municipalities discussed above that are considered held-to-maturity, all of
the Company’s available-for-sale municipal bonds are investment-grade government obligation (“G.O.”) bonds. G.O. bonds are generally
considered safer than revenue bonds because they are backed by the full faith and credit of the government while revenue bonds rely on
the revenue produced by a particular project. All of the Company’s municipal bonds are to municipalities in New York State. To the
Company’s knowledge, there has never been a default on a NY G.O. bond in the history of the state. The Company believes that its risk of
loss on default of a G.O. municipal bond for the Company is relatively low. However, historical performance does not guarantee future
performance.
All fixed and adjustable rate mortgage pools backing the Company’s mortgage-backed securities contain a certain amount of risk related to
the uncertainty of prepayments of the underlying mortgages. Interest rate changes have a direct impact on prepayment rates. The
Company uses a third-party developed model to monitor the average life and yield volatility of mortgage pools under various interest rate
assumptions.
The Company designates all securities at the time of purchase as either “held to maturity” or “available for sale.” Securities designated as
held to maturity are reported at amortized cost and consist of municipal investments that the Bank has made in its local market area. At
December 31, 2019, $2.4 million in securities were designated as held to maturity. Debt and mortgage backed securities designated as
available for sale are reported at fair market value.
Fair values for available for sale securities are determined using independent pricing services and market-participating brokers. The
Company utilizes a third-party for these pricing services. The third-party 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 third-party service provider’s 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, our third-party pricing service provider uses model processes, such as the Option Adjusted Spread model, 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 third party, at times, may 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, as submitted by our third-party pricing service provider, in the market value of its securities
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 securities portfolio priced by a second pricing
service to determine consistency with another market evaluator. If, on the Company’s review or in comparing with another servicer, a
material difference between pricing evaluations were to exist, the Company may submit an inquiry to our third party pricing 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 our third-party pricing service provider’s evaluation it can submit a challenge for a change to that security’s valuation.
There were no material differences in valuations noted in 2019 or 2018.
The available for sale portfolio totaled $128 million or approximately 98% of the Company’s securities portfolio at December 31, 2019. Net
unrealized gains and losses on available for sale securities resulted in an unrealized gain of $0.7 million at December 31, 2019, as compared
with an unrealized loss of $3.2 million at December 31, 2018 The change in the net unrealized position of the portfolio in 2019 was due to the
decrease in market interest rates during the year. Unrealized gains and losses on available-for-sale securities are reported, net of taxes, as a
separate component of stockholders’ equity. For the year ended December 31, 2019, the impact of net unrealized gains, net of taxes, on
stockholders’ equity was $2.9 million.
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Table of Contents
Certain securities available for sale were in an unrealized loss position at December 31, 2019. Management assessed those securities
available for sale in an unrealized loss position at December 31, 2019 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, the financial condition of the issuer (primarily government or government-
sponsored enterprises) and the Company’s ability and intent to hold these securities until their fair value recovers to 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 issuer.
Securities and interest-bearing deposits at banks made up 13% of the Company’s total average interest-earning assets in 2019 and
2018. The Company’s securities portfolio outstanding balances decreased from $134 million at December 31, 2018 to $130 million at
December 31, 2019 and the Company’s interest-bearing deposits at banks increased from $26 million to $28 million over the same time
period. The interest-bearing deposits are liquid interest-bearing cash accounts at correspondent banks. At December 31, 2019, the
Company’s concentration in U.S. government-sponsored agency bonds was 22% of the total securities balance versus 25% at December
31, 2018. Government-sponsored mortgage-backed securities comprised 74% of the portfolio at December 31, 2019, compared with 57% of
the portfolio at December 31, 2018, and tax-advantaged municipal bonds made up 4% of the portfolio at December 31, 2019 versus 18% of
the portfolio at December 31, 2018. The decrease in securities was a result of managing excess funds into interest-bearing deposits. With
the flattened yield curve, the Company determined that maintaining liquidity was preferred to purchasing longer duration securities, which
do not offer the appropriate level of yield during the year.
As a member of both the Federal Reserve System and the FHLB, the Bank is required to hold stock in those entities. The Bank held $1.6
million and $1.5 million in FHLB stock as of December 31, 2019 and 2018, respectively, and $2.0 million and $1.9 million in FRB stock at
December 31, 2019 and 2018, respectively.
Income from securities held in the Bank’s investment portfolio represented 6% of total interest income of the Company in 2019 and 7% in
2018 and 2017. Taxable securities yields improved to 2.71% in 2019 from 2.67% in 2018, and 2.45% in 2017, while tax-exempt yields were
2.51% in 2019, 2.34% in 2018 from 2.38% in 2017. Returns improved in 2019 as market interest rates rose. The tax-exempt portfolio has
significantly declined since 2017 as the decrease in the Company’s federal tax rate has reduced the effectiveness of municipal bonds.
Available for sale securities with a total fair value of $102 million at December 31, 2019 were pledged as collateral to secure public deposits
and for other purposes required or permitted by law.
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The following table summarizes the Bank’s securities with those designated as debt and mortgage backed securities at fair value and
securities designated as equity and held to maturity at amortized cost as of December 31, 2019 and 2018:
Available for Sale:
Debt securities
U.S. government agencies
States and local subdivisions
Total debt securities
Mortgage-backed securities
FNMA
FHLMC
GNMA
SBA
CMO's
Total mortgage-backed securities
Total available for sale securities
Held to Maturity:
Debt securities
States and local subdivisions
Total held to maturity securities
At December 31,
2019
2018
(in thousands)
$
$
$
$
$
$
$
28,155 $
3,351
31,506 $
34,672 $
15,514
3,413
13,772
29,045
96,416 $
127,922 $
2,386 $
2,386 $
33,928
22,173
56,101
27,039
14,225
1,630
9,133
23,976
76,003
132,104
1,685
1,685
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The following table sets forth the contractual maturities and weighted average interest yields of the Bank’s securities portfolio (yields on
tax-exempt obligations are not presented on a tax-equivalent basis) as of December 31, 2019. Expected maturities will differ from contracted
maturities since issuers may have the right to call or prepay obligations without penalties.
Maturing
Within
One Year
After One But
After Five But
Within Five Years
Within Ten Years
After
Ten Years
Amount
Yield
Amount
Yield
($ in thousands)
Amount
Yield
Amount
Yield
$
6,014
1.70 % $
5,320
2.33 % $
16,821
2.43 % $
-
- %
-
- %
1.70 % $
1,306
6,626
3.57 %
2.57 % $
2,045
18,866
3.30 %
2.52 % $
-
-
- %
- %
Available for Sale:
Debt Securities
U.S. Government agencies
States and political
subdivisions
Total debt securities
$
6,014
Mortgage-backed securities
FNMA
FHLMC
GNMA
SBA
CMO
Total mortgage-backed
securities
Total available for sale
Held to Maturity:
Debt Securities
States and political
subdivisions
Total held to maturity
Total securities
LENDING ACTIVITIES
$
$
$
$
$
$
-
-
-
-
-
- % $
- %
- %
- %
- %
4,405
117
-
-
-
2.41 % $
3.87 %
- %
- %
- %
11,302
1,422
357
-
2,853
2.62 % $
2.44 %
3.74 %
- %
3.19 %
18,965
13,975
3,056
13,772
26,192
3.12 %
3.00 %
3.39 %
2.82 %
2.44 %
-
- % $
4,522
2.45 % $
15,934
2.73 % $
75,960
2.82 %
6,014
1.70 % $
11,148
2.52 % $
34,800
2.62 % $
75,960
2.82 %
1,139
1,139
2.53 % $
2.53 % $
712
712
2.95 % $
2.95 % $
54
54
3.50 % $
3.50 % $
481
481
2.97 %
2.97 %
7,153
1.83 % $
11,860
2.55 % $
34,854
2.62 % $
76,441
2.82 %
The Bank has a loan policy which is approved by its Board of Directors on an annual basis. The loan policy governs the conditions under
which loans may be made, addresses the lending authority of Bank officers, documentation requirements, appraisal policy, charge-off
policies and desired portfolio mix. The Bank’s lending limit to any one borrower is subject to regulation by the OCC. The Bank continually
monitors its loan portfolio to review compliance with new and existing regulations.
The Bank offers a variety of loan products to its customers, including residential and commercial real estate mortgage loans, commercial
loans, and installment loans. The Bank primarily extends loans to customers located within the Western New York area. Interest income on
loans represented 93% of the total interest income of the Company in 2019, 92% in 2018 and 93% in 2017. The Bank’s loan portfolio, net of
the allowances for loan losses, totaled $1.2 billion and $1.1 billion at December 31, 2019 and December 31, 2018, respectively. The net loan
portfolio represented 87% of the Company’s average interest-earning assets during 2019 and 2018.
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Table of Contents
The following table summarizes the major classifications of the Bank’s loans as of the dates indicated:
2019
2018
December 31,
2017
(in thousands)
2016
2015
$
158,572 $
645,036
1,067
97,848
69,351
971,874
158,404 $
592,507
113
105,196
70,546
926,766
131,208 $
519,902
2,134
107,274
69,745
830,263
251,197
1,926
1,534
1,226,531
226,057
1,520
1,587
1,155,930
232,211
1,654
1,187
1,065,315
118,542 $
462,385
2,540
93,240
66,234
742,941
197,371
1,417
783
942,512
103,941
399,819
1,546
60,892
61,042
627,240
144,330
1,735
679
773,984
(15,175)
(14,784)
(14,019)
(13,916)
(12,883)
$
1,211,356 $
1,141,146 $
1,051,296 $
928,596 $
761,101
Mortgage loans on real estate:
Residential Mortgages
Commercial and multi-family
Construction-Residential
Construction-Commercial
Home equities
Total real estate loans
Commercial and industrial loans
Consumer and other loans
Net deferred loan origination costs
Total gross loans and leases
Allowance for loan and
lease losses
Loans and leases, net
Real Estate Loans
Approximately 79% of the Bank’s total loan portfolio at December 31, 2019 consisted of real estate loans or loans collateralized by
mortgages on real estate, including residential mortgages, commercial mortgages and other types of real estate loans. The Bank’s real
estate loan portfolio was $972 million at December 31, 2019, compared with $927 million at December 31, 2018. The real estate loan portfolio
increased by 5% in 2019 over 2018 compared with an increase of 12% in 2018 over 2017.
The Bank offers fixed rate residential mortgage loans with terms of 10 to 30 years with, typically, up to an 80% loan-to-value (“LTV”)
ratio. Fixed rate residential mortgage loans outstanding totaled $156 million at December 31, 2019 and 2018, which was 13% and 14% of total
loans outstanding, respectively. This balance did not include any construction residential mortgage loans, which are discussed
below. Residential mortgage originations in 2019 were $28 million compared with $45 million in 2018. The decline was primarily the result of
a decrease in number of mortgage loan officers at the Bank.
The Bank has a contractual arrangement with FNMA, pursuant to which the Bank sells certain mortgage loans to FNMA and the Bank
retains the servicing rights to those loans. The Bank determines with each origination of residential real estate loans which desired
maturities, within the context of overall maturities in the loan portfolio, provide the appropriate mix to optimize the Bank’s ability to absorb
the corresponding interest rate risk within the Company’s tolerance ranges. In 2019, the Bank sold $13 million in mortgages to FNMA
under this arrangement, compared with $4 million in mortgages sold in 2018.
At December 31, 2019, the Bank had retained the servicing rights on $76 million in mortgages sold to FNMA, compared with a $73 million
servicing portfolio of loans sold to FNMA at December 31, 2018. The Company recorded a net servicing asset for such loans of $0.6 million
at December 31, 2019 and 2018.
The Bank offers adjustable rate residential mortgage loans with terms of up to 30 years. Rates on these mortgage loans remain fixed for a
predetermined time and are adjusted annually thereafter. The Bank’s outstanding adjustable rate residential mortgage loans were $2 million
at December 31, 2019 and 2018. At each respective time period adjustable rate residential mortgage loans represented less than 1% of total
loans outstanding. With rates on fixed rate mortgage products at still near historic lows, there has been little demand for variable-rate
products which has resulted in minimal growth in variable rate mortgage loan balances.
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Overall, residential real estate loans remained relatively flat, from $158 million at December 31, 2018 to $159 million at December 31, 2019.
The Bank also offers commercial mortgage loans with up to an 80% LTV ratio for up to 20 years on a variable and fixed rate basis. Many of
these mortgage loans either mature or are subject to a rate call after three to five years. To the extent required, loans exceeding an 80% LTV
are reported on an exception report to the Board of Directors. The Bank’s outstanding commercial mortgage loans were $645 million at
December 31, 2019, which was 53% of total loans outstanding, and 9% higher than the $593 million balance at December 31, 2018. The
Company’s Western New York footprint continued to experience strong demand for commercial real estate in 2019. The balance at
December 31, 2019 included $204 million in fixed rate and $441 million in variable rate commercial mortgage loans, which include interest rate
calls.
The Bank also offers other types of loans collateralized by real estate, such as home equity loans. The Bank offers home equity loans at
variable and fixed interest rates with terms of up to 15 years and up to an 85% combined LTV ratio. At December 31, 2019, the real estate
loan portfolio included $69 million of home equity loans, which represented 6% of total loans outstanding, compared with $71 million and
6% at December 31, 2018, respectively. The total home equity portfolio included $61 million in variable rate loans and $8 million in fixed rate
loans.
The Bank also offers both residential and commercial real estate construction loans at up to an 80% LTV ratio at fixed interest or adjustable
interest rates and multiple maturities. At December 31, 2019, adjustable rate construction loans outstanding totaled $85 million, or 7% of
total loans outstanding, and fixed rate real estate construction loans outstanding totaled $14 million, or 1% of total loans outstanding. At
December 31, 2018, adjustable rate construction loans outstanding totaled $103 million, or 9% of total loans outstanding, and fixed rate real
estate construction loans outstanding totaled $3 million, or less than 1% of total loans outstanding. Western New York has experienced a
strong commercial construction market recently and the Company’s commercial real estate lending expertise has allowed the Company to
take advantage of this strong market and grow this portfolio significantly over the past three years.
Commercial and Industrial Loans
The Bank offers C&I loans on a secured and unsecured basis, including lines of credit and term loans at fixed and variable interest rates and
multiple maturities. The Bank’s C&I loan portfolio totaled $251 million at December 31, 2019, compared with $226 million at December 31,
2018, a 11% increase. The growth is attributable to the success of the Bank’s community-focused and relationship-based lending approach
in the local market. C&I loans represented 20% of the Bank’s total loans at the end of 2019 and 2018, respectively.
Collateral for C&I loans, where applicable, may consist of inventory, receivables, equipment and other business assets. At December 31,
2019, 53% of the Bank’s C&I loans were at variable rates which are tied to the prime rate or LIBOR.
Consumer Loans
The Bank’s consumer installment and other loan portfolio totaled $2 million at December 31, 2019 and 2018, representing less than 1% of the
Bank’s total loans outstanding at those dates. Traditional installment loans are offered at fixed interest rates with various maturities of up
to 60 months, on a secured and unsecured basis. This segment of the portfolio is done on an accommodation basis for customers. The
Company does not actively try to grow the portfolio in a significant way. Other loans consisted primarily of cash reserves, overdrafts, and
loan clearing accounts.
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Table of Contents
Loan Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the maturities of commercial and industrial loans and commercial real estate construction loans outstanding as of
December 31, 2019 and the classification of those loans due after one year according to sensitivity to changes in interest rates.
Within
One Year
After One But
Within Five Years
After Five
Years
Total
Commercial and industrial
Commercial real estate construction
$
$
77,161 $
32,429
109,590 $
(in thousands)
98,332 $
14,269
112,601 $
75,704 $
51,150
126,854 $
251,197
97,848
349,045
Loans maturing after one year with:
Fixed Rates
Variable Rates
SOURCES OF FUNDS
General
$
$
52,217 $
60,384
112,601 $
75,426
51,428
126,854
Customer deposits represent the primary source of the Bank’s funds for lending and other investment purposes. In addition to deposits,
other sources of funds include loan repayments, loan sales on the secondary market, interest and dividend income from investments,
matured investments, and borrowings from the FHLB and from correspondent banks.
Deposits
The Bank offers a variety of deposit products, including checking, savings, NOW accounts, certificates of deposit and jumbo certificates of
deposit. Bank deposits are insured up to the limits provided by the FDIC. The following table details the Bank’s deposits as of the dates
indicated:
2019
December 31,
2018
(in thousands)
2017
Demand deposits
NOW accounts
Regular savings
Time deposits, $250,000 and over
Other time deposits
Total
$
$
263,717
$
231,902
$
140,654
587,142
58,002
217,925
1,267,440 $
110,450
571,479
59,525
241,702
1,215,058
$
219,664
109,378
535,730
40,182
146,275
1,051,229
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The following schedule sets forth the maturities of the Bank’s time deposits as of December 31, 2019:
0-3 Mos.
3-6 Mos.
6-12 Mos.
Over 12 Mos.
Total
Time Deposit Maturity Schedule
(in thousands)
Time deposits - $100,000 and over
Other time deposits
Total time deposits
$
$
31,636 $
60,265 $
25,023 $
21,561
53,197 $
40,138
100,403
$
30,003
55,026 $
25,884
$
41,417
67,301
$
142,808
133,119
275,927
Total deposits at December 31, 2019 increased $52 million or 4% from the end of 2018. The increase was comprised of higher commercial and
municipal deposits. Commercial deposits increased as the Company was able to attract new core customers and some current commercial
customers maintained higher cash balances. The Company invested in its government banking program in an effort to enhance another
opportunity to acquire core deposits.
The Company grew core transactional checking accounts, including non-interest bearing demand deposits and NOW accounts, by 18% to
$404 million at December 31, 2019. The $32 million in growth in non-interest bearing demand deposits during 2019 was largely due to
growth in retail demand deposits of $19 million and commercial demand deposits of $15 million, partially offset by a decrease in municipal
demand deposits of $2 million. The growth in retail demand deposits was largely the result of new product offerings and was generally
funded by decreases in retail time, NOW and savings deposits. NOW accounts increased $30 million or 27% during 2019, primarily
attributable to increases in commercial deposits of $16 million and municipal deposits of $16 million, partially offset by a decrease in retail
NOW deposits of $2 million.
As of December 31, 2019, savings deposits increased $16 million, or 3%, over the previous year end. The growth in savings deposits was
attributable to a $17 million increase in commercial savings deposits, while retail and municipal savings deposits declined slightly.
Time deposits were $276 million as of December 31, 2019, a $25 million or 8% decrease from December 31, 2018. The Company offered
competitive rates for time deposits as a way to raise funds for loan growth and fix interest rates for a portion of its deposit portfolio,
however decreases in interest rates in the second half of 2019, reflecting FRB reductions to the targeted federal funds rate, resulted in a
decrease in year-over-year as at balances. Brokered time deposits, included in other time deposits in the tables above, provide an
additional funding source for loan growth. Consumer time deposits decreased $11 million which largely funded the growth in retail demand
deposits. Brokered time deposits decreased $14 million from December 31, 2018 to December 31, 2019.
The following table shows daily average deposits and average rates paid on significant deposit categories by the Bank:
2019
2018
2017
Average Balance
Weighted Average
Rate
Average Balance
Weighted
Average Rate
Average Balance
Weighted
Average Rate
(in thousands)
Demand deposits
NOW accounts
Regular savings
Time deposits
Total
$
$
255,125
126,628
595,605
286,181
1,263,539
- %
0.43 %
0.88 %
2.15 %
0.94 %
$
$
235,998
115,193
572,921
246,588
1,170,700
- %
0.28 %
0.65 %
1.78 %
0.72 %
$
$
208,898
93,881
536,862
160,440
1,000,081
- %
0.22 %
0.48 %
1.30 %
0.49 %
Federal Funds Purchased and Other Borrowed Funds. Another source of the Bank’s funds for lending and investing activities is
borrowings from the FHLB. The Bank had no outstanding balance on its overnight line of credit with the FHLB as of December 31, 2019
and 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 deposits along with the line usage’s impact on interest rate risk. The Bank had an FHLB advance of $10 million outstanding
with a rate of 1.73% maturing in 2020 at each of December 31, 2019 and 2018.
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Securities Sold Under Agreements to Repurchase
The Bank enters into agreements with certain customers to sell securities owned by the Bank to those customers and repurchase the
identical security within one day. No physical movement of the securities is involved. The customer is informed that the securities are held
in safekeeping by the Bank on behalf of the customer. Securities sold under agreements to repurchase totaled $2.4 million at December 31,
2019 compared with $3.1 million at December 31, 2018. Balances can vary day to day based on customer needs.
Pension
The Bank maintains a qualified defined benefit pension plan (the “Pension Plan”), which covered substantially all employees of the Bank at
the time the Pension Plan was frozen on January 31, 2008. All benefits eligible participants accrued in the Pension Plan through the freeze
date have been retained. Employees have not accrued additional benefits in the Pension Plan from that date. Employees will be eligible to
receive these benefits at normal retirement age. Additionally, the Company has entered into individual retirement agreements with certain
of its executive officers providing for unfunded supplemental pension benefits under the Company’s Supplemental Executive Retirement
Plan and Senior Executive Supplemental Executive Retirement Plan (collectively, the “SERP plans”). Information about the Company’s
Pension Plan and SERP plans, including contributions, pension expense and actuarial assumptions, including return on plan assets and the
discount rate utilized to determine future pension obligations, can be found in Note 11 to the Consolidated Financial Statements included in
Item 8 of this Annual Report on Form 10-K.
Management decided to fully fund the Pension Plan in 2017 with a $1 million contribution. As a result, the primary objective of the
investment philosophy for the management of the Pension Plan assets shifted from long term capital appreciation to capital
preservation. Management believes that because the Pension Plan is frozen, managing the assets of the Pension Plan with a lower risk
investment strategy is the optimal course of action. Furthermore, by making the large contribution in 2017, the Company maximized the tax
benefit of the deduction considering the Company’s lower effective tax rate for 2018 and going forward under the TCJA. At December 31,
2019, the projected benefit obligation of the Pension Plan exceeded the value of the plan assets by $0.4 million.
Management tested the sensitivity of the pension expense to changes in three key assumptions: return on plan assets, the discount rate,
and salary rate increases. A 0.25% decrease in the rate of return on plan assets would have resulted in an increase in pension expense of
30% or $13 thousand. A 0.25% decrease in the discount rate would have resulted in an increase in pension expense of 6% or $2
thousand. Since the Pension Plan has been frozen, pension expense is not sensitive to compensation scale increases or decreases. The
SERP has no plan assets; therefore there is no rate of return on plan assets. A 0.25% decrease in the discount rate would have resulted in
an increase in SERP expense of 2% or $11 thousand. A 0.25% increase in the rate of annual salary increases would have resulted in an
increase in SERP expense of less than 1% or $2 thousand.
Liquidity
The Company utilizes cash flows from its investment portfolio and federal funds sold balances to manage the liquidity requirements it
experiences due to loan demand and deposit fluctuations. The Bank also has many borrowing options. As a member of the FHLB, the
Bank is able to borrow funds at competitive rates. Given the current collateral available, advances of up to $198 million can be drawn on the
FHLB via the Bank’s Overnight Line of Credit Agreement. The Bank also has the ability to purchase up to $8 million in federal funds from
its correspondent banks. By placing sufficient collateral in safekeeping at the Federal Reserve Bank, the Bank could also borrow at the
FRB’s discount window. The Company’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. Additionally, the
Company has access to capital markets as a funding source.
The cash flows from the Company’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, so that securities are available for sale from time-to-time without the need to incur significant losses. At
December 31, 2019, approximately 5% of the Company’s debt securities had maturity dates of one year or less, and approximately 11% had
maturity dates of five years or less. In addition, the Company receives regular cash flows on its mortgage-backed securities.
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Management, on an ongoing basis, closely monitors the Company’s liquidity position for compliance with internal policies, and believes
that available sources of liquidity are adequate to meet funding needs in the normal course of business. As part of that monitoring process,
management calculates the 90-day liquidity each month by analyzing the cash needs of the Bank. Included in the calculation are liquid
assets and potential liabilities. Management stresses the potential liabilities calculation to ensure a strong liquidity position. Included in
the calculation are assumptions of some significant deposit run-off as well as funds needed for loan closing and investment purchases. At
December 31, 2019, in the stress test, the Bank had net short-term liquidity available of $209 million as compared with $249 million at
December 31, 2018. Available assets of $161 million divided by public and purchased funds of $272 million, resulted in a long-term liquidity
ratio of 59% at December 31, 2019, compared with 63% at December 31, 2018.
Management does not anticipate engaging in any activities, either currently or over the long-term, for which adequate funding would not
be available and which would therefore result in significant pressure on liquidity. However, an economic recession could negatively impact
the Company’s liquidity. The Bank relies heavily on FHLBNY as a source of funds, particularly with its overnight line of credit. In past
economic recessions, some FHLB branches have suspended dividends, cut dividend payments, and not bought back excess FHLB stock
that members hold in an effort to conserve capital. FHLBNY has stated that it expects to be able to continue to pay dividends, redeem
excess capital stock, and provide competitively priced advances in the future. The 11 FHLB branches are jointly liable for the consolidated
obligations of the FHLB system. To the extent that one FHLB branch cannot meet its obligations to pay its share of the system’s debt,
other FHLB branches can be called upon to make the payment.
Systemic weakness in the FHLB could result in higher costs of FHLB borrowings and increased demand for alternative sources of liquidity
that are more expensive, such as brokered time deposits, the discount window at the Federal Reserve, or lines of credit with correspondent
banks.
Contractual Obligations
The Company is party to contractual financial obligations, including repayment of borrowings, operating lease payments, commitments to
extend credit, and purchase agreements. The table below presents certain future financial obligations.
Payments due within time period at December 31, 2019
(in thousands)
Total
Less Than 1
Year
1 - 3 Years
3 - 5 Years
More Than 5
Years
$
2,425
$
2,425
$
- $
- $
4,805
10,000
11,330
1,500
748
10,000
-
-
1,376
-
-
1,500
1,041
-
-
-
-
1,640
-
11,330
-
$
$
30,060
$
13,173
$
2,876
$
1,041
$
12,970
51
$
51
$
- $
- $
-
Contractual Obligations:
Securities sold under agreement
to repurchase
Operating lease obligations
Other borrowed funds
Junior subordinated debentures
R&S purchase agreement
Total
Interest expense on fixed rate debt
At December 31, 2019, the Company had commitments to extend credit of $332 million, compared with $291 million at December 31, 2018. For
additional information regarding future financial commitments, this disclosure should be read in conjunction with Note 17 to the Company’s
Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
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Capital
Total Company stockholders’ equity was $148 million at December 31, 2019, an increase from $132 million at December 31, 2018. Equity as a
percentage of assets was 10.2% at December 31, 2019, compared with 9.5% at December 31, 2018. Book value per share of common stock
increased to $30.12 at December 31, 2019 from $27.13 at December 31, 2018. The increase in stockholders’ equity and book value per share
was primarily the result of $17 million in net income and a $3 million unrealized gain on available for sale investment securities, offset in part
by $5 million in dividends paid to common stockholders in 2019.
The aggregate dividend payment of $1.04 per share in 2019 was $0.12, or 13% higher per share than dividends paid in 2018. The Company
typically pays a semi-annual dividend in April and October of each year. Management and the Board of Directors of the Company believe
that the dividend level is prudent to maintain available capital to support the continued growth of the Company, as well as to manage the
Company’s and the Bank’s capital ratios, while providing a dividend yield (dividend per share divided by stock price) competitive with
peers in the industry at an annualized rate of 2.6% at December 31, 2019.
Included in stockholders’ equity is accumulated other comprehensive income/(loss) which includes the net after-tax impact of unrealized
gains or losses on investment securities classified as available for sale. Net unrealized gains after tax were $0.5 million, or $0.11 per share of
common stock, at December 31, 2019, compared with net unrealized losses after tax of $2.3 million, or $0.48 per share of common stock, at
December 31, 2018. Such unrealized gains and losses are generally due to changes in interest rates and represent the difference, net of
applicable income tax effect, between the estimated fair value and amortized cost of investment securities classified as available-for-
sale. The Company had no other-than-temporary impairment charges in its investment portfolio in 2019 or 2018.
The Company and the Bank have consistently maintained regulatory capital ratios above well capitalized standards. For further detail on
capital and capital ratios, see Note 22 to the Company’s Consolidated Financial Statements included under Item 8 of this Annual Report on
Form 10-K.
Market Risk
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 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 re-price 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 the 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. The balances of financial instruments used in the projections are based on expected growth from
forecasted business opportunities, anticipated prepayments of loans and investment securities and expected maturities of investment
securities, loans and deposits. Management supplements the modeling technique described above with the analysis of market values of
the Bank’s financial instruments and changes to such market values given changes in interest rates.
ALCO, which includes members of the Bank’s senior management, monitors the Bank’s interest rate sensitivity with the aid of a model that
considers the impact of ongoing lending and deposit gathering activities, as well as the interrelationships between the magnitude and
timing of the re-pricing of financial instruments, including the effect of changing interest rates on expected prepayments and
maturities. When deemed prudent, the Bank’s management has taken actions and intends to do so in the future, to mitigate the Bank's
exposure to interest rate risk through the use of on or off-balance sheet financial instruments. Possible actions include, but are not limited
to, changes in the pricing of loan and deposit products, modifying the composition of interest-earning assets and interest-bearing liabilities,
and the purchase of other financial instruments used for interest rate risk management purposes. In 2019 and 2018, the Bank did not use
off-balance sheet financial instruments to manage interest rate risk.
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SENSITIVITY OF NET INTEREST INCOME TO CHANGES IN INTEREST RATES
Changes in interest rates
+200 basis points
+100 basis points
-100 basis points
-200 basis points
Calculated increase
in projected annual net interest income
(in thousands)
December 31, 2019
December 31, 2018
$
$
(32)
2,327
(2,455)
NM
1,598
2,825
(3,026)
NM
Many assumptions are utilized by the Bank to calculate the impact that changes in interest rates may have on net interest income. The
more significant assumptions relate to the rate of prepayments of mortgage-related assets, loan and deposit volumes and pricing, and
deposit maturities. The Bank also assumes immediate changes in rates, including 100 and 200 basis point rate changes. In the event that a
100 or 200 basis point rate change cannot be achieved, the applicable rate changes are limited to lesser amounts, such that interest rates
cannot be less than zero. These assumptions are inherently uncertain and, as a result, the Bank cannot precisely predict the impact of
changes in interest rates on net interest income. Actual results may differ significantly due to the timing, magnitude, and frequency of
interest rate changes in market conditions and interest rate differentials (spreads) between maturity/re-pricing categories, as well as any
actions, such as those previously described, which management may take to counter such changes. At each of December 31, 2019 and
December 31, 2018, the Bank's projected net interest income benefitted more from a 100 basis point increase in market rates compared with a
200 basis point increase in rates. This relationship was due in part to expected increases in deposit rates needed to retain deposit
customers if rates moved up 200 basis points but were not required if rates only moved 100 basis points higher. 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
Financial instruments with off-balance sheet risk at December 31, 2019 included $287 million in undisbursed lines of credit at an average
interest rate of 4.76%; $14 million in fixed rate loan origination commitments at 4.15%; and $13 million in adjustable rate letters of credit,
which if drawn upon, would typically earn an interest rate equal to the prime lending rate plus 2%. Unused overdraft protection lines
totaled $18 million.
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The following table represents expected maturities of interest-bearing assets and liabilities and their corresponding average interest rates.
Expected maturity year ended December 31,
2020
2021
2022
2023
2024
Thereafter
Total
Fair Value
(in thousands)
Interest-bearing Assets
Gross loan and lease
receivables
Average interest
$
244,880
$
68,754
$
49,163
$
64,562
$
61,508
$
737,664
$
1,226,531
$
1,237,561
4.96 %
4.74 %
4.64 %
4.87 %
4.89 %
4.78 %
4.82 %
4.82 %
Investment securities
$
7,153
$
103
$
1,367
$
4,270
$
6,119
$
111,296
$
130,308
$
130,314
Average interest
1.83 %
2.78 %
1.91 %
2.30 %
2.86 %
2.76 %
2.69 %
2.69 %
Interest-bearing Liabilities
Interest-bearing
deposits
Average interest
$
936,525
$
47,226
$
10,101
$
8,829
$
1,042
$
-
$
1,003,723
$
1,004,847
1.10 %
2.47 %
2.00 %
2.79 %
1.57 %
- %
1.19 %
1.19 %
Other borrowed funds
$
10,000
$
-
$
-
$
-
$
-
$
-
$
10,000
$
Average interest
1.73 %
- %
%
- %
- %
- %
1.73 %
Securities sold under
agreements to repurchase
$
2,425
$
-
$
-
$
-
$
-
$
-
$
2,425
$
Average interest
0.18 %
- %
- %
- %
- %
- %
0.18 %
9,997
1.73 %
2,425
0.18 %
Junior subordinated
debt
Average interest
$
-
$
-
$
-
$
-
$
-
$
11,330
$
11,330
$
11,330
- %
- %
- %
- %
- %
4.56 %
4.56 %
4.56 %
When rates rise or fall, the market value of the Company’s rate-sensitive assets and liabilities increases or decreases. As a part of the
Company’s asset/liability policy, the Company has set limitations on the acceptable level of the negative impact of such rate fluctuations
on the market value of the Company’s balance sheet. The Bank’s securities portfolio is priced monthly and adjustments are made on the
balance sheet to reflect the market value of the available for sale portfolio. At December 31, 2019, the impact on equity, net of tax, as a result
of marking available for sale securities to market was an unrealized gain of $0.5 million. On a monthly basis, the available for sale portfolio is
shocked for immediate rate increases of 200 basis points. At December 31, 2019, the Company determined it would take an immediate
increase in rates in excess of 200 basis points to eliminate the current capital cushion in excess of regulatory requirements. The Company’s
and the Bank’s capital ratios are also reviewed by management on a quarterly basis.
Capital Expenditures
Significant planned expenditures for 2020 primarily consist of building renovations, furniture and equipment related to the Company’s
planned 2020 relocation to a new corporate headquarters. The Company believes it has a sufficient capital base to support these known
and potential capital expenditures, currently expected to total approximately $5 million, with current assets.
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Table of Contents
Impact of Inflation and Changing Prices
There will continually be economic events, such as changes in the economic policies of the FRB, which will have an impact on the
profitability of the Company. Inflation may result in impaired asset growth, reduced earnings and substandard capital ratios. The net
interest margin can be adversely impacted by the volatility of interest rates throughout the year. Since these factors are unknown,
management attempts to structure the balance sheet and re-pricing frequency of assets and liabilities to avoid a significant concentration
that could result in a negative impact on earnings.
Segment Information
The Company’s operating segments have been determined based upon its internal profitability reporting. The Company’s operating
segments consist of banking activities and insurance agency activities.
The banking activities segment includes all of the activities of the Bank in its function as a full-service commercial bank. Net income from
banking activities was $16.0 million in 2019 compared with $15.5 million in 2018. The increase in net income from banking activities was
driven primarily by net interest income, which increased 8% from $48.2 million in 2018 to $52.2 million in 2019, resulting from higher yields on
loans reflecting the impact of a higher average target federal funds rate in 2019 on the Bank’s variable rate loan portfolio and loan growth.
The increase in net interest income was partially offset by an increase in non-interest expenses reflecting investments in talent and
technology and atypical legal and accounting costs. Total assets of the banking activities segment were $1.4 billion at December 31, 2019,
an increase of $72 million or 5% from December 31, 2018.
The insurance activities segment includes activities of TEA, a property and casualty insurance agency with locations in the Western New
York area. Net income from insurance activities was $1.0 million in 2019, an increase from $0.8 million in 2018, primarily reflecting the full
year impact of the 2018 R&S asset acquisition. TEA’s total assets were $16.6 million at December 31, 2019 and December 31, 2018.
Fourth Quarter 2019 Results
Net income was $3.7 million, or $0.75 per diluted share, in the fourth quarter of 2019, compared with
$5.2 million, or $1.04 per diluted share, in the third quarter of 2019 and $4.5 million, or $0.90 per diluted share, in last year’s fourth
quarter. The decrease from the linked quarter resulted from lower net interest income reflecting lower interest rates, seasonally lower
insurance fee revenue. Return on average equity was 10.16% for the fourth quarter of 2019, compared with 14.29% in the third quarter of
2019 and 13.86% in the fourth quarter of 2018.
Net interest income decreased $0.8 million, or 6%, from the third quarter of 2019, but increased $0.4 million, or 3%, from the prior-year fourth
quarter. The decrease from the trailing quarter was driven by a decline in loan yields as a result of the re-pricing of variable rate loans tied
to the Company’s prime rate. The third quarter of 2019 also included $0.2 million of interest related to the recovery of a single commercial
loan that was previously written-off. The increase from the prior-year fourth quarter reflects growth in average commercial loans, including
commercial real estate and commercial and industrial loans, which were $996 million, up $83 million.
Fourth quarter net interest margin of 3.67% decreased 27 basis points from the 2019 third quarter and 3 basis points from the fourth quarter
of 2018. When excluding the interest related to the trailing third quarter recovery, net interest margin decreased 22 basis points, reflecting
the Federal Reserve’s decrease of the prime rate. The cost of interest-bearing liabilities was 1.24% in the fourth and third quarter of 2019
compared with 1.14% in the fourth quarter of 2018.
The $0.1 million release of allowance for loan losses reflects improved asset quality of impaired loans and marginal loan growth in the fourth
quarter.
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Table of Contents
Non-interest income was $4.0 million in the fourth quarter of 2019, compared with $5.2 million in the third quarter of 2019 and $3.0 million in
the prior-year period. The fourth quarter of 2018 included a $0.9 million net reduction of non-interest income related to an investment in a
historic rehabilitation tax credit. There were no significant historic tax credit transactions in the fourth and third quarter of 2019. Insurance
revenue decreased $1.1 million from the trailing third quarter due to the seasonal decrease in commercial lines insurance commissions and a
decrease in profit sharing revenue.
Total non-interest expense was $12.2 million in the fourth quarter of 2019, a decrease of $0.1 million or 1% from the third quarter of 2019, and
an increase of $0.7 million, or 6% from the fourth quarter of 2018. Salaries and benefits costs decreased $0.3 million or 4% from the linked
quarter as a result of severance costs recorded during the third quarter of 2019. The $0.1 million increase from the prior-year period reflects
the addition of strategic personnel hires to support the Company’s continued growth. Fourth quarter professional service fees of $1.1
million included $0.2 million in merger-related costs relating to the previously announced agreement to acquire FSB. FDIC insurance
expense of $0.1 million decreased $0.2 million when compared to prior year’s fourth quarter. The reduced FDIC insurance expense reflects
the benefit of the FDIC’s small bank assessment credit. Third quarter of 2019 other non-interest expense included a $0.2 million charitable
contribution accrual. The Company contributes to, and invests in, community organizations that provide positive, meaningful impact on
the Western New York region.
The Company’s GAAP efficiency ratio, or noninterest expenses divided by the sum of net interest income and noninterest income, was
72.5% in the fourth quarter of 2019, 65.4% in the third quarter of 2019, and 74.2% in the fourth quarter of 2018. The Company’s non-GAAP
efficiency ratio, which excludes amortization expense, gains and losses from investment securities, merger-related expenses and the impact
of historic tax credit transactions, was 70.3% in the fourth quarter of 2019, compared with 64.8% in the third quarter of 2019 and 69.5% in last
year’s fourth quarter. .
During the fourth quarter of 2019 the Company recognized income tax expense of $1.0 million, representing an effective tax rate of 20.9%,
compared with an income tax benefit of $0.2 million in the prior year’s fourth quarter. Excluding the impact of historic tax credit transactions,
the fourth quarter 2018 effective tax rate was 23.1%. The third quarter 2019 income tax expense was $1.8 million, or an effective tax rate of
25.6%.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this Item is incorporated by reference to the discussion of "Liquidity" and "Market Risk”, including the
discussion under the caption "Sensitivity of Net Interest Income to Changes in Interest Rates" included in Part II, Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K.
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Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Supplementary Data consist of the financial statements as indexed and presented below and the Selected
Quarterly Financial Data - Unaudited presented in Note 24 to our Consolidated Financial Statements.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management's Annual Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm (consolidated financial statements)
Report of Independent Registered Public Accounting Firm (internal control over financial reporting)
Consolidated Balance Sheets – December 31, 2019 and 2018
Consolidated Statements of Income – Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income – Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in Stockholders’ Equity – Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows – Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Page
55
56
57
58
59
60
61
62
64
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Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for Evans Bancorp, Inc. and
subsidiaries (the “Company”). Management has assessed the effectiveness of the Company’s internal control over financial reporting as
of December 31, 2019 based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, management concluded that, as of December
31, 2019, the Company’s internal control over financial reporting was effective.
The Company's consolidated financial statements for the fiscal year ended December 31, 2019 were audited by KPMG LLP, an independent
registered public accounting firm. KPMG LLP also audited the effectiveness of the Company's internal control over financial reporting as of
December 31, 2019, as stated in their report, which appears in the "Report of Independent Registered Public Accounting Firm" immediately
following this annual report of management.
EVANS BANCORP, INC. AND SUBSIDIARIES
/s/ David J. Nasca
David J. Nasca
President and Chief Executive Officer
/s/ John B. Connerton
John B. Connerton
Treasurer
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Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Evans Bancorp, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Evans Bancorp, Inc. and subsidiaries (the Company) as of
December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and
cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated
financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 12, 2020,
expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2003.
Buffalo, New York
March 12, 2020
56
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Evans Bancorp, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Evans Bancorp, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of income,
comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31,
2019, and the related notes (collectively, the consolidated financial statements), and our report dated March 12, 2020 expressed an
unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on
our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Buffalo, New York
March 12, 2020
57
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EVANS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2019 AND DECEMBER 31, 2018
(in thousands, except share and per share amounts)
ASSETS
Cash and due from banks
Interest-bearing deposits at banks
Securities:
December 31,
2019
December 31,
2018
$
10,577 $
28,280
13,997
25,918
Available for sale, at fair value (amortized cost: $127,217 at December 31, 2019;
127,922
132,104
$135,274 at December 31, 2018)
Held to maturity, at amortized cost (fair value: $2,392 at December 31, 2019;
$1,674 at December 31, 2018)
Federal Home Loan Bank common stock, at cost
Federal Reserve Bank common stock, at cost
Loans, net of allowance for loan losses of $15,175 at December 31, 2019
and $14,784 at December 31, 2018
Properties and equipment, net of accumulated depreciation of $20,682 at December 31, 2019
and $19,416 at December 31, 2018
Goodwill and intangible assets
Bank-owned life insurance
Operating lease right-of-use asset (see Note 1)
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand
NOW
Savings
Time
Total deposits
Securities sold under agreement to repurchase
Other borrowings
Operating lease liability (see Note 1)
Other liabilities
Junior subordinated debentures
Total liabilities
CONTINGENT LIABILITIES AND COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.50 par value, 10,000,000 shares authorized; 4,929,593
and 4,852,868 shares issued at December 31, 2019 and December 31, 2018,
respectively, and 4,929,283 and 4,852,868 outstanding at December 31, 2019
and December 31, 2018, respectively
Capital surplus
Treasury stock, at cost, 310 and 0 shares at December 31, 2019 and
December 31, 2018, respectively
Retained earnings
Accumulated other comprehensive loss, net of tax
Total stockholders' equity
2,386
1,588
1,956
1,685
1,474
1,929
1,211,356
1,141,146
13,754
12,545
29,418
3,720
16,728
10,485
12,992
28,403
-
18,074
$
1,460,230 $
1,388,207
$
263,717 $
140,654
587,142
275,927
1,267,440
2,425
10,000
4,154
16,428
11,330
1,311,777
231,902
110,450
571,479
301,227
1,215,058
3,142
10,000
-
17,031
11,330
1,256,561
2,467
63,302
-
85,267
(2,583)
148,453
2,429
61,225
-
73,345
(5,353)
131,646
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
1,460,230 $
1,388,207
See Notes to Consolidated Financial Statements
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EVANS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2019, 2018, AND 2017
(in thousands, except share and per share amounts)
INTEREST INCOME
Loans
Interest bearing deposits at banks
Securities:
Taxable
Non-taxable
Total interest income
INTEREST EXPENSE
Deposits
Other borrowings
Junior subordinated debentures
Total interest expense
NET INTEREST INCOME
PROVISION FOR LOAN LOSSES
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
NON-INTEREST INCOME
Deposit service charges
Insurance service and fees
Gain on loans sold
Bank-owned life insurance
Loss on tax credit investments
Refundable state historic tax credit
Interchange fee income
Other
Total non-interest income
NON-INTEREST EXPENSE
Salaries and employee benefits
Occupancy
Advertising and public relations
Professional services
Technology and communications
Amortization of intangibles
FDIC insurance
Other
Total non-interest expense
INCOME BEFORE INCOME TAXES
INCOME TAX PROVISION
NET INCOME
Net income per common share-basic
Net income per common share-diluted
Weighted average number of common shares outstanding
Weighted average number of diluted shares outstanding
See Notes to Consolidated Financial Statements
2019
2018
2017
$
60,193 $
697
53,282
427
$
3,537
313
64,740
11,939
181
565
12,685
52,055
75
51,980
2,569
10,688
154
656
(158)
115
1,722
2,336
18,082
29,628
3,429
1,033
3,742
4,124
448
431
4,985
47,820
22,242
5,228
3,253
650
57,612
8,416
554
535
9,505
48,107
1,402
46,705
2,176
9,365
38
680
(2,870)
1,982
1,750
2,106
15,227
27,412
3,135
1,070
2,466
3,394
280
1,024
4,512
43,293
18,639
2,283
17,014 $
16,356
$
3.47 $
3.42 $
4,897,803
4,968,172
3.40
3.32
$
$
4,814,882
4,933,743
$
$
$
59
44,379
66
2,466
837
47,748
4,887
418
426
5,731
42,017
738
41,279
1,747
7,898
156
864
(3,997)
2,843
1,494
1,998
13,003
24,125
3,199
1,095
2,260
2,881
113
740
4,181
38,594
15,688
5,209
10,479
2.21
2.16
4,738,394
4,860,828
Table of Contents
EVANS BANCORP, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2019, 2018, AND 2017
(in thousands)
2019
2018
2017
NET INCOME
$
17,014
$
16,356
$
10,479
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gain (loss) on available-for-sale securities
2,870
(1,299)
(507)
Defined benefit pension plans:
Amortization of prior service cost
Amortization of actuarial loss
Actuarial losses
Total
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
23
246
(369)
26
128
(791)
27
137
(19)
(100)
2,770
(637)
(1,936)
145
(362)
COMPREHENSIVE INCOME
$
19,784
$
14,420
$
10,117
See Notes to Consolidated Financial Statements
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EVANS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2019, 2018, AND 2017
(in thousands, except share and per share amounts)
Common
Stock
Capital
Surplus
Retained
Earnings
Comprehensive
Income (Loss)
Treasury
Stock
Accumulated
Other
Balance, December 31, 2016
Net Income
Other comprehensive loss
Reclassification of certain tax effects from AOCI related to the
Tax Cuts and Jobs Act of 2017
Cash dividends ($0.80 per common share)
Stock compensation expense
Reissued 741 restricted shares
Issued 440,000 shares in stock offering
Issued 13,112 restricted shares, net of forfeitures
Issued 6,155 shares under Dividend Reinvestment Plan
Issued 7,610 shares in Employee Stock Purchase Plan
Issued 10,001 shares in stock option exercises
Repurchased 9,218 shares in treasury stock
Reissued 13,470 shares in stock option exercises
Balance, December 31, 2017
Cumulative-effect adjustment due to change in accounting principle
Net Income
Other comprehensive loss
Cash dividends ($0.92 per common share)
Stock compensation expense
Reissued 1,057 restricted shares
Issued 14,839 restricted shares, net of forfeitures
Issued 6,329 shares under Dividend Reinvestment Plan
Issued 10,821 shares in Employee Stock Purchase Plan
Issued 37,317 shares in stock option exercises
Balance, December 31, 2018
Net Income
Other comprehensive income
Cash dividends ($1.04 per common share)
Stock compensation expense
Reissued 500 restricted shares
Issued 20,632 restricted shares, net of forfeitures
Issued 7,549 shares under Dividend Reinvestment Plan
Issued 11,712 shares in Employee Stock Purchase Plan
Issued 32,516 shares in stock option exercises
Reissued 3,506 shares in stock option exercises
$
2,153 $
44,389 $
623
13,922
(9)
249
261
140
220
9
3
4
5
$
2,394 $
(131)
59,444 $
8
4
6
17
2,429 $
$
791
(8)
287
339
372
61,225 $
937
(12)
272
381
499
12
4
6
16
52,630 $
10,479
631
(3,819)
(2,424) $
- $
(362)
(631)
(342)
342
- $
59,921 $
1,496
16,356
(4,428)
(3,417) $
(1,936)
73,345 $
17,014
(5,092)
(5,353) $
- $
2,770
Balance, December 31, 2019
$
2,467 $
63,302 $
85,267 $
(2,583) $
- $
See Notes to Consolidated Financial Statements
Total
96,748
10,479
(362)
-
(3,819)
623
-
14,142
-
252
265
145
(342)
211
118,342
1,496
16,356
(1,936)
(4,428)
791
-
-
291
345
389
131,646
17,014
2,770
(5,092)
937
-
-
276
387
515
-
148,453
61
Table of Contents
EVANS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2019, 2018, AND 2017
(in thousands)
OPERATING ACTIVITIES:
Interest received
Fees received
Interest paid
Cash paid to employees and vendors
Cash contributed to pension plan
Income tax refund (paid)
Proceeds from sale of loans held for resale
Originations of loans held for resale
2019
2018
2017
$
65,036 $
17,872
(12,771)
(45,732)
-
(3,102)
13,008
(13,238)
57,605 $
14,960
(9,140)
(41,302)
-
3,314
4,301
(4,615)
Net cash provided by operating activities
21,073
25,123
INVESTING ACTIVITIES:
Available for sales securities:
Purchases
Proceeds from sales
Proceeds from maturities, calls, and payments
Held to maturity securities:
Purchases
Proceeds from maturities, calls, and payments
Cash received (paid) for bank owned life insurance
Additions to properties and equipment
Proceeds from sales of assets
Proceeds from equity securities sales
Purchase of tax credit investment
Acquisitions
Net increase in loans
(48,916)
15,224
41,332
(1,592)
891
(360)
(4,640)
185
-
(3,116)
-
(68,890)
(47,863)
-
60,869
(630)
4,278
675
(1,106)
-
1,960
(3,877)
(5,000)
(91,873)
Net cash used in investing activities
(69,882)
(82,567)
(186,523)
FINANCING ACTIVITIES:
Proceeds (repayments) from short-term borrowings, net
Net increase in deposits
Dividends paid
Repurchase of treasury stock
Issuance of common stock
Reissuance of treasury stock
Net cash provided by financing activities
Net increase (decrease) in cash and equivalents
CASH AND CASH EQUIVALENTS:
Beginning of year
End of year
(717)
52,382
(5,092)
-
1,178
-
47,751
(1,058)
(84,397)
163,829
(4,428)
-
1,025
-
76,029
18,585
39,915
21,330
$
38,857 $
39,915 $
62
59,180
111,255
(3,819)
(342)
14,804
211
181,289
8,246
13,084
21,330
47,028
13,419
(5,631)
(37,778)
(1,000)
(3,029)
11,487
(11,016)
13,480
(65,889)
-
13,014
(4,345)
995
(6,000)
(483)
-
-
(3,102)
(275)
(120,438)
Table of Contents
EVANS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2019, 2018, AND 2017
(in thousands)
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
2019
2018
2017
Net income
$
17,014 $
16,356 $
10,479
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Deferred tax expense (benefit)
Provision for loan losses
Loss on tax credit investment
Changes in refundable state historic tax credits
Net gain on sales of assets
(Gain) loss on sales of securities
Gain on loans sold
Change in fair value of equity securities
Stock compensation expense
Proceeds from sale of loans held for resale
Originations of loans held for resale
Changes in assets and liabilities affecting cash flow:
Other assets
Other liabilities
2,049
(571)
75
158
(115)
(3)
(42)
(154)
-
937
13,008
(13,238)
(4,948)
6,903
1,825
495
1,402
2,870
3,105
-
98
(38)
(244)
791
4,301
(4,615)
(3,406)
2,183
NET CASH PROVIDED BY OPERATING ACTIVITIES
$
21,073 $
25,123 $
63
1,762
3,150
738
3,997
(2,843)
-
-
(156)
-
623
11,487
(11,016)
(2,975)
(1,766)
13,480
Table of Contents
EVANS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and General
Evans Bancorp, Inc. (the “Company”) was organized as a New York business corporation and incorporated under the laws of the State of
New York on October 28, 1988 for the purpose of becoming a bank holding company. Through August 2004, the Company was registered
with the Federal Reserve Board (“FRB”) as a bank holding company under the Bank Holding Company Act of 1956, as amended. In August
2004, the Company filed for, and was approved as, a Financial Holding Company under the Bank Holding Company Act. The Company
currently conducts its business through its two subsidiaries: Evans Bank, N.A. (the “Bank”), a nationally chartered bank, and its
subsidiary, Evans National Holding Corp. (“ENHC”); and Evans National Financial Services, LLC (“ENFS”) and its subsidiary, The Evans
Agency LLC (“TEA”). Unless the context otherwise requires, the term “Company” refers collectively to Evans Bancorp, Inc. and its
subsidiaries. The Company conducts its business through its subsidiaries. It does not engage in any other substantial business.
Regulatory Requirements
The Company is subject to the rules, regulations, and reporting requirements of various regulatory bodies, including the FRB, the Federal
Deposit Insurance Corporation (“FDIC”), the Office of the Comptroller of the Currency (“OCC”), the New York State Department of
Financial Services (“NYSDFS”), and the Securities and Exchange Commission (“SEC”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the Bank, ENFS and their subsidiaries. All material inter-
company accounts and transactions are eliminated in consolidation.
Accounting Estimates
Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and disclosure of
contingent assets and liabilities in order to prepare these consolidated financial statements in conformity with U.S. generally accepted
accounting principles. The estimates and assumptions that management deems to be critical involve our accounting policies relating to the
determination of our allowance for loan losses and the valuation of goodwill. These estimates and assumptions are based on
management’s best estimates and judgment and management evaluates them on an ongoing basis using historical experience and other
factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust our
estimates and assumptions when facts and circumstances dictate. As future events cannot be determined with precision, actual results
could differ significantly from our estimates. Changes in those estimates resulting from continuing changes in the economic environment
will be reflected in the consolidated financial statements in periods as they occur.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and interest-bearing deposits at banks.
Securities
Securities which the Bank has the positive intent and ability to hold to maturity are classified as held to maturity and are stated at cost,
adjusted for discounts and premiums that are recognized in interest income over the period to the earlier of the call date or maturity using
the level yield method. These securities represent debt issuances of local municipalities in the Bank’s market area for which market prices
are not readily available. Management periodically evaluates the financial condition of the municipalities for any indication that the Bank
does not expect to recover the entire amortized cost basis of their bonds.
Securities classified as available for sale are stated at fair value with unrealized gains and losses excluded from earnings and reported, net of
deferred income taxes, in accumulated other comprehensive income or loss, a component of stockholders’ equity. Gains and losses on
sales of securities are computed using the specific identification method.
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Declines in the fair value of investment securities (with certain exceptions for debt securities noted below) that are deemed to be other-than-
temporary are charged to earnings as a realized loss and a new cost basis for the securities is established. Declines in the fair value of debt
securities below amortized cost are deemed to be other-than-temporary in circumstances where: (1) the Bank has the intent to sell a
security; (2) it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis; or (3) the
Bank does not expect to recover the entire amortized cost basis of the security. If the Bank intends to sell a security or if it is more likely
than not that the Bank will be required to sell the security before recovery, an other-than-temporary impairment write-down is recognized in
earnings equal to the difference between the security’s amortized cost basis and its fair value. If the Bank does not intend to sell the
security or it is not more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment
write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors,
which is recognized in other comprehensive income.
The Bank does not engage in securities trading activities.
Loans
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, generally are reported at
their outstanding unpaid principal balances adjusted for unamortized deferred fees or costs. Interest income is accrued on the unpaid
principal balance and is recognized using the interest method. Loan origination fees, net of certain direct origination costs, are deferred and
recognized as an adjustment of the related loan yield using the effective yield method of accounting for amortizing loans and straight line
over an estimated life for lines of credit.
Loans become past due when the payment date has been missed. If payment has not been received within 30 days, then the loan is
delinquent. Delinquent loans are placed into three categories; 30-59 days past due, 60-89 days past due, or 90+ days past due. Loans 90 or
more days past due are considered non-performing.
The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent, unless the credit is well secured and in process
of collection. If the credit is not well secured and in the process of collection, the loan is placed on non-accrual status and is subject to
charge-off if collection of principal or interest is considered doubtful. A loan can also be placed on nonaccrual before it is 90 days
delinquent if management determines that it is probable that the Bank will be unable to collect principal or interest due according to the
contractual terms of the loan.
All interest due but not collected for loans that are placed on non-accrual status or charged off is reversed against interest income. The
interest on these loans is accounted for on the cost-recovery method, until it again qualifies for an accrual basis. Any cash receipts on
non-accrual loans reduce the carrying value of the loans. Loans are returned to accrual status when all principal and interest amounts
contractually due are brought current, the adverse circumstances which resulted in the delinquent payment status are resolved, and
payments are made in a timely manner for a period of time sufficient to reasonably assure their future dependability.
The Bank considers a loan impaired when, based on current information and events, it is probable that it will be unable to collect principal
or interest due according to the contractual terms of the loan. These loans are individually assessed for any impairment. Loan impairment
is measured based on the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at
the loan’s observable market price or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Appraised and
reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation,
estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business. The Company has an
appraisal policy in which appraisals are obtained upon a loan being downgraded on the Company’s internal loan rating scale to special
mention or substandard depending on the amount of the loan, the type of loan and the type of collateral. All impaired nonaccrual loans are
either graded special mention or substandard on the internal loan rating scale. Subsequent to the downgrade, 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.
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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: Credits with a slight risk of loss. The loan is secured by collateral of sufficient value to cover the loan by an
acceptable margin. The financial statements of the company demonstrate sufficient net worth and repayment ability. The
company has established an acceptable credit history with the bank and typically has a proven track record of
performance. Management is experienced, and has an at least average ability to manage the company. The industry has an
average or less than average susceptibility to wide fluctuations in business cycles.
· Watch: Credits are generally acceptable but warrant greater attention than those rated acceptable or better. Temporary
performance issues, if left unresolved, may result in above average risk. The borrower’s financial position is not typically
strong. Earnings, while still positive, may be inconsistent. Industry issues or external events (such as possible litigation
exposure) may cause concern. Although ability to repay is not an immediate concern, more regular monitoring may be necessary
as a result of the short-term performance issues or sensitivities to external events that may result in a weakening condition. Any
perceived weaknesses are acceptable when viewed against the overall credit and collateral risks assumed. Borrowers are likely
fully leveraged when compared to others in a similar industry and their ability to raise capital may be limited.
· Special Mention: Credits that have potential weaknesses that warrant management’s close attention. If left uncorrected, these
potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at
some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant
adverse classification.
Borrowers in this category may be experiencing adverse operating trends (declining revenues or margins) or an ill proportioned
balance sheet. Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also
support a special mention rating. Nonfinancial reasons for rating a credit exposure as special mention include management
problems, pending litigation, stale financial statements, an ineffective loan agreement or other material structural weakness, and
any other significant deviation from prudent lending practices.
Potential weaknesses in commercial real estate loans may include, construction delays, changes in concept or project plan, slow
leasing, rental concessions, deteriorating market conditions, impending expiry of a major lease, or other adverse events that do not
currently jeopardize repayment.
· Substandard: Credits that are inadequately protected by the current sound worth and paying capacity of the obligor or of the
collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation
of the debt. They are characterized by the distinct possibility of loss if the deficiencies are not corrected.
Substandard assets have a high probability of payment default, or they have other well-defined weaknesses. They are generally
characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal
capitalization. Repayment may depend on collateral or other credit risk mitigates. Although substandard assets in the aggregate
will have distinct potential for loss, an individual asset’s loss potential does not have to be distinct for the asset to be rated
substandard.
A well-defined weakness may manifest itself via:
significant deterioration in financial condition of the borrower;
impairment of primary repayment source;
•
•
• material deviation from planned absorption of rental or sales units; or
• material deterioration in market conditions.
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Commercial real estate credits evidencing one or more of the following characteristics are evaluated for a possible substandard
classification:
lower than projected lease rates or sales prices that jeopardize repayment capacity;
inability to obtain necessary zoning or permits necessary to develop the project as planned;
• slower than projected leasing or sales activity that threatens to result in protracted repayment or default;
•
• changes in concept or plan due to unfavorable market conditions;
• construction or tax liens;
•
•
• material imbalances in the construction budget;
• significant construction delays;
• expiration of a major lease or default by a major tenant;
• poorly structured of overly liberal repayment terms.
a diversion of needed cash from an otherwise viable property to satisfy the demands of a troubled borrower or guarantor;
When a project has slowed or stalled and the guarantor is providing some support but the loan has not been restructured, unless
the guarantor is providing support of principal payments sufficient to retire the debt under reasonable terms, a substandard
classification is typically warranted. If the guarantor is keeping interest payments current and shows a documented willingness
and capacity to do so in the future, and collateral values protect against loss, the loan should generally be left on accrual. This
level of support; however, does not fully mitigate the well-defined weaknesses in the credit and does not preclude a substandard
classification.
· Doubtful: Credits that have all the weaknesses inherent in one classified Substandard with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. A doubtful asset has a high probability of total or substantial loss but because of specific pending
events that may strengthen the assets, its classification as loss is deferred. Borrowers in this category are usually in default, lack
adequate liquidity or capital and lack the resources necessary to remain an operating entity. Because of high probability of loss,
nonaccrual accounting treatment is required for doubtful assets.
Circumstances that might warrant a doubtful classification for commercial real estate loans could include collateral values that are
uncertain due to a lack of comparisons in an inactive market, impending changes such as zoning classification, environmental
issues, or the pending resolution of legal issues that may affect the realization of value in a sale.
· Loss: Credits that are considered uncollectable and of such little value that their continuance as bankable assets is not
warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not
practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the
future. Borrowers in this category are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased
normal business operations. The Company does not maintain an asset on the balance sheet if realizing its value would require
long-term litigation or other lengthy recovery efforts.
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. Consumers are not required to provide the Company with updated financial information as is a commercial
customer. Consumer loans also carry smaller balances. Given the lack of updated information since the initial underwriting of the loan and
small size of individual loans, the Company does not have credit risk ratings for consumer loans and instead uses delinquency status as the
credit quality indicator for consumer loans. However, once a consumer loan is identified as impaired, it is individually evaluated for
impairment.
Allowance for Loan Losses
The provision for loan losses represents the amount charged against the Bank’s earnings to maintain an allowance for loan losses inherent
in the portfolio based on management’s evaluation of the loan portfolio at the balance sheet date. Factors considered by the Bank’s
management in establishing the allowance include: the collectability of individual loans, current loan concentrations, charge-off history,
loss emergence period, delinquent loan percentages, the fair value of the collateral, input from regulatory agencies, and general economic
conditions.
On a quarterly basis, management of the Bank meets to review and determine the adequacy of the allowance for loan losses. In making this
determination, the Bank’s management analyzes the ultimate collectability of the loans in its portfolio by incorporating feedback provided
by the Bank’s internal loan staff, an independent internal loan review function and information provided by examinations performed by
regulatory agencies.
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The analysis of the allowance for loan losses is composed of two components: specific credit allocation and general portfolio
allocation. The specific credit allocation includes a detailed review of each impaired loan and allocation is made based on this
analysis. Factors may include the appraisal value of the collateral, the age of the appraisal, the type of collateral, the performance of the
loan to date, the performance of the borrower’s business based on financial statements, and legal judgments involving the borrower. The
general portfolio allocation consists of an assigned reserve percentage based on the historical loss experience, the loss emergence period,
and other qualitative factors of the loan category.
The general portfolio allocation is segmented into homogeneous pools of loans with similar characteristics. Separate pools of loans include
loans pooled by loan grade and by portfolio segment. An average historical loss rate over the past seven years multiplied by the loss
emergence period factor is applied against these loans.
For both the criticized and non-criticized loan pools in the general portfolio allocation, additional qualitative factors are applied. The
qualitative factors applied to the general portfolio allocation reflect management’s evaluation of various conditions. The conditions
evaluated include the following: levels and trends in delinquencies, non-accruals, and criticized loans; trends in volume and terms of loans;
effects of any changes in lending policies and credit quality underwriting standards; experience, ability, and depth of management; national
and economic trends and conditions; changes in the quality of the loan review system; concentrations of credit risk; changes in collateral
value; and large loan risk. The total possible qualitative allocation is determined by comparing peer bank historical charge-off rates to the
Bank’s historical charge-off rate. The actual qualitative allocation is determined by qualitative factor by loan type based on metrics that
management believes are appropriate indicators of whether the Bank is in a low, moderate, or high risk range relative to historical experience
for each qualitative factor.
Foreclosed Real Estate
Foreclosed real estate is initially recorded at the lower of carrying or fair value (net of costs of disposal) at the date of foreclosure. Costs
relating to development and improvement of property are capitalized, whereas costs relating to the holding of property are
expensed. Assessments are periodically performed by management, and an allowance for losses is established through a charge to
operations if the carrying value of a property exceeds fair value.
Insurance Service and Fees
Commission revenue from selling commercial and personal property and casualty insurance on behalf of the insurance carriers is recognized
at the time of the sale of the policy or when a policy renews. Commission revenue from selling benefit plans to commercial customers on
behalf of the insurance carriers is recognized each month when the customer continues with the benefit plan. The Company also receives
contingent commissions from insurance companies which are based on the overall profitability of their relationship based primarily on the
loss experience of the insurance placed by the Company. Contingent commissions from insurance companies are accrued throughout the
year based on recent historical results. As loss events occur and overall performance becomes known, accrual adjustments are recorded
until the cash is ultimately received. Financial services commissions and insurance claims services revenue are recognized when the
services are rendered. Information on insurance service and fee revenue is included in Note 14 to these Consolidated Financial
Statements, “Revenue Recognition of Non-interest Income.”
Goodwill and Other Intangible Assets
The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired,
less liabilities assumed, as goodwill. The Company amortizes acquired intangible assets with definite useful economic lives over their
useful economic lives utilizing the straight-line method. On a periodic basis, management assesses whether events or changes in
circumstances indicate that the carrying amounts of the intangible assets may be impaired. The Company does not amortize goodwill and
any acquired intangible asset with an indefinite useful economic life, but reviews them for impairment at a reporting unit level on an annual
basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. A reporting unit is defined as any
distinct, separately identifiable component of one of our operating segments for which complete, discrete financial information is available
and reviewed regularly by the segment’s management.
The impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. The fair value of the
reporting units is measured utilizing the average of a discounted cash flow model and a market value based on a multiple to earnings before
interest, taxes, depreciation, and amortization (“EBITDA”) for similar companies. When modeling future cash flows, management
considered historical information, the operating budget, and strategic goals in projecting net income and cash flows for the next five years.
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Bank-Owned Life Insurance
The Bank has purchased insurance on the lives of Company directors and certain members of the Company’s management. The policies
accumulate asset values to meet future liabilities, including the payment of employee benefits, such as retirement benefits. Increases in the
cash surrender value are recorded as other income in the Company’s Consolidated Statements of Income.
Properties and Equipment
Properties and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets, which range from 3 to 39 years. Impairment losses on properties and equipment are realized if the
carrying amount is not recoverable from its undiscounted cash flows and exceeds its fair value.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax effects attributable to differences between the financial statement value of
existing assets and liabilities and their respective tax bases and carryforwards. Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the periods in which the deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense.
The Bank has invested in partnerships that incur expenses related to the rehabilitation of a certified historic structure located in New York
State. At the time the historic structure is placed in service, the Bank is eligible for a federal and New York State tax credit. At the same
time, the Bank evaluates its investment, which is valued at the present value of the expected cash flows from its partnership interest. If the
investment is determined to be impaired, the Bank will record that impairment loss on its income statement in non-interest income. The
federal tax credit impact is included in the Company’s estimated effective tax rate calculation and recorded in income tax expense. For New
York State, any new credit earned from rehabilitated historic properties placed in service on or after January 1, 2015 not used in the current
tax year will be treated as a refund or overpayment of tax to be credited to the next year’s tax. Since the realization of the tax credit does not
depend on the Bank’s generation of future taxable income or the Bank’s ongoing tax status or tax position, the refund is not considered an
element of income tax accounting. In such cases, the Bank would not record the credit as a reduction of income tax expense; rather, the
Bank includes the refundable New York State tax credit in non-interest income with a corresponding receivable recorded in other assets.
Earnings Per Share
Earnings per common share is determined by dividing net income by the weighted average number of shares outstanding during the
period. Diluted earnings per common share is based on increasing the weighted-average number of shares of common stock by the number
of shares of common stock that would be issued assuming the exercise of stock options. Such adjustments to weighted-average number of
shares of common stock outstanding are made only when such adjustments are expected to dilute earnings per common share. There were
70,369, 118,861, and 122,434 potentially dilutive shares of common stock included in calculating diluted earnings per share for the years
ended December 31, 2019, 2018, and 2017, respectively. Potential common shares that would have the effect of increasing diluted earnings
per share are considered to be anti-dilutive and are not included in calculating diluted earnings per share. There were 43,385, 27,600 and
zero anti-dilutive shares at December 31, 2019, 2018 and 2017, respectively.
Treasury Stock
Repurchases of shares of Evans Bancorp, Inc. stock are recorded at cost as a reduction of shareholders’ equity. Reissuances of shares of
treasury stock are recorded at market value.
Comprehensive Income
Comprehensive income includes both net income and other comprehensive income, including the change in unrealized gains and losses on
securities available for sale, and the change in the liability related to pension costs, net of tax.
Employee Benefits
The Bank maintains a non-contributory, qualified, defined benefit pension plan (the “Pension Plan”) that covered substantially all
employees before it was frozen on January 31, 2008. All benefits eligible participants had accrued in the Pension Plan until the freeze date
have been retained. Employees have not accrued additional benefits in the Pension Plan from that date. The actuarially determined
pension benefit in the form of a life annuity is based on the employee’s combined years of service, age and compensation. The Bank’s
policy is to fund the minimum amount required by government regulations. Employees are eligible to receive these benefits at normal
retirement age.
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The Bank maintains a defined contribution 401(k) plan and accrues contributions due under this plan as earned by employees. In addition,
the Bank maintains a non-qualified Supplemental Executive Retirement Plan for certain members of senior management, a non-qualified
Deferred Compensation Plan for directors and certain members of management, and a non-qualified Executive Incentive Retirement Plan for
certain members of management, as described more fully in Note 11 to these Consolidated Financial Statements, “Employee Benefits and
Deferred Compensation Plans.”
Stock-based Compensation
Stock-based compensation expense is recognized over the vesting period of the stock-based grant based on the estimated grant date value
of the stock-based compensation that is expected to vest. The Company accounts for forfeitures of stock awards when they occur. When
stock awards are granted, the Company assumes that the service condition will be achieved when determining the initial amount of
compensation cost recognized. Information on the determination of the estimated value of stock-based awards used to calculate stock-
based compensation expense is included in Note 12 to these Consolidated Financial Statements, “Stock-Based Compensation.”
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Financial Instruments with Off-Balance Sheet Risk
In the ordinary course of business, the Bank has entered into off-balance sheet financial arrangements consisting of commitments to extend
credit and standby letters of credit. The Bank provides guarantees in the form of standby letters of credit, which represent an irrevocable
obligation to make payments to a third party if the borrower defaults on its obligation under a borrowing or other contractual arrangement
with the third party. The Bank could potentially be required to make payments to the extent of the amount guaranteed by the standby
letters of credit based on the terms of the agreement. The maximum potential amount of future payments under standby letters of credit was
$4.3 million and $3.4 million as of December 31, 2019 and 2018, respectively. There were no liabilities recorded on the Consolidated Balance
Sheets related to standby letters of credit as of December 31, 2019 and 2018, respectively, reflecting management’s assessment of the value
of the guarantee given the lack of historical activity and the likelihood of current customers to draw on the letters of credit. The Bank has
not incurred any losses on its commitments during the past three years and has not recorded a reserve for its commitments.
Advertising costs
Advertising costs are expensed as incurred.
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RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
The 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.
ASU 2016-02 had an 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 $3.7 million and $4.2 million, respectively, at
December 31, 2019. Operating lease expenses during 2019 were $0.7 million, 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 2019 were $0.7 million and
are 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 December 31, 2019. The weighted average remaining lease term related to the Company’s
leases was 8.5 years as of December 31, 2019. Future minimum lease payments under non-cancellable leases as of December 31, 2019 were
as follows:
2020 $
2021
2022
2023
2024
Thereafter
Total future minimum
lease payments
Less imputed interest
Total $
Year Ending December 31,
748
682
694
589
452
1,640
4,805
651
4,154
The future minimum lease payments under non-cancellable leases prior to the adoption of ASU 2016-02 were $736 thousand in 2020; $682
thousand in 2021; $694 thousand in 2022; $580 thousand in 2023, and $2.1 million thereafter.
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Accounting standards that have been recently issued but not yet required to be adopted as of December 31, 2019, to the extent
management believes their adoption will have a material impact on the Company’s financial condition, results of operations, cash flows or
disclosures, are discussed below.
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 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. On October 16, 2019, the FASB affirmed its decision to amend the
effective date for the amendments in CECL for smaller reporting companies to fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years. Early adoption is allowed for fiscal years beginning after December 15, 2018. The Company
intends to early adopt CECL effective January 1, 2022.
ASU 2017-4, Simplifying the Test for Goodwill Impairment – The amendments in this ASU eliminate step 2 from the goodwill impairment
test. The Company adopted the amended guidance effective January 1, 2020 using a prospective transition method and will incorporate the
guidance as necessary when circumstances arise for the guidance to be utilized. The Company does not expect the guidance will have a
material impact on its consolidated financial statements, unless at some point in the future one of its reporting units were to fail step 1 of the
goodwill impairment test.
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 presented in the
initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date.
The Company adopted the amended guidance effective January 1, 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.
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.
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AU 2019-12, Simplifying the Accounting for Income Taxes – The amendments in this ASU simplify the accounting for income taxes
by removing the following exceptions: 1. Exception to the incremental approach for intraperiod tax allocation when there is a loss from
continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income) 2.
Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an
equity method investment 3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity
method investment becomes a subsidiary 4. Exception to the general methodology for calculating income taxes in an interim period when a
year-to-date loss exceeds the anticipated loss for the year. The amendments also simplify the accounting for income taxes by doing the
following: 1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income based tax and
account for any incremental amount incurred as a non-income-based tax. 2. Requiring that an entity evaluate when a step up in the tax
basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it
should be considered a separate transaction. 3. Specifying that an entity is not required to allocate the consolidated amount of current and
deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on
an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority. 4. Requiring that an entity
reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the
enactment date. 5. Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in
qualified affordable housing projects accounted for using the equity method.
The amendments in this ASU related to separate financial statements of legal entities that are not subject to tax should be applied on a
retrospective basis for all periods presented. The amendments related to changes in ownership of foreign equity method investments or
foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of
the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied
on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained
earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. Early adoption
of the amendments in an interim period would require recognition of any adjustments as of the beginning of the annual period that includes
that interim period.
The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.
Early adoption is permitted. The Company is evaluating the impact that the guidance will have on its consolidated financial statements.
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2.
SECURITIES
The amortized cost of securities and their approximate fair value at December 31 were as follows:
Available for Sale:
Debt securities:
U.S. government agencies
States and political subdivisions
Total debt securities
Mortgage-backed securities:
FNMA
FHLMC
GNMA
SBA
CMO
Total mortgage-backed securities
Total securities designated as available for sale
Held to Maturity:
Debt securities
States and political subdivisions
Total securities designated as held to maturity
Available for Sale:
Debt securities:
U.S. government agencies
States and political subdivisions
Total debt securities
Mortgage-backed securities:
FNMA
FHLMC
GNMA
SBA
CMO
Total mortgage-backed securities
Total securities designated as available for sale
Held to Maturity:
Debt securities
States and political subdivisions
Total securities designated as held to maturity
2019
(in thousands)
Unrealized
Gains
Losses
Fair
Value
Amortized
Cost
27,951
3,289
$
31,240
$
$
225
69
294
$
$
(21)
(7)
(28)
$
34,395
$
330
$
(53)
$
15,390
3,421
13,752
29,019
95,977
$
137
16
90
190
763
$
(13)
(24)
(70)
(164)
(324)
$
28,155
3,351
31,506
34,672
15,514
3,413
13,772
29,045
96,416
127,217
$
1,057
$
(352)
$
127,922
2,386
$
2,386
$
24
$
24
$
(18)
$
(18)
$
2,392
2,392
2018
(in thousands)
Unrealized
Gains
Losses
Fair
Value
Amortized
Cost
34,597
22,168
$
56,765
$
27,747
$
14,645
1,660
9,432
25,025
$
2
69
71
$
$
(671)
(64)
(735)
$
21
11
6
-
6
$
(729)
$
(431)
(36)
(299)
(1,055)
78,509
$
44
$
(2,550)
$
33,928
22,173
56,101
27,039
14,225
1,630
9,133
23,976
76,003
135,274
$
115
$
(3,285)
$
132,104
1,685
$
1,685
$
11
$
11
$
(22)
$
(22)
$
1,674
1,674
74
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Table of Contents
Available for sale securities with a total fair value of $102 million and $94 million were pledged as collateral to secure public deposits and for
other purposes required or permitted by law at December 31, 2019 and 2018, respectively.
The scheduled maturity of debt and mortgage-backed securities at December 31, 2019 and 2018 is 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.
Debt securities available for sale:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
available for sale
Total
Debt securities held to maturity:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
2019
2018
Amortized
cost
Estimated
fair value
(in thousands)
Amortized
cost
Estimated
fair value
(in thousands)
$
$
$
$
6,005 $
6,481
18,754
-
31,240
6,014 $
6,626
18,866
-
31,506
5,074 $
22,637
28,870
184
56,765
5,075
22,448
28,391
187
56,101
95,977
96,416
78,509
76,003
127,217 $
127,922 $
135,274 $
132,104
1,139 $
712
54
481
2,386 $
1,140 $
732
54
466
2,392 $
693 $
811
93
88
1,685 $
693
811
89
81
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.
Gross realized gains and losses on sales of investment securities were both less than $0.1 million in 2019. Gross realized losses on sales of
investment securities were $0.1 million in 2018. There were no gross realized gains from sales of securities in 2018. There were no gross
realized gains or losses from sales of investment securities in 2017.
Information regarding unrealized losses within the Company’s available for sale securities at December 31, 2019 and 2018 is summarized
below. The securities are primarily U.S. government-guaranteed agency securities or municipal securities. All unrealized losses are
considered temporary and related to market interest rate fluctuations.
75
Table of Contents
Available for Sale:
Debt securities:
U.S. government agencies
States and political subdivisions
Total debt securities
Mortgage-backed securities:
FNMA
FHLMC
GNMA
SBA
CMO
Total mortgage-backed securities
Held to Maturity:
Debt securities:
States and political subdivisions
Total temporarily impaired
securities
Available for Sale:
Debt securities:
U.S. government agencies
States and political subdivisions
Total debt securities
Mortgage-backed securities:
FNMA
FHLMC
GNMA
SBA
CMO
Total mortgage-backed securities
Held to Maturity:
Debt securities:
States and political subdivisions
Total temporarily impaired
securities
Less than 12 months
Fair
Value
Unrealized
Losses
2019
12 months or longer
Fair
Value
Unrealized
Losses
(in thousands)
Total
Fair
Value
Unrealized
Losses
1,976 $
-
1,976 $
(18) $
-
(18) $
3,997 $
181
4,178 $
(3) $
(7)
(10) $
5,973 $
181
6,154 $
5,355 $
-
2,091
5,171
5,706
18,323 $
(38) $
-
(22)
(70)
(36)
(166) $
3,630 $
1,242
770
-
8,911
14,553 $
(15) $
(13)
(2)
-
(128)
(158) $
8,985 $
1,242
2,861
5,171
14,617
32,876 $
(21)
(7)
(28)
(53)
(13)
(24)
(70)
(164)
(324)
227 $
(1) $
2,165 $
(17) $
2,392 $
(18)
20,526 $
(185) $
20,896 $
(185) $
41,422 $
(370)
Less than 12 months
Fair
Value
Unrealized
Losses
2018
12 months or longer
Fair
Value
Unrealized
Losses
(in thousands)
Total
Fair
Value
Unrealized
Losses
9,931 $
5,218
15,149 $
2,637 $
1,895
-
-
-
4,532 $
(49) $
(15)
(64) $
(21) $
(25)
-
-
-
(46) $
21,144 $
6,893
28,037 $
(622) $
(49)
(671) $
31,075 $
12,111
43,186 $
23,667 $
11,899
926
9,133
23,127
68,752 $
(708) $
(406)
(36)
(299)
(1,055)
(2,504) $
26,304 $
13,794
926
9,133
23,127
73,284 $
(671)
(64)
(735)
(729)
(431)
(36)
(299)
(1,055)
(2,550)
156 $
- $
722 $
(22) $
878 $
(22)
19,837 $
(110) $
97,511 $
(3,197) $
117,348 $
(3,307)
$
$
$
$
$
$
$
$
$
$
$
$
76
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Management has assessed the securities available for sale in an unrealized loss position at December 31, 2019 and 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 holds no securities backed by sub-prime or Alt-A residential mortgages or commercial mortgages and also does not
hold any trust-preferred securities.
The Company did not record any other-than-temporary impairment charges in 2019, 2018, or 2017. The credit worthiness of the Company’s
portfolio is largely reliant on the ability of U.S. government agencies such as the Federal Home Loan Bank (“FHLB”), Federal National
Mortgage Association (“FNMA”), and the 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 going forward.
3.
LOANS AND THE ALLOWANCE FOR LOAN LOSSES
Major categories of loans at December 31, 2019 and 2018 are summarized as follows:
Mortgage loans on real estate:
Residential mortgages
Commercial and multi-family
Construction-Residential
Construction-Commercial
Home equities
Total real estate loans
Commercial and industrial loans
Consumer and other loans
Net deferred loan origination costs
Total gross loans
Allowance for loan losses
Loans, net
December 31, 2019
December 31, 2018
$
(in thousands)
$
158,572
645,036
1,067
97,848
69,351
971,874
251,197
1,926
1,534
1,226,531
(15,175)
$
1,211,356
$
158,404
592,507
113
105,196
70,546
926,766
226,057
1,520
1,587
1,155,930
(14,784)
1,141,146
Residential Mortgages: The Company originates adjustable-rate and fixed-rate, one-to-four-family residential real estate loans for the
construction, purchase, or refinancing of a mortgage. These loans are collateralized by owner-occupied properties located in the
Company’s market area and are amortized over a period of 10 to 30 years. Loans on one-to-four-family residential real estate are mostly
originated in amounts of no more than 80% of the property’s appraised value or have private mortgage insurance. Mortgage title insurance
and hazard insurance are normally required. Construction loans have a unique risk, because they are secured by an incomplete dwelling.
The Bank, in its normal course of business, sells certain residential mortgages which it originates to FNMA. The Company maintains
servicing rights on the loans that it sells to FNMA and earns a fee thereon. The Bank determines with each origination of residential real
estate loans which desired maturities, within the context of overall maturities in the loan portfolio, provide the appropriate mix to optimize
the Bank’s ability to absorb the corresponding interest rate risk within the Company’s tolerance ranges. This practice allows the Company
to manage interest rate risk, liquidity risk, and credit risk. At December 31, 2019 and 2018, the Company had approximately $76 million and
$73 million, respectively, in unpaid principal balances of loans that it services for FNMA. For the years ended December 31, 2019 and 2018,
the Company sold $13 million and $4 million, respectively, in loans to FNMA and realized gains on those sales of $0.2 million and less than
$0.1 million, respectively. Gains or losses recognized upon the sale of loans are determined on a specific identification basis. The Company
had a related asset carried at fair value of approximately $0.6 million for the servicing portfolio rights at December 31, 2019 and 2018. There
were $0.7 million and $0.4 million in loans held for sale at December 31, 2019 and 2018, respectively. Loans held for sale are typically in the
portfolio for less than a month. As a result, the carrying value approximates fair value. The Company has never been contacted by FNMA
to repurchase any loans due to improper documentation or fraud.
77
Table of Contents
Due to the lack of significant foreclosure activity and absence of any ongoing litigation at December 31, 2019 and 2018, the Company had
no accrual for loss contingencies or potential costs associated with foreclosure-related activities at those dates.
Commercial and Multi-Family Mortgages and Commercial Construction Loans: Commercial real estate loans are made to finance the
purchases of real estate with completed structures or in the midst of being constructed. These commercial real estate loans are secured by
first liens on the real estate, which may include apartments, hotels, retail stores or plazas, healthcare facilities, and other non-owner-
occupied facilities. These loans are generally less risky than commercial and industrial loans since they are secured by real estate and
buildings. The Company offers commercial mortgage loans with up to an 80% LTV ratio for up to 20 years on a variable and fixed rate
basis. Many of these mortgage loans either mature or are subject to a rate call after three to five years. The Company’s underwriting
analysis includes credit verification, independent appraisals, a review of the borrower's financial condition, and the underlying cash
flows. Construction loans have a unique risk, because they are secured by an incomplete dwelling.
As of December 31, 2019, there were $407 million in residential and commercial mortgage loans pledged to FHLBNY to serve as collateral for
potential borrowings.
Home Equities: The Company originates home equity lines of credit and second mortgage loans (loans secured by a second lien position
on one-to-four-family residential real estate). These loans carry a higher risk than first mortgage residential loans because they are in a
second position with respect to collateral. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a
review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in
the underlying real estate.
Commercial and Industrial Loans: These loans generally include term loans and lines of credit. Such loans are made available to
businesses for working capital (including inventory and receivables), business expansion (including acquisition of real estate, expansion,
and improvements) and equipment purchases. As a general practice, a collateral lien is placed on equipment or other assets owned by the
borrower. These loans generally carry a higher risk than commercial real estate loans based on the nature of the underlying collateral,
which can be business assets such as equipment and accounts receivable. To reduce the risk, management also attempts to secure real
estate as collateral and obtain personal guarantees of the borrowers. To further reduce risk and enhance liquidity, these loans generally
carry variable rates of interest, re-pricing in three- to five-year periods, and have a maturity of five years or less. Lines of credit generally
carry floating rates of interest (e.g. prime plus a margin).
Consumer Loans: The Company funds a variety of consumer loans, including direct automobile loans, recreational vehicle loans, boat
loans, home improvement loans, and personal loans (collateralized and uncollateralized). Most of these loans carry a fixed rate of interest
with principal repayment terms typically ranging up to five years, based upon the nature of the collateral and the size of the loan. The
majority of consumer loans are underwritten on a secured basis using the underlying collateral being financed. A minimal amount of loans
are unsecured, which carry a higher risk of loss. These loans included overdrawn deposit accounts classified as loans of $0.3 million at
December 31, 2019 and less than $0.1 million at December 31, 2018.
The Company maintains an allowance for loan losses in order to capture the probable losses inherent in its loan portfolio. There is a risk
that the Company may experience significant loan losses in 2020 and beyond which could exceed the allowance for loan losses. If the
Company's assumptions and judgments prove to be incorrect or bank regulators require the Company to increase its provision for loan
losses or recognize further loan charge-offs, the Company may have to increase its allowance for loan losses or loan charge-offs which
could have a material adverse effect on the Company's operating results and financial condition. There can be no assurance that the
Company's allowance for loan losses will be adequate to protect the Company against loan losses that it may incur.
Changes in the allowance for loan losses for the years ended December 31, 2019, 2018 and 2017 follow:
Balance, beginning of year
Provisions for loan losses
Recoveries
Charge-offs
Balance, end of year
2019
2018
(in thousands)
2017
14,784 $
14,019 $
75
841
(525)
15,175 $
1,402
54
(691)
14,784 $
13,916
738
350
(985)
14,019
$
$
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Table of Contents
The following tables summarize the allowance for loan losses, as of December 31, 2019 and 2018, respectively, by portfolio segment. The
segments presented are at the level management uses to assess and monitor the risk and performance of the portfolio.
2019
Commercial and
Industrial
Commercial
Real Estate
Mortgages*
Consumer and
Other
Residential
Mortgages*
Home Equities
Total
(in thousands)
Allowance for loan
losses:
Beginning balance
$
4,368 $
8,844 $
106 $
1,121 $
Charge-offs
Recoveries
Provision (Credit)
(301)
797
(317)
(33)
2
192
(156)
42
163
(13)
-
(37)
Ending balance
$
4,547 $
9,005 $
155 $
1,071 $
345 $
(22)
-
74
397 $
14,784
(525)
841
75
15,175
Allowance for loan
losses:
Ending balance:
Individually evaluated
for impairment
Collectively evaluated
for impairment
Total
Loans:
Ending balance:
Individually evaluated
for impairment
Collectively evaluated
for impairment
Total
$
$
442 $
9 $
21 $
5 $
- $
477
4,105
8,996
4,547 $
9,005 $
134
155 $
1,066
1,071 $
397
397 $
14,698
15,175
$
6,558 $
7,791 $
21 $
2,804 $
1,453 $
18,627
244,639
735,093
1,905
156,835
67,898
1,206,370
$
251,197 $
742,884 $
1,926 $
159,639 $
69,351 $
1,224,997
Note: Loan balances do not include $1.5 million in net deferred loan origination costs as of December 31, 2019.
* includes construction loans
79
Table of Contents
(in thousands)
Allowance for loan
losses:
2018
Commercial and
Industrial
Commercial
Real Estate
Mortgages*
Consumer and
Other
Residential
Mortgages*
Home Equities
Total
Beginning balance
$
5,204 $
Charge-offs
Recoveries
Provision (Credit)
(203)
41
(674)
Ending balance
$
4,368 $
7,409 $
(262)
-
1,697
8,844 $
109 $
(113)
12
98
950 $
(86)
-
257
106 $
1,121 $
347 $
(27)
1
24
345 $
14,019
(691)
54
1,402
14,784
Allowance for loan
losses:
Ending balance:
Individually evaluated
for impairment
Collectively evaluated
for impairment
Total
Loans:
Ending balance:
Individually evaluated
for impairment
Collectively evaluated
for impairment
Total
$
$
249 $
716 $
23 $
85 $
- $
1,073
4,119
8,128
83
1,036
4,368 $
8,844 $
106 $
1,121 $
345
345 $
13,711
14,784
$
3,701 $
15,290 $
23 $
2,814 $
1,887 $
23,715
222,356
682,413
1,497
155,703
68,659
1,130,628
$
226,057 $
697,703 $
1,520 $
158,517 $
70,546 $
1,154,343
Note: Loan balances do not include $1.6 million in net deferred loan origination costs as of December 31, 2018.
* includes construction loans
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Table of Contents
A description of the Company’s accounting policies and the methodology used to estimate the allowance for loan losses, including a
description of the factors considered in determining the allowance for loan losses, such as historical losses and existing economic
conditions, is included in Note 1 to these Consolidated Financial Statements.
The following table provides data, at the class level, of credit quality indicators of certain loans, as of December 31, 2019 and 2018,
respectively:
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
$
73,646
$
451,297
$
524,943
$
Watch
Special Mention
Substandard
Doubtful/Loss
Total
$
13,380
8,359
2,463
-
97,848
$
171,277
15,725
6,737
-
645,036
$
184,657
24,084
9,200
-
742,884
$
165,255
68,665
7,631
9,646
-
251,197
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
$
Watch
Special Mention
Substandard
Doubtful/Loss
Total
$
30,628
-
8,636
-
105,196
$
109,409
10,583
6,221
-
592,507
$
140,037
10,583
14,857
-
697,703
$
155,687
57,366
4,105
8,870
29
226,057
The Company’s risk ratings are monitored by the individual relationship managers and changed as deemed appropriate after receiving
updated financial information from the borrowers or deterioration or improvement in the performance of a loan is evident in the customer’s
payment history. Each commercial relationship is individually assigned a risk rating. The Company also maintains a loan review process
that monitors the management of the Company’s commercial loan portfolio by the relationship managers. The Company’s loan review
function reviews at least 40% of the commercial loan portfolio annually.
The Company’s consumer loans, including residential mortgages and home equity loans and lines of credit, are not individually risk rated or
reviewed as part of 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 dollar balances. Given the lack of updated
information since the initial underwriting of the loan and the small size of individual loans, the Company uses delinquency status as the
primary credit quality indicator for consumer loans. Once a consumer loan reaches 60 days past due, management orders an independent
appraisal of the underlying collateral and produces a credit report on the borrower. After discounting for potential selling costs and other
factors specific to the property or borrower, the book value of the loan is then compared to the collateral value as determined by the
appraisal. In situations where the Company holds a junior lien, management accounts for the amount of the senior liens held by other
lenders, and the collateral value is more heavily discounted to account for the increased risk. If the loan is ultimately determined to be
impaired, it is placed in non-accrual status. Unless the loan is well secured and in the process of collection, all consumer loans that are
more than 90 days past due are placed in non-accrual status.
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Table of Contents
A summary of current, past due, and nonaccrual loans as of December 31, 2019 and 2018 follows:
2019
(in thousands)
Current
Balance
30-59 days
60-89 days
90+ days
Loans
Non-accruing
Total
Balance
Commercial and industrial
$
245,658 $
705 $
- $
- $
4,834 $
251,197
Residential real estate:
Residential
Construction
Commercial real estate:
Commercial
Construction
Home equities
Consumer and other
Total Loans
153,630
2,616
865
-
630,016
92,667
67,868
1,907
3,482
2,886
354
15
888
202
5,879
720
239
4
-
-
-
-
-
-
1,438
-
5,659
1,575
890
-
158,572
1,067
645,036
97,848
69,351
1,926
$
1,192,611 $
10,058 $
7,932 $
- $
14,396 $
1,224,997
2018
(in thousands)
Current
Balance
30-59 days
60-89 days
90+ days
Loans
Non-accruing
Total
Balance
Commercial and industrial
$
217,625 $
6,173 $
565 $
- $
1,694 $
226,057
Residential real estate:
Residential
Construction
Commercial real estate:
Commercial
Construction
Home equities
Consumer and other
Total Loans
154,063
2,546
113
-
582,016
95,204
69,094
1,514
4,546
1,027
123
5
332
-
-
329
76
1
-
-
-
-
-
-
1,463
-
5,945
8,636
1,253
-
158,404
113
592,507
105,196
70,546
1,520
$
1,119,629 $
14,420 $
1,303 $
- $
18,991 $
1,154,343
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Table of Contents
The following table provides data, at the class level, of impaired loans:
At December 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
Residential real estate:
Residential
Construction
Commercial real estate:
Commercial
Construction
Home equities
Consumer and other
Total impaired loans
$
3,798 $
4,112 $
- $
4,046 $
118 $
143
2,744
-
6,019
1,335
1,453
3,003
-
6,521
1,352
1,687
-
-
-
-
-
2,823
-
6,293
1,344
1,525
73
-
225
23
64
-
15,349 $
-
16,675 $
$
-
- $
-
16,031 $
-
503 $
63
-
72
50
30
-
358
At December 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
Residential real estate:
Residential
Construction
Commercial real estate:
Commercial
Construction
Home equities
Consumer and other
Total impaired loans
$
2,760 $
2,808 $
442 $
2,764 $
109 $
63
60
-
197
240
-
62
-
197
246
-
5
-
4
5
-
61
-
197
242
-
3
-
8
8
-
21
3,278 $
23
3,336 $
$
21
477 $
22
3,286 $
-
128 $
1
-
4
9
-
1
78
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Table of Contents
Total:
Commercial and industrial
Residential real estate:
Residential
Construction
Commercial real estate:
Commercial
Construction
Home equities
Consumer and other
Total impaired loans
At December 31, 2019
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Foregone
Interest
Income
Recognized
(in thousands)
$
6,558 $
6,920 $
442 $
6,810 $
227 $
206
2,804
-
6,216
1,575
1,453
3,065
-
6,718
1,598
1,687
5
-
4
5
-
2,884
-
6,490
1,586
1,525
76
-
233
31
64
21
18,627 $
23
20,011 $
$
21
477 $
22
19,317 $
-
631 $
64
-
76
59
30
1
436
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
Residential real estate:
Residential
Construction
Commercial real estate:
Commercial
Construction
Home equities
Consumer and other
Total impaired loans
$
1,633 $
2,611 $
- $
1,785 $
116 $
65
2,289
-
6,538
116
1,887
2,483
-
6,914
116
2,058
-
-
-
-
-
2,337
-
6,733
143
1,952
45
-
220
-
71
-
12,463 $
-
14,182 $
$
-
- $
-
12,950 $
-
452 $
69
-
115
12
43
-
304
84
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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
Residential real estate:
Residential
Construction
Commercial real estate:
Commercial
Construction
Home equities
Consumer and other
Total impaired loans
Total:
Commercial and industrial
Residential real estate:
Residential
Construction
Commercial real estate:
Commercial
Construction
Home equities
Consumer and other
Total impaired loans
$
2,068 $
2,095 $
249 $
2,098 $
17 $
125
525
-
-
8,636
-
556
-
-
8,975
-
85
-
-
716
-
520
-
-
8,793
-
22
-
-
379
-
23
11,252 $
27
11,653 $
23
1,073 $
23
11,434 $
$
-
418 $
3
-
-
113
-
2
243
At December 31, 2018
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Foregone
Interest
Income
Recognized
(in thousands)
$
3,701 $
4,706 $
249 $
3,883 $
133 $
190
2,814
-
6,538
8,752
1,887
3,039
-
6,914
9,091
2,058
85
-
-
716
-
2,857
-
6,733
8,936
1,952
67
-
220
379
71
23
23,715 $
27
25,835 $
23
1,073 $
23
24,384 $
$
-
870 $
72
-
115
125
43
2
547
There were $15.3 million and $12.5 million in impaired loans with no related allowance at December 31, 2019 and 2018, respectively. As
management identifies impaired loans that are collateral dependent, new appraisals are ordered to determine the fair value of the
collateral. It should also be noted that when estimating the fair value of collateral for the purpose of performing an impairment test,
management further reduces the appraised value of the collateral to account for estimated selling or carrying costs, age of the appraisal, if
applicable, or any other perceived market or borrower-specific risks to the value of the collateral.
The interest income in the preceding table was interest income recognized on accruing TDRs and interest paid prior to loans being
identified as non-accrual. The interest income foregone in the preceding table represents interest income that the Company did not
recognize on those loans while they were on non-accrual.
The Bank had no loan commitments to borrowers in non-accrual status at December 31, 2019 and 2018.
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Troubled debt restructurings (“TDRs”)
The following tables summarize the loans that were classified as troubled debt restructurings as of the dates indicated:
Commercial and industrial
Residential real estate:
Residential
Construction
Commercial real estate:
Commercial and multi-family
Construction
Home equities
Consumer and other
Total TDR loans
Commercial and industrial
Residential real estate:
Residential
Construction
Commercial real estate:
Commercial and multi-family
Construction
Home equities
Consumer and other
Total TDR loans
December 31, 2019
(in thousands)
Total
Nonaccruing
Accruing
$
2,052
$
328
$
1,724
$
1,815
-
3,632
-
738
449
-
3,075
-
175
1,366
-
557
-
563
$
21
8,258
$
-
4,027
$
21
4,231
$
Related
Allowance
26
-
-
-
-
-
21
47
December 31, 2018
(in thousands)
Total
Nonaccruing
Accruing
Related
Allowance
$
2,282
$
275
$
2,007
$
154
1,617
-
4,164
8,753
756
266
-
3,571
8,637
122
1,351
-
593
116
634
$
23
17,595
$
-
12,871
$
23
4,724
$
14
-
-
716
-
23
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 December 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.
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The following tables show the data for TDR activity by type of concession granted to the borrower during 2019 and 2018:
Year ended December 31, 2019
Year ended December 31, 2018
(Recorded Investment in thousands)
(Recorded Investment in thousands)
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number
of
Contracts
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number
of
Contracts
2
1
-
-
3
-
-
-
-
3
1
-
$
189
$
42
-
-
189
42
-
-
2
1
1
1
307
307
-
-
-
-
-
390
54
-
-
-
-
-
390
54
-
1
1
1
1
-
-
-
$
1,651
$
1,651
29
63
156
-
8,768
181
154
29
63
156
-
8,768
181
154
100
100
-
-
-
-
-
-
Troubled Debt Restructurings by Type of
Concession
Commercial and Industrial:
Extension of maturity
Term-out line of credit
Combination of concessions
Residential Real Estate & Construction:
Extension of maturity
Extension of maturity and
interest rate reduction
Commercial Real Estate & Construction:
Deferral of principal
Extension of maturity
Combination of concessions
Home Equities:
Deferral of principal
Extension of maturity and
interest rate reduction
Combination of concessions
Consumer and other loans
Modifications made to loans in a troubled debt restructuring did not have a material impact on the Company’s net income for the years
ended December 31, 2019 and 2018. All of the C&I and commercial real estate TDRs were already considered impaired and sufficiently
reserved for prior to being identified as a TDR.
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 preceding
twelve months and which subsequently defaulted during the twelve-month periods ended December 31, 2019 and 2018 were not material.
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4.
PROPERTIES AND EQUIPMENT
Properties and equipment at December 31 were as follows:
Land
Buildings and improvements
Furniture, fixtures, and equipment
Construction in progress
Less accumulated depreciation
Properties and equipment, net
2019
2018
(in thousands)
268
13,261
17,219
3,688
34,436
(20,682)
13,754
$
$
268
13,258
16,375
-
29,901
(19,416)
10,485
$
$
Construction in progress at December 31, 2019 relates to the Company’s planned relocation to a new corporate headquarters in 2020.
Depreciation expense totaled $1.3 million in 2019 and $1.2 million in 2018 and 2017.
5.
OTHER ASSETS
Other assets at December 31 were as follows:
Net deferred tax asset
Accrued interest receivable
State historic tax credit receivable
Prepaid expenses
Mortgage servicing rights
Historic tax credit investments
Accounts receivable
Other
Total other assets
$
2019
2018
(in thousands)
$
3,957
4,606
1,969
1,367
555
1,222
2,111
941
4,417
4,594
1,854
1,451
609
1,243
3,002
904
$
16,728
$
18,074
6.
GOODWILL AND INTANGIBLE ASSETS
The Company had $10.5 million in goodwill at December 31, 2019 and 2018. The entire amount of goodwill is within the insurance agency
activities segment. The Company measures the fair value of the insurance agency reporting unit annually, as of December 31, utilizing
market value earnings before interest, taxes, depreciation, and amortization (“EBITDA”) multiples based on industry data and cash flow
modeling. When using the cash flow models, management considered historical information, the operating budget for 2020, economic and
insurance market cycles, and strategic goals in projecting net income and cash flows for the next five years. The value based on EBITDA
was higher than the value calculated using cash flow modeling, a result of growth assumptions used by the Company in the cash flow
model as well as an implied control premium in the multiple. The multiple used was based on industry data and consistent with the previous
year’s assumption.
The fair value determined in the impairment test was substantially higher than the carrying value for TEA. Management used growth rates
that are achievable over the long run through both soft and hard insurance cycles. Including the impact of the 2018 R&S acquisition,
TEA’s total revenue increased by 17.5% in 2019. No impairment was recognized as a result of the goodwill impairment tests performed as of
December 31, 2019 and 2018.
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TEA purchased the assets of Richardson and Stout Inc. (“R&S”), an insurance agency in Wellsville, NY, on July 1, 2018, A.M. Smith
Group, Inc., an insurance agency in Lockport, NY, on December 31, 2016 and Mietus Agency, an insurance agency in Derby, NY on
January 1, 2017. Intangible assets related to those acquisitions are reflected in the table below:
2019
Gross Carrying
Amount
Accumulated
Amortization
(in thousands)
Net
Weighted Avg
Amortization
Period
Insurance expirations
$
2,865
$
(840) $
2,025
5 years
2018
Gross Carrying
Amount
Accumulated
Amortization
(in thousands)
Net
Weighted Avg
Amortization
Period
Insurance expirations
$
2,865
$
(393) $
2,472
6 years
Amortization expense related to intangibles for the years ended December 31, 2019, 2018, and 2017 was $0.4 million, $0.3 million, and $0.1
million, respectively. Estimated amortization expense for each of the four succeeding fiscal years is as follows:
Year Ending December 31
Amount
(in thousands)
2020
2021
2022
2023
2024 - 2025
$
$
447
447
334
325
472
2,025
7.
DEPOSITS
Time deposits of $250 thousand and over, excluding brokered deposits, totaled $58.0 million and $59.5 million at December 31, 2019 and
2018, respectively. Brokered time deposits totaled $27.2 million and $41.0 million at December 31, 2019 and 2018, respectively. There were
overdrawn deposit accounts classified as loans of $0.3 million and less than $0.1 million at December 31, 2019 and 2018, respectively.
At December 31, 2019, the scheduled maturities of all time deposits were as follows:
2020
2021
2022
2023
2024
$
$
(in thousands)
89
208,728
47,227
10,101
8,829
1,042
275,927
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8.
BORROWED FUNDS AND JUNIOR SUBORDINATED DEBENTURES
Other borrowings at December 31, 2019 consist of a $10 million advance from the FHLB with a fixed interest rate of 1.73% that matures in
2020.
The Bank has the ability to borrow additional funds from the FHLB based on the securities or real estate loans that can be used as collateral
and to purchase additional federal funds through one of the Bank’s correspondent banks. Given the current collateral available, additional
advances of up to $198 million can be drawn on the FHLB via the Bank’s Overnight Line of Credit Agreement. The Bank also has the
ability to purchase up to $8 million in federal funds from its correspondent banks.
As a member of the Federal Home Loan Bank System, the Bank is required to hold stock in FHLBNY. The Bank held FHLBNY stock with a
carrying value of $1.6 million and $1.5 million as of December 31, 2019 and December 31, 2018, respectively.
The amounts and interest rates of other borrowed funds were as follows:
FHLB Overnight
Line of Credit
FHLB Advances
Total Other Borrowings
(in thousands)
At December 31, 2019
Amount outstanding
Weighted-average interest rate
For the year ended December 31, 2019
Highest amount at a month end
Daily average amount outstanding
Weighted-average interest rate
At December 31, 2018
Amount outstanding
Weighted-average interest rate
For the year ended December 31, 2018
Highest amount at a month end
Daily average amount outstanding
Weighted-average interest rate
At December 31, 2017
Amount outstanding
Weighted-average interest rate
For the year ended December 31, 2017
Highest amount at a month end
Daily average amount outstanding
Weighted-average interest rate
$
$
$
$
$
$
$
$
$
-
- %
-
11
2.70 %
-
- %
78,900
20,981
1.76 %
$
$
$
$
$
$
10,000
$
1.73 %
10,000
1.73 %
10,000
10,000
1.73 %
$
10,011
1.73 %
10,000
$
1.73 %
10,000
1.73 %
10,000
10,000
1.73 %
$
78,250
$
10,000
$
1.53 %
1.73 %
78,250
16,491
1.36 %
$
$
10,000
10,000
1.73 %
$
30,981
1.75 %
88,250
1.55 %
26,491
1.50 %
On October 1, 2004, Evans Capital Trust I, a statutory business trust wholly-owned by the Company (the “Trust”), issued $11.0 million in
aggregate principal amount of floating rate preferred capital securities due November 23, 2034 (the “Capital Securities”) and $0.3 million of
common securities (the “Common Securities”). The Capital Securities represent preferred undivided interests in the assets of the
Trust. Under the Federal Reserve Board’s current risk-based capital guidelines, the Capital Securities are includable in the Company’s Tier
1 (Core) capital. The Common Securities are wholly-owned by the Company and are the only class of the Trust’s securities possessing
general voting powers.
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The Capital Securities have a distribution rate of three-month LIBOR plus 2.65%, and the distribution dates are February 23, May 23,
August 23, and November 23. The distribution rate was 4.56% at December 31, 2019.
The proceeds from the issuances of the Capital Securities and Common Securities were used by the Trust to purchase $11.3 million in
aggregate liquidation amount of floating rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) of the
Company, due October 1, 2037, which are comprised of $11.0 million of Capital Securities and $0.3 million of Common Securities. The $0.3
million of Common Securities represent the initial capital contribution of the Company to the Trust, which have not been consolidated and
are included in “Other Assets” on the consolidated balance sheet.
The Junior Subordinated Debentures represent the sole assets of the Trust, and payments under the Junior Subordinated Debentures are
the sole source of cash flow for the Trust. The interest rate payable on the Junior Subordinated Debentures was 4.56% at December 31,
2019.
Holders of the Capital Securities receive preferential cumulative cash distributions on each distribution date at the stated distribution rate,
unless the Company exercises its right to extend the payment of interest on the Junior Subordinated Debentures for up to twenty quarterly
periods, in which case payment of distributions on the respective Capital Securities will be deferred for comparable periods. During an
extended interest period, in accordance with terms as defined in the indenture relating to the Capital Securities, the Company may not pay
dividends or distributions on, or repurchase, redeem, or acquire any shares of its capital stock. The agreements governing the Capital
Securities, in the aggregate, provide a full, irrevocable, and unconditional guarantee by the Company of the payment of distributions on,
the redemption of, and any liquidation distribution with respect to the Capital Securities. The obligations under such guarantee and the
Capital Securities are subordinate and junior in right of payment to all senior indebtedness of the Company.
The Capital Securities will remain outstanding until the Junior Subordinated Debentures are repaid at maturity, are redeemed prior to
maturity, or are distributed in liquidation to the Trust. The Capital Securities are mandatorily redeemable in whole, but not in part, upon
repayment at the stated maturity dates of the Junior Subordinated Debentures or the earlier redemption of the Junior Subordinated
Debentures in whole upon the occurrence of one or more events (“Events”) set forth in the indentures relating to the Capital Securities, and
in whole or in part at any time contemporaneously with the optional redemption of the related Junior Subordinated Debentures in whole or
in part. The Junior Subordinated Debentures are redeemable prior to their stated maturity dates at the Company’s option: (i) on or after the
stated optional redemption dates, in whole at any time, or in part from time to time; or (ii) in whole, but not in part, at any time within 90 days
following the occurrence and during the continuation of one or more of the Events, in each case subject to possible regulatory
approval. The redemption price of the Capital Securities and the related Junior Subordinated Debentures upon early redemption would be
at the liquidation amount plus accumulated but unpaid distributions.
9.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank enters into agreements with customers to sell securities owned by the Bank to the customers and repurchase the identical
security, within one business day. No physical movement of the securities is involved. The Bank had $2.4 million and $3.1 million in
securities sold under agreement to repurchase at December 31, 2019 and 2018, respectively.
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10.
COMPREHENSIVE INCOME (LOSS)
The following tables display the components of other comprehensive income (loss), net of tax:
Net unrealized (loss) gain on investment securities
Net defined benefit pension plan adjustments
Total
Net unrealized loss on investment securities
Net defined benefit pension plan adjustments
Total
Net unrealized loss on investment securities
Net defined benefit pension plan adjustments
Total
Unrealized loss on investment securities:
Unrealized gain (loss) on investment securities
Defined benefit pension plans adjustments:
Net actuarial (loss) gain
Reclassifications from accumulated other
comprehensive income for gains (losses)
Amortization of prior service cost (a)
Amortization of actuarial loss (a)
Net change
Other Comprehensive Income (Loss)
Balance at
December 31, 2018
Net Change
(in thousands)
Balance at
December 31, 2019
$
$
(2,348) $
(3,005)
(5,353) $
2,870 $
(100)
2,770 $
522
(3,105)
(2,583)
Balance at
December 31, 2017
Net Change
(in thousands)
Balance at
December 31, 2018
$
$
(1,049) $
(2,368)
(3,417) $
(1,299) $
(637)
(1,936) $
(2,348)
(3,005)
(5,353)
Balance at
December 31, 2016
$
$
(365) $
(2,059)
(2,424) $
Net Change
(in thousands)
Balance at
December 31, 2017
(684) $
(309)
(993) $
(1,049)
(2,368)
(3,417)
December 31, 2019
(in thousands)
Income Tax (Provision)
Benefit
Net-of-Tax Amount
Before-Tax Amount
$
$
$
3,875 $
(1,005) $
2,870
(581) $
212 $
(369)
32
332
(217)
(9)
(86)
117
3,658 $
(888) $
23
246
(100)
2,770
(a) Included in net periodic pension cost as described in Note 11 – “Employee Benefits and Deferred Compensation Plans”
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Table of Contents
December 31, 2018
(in thousands)
Before-Tax Amount
Income Tax (Provision) Benefit
Net-of-Tax Amount
Unrealized loss on investment securities:
Unrealized (loss) gain on investment securities
Defined benefit pension plans adjustments:
Net actuarial gain (loss)
Reclassifications from accumulated other
comprehensive income for gains (losses)
Amortization of prior service cost (a)
Amortization of actuarial loss (a)
Net change
$
$
(1,756)
$
457 $
(1,299)
(987)
$
196 $
(791)
31
169
(787)
(5)
(41)
150
26
128
(637)
Other Comprehensive Income (Loss)
$
(2,543)
$
607 $
(1,936)
(a) Included in net periodic pension cost as described in Note 11 – “Employee Benefits and Deferred Compensation Plans”
December 31, 2017
(in thousands)
Before-
Tax
Amount
Income
Tax
(Provision)
Benefit
Net-of-Tax
Amount
Tax
effect
reclass
due to
TCJA
Total Net
Change
Unrealized loss on investment securities:
Unrealized (loss) gain on investment
securities
Defined benefit pension plans
adjustments:
Net actuarial gain (loss)
Reclassifications from accumulated other
comprehensive income for gains (losses)
Amortization of prior service cost (a)
Amortization of actuarial loss (a)
Net change
$
$
(826) $
319 $
(507) $
(177)
$
(684)
(30) $
11 $
(19)
31
173
174
(4)
(36)
(29)
27
137
145
(454)
(309)
Other Comprehensive Income (Loss)
$
(652) $
290 $
(362) $
(631)
$
(993)
(a) Included in net periodic pension cost as described in Note 11 – “Employee Benefits and Deferred Compensation Plans”
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11.
EMPLOYEE BENEFITS AND DEFERRED COMPENSATION PLANS
Employees’ Pension Plan
The Bank has a defined benefit pension plan that covered substantially all employees of the Company and its subsidiaries (the “Pension
Plan”). The Pension Plan provides benefits that are based on the employees’ compensation and years of service. The Bank uses an
actuarial method of amortizing prior service cost and unrecognized net gains or losses which result from actual experience and assumptions
being different than those that are projected. The amortization method the Bank uses recognizes the prior service cost and net gains or
losses over the average remaining service period of active employees which exceeds the required amortization. The Pension Plan was
frozen effective January 31, 2008. Under the freeze, eligible employees will receive the benefits already earned through January 31, 2008 at
retirement, but will not be able to accrue any additional benefits. As a result, service cost will no longer be incurred.
Selected Financial Information for the Pension Plan is as follows:
Change in benefit obligation:
12/31/2019
12/31/2018
(in thousands)
Benefit obligation at the beginning of the year
$
5,390
$
Service cost
Interest cost
Assumption change
Actuarial (gain) loss
Benefits paid
Benefit obligation at the end of the year
Change in plan assets:
Fair value of plan assets at the beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at the end of year
Funded status
Amount recognized in the Consolidated Balance Sheets consist of:
Accrued benefit liabilities
Amount recognized in the Accumulated Other Comprehensive Loss consists of:
Net actuarial loss
Prior service cost
Net amount recognized in equity - pre-tax
Accumulated benefit obligation at year end
94
-
223
978
38
(227)
6,402
5,180
1,091
-
(227)
6,044
(358)
$
(358)
2,477
-
2,477
6,402
$
$
$
$
$
$
$
$
$
5,842
-
205
(491)
50
(216)
5,390
5,787
(391)
-
(216)
5,180
(210)
(210)
2,372
-
2,372
5,390
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Assumptions used by the Bank in the determination of Pension Plan information consisted of the following:
Discount rate for projected benefit obligation
Discount rate for net periodic pension cost
Rate of increase in compensation levels
Expected long-term rate of return of plan assets
The components of net periodic benefit cost consisted of the following:
2019
2018
2017
3.20 %
4.20 %
- %
5.50 %
4.20 %
3.55 %
- %
5.50 %
3.55 %
3.95 %
- %
6.50 %
Service cost
Interest cost
Expected return on plan assets
Net amortization and deferral
Net periodic benefit cost
2019
2018
(in thousands)
2017
-
$
-
$
223
(278)
98
43
$
205
(312)
83
(24)
$
-
216
(275)
92
33
$
$
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.
The estimated amounts to be amortized from accumulated other comprehensive loss into net periodic cost in 2020 for amortization of
actuarial loss will be $0.1 million.
The Company did not contribute to the Pension Plan in 2019 and expects that it will not contribute to the Pension Plan in 2020.
The expected long-term rate of return on Pension Plan assets assumption was determined based on historical returns earned by equity and
fixed income securities, adjusted to reflect future return expectations based on plan targeted asset allocation. Equity and fixed income
securities were assumed to earn returns in the ranges of 5% to 10% and 4% to 5%, respectively. When these overall return expectations are
applied to the Pension Plan’s targeted allocation, the expected rate of return was determined to be 5.50%, which is within the range of
expected return. The Company’s management will continue to evaluate its actuarial assumptions, including the expected rate of return, at
least annually, and will adjust as necessary.
The weighted average asset allocation of the Pension Plan at December 31, 2019 and 2018, the Pension Plan measurement date, was as
follows:
Asset Category:
Equity mutual funds
Fixed income mutual funds
Cash/Short-term investments
2019
2018
27.28 %
71.59 %
1.13 %
100.00 %
26.53 %
71.61 %
1.86 %
100.00 %
The portfolio is invested in accordance with sound investment practices. Consistent with this approach, the investment strategy is to
diversify the portfolio in order to reduce risk and to maintain sufficient liquidity to meet the obligations of the Plan. The Plan’s long-term
asset allocation under normal market conditions is 25% equity investment and 75% fixed income assets and other short term investments
and cash equivalents. The investment objective of the allocation in equity investments emphasizes long term capital appreciation. These
equity investments are diversified across market capitalization, industries, style and geographical location. The investment objective of the
fixed income allocation is to generally provide a diversified source of income with an awareness of capital preservation. The primary
objective of the investment philosophy is capital preservation.
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Table of Contents
The major categories of assets in the Bank’s Pension Plan as of year-end are presented in the following table. Assets are segregated
according to their investment objective by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (see
Note 21 – Fair Value of Financial Instruments).
Level 1:
Cash
Mutual funds:
Short-term investments:
Money market
Fixed Income:
Equities:
Large cap
International large cap
International small cap
2019
2018
(in thousands)
13
55
4,327
617
1,032
-
6,044
$
$
-
96
3,710
576
789
9
5,180
$
$
The mutual funds are actively traded with market quotes available on at least a daily basis. Therefore, they are Level 1 assets.
The discount rate utilized by the Company for determining future pension obligations is based on a review of long-term bonds that receive
one of the two highest ratings given by a recognized rating agency. The discount rate determined on this basis decreased from 4.20% at
December 31, 2018 to 3.20% at December 31, 2019 for the Company's Pension Plan.
Expected benefit payments under the Pension Plan over the next ten years at December 31, 2019 are as follows:
(in thousands)
2020 $
2021
2022
2023
2024
219
234
268
291
338
Year 2025 - 2029
1,722
Supplemental Executive Retirement Plans
The Bank also maintains a non-qualified supplemental executive retirement plan (the “SERP”) covering certain members of the Company’s
senior management. The SERP was amended during 2003 to provide a benefit based on a percentage of final average earnings, as opposed
to the fixed benefit that was provided for in the superseded plan.
On April 8, 2010, the Compensation Committee of the Board of Directors of the Company approved the adoption of the Evans Bank, N.A.
Supplemental Executive Retirement Plan for Senior Executives (“the Senior Executive SERP”). The “old” SERP plan will keep its participants
at the time of the creation of the Senior Executive SERP, but any future executives identified by the Board of Directors as eligible for SERP
benefits will participate in the Senior Executive SERP. A participant is generally entitled to receive a benefit under the Senior Executive
SERP upon a termination of employment, other than for “cause”, after the participant has completed 10 full calendar years of service with
the Bank. No benefit is payable under the Senior Executive SERP if the participant’s employment is terminated for “cause” or if the
participant voluntarily terminates before completing 10 full calendar years of service with the Bank. In addition, the payment of benefits
under the Senior Executive SERP is conditioned upon certain agreements of the participant related to confidentiality, cooperation, non-
competition, and non-solicitation. A participant will be entitled to a retirement benefit under the Senior Executive SERP if his or her
employment with the Bank terminates other than for “cause”. The “accrued benefit” is based on a percentage of the participant’s final
average earnings, which is determined based upon the participant’s total annual compensation over the highest consecutive five calendar
years of the participant’s employment with the Bank, accrued over the participant’s “required benefit service”. The percentages and years
of service requirements are set forth in each participant’s Participation Agreement, and range from 25% to 35% and from 15 to 20 years.
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The obligations related to the two SERP plans are indirectly funded by various life insurance contracts naming the Bank as
beneficiary. The Bank has also indirectly funded the SERPs, as well as other benefits provided to other employees, through bank-owned
life insurance. The Bank uses an actuarial method of amortizing unrecognized net gains or losses which result from actual experience and
assumptions being different than those that are projected. The amortization method the Bank is using recognizes the net gains or losses
over the average remaining service period of active employees, which exceeds the required amortization.
Selected financial information for the two SERP plans is as follows:
Change in benefit obligation:
12/31/2019
12/31/2018
(in thousands)
Benefit obligation at the beginning of the year
$
5,398
$
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Benefit obligation at the end of the year
Change in plan assets:
Fair value of plan assets at the beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at the end of year
Funded status
Amount recognized in the Consolidated Balance Sheets consist of:
Accrued benefit liabilities
Amount recognized in the Accumulated Other Comprehensive Loss consists of:
Net actuarial loss
Prior service cost
Net amount recognized in equity - pre-tax
Accumulated benefit obligation at year end
$
$
$
$
$
146
202
378
(377)
5,747
-
-
377
(377)
-
(5,747)
$
(5,747)
$
1,624
$
93
1,717
$
5,432
$
4,542
187
137
725
(193)
5,398
-
-
193
(193)
-
(5,398)
(5,398)
1,480
125
1,605
5,047
Assumptions used by the Bank in the determination of SERP information consisted of the following:
Discount rate for projected benefit obligation
Discount rate for net periodic pension cost
Salary scale
2018
2018
2017
2.72 %
3.84 %
6.00 %
3.84 %
3.09 %
6.00 %
3.09 %
3.30 %
3.00 %
The discount rate utilized by the Company for determining future pension obligations is based on a review of long-term bonds that receive
one of the two highest ratings given by a recognized rating agency. The discount rate determined on this basis decreased from 3.84% at
December 31, 2018 to 2.72% at December 31, 2019 (i.e. the measurement date) for the SERP.
The components of net periodic benefit cost consisted of the following:
Service cost
Interest cost
Net amortization and deferral
Net periodic benefit cost
2019
2018
(in thousands)
2017
$
$
146
202
266
614
$
$
187
137
117
441
$
$
168
137
112
417
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The estimated amounts to be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2020 for prior service
costs and actuarial loss will be $31 thousand and $350 thousand, respectively.
Expected benefit payments under the SERP over the next ten years at December 31, 2019 are as follows:
(in thousands)
2020 $
2021
2022
2023
2024
Year 2025 - 2029
378
285
3,030
285
285
1,026
Other Compensation Plans
The Company has a non-qualified deferred compensation plan whereby directors and certain officers may defer a portion of their base pre-
tax compensation. Additionally, the Company has a non-qualified executive incentive retirement plan, whereby the Company defers on
behalf of certain officers a portion of their base compensation until retirement or termination of service, subject to certain vesting
arrangements. Aggregate expense under these plans was approximately $0.2 million in 2019, $0.1 million in 2018 and 2017. The benefit
obligation, included in other liabilities in the Company’s consolidated balance sheets, was $1.9 million at December 31, 2019, $2.1 million at
December 31, 2018 and $2.0 million at December 31, 2017.
These benefit plans are indirectly funded by bank-owned life insurance contracts with a total aggregate cash surrender value of
approximately $29.4 million and $28.4 million at December 31, 2019 and 2018, respectively. Increases in cash surrender value are included in
other non-interest income on the Company’s Consolidated Statements of Income. Endorsement split-dollar life insurance benefits have
also been provided to directors and certain officers of the Bank and its subsidiaries during employment.
The Bank also has a defined contribution retirement and thrift 401(k) Plan (the “401(k) Plan”) for its employees who meet certain length of
service and age requirements. The provisions of the 401(k) Plan allow eligible employees to contribute a portion of their annual salary, up
to the IRS statutory limit. The 401(k) plan includes a Qualified Automatic Contribution Arrangement (“QACA”). This arrangement features
automatic deferred contributions with annual escalation, a QACA matching contribution, and an additional matching contribution.
Employees vest in employer contributions over six years. The Company’s expense under the 401(k) Plan was approximately $1.0 million in
2019 and 2018 and $0.8 million in 2017.
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12.
STOCK-BASED COMPENSATION
At December 31, 2019, the Company had two stock-based compensation plans, which are described below. The compensation cost
charged against income for those plans was $0.7 million, $0.6 million, and $0.5 million for 2019, 2018, and 2017, respectively, and is included
in “Salaries and Employee Benefits” in the Company’s Consolidated Statements of Income. All stock option and restricted stock expense is
recorded on a straight-line basis over the expected vesting term. In addition, expenses for director stock-based compensation were
recognized to reflect $0.2 million in 2019 and 2018, and $0.1 million in 2017, as part of “Other” expense in the Company’s Consolidated
Statements of Income.
2019 Long-Term Equity Incentive Plan
Under the Company’s 2019 Long-Term Equity Incentive Plan (the “2019 Plan”) and, prior to the adoption of the 2019 Plan by shareholders
in April 2019, under the Company’s 2009 Long-Term Incentive Plan (the “2009 Plan” and together with the 2019 Plan, the “Equity Plans”),
the Company has granted options or restricted stock to officers, directors and key employees of the Company and its subsidiaries. Under
the Equity Plans, the Company was authorized to issue up to 603,883 shares of common stock. Under the Equity Plans, the exercise price of
each option is not to be less than 100% of the market price of the Company’s stock on the date of grant and an option’s maximum term is
ten years. If available, the Company normally issues shares out of its treasury for any options exercised or restricted shares issued. The
options have vesting schedules from 12 months through 4 years. At December 31, 2019, there were a total of 313,429 shares available for
grant under the 2019 Plan. The Company may no longer make grants under the 2009 Plan.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
Dividend Yield
Expected Life (years)
Expected Volatility
Risk-free Interest Rate
Weighted Average Fair Value
$
2019
2018
2017
2.88 %
6.96
17.36 %
2.47 %
5.01
$
2.04 %
6.81
16.57 %
2.82 %
7.63
$
2.03 %
6.95
17.34 %
2.24 %
6.41
The Company used historical volatility calculated using daily closing prices for its common stock over periods that match the expected term
of the option granted to estimate the expected volatility. The risk-free interest rate assumption was based upon U.S. Treasury yields
appropriate for the expected term of the Company's stock options based upon the date of grant. The expected dividend yield was based
upon the Company's recent history of paying dividends. The expected life was based upon the options’ expected vesting schedule and
historical exercise patterns.
Stock options activity for 2019 was as follows:
Options
Weighted Average
Exercise Price
Weighted Average
Remaining Contractual
Term (years)
Aggregate Intrinsic
Value
(in thousands)
Balance, December 31, 2018
Granted
Exercised
Expired
Forfeited
Balance, December 31, 2019
Exercisable, December 31, 2019
218,968
44,820
(37,490)
(2,140)
(8,598)
215,560
140,974
$
$
$
24.18
36.12
15.18
39.19
37.73
27.54
22.39
99
5.68
4.21
$
$
2,827
2,531
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Future compensation cost expected to be expensed over the weighted average remaining contractual term for remaining outstanding
options is $0.3 million. The unrecognized compensation cost is scheduled to be recognized as follows:
(in thousands)
$
2020
2021
2022
2023
132
96
60
15
Restricted stock award activity for 2019 was as follows:
Balance, December 31, 2018
Granted
Vested
Forfeited
Balance, December 31, 2019
Shares
Weighted Average Grant Date Fair
Value
35,345
25,448
(17,166)
(3,816)
39,811
$
$
38.01
35.98
36.22
38.37
37.45
As of December 31, 2019, there was $0.9 million in unrecognized compensation cost related to restricted share-based compensation
arrangements granted under the Equity Plans. The unrecognized compensation cost is scheduled to be recognized as follows:
$
(in thousands)
2020
2021
2022
2023
434
281
165
40
During fiscal years 2019, 2018, and 2017, the following activity occurred under the Company’s plans:
Total intrinsic value of stock options exercised
Total fair value of restricted stock awards vested
2019
2018
2017
(in thousands)
$
$
770
610
$
$
1,237
736
$
$
567
645
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Employee Stock Purchase Plan
The Company also maintains the Evans Bancorp, Inc. Employee Stock Purchase Plan (the “Purchase Plan”). As of December 31, 2019, there
were 92,411 shares of common stock available to issue to full-time employees of the Company and its subsidiaries, nearly all of whom are
eligible to participate. Under the terms of the Purchase Plan, employees can choose each year to have up to 15% of their annual base
earnings withheld to purchase the Company’s common stock. Employees can purchase stock only on June 30 and December 31 each year
during the term of the Purchase Plan for 85% of the price on the purchase date. Under the Purchase Plan, the Company issued 11,712,
10,821, and 7,610 shares to employees in 2019, 2018, and 2017, respectively. Compensation cost is calculated by the value of the 15%
discount only. The compensation cost that was charged against income for the Purchase Plan was less than $0.1 million in 2019, 2018, and
2017.
13.
INCOME TAXES
The components of the provision for income taxes were as follows:
Current federal tax expense
Current state tax expense
Total current tax expense
Deferred federal tax expense (benefit)
Deferred state tax expense
Total deferred tax expense (benefit)
Total income tax provision
2019
2018
(in thousands)
2017
$
$
4,639
1,160
5,799
(513)
(58)
(571)
$
$
1,182
606
1,788
-
495
495
5,228
$
2,283
$
2,041
18
2,059
2,441
709
3,150
5,209
$
$
$
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The Company’s provision for income taxes differs from the amounts computed by applying the federal income tax statutory rates to income
before income taxes. A reconciliation of the differences is as follows:
Tax provision at statutory rate
Change in taxes resulting from:
Tax-exempt income
Historic tax credit
State taxes, net of federal benefit
Deferred tax asset remeasurement
Other items, net
Income tax provision
2019
2018
2017
Amount
Percent
Amount
Percent
Amount
Percent
(in thousands)
$
4,671
21 %
$
3,914
21 %
$
5,334
34 %
(213)
(81)
870
-
(19)
5,228
$
(1)
-
4
-
-
24 %
$
(287)
(2,043)
871
-
(172)
2,283
(2)
(11)
5
-
(1)
12 %
$
(589)
(1,869)
455
2,074
(196)
5,209
(4)
(12)
2
13
-
33 %
In 2018 and 2017, the Company recognized significant impact from its investments in partnerships that incurred expenses related to the
rehabilitation of certified historic structures located in New York State after the historic structures were placed in service. At the time a
historic structure is placed in service, the Bank is eligible for a federal and New York State tax credit. As noted in Note 1 to these
Consolidated Financial Statements, for New York State, any new credit earned from rehabilitated historic properties placed in service on or
after January 1, 2015 not used in the current tax year will be treated as a refund or overpayment of tax to be credited to the next year’s
tax. Since the realization of the tax credit does not depend on the Bank’s generation of future taxable income or the Bank’s ongoing tax
status or tax position, the refund is not considered an element of income tax accounting. In such cases, the Bank would not record the
credit as a reduction of income tax expense; rather, the Bank includes the refundable New York State tax credit in non-interest income with a
corresponding receivable recorded in other assets. There were no significant historic tax credit transactions during 2019.
The following table presents the impact on the results of operations from the Bank’s historic tax credit activity for the years ended
December 31, 2019, 2018 and 2017.
2019
2018
2017
Loss on tax credit investment
Refundable state historic tax credit
Income tax benefit
Total HTC income
$
$
(158)
$
(2,870)
$
115
81
38
$
1,982
2,043
1,155
$
(3,997)
2,843
1,869
715
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At December 31, 2019 and 2018 the components of the net deferred tax asset were as follows:
2019
2018
(in thousands)
Deferred tax assets:
Pension and SERP plans
Allowance for loan and lease losses
Non accrued interest
Deferred compensation
Loss on investment in tax credit
Stock options granted
Lease liabilities
Net unrealized losses on securities
Other
Gross deferred tax assets
Deferred tax liabilities:
Depreciation and amortization
Right of use assets
Prepaid expenses
Net unrealized gains on securities
Deferred dividend income
Mortgage servicing asset
Other
Gross deferred tax liabilities
Valuation allowance
Net deferred tax asset
$
$
$
$
$
1,584
3,876
-
558
444
192
1,078
-
37
7,769
1,614
965
617
183
-
144
71
3,594
(218)
3,957
$
$
$
$
$
1,452
3,788
68
614
490
165
119
822
-
7,518
1,637
616
-
356
158
-
2,767
(334)
4,417
The net deferred tax asset at December 31, 2019 and 2018 is included in “other assets” in the Company’s consolidated balance sheets.
In assessing the ability of the Company to realize the benefit of the deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, availability of operating loss carrybacks, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the level of historical taxable income, the opportunity for net operating loss
carrybacks, and projections for future taxable income over the periods which deferred tax assets are deductible, management believes it is
more likely than not that the Company will generate sufficient taxable income to realize the benefits of these deductible differences at
December 31, 2019, except for a valuation allowance of $0.2 million on the net deferred tax asset for the investment in historic tax credits of
$0.4 million. In assessing the need for a valuation allowance for the deferred tax assets for the investments in historic tax credits, the
Company considered all positive and negative evidence in assessing whether the weight of available evidence supports the recognition of
some or all of the deferred tax assets.
In regard to historic tax credit investments, because of the tax nature of the loss to be recognized when the investment is ultimately sold
(which for tax purposes will give rise to a capital loss), the Company has limited capital gains to use in the future to be able to utilize the
capital losses from these investments. Therefore, the Company’s assessment of the deferred tax asset warrants the need for a valuation
allowance to be recognized on the deferred tax asset that it determined is more-likely-than-not to not be realized. The amount of remaining
capital loss includes the projected capital basis after taking the tax credit, expected losses, and cash distributions.
The state historic tax credit carryforward has an indefinite life with no expiration date in which to utilize the credit.
The Company did not have any unrecognized tax benefits for the years ended December 31, 2019, 2018, and 2017.
There were no accrued penalties and interest at December 31, 2019 and 2018.
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The Company is subject to routine audits of its tax returns by the Internal Revenue Service (“IRS”) and various state taxing authorities.
The tax years 2016-2018 remain subject to examination by the IRS. In 2019, the Company concluded a New York State audit covering the
tax years 2015-2016. These audits concluded with no material adverse findings. The tax years 2017-2018 remain subject to examination by
the New York State Department of Taxation & Finance.
The TCJA was signed into law on December 22, 2017. The most significant impact of the TCJA has been on the Company’s marginal
federal tax rate in 2018 and beyond, which decreased from 35% to 21%. The change in the corporate tax rate resulted in a $2.1 million
expense related to the remeasurement of the Company’s deferred tax asset as of December 31, 2017.
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14. REVENUE 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.
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 Frontier Claims Services, Inc. (“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.
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A disaggregation of the total insurance service and other fees at December 31, 2019, 2018, and 2017:
2019
2018
(in thousands)
2017
Commercial property and casualty insurance commissions
$
4,014
$
Personal property and casualty insurance commissions
Employee benefits sales commissions
Profit sharing and contingent revenue
Wealth management and other financial services
Insurance claims services revenue
Other insurance-related revenue
Total insurance service and other fees
$
3,416
1,136
1,050
517
453
102
10,688
$
3,541
$
3,067
855
905
563
305
129
9,365
$
15.
OTHER LIABILITIES
Other liabilities at December 31 were as follows:
Retirement compensation liabilities
$
Accounts payable
Taxes Payable
Historic tax credit investment
Interest payable
Loan participation payable
Other
Total other liabilities
2019
2018
(in thousands)
$
8,308
5,211
1,657
-
677
437
138
$
16,428
$
17,031
16.
RELATED PARTY TRANSACTIONS
The Bank has entered into loan transactions with certain directors, executive officers, significant shareholders and their affiliates (related
parties) in the ordinary course of its business. The aggregate outstanding principal balance of loans to such related parties on December
31, 2019 and 2018 was $1.7 million and $1.3 million, respectively. During 2019, there were $2.9 million of advances and new loans to such
related parties, and repayments amounted to $2.5 million. Terms of these loans have prevailing market pricing that would be offered to
similarly-situated non-affiliated third parties. Deposits from related parties were $4.1 million and $3.4 million as of December 31, 2019 and
2018, respectively.
106
2,918
2,608
528
928
425
390
101
7,898
7,976
4,989
-
2,996
877
-
193
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17.
CONTINGENT LIABILITIES AND COMMITMENTS
The Company’s 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 are commitments to extend credit and standby letters of credit. A summary of the Bank’s commitments and contingent liabilities at
December 31, 2019 and 2018 is as follows:
Commitments to extend credit
Standby letters of credit
Total
$
$
December 31,
2019
December 31,
2018
(in thousands)
331,974
4,309
336,283
$
$
290,785
3,379
294,164
Commitments to extend credit and standby letters of credit all include exposure to some credit loss in the event of non-performance of 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 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 to the Bank. The Bank has not incurred any
losses on its commitments during the past three years and has not recorded a reserve for its commitments.
The Company has entered into contracts with third parties, some of which include indemnification clauses. Examples of such contracts
include contracts with third-party service providers, brokers and dealers, correspondent banks, and purchasers of residential
mortgages. Additionally, the Company has bylaws, policies, and agreements under which it agrees to indemnify its officers and directors
from liability for certain events or occurrences while the directors or officers are, or were, serving at the Company’s request in such
capacities. The Company indemnifies its officers and directors to the fullest extent allowed by law. The maximum potential amount of
future payments that the Company could be required to make under these indemnification provisions is unlimited, but would be affected by
all relevant defenses to such claims, as well as directors’ and officers’ liability insurance maintained by the Company. Due to the nature of
these indemnification provisions, it is not possible to quantify the aggregate exposure to the Company resulting from them.
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.
The Company leases certain offices, land and equipment under long-term operating leases. The aggregate minimum annual rental
commitments under these leases total approximately $0.7 million in 2020, 2021 and 2022, $0.6 million in 2023, $0.5 million in 2024 and $1.6
million thereafter. The rental expense under operating leases contained in the Company’s Consolidated Statements of Income was $0.7
million in 2019, 2018, and 2017.
18.
CONCENTRATIONS OF CREDIT
All of the Bank’s loans, commitments, and standby letters of credit have been granted to customers in the Bank’s primary market area,
which is Western New York. Investments in state and municipal securities also involve governmental entities within the Bank’s primary
market area. The concentrations of credit by type of loan are set forth in Note 3 to these Consolidated Financial Statements, "Loans and
the Allowance for Loan Losses." The distribution of commitments to extend credit approximates the distribution of loans
outstanding. Standby letters of credit were granted primarily to commercial borrowers. The Bank, as a matter of policy, does not extend
credit to any single borrower or group in excess of 15% of capital.
19.
SEGMENT INFORMATION
The Company is comprised of two primary business segments: banking activities and insurance agency activities. The operating segments
are separately managed and their performance is evaluated based on net income. The banking business segment includes both commercial
and consumer banking services, including a wide array of lending and depository services as well as offering non-deposit investment
products, such as annuities and mutual funds. The insurance agency segment includes the activities of selling various premium-based
insurance policies on a commission basis, including business and personal insurance, employee benefits, surety bonds, risk management,
life, disability and long-term care coverage, as well as providing claims adjusting services to various insurance companies. All sources of
segment specific revenues and expenses contributed to management’s definition of net income. Revenues from transactions between the
two segments are not significant.
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The following tables set forth information regarding these segments for the years ended December 31, 2019, 2018, and 2017.
Net interest income (expense)
Provision for loan losses
Net interest income (expense) after
provision for loan losses
Insurance service and fees
Other non-interest income
Amortization expense
Other non-interest expense
Income before income taxes
Income tax provision
Net income
Net interest income (expense)
Provision for loan losses
Net interest income (expense) after
provision for loan losses
Insurance service and fees
Other non-interest income
Amortization expense
Other non-interest expense
Income before income taxes
Income tax provision
Net income
Net interest income (expense)
Provision for loan losses
Net interest income (expense) after
provision for loan losses
Insurance service and fees
Other non-interest income
Amortization expense
Other non-interest expense
Income before income taxes
Income tax provision
Net income
$
$
$
$
$
$
Banking
Activities
2019
Insurance Agency
Activities
(in thousands)
Total
52,152
75
$
52,077
480
7,232
-
38,961
20,828
4,860
15,968
$
$
(97)
-
(97)
10,208
162
448
8,411
1,414
368
1,046
$
Banking
Activities
2018
Insurance Agency
Activities
(in thousands)
Total
48,228
1,402
$
46,826
541
5,862
-
35,683
17,546
1,999
15,547
$
$
(121)
-
(121)
8,824
-
280
7,330
1,093
284
809
$
Banking
Activities
2017
Insurance Agency
Activities
(in thousands)
Total
$
(102)
-
(102)
7,482
-
113
5,871
1,396
535
861
$
42,119
738
$
41,381
416
5,105
-
32,610
14,292
4,674
9,618
$
108
52,055
75
51,980
10,688
7,394
448
47,372
22,242
5,228
17,014
48,107
1,402
46,705
9,365
5,862
280
43,013
18,639
2,283
16,356
42,017
738
41,279
7,898
5,105
113
38,481
15,688
5,209
10,479
Table of Contents
Identifiable Assets, Net
Banking activities
Insurance agency activities
Consolidated Total Assets
20. ACQUISITIONS
December 31,
2019
December 31,
2018
(in thousands)
1,443,611
16,619
1,460,230
$
$
$
$
1,371,560
16,647
1,388,207
On December 19, 2019, the Company announced that it had entered into a definitive Agreement and Plan of Reorganization (the
“Agreement”) with FSB Bancorp, Inc. (“FSB”), a Maryland corporation and the parent holding company of Fairport Savings Bank, under
which FSB would be acquired by the Company (the “Merger”). Subject to the terms and conditions of the Agreement, upon the
consummation of the Merger, FSB stockholders will have the right to receive, subject to possible adjustment, for each share of common
stock, par value $0.01 per share, of FSB, either (i) 0.4394 shares of common stock, par value $0.50 per share, of Evans (“Evans Common
Stock”), or (ii) $17.80 in cash, at the election of such holder. All such elections are subject to adjustment on a pro rata basis, so that
approximately 50% of the aggregate consideration paid to FSB stockholders will be cash and approximately 50% will be Evans Common
Stock. As of December 19, 2019 total consideration to be paid was valued at approximately $35 million.
As of September 30, 2019, FSB reported $325 million of assets, including $277 million of loans (predominantly residential real estate loans)
and $24 million of investment securities, and $293 million of liabilities, including $233 million of deposits.
The Company incurred $0.2 million of merger-related expenses in 2019 associated with the pending Merger, consisting largely of
professional services of their attorneys, accountants, investment bankers and other advisors. Merger related expenses incurred in 2018
were not material. There were no merger-related expenses during 2017.
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21.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
There are three levels of inputs to fair value measurements:
· Level 1 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 at December 31, 2019 and 2018:
(in thousands)
December 31, 2019
Securities available-for-sale:
US government agencies
States and political subdivisions
Mortgage-backed securities
Mortgage servicing rights
December 31, 2018
Securities available-for-sale:
US government agencies
States and political subdivisions
Mortgage-backed securities
Mortgage servicing rights
Securities available for sale
Level 1
Level 2
Level 3
Fair Value
$
$
$
$
-
-
-
-
-
-
-
-
$
$
28,156
3,351
96,416
-
33,928
22,173
76,003
-
$
$
-
-
-
555
-
-
-
609
28,156
3,351
96,416
555
33,928
22,173
76,003
609
Fair values for available for sale securities are determined using independent pricing services and market-participating brokers. The
Company utilizes a third-party for these pricing services. The third-party 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 third-party service provider’s 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, our third-party pricing service provider uses model processes, such as the Option Adjusted Spread model, 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 third-party, at times, may 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.
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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, as submitted by our third-party pricing service provider, in the market value of its securities
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 securities portfolio priced by a second pricing
service to determine consistency with another market evaluator. If, on the Company’s review or in comparing with another servicer, a
material difference between pricing evaluations were to exist, the Company may submit an inquiry to our third-party pricing 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 our third-party service provider’s evaluation it can submit a challenge for a change to that security’s valuation. There were
no material differences in valuations noted in 2019 or 2018.
Securities available for sale are classified as Level 2 in the fair value hierarchy as the valuation provided by the third-party provider uses
observable market data.
Mortgage servicing rights
Mortgage servicing rights (“MSRs”) do not trade in an active, open market with readily observable prices. Accordingly, the Company
obtains the fair value of the MSRs using a third-party pricing provider. The provider determines the fair value by discounting projected net
servicing cash flows of the remaining servicing portfolio. The valuation model used by the provider considers market loan prepayment
predictions and other economic factors. 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. All assumptions are market driven. Management has a sufficient
understanding of the third-party service’s valuation models, assumptions and inputs used in determining the fair value of MSRs to enable
management to maintain an appropriate system of internal control. Mortgage servicing rights are classified within Level 3 of the fair value
hierarchy as the valuation is model driven and primarily based on unobservable inputs.
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The following table summarizes the changes in fair value for items measured at fair value (Level 3) on a recurring basis using significant
unobservable inputs during the years ended December 31:
(in thousands)
Mortgage servicing rights - January 1
Gains/(Losses) included in earnings
Additions from loan sales
Mortgage servicing rights - December 31
2019
2018
2017
$
$
609
(178)
124
555
$
$
586
(22)
45
609
$
$
527
(48)
107
586
Quantitative information about the significant unobservable inputs used in the fair value measurement of MSRs at the respective dates is
as follows:
Servicing fees
Discount rate
Prepayment rate (CPR)
December 31, 2019
December 31, 2018
0.25 %
9.00 %
8.21 %
0.25 %
9.00 %
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 December 31, 2019 and 2018:
(in thousands)
Level 1
Level 2
Level 3
Fair Value
December 31, 2019
Collateral dependent impaired loans
December 31, 2018
Collateral dependent impaired loans
Impaired loans
$
$
- $
- $
15,735
$
15,735
- $
- $
20,590
$
20,590
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 value has a unique appraisal and management’s discount
of the value is based on factors unique to each impaired loan. The significant unobservable input in determining the fair value is
management’s subjective discount on appraisals of the collateral securing the loan, which ranges from 10%-50%. Fair value is estimated
based on the value of the collateral securing these loans. Collateral may consist of real estate and/or business assets including equipment,
inventory and/or accounts receivable and the value of these assets is determined based on appraisals by qualified licensed appraisers hired
by the Company. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market
conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s
business.
The Company has an appraisal policy in which appraisals are obtained upon a commercial loan being downgraded on the Company’s
internal loan rating scale to a 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 $16.0 million, with an allowance for loan loss of
$0.3 million, at December 31, 2019 compared with $21.7 million and $1.1 million, respectively, at December 31, 2018.
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At December 31, 2019 and 2018, the estimated fair values of the Company’s financial instruments, including those that are not measured and
reported at fair value on a recurring basis or nonrecurring basis, were as follows:
December 31, 2019
December 31, 2018
Carrying
Amount
Fair
Value
(in thousands)
Carrying
Amount
Fair
Value
(in thousands)
Financial assets:
Level 1:
Cash and cash equivalents
$
38,857
$
38,857
$
39,915
$
39,915
Level 2:
Available for sale securities
FHLB and FRB stock
Level 3:
Held to maturity securities
Loans, net
Mortgage servicing rights
Financial liabilities:
Level 1:
Demand deposits
NOW deposits
Savings deposits
Level 2:
Securities sold under agreement to
repurchase
Other borrowed funds
Junior subordinated debentures
Level 3:
Time deposits
127,922
3,544
2,386
1,211,356
555
127,922
3,544
2,392
1,222,386
555
132,104
3,403
1,685
1,141,146
609
$
$
263,717
140,654
587,142
$
263,717
140,654
587,142
$
231,902
110,450
571,479
2,425
10,000
11,330
2,425
9,997
11,330
3,142
10,000
11,330
132,104
3,403
1,674
1,131,891
609
231,902
110,450
571,479
3,142
9,854
11,330
275,927
277,051
301,227
298,999
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is
practicable to estimate that value.
Securities Available for Sale
Fair values for available for sale securities are determined using independent pricing services and market-participating brokers.
FHLB and FRB stock
The carrying value of FHLB and FRB stock, which are non-marketable equity investments, approximates fair value.
Deposits
The fair value of demand deposits, NOW accounts, muni-vest accounts and regular savings accounts is the amount payable on demand at
the reporting date. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.
Borrowed Funds and Securities Sold Under Agreement to Repurchase
The fair value of securities sold under agreement to repurchase approximates its carrying value. The fair value of other borrowed funds was
estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of
borrowing arrangements.
Junior Subordinated Debentures
There is no active market for the Company’s debentures and there have been no issuances of similar instruments in recent years. The
Company looked at a market bond index to estimate a discount margin to value the debentures. The discount margin was very similar
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to the spread to LIBOR established at the issuance of the debentures. As a result, the Company determined that the fair value of the
adjustable-rate debentures approximates their face amount.
Pension Plan Assets
Refer to Note 11 to these Consolidated Financial Statements, “Employee Benefits and Deferred Compensation Plans” for the fair value
analysis of the Pension Plan assets.
22.
REGULATORY MATTERS
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios
(set forth in the table that follows) of Common Equity Tier I, Total Capital, and Tier I Capital (as defined in FRB regulations) to risk-weighted
assets (as defined in FRB regulations), and of Tier I capital (as defined in FRB regulations) to average assets (as defined in FRB
regulations). Management believes that as of December 31, 2019 and 2018, the Company and the Bank met all capital adequacy
requirements to which they are subject.
The most recent notification from their regulators categorized the Company and the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the Company and the Bank must maintain minimum Common Equity Tier
I, total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Company’s or Bank’s category rating.
The Company’s and the Bank’s actual capital amounts and ratios were as follows:
December 31, 2019
(in thousands)
Company
Bank
Minimum for Capital
Adequacy Purposes
Minimum to be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
Common Equity Tier I
(to Risk Weighted Assets)
$
150,860
12.32 %
$
147,618
12.08 %
$
55,099 4.5 %
$
85,710
7.0 %
Total Capital
(to Risk Weighted Assets)
$
166,035
13.56 %
$
162,793
13.32 %
$
97,954 8.0 %
$
128,565
10.5 %
Tier I Capital
(to Risk Weighted Assets)
$
150,860
12.32 %
$
147,618
12.08 %
$
73,466 6.0 %
$
104,076
8.5 %
Tier I Capital
(to Average Assets)
$
150,860
10.33 %
$
147,618
10.15 %
$
58,397 4.0 %
$
72,996
5.0 %
The Company is subject to the dividend restrictions imposed by the FRB and the OCC. Dividends are paid as declared by the Board of
Directors. The Company may pay dividends only if it is solvent and would not be rendered insolvent by the dividend payment and only
from unrestricted and unreserved earned surplus and under some circumstances capital surplus. The Bank’s dividend restrictions apply
indirectly to the Company since cash available for dividend distribution will initially come from dividends paid to the Company by the Bank.
Dividends may be paid by the Bank only if it would not impair the Bank’s capital structure, if the Bank’s surplus is at least equal to its
common capital and if the dividends declared in any year do not exceed the total of net profits in that year combined with undivided profits
of the preceding two years less any required transfers to surplus, and if no losses have been sustained equal to or exceeding its undivided
profits.
In addition, federal regulators have the ability to restrict dividend payments. If the Bank or the Company approaches well-capitalized or
minimum capital adequacy levels, regulators could restrict or forbid dividend payments.
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23.
PARENT COMPANY ONLY FINANCIAL INFORMATION
Parent company (Evans Bancorp, Inc.) only condensed financial information is as follows:
CONDENSED BALANCE SHEETS
ASSETS
Cash
Other assets
Investment in subsidiaries
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Junior subordinated debentures
Other liabilities
Total liabilities
STOCKHOLDERS’ EQUITY
Total Stockholders’ Equity
Total liabilities and stockholders’ equity
December 31,
2019
2018
(in thousands)
$
$
$
$
$
1,027
407
159,620
161,054
11,330
1,271
12,601
148,453
161,054
$
$
$
$
$
1,446
403
142,268
144,117
11,330
1,141
12,471
131,646
144,117
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CONDENSED STATEMENTS OF INCOME
2019
December 31,
2018
(in thousands)
Dividends from subsidiaries
$
4,500
$
Income
Expenses
Income before equity in undistributed
earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Net income
Other comprehensive income
4
(1,323)
3,181
13,833
17,014
-
8,300
147
(927)
7,520
8,836
16,356
-
$
2017
2,100
-
(771)
1,329
9,150
10,479
-
Comprehensive income
$
17,014
$
16,356
$
10,479
CONDENSED STATEMENTS OF CASH FLOWS
Operating Activities:
Net income
Adjustments to reconcile net income to
net cash provided by operating activities:
Undistributed earnings of subsidiaries
Changes in assets and liabilities affecting cash flow:
Other assets
Other liabilities
Other
Net cash provided by operating activities
Investing Activities:
Proceeds from equity securities sales
Investment in subsidiaries
Net cash used in investing activities
Financing Activities:
Proceeds from issuance of common stock
Cash dividends paid
Purchase of Treasury stock
Net cash used in financing activities
Net increase (decrease) in cash
Cash beginning of year
Cash ending of year
2019
Year Ended
2018
(in thousands)
2017
$
17,014
$
16,356
$
10,479
(13,833)
(8,836)
(9,150)
130
4
180
3,495
-
-
-
1,178
(5,092)
-
(3,914)
(419)
1,446
1,027
(470)
250
153
7,453
1,960
(5,000)
(3,040)
1,025
(4,428)
-
(3,403)
1,010
436
1,446
(13)
(183)
-
1,133
-
(11,791)
(11,791)
15,015
(3,819)
(342)
10,854
196
240
436
$
$
$
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Table of Contents
24.
SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
2019
Interest Income
Interest Expense
Net Interest Income
Net Income
Earnings per share basic
Earnings per share diluted
2018
Interest Income
Interest Expense
Net Interest Income
Net Income
Earnings per share basic
Earnings per share diluted
4th Quarter
3rd Quarter
2nd Quarter
(in thousands, except for per share data)
1st Quarter
$
16,028
$
16,845
$
16,325
$
3,236
12,792
3,748
0.76
0.75
3,224
13,621
5,164
1.05
1.04
3,191
13,134
4,382
0.90
0.88
$
15,309
$
14,690
$
14,247
$
2,604
12,086
4,795
0.99
0.97
2,051
12,196
3,791
0.79
0.77
2,936
12,373
4,451
0.92
0.90
117
15,542
3,034
12,508
3,720
0.77
0.75
13,366
1,914
11,452
3,319
0.69
0.68
Table of Contents
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
Item 9A.
CONTROLS AND PROCEDURES
(a) 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 December 31, 2019 (the end of the period
covered by this Annual Report on Form 10-K). Based on that evaluation, the Company’s principal executive and principal financial
officers concluded that, as of December 31, 2019, the Company’s disclosure controls and procedures were effective.
(b) Management's Annual Report on Internal Control Over Financial Reporting. Management's Annual Report on Internal Control Over
Financial Reporting appears at "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K, and is
incorporated herein by reference in response to this Item 9A.
(c) Attestation Report of the Independent Registered Public Accounting Firm. The effectiveness of the Company's internal control over
financial reporting as of December 31, 2019 has been audited by KPMG LLP, an independent registered public accounting firm, as
stated in their report, which appears in the "Report of Independent Registered Public Accounting Firm" in "Item 8. Financial
Statements and Supplementary Data" of this Annual Report on Form 10-K, and is incorporated herein by reference in response to this
Item 9A.
(d) Changes in Internal Control Over Financial Reporting. No changes in the Company's internal control over financial reporting were
identified in the fiscal quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Item 9B.
OTHER INFORMATION
None
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PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by this item is incorporated herein by reference to the material under the captions "Information Regarding
Directors, Director Nominees and Executive Officers,” "Section 16(a) Beneficial Ownership Reporting Compliance," “Corporate Governance
– Code of Ethics for Chief Executive Officer and Principal Financial Officers,” and "Board of Director Committees – Audit Committee" in the
Company's definitive proxy statement relating to its 2020 annual meeting of shareholders to be held on April 23, 2020 (the "Proxy
Statement").
Item 11.
EXECUTIVE COMPENSATION
The information called for by this item is incorporated herein by reference to the material under the captions "Director Compensation,"
“Executive Compensation," “Corporate Governance – Compensation Risk,” “Board of Director Committees – Human Resource and
Compensation Committee,” "Human Resource and Compensation Committee Interlocks and Insider Participation" and "Human Resource
and Compensation Committee Report" in the Proxy Statement.
The material incorporated herein by reference to the material under the caption, "Human Resource and Compensation Committee Report" in
the Proxy Statement is deemed “furnished” in this Annual Report on Form 10-K and shall not be deemed to be “soliciting material” or to be
“filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically
incorporates it by reference into a document filed under the Securities Act or the Exchange Act.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information called for by this item is incorporated herein by reference to the material under the captions "General Information - Security
Ownership of Management and Certain Beneficial Owners" and “General Information – Equity Compensation Plans” in the Proxy Statement.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information called for by this item is incorporated herein by reference to the material under the captions "Corporate Governance –
Independence of Directors" and "Transactions with Related Persons" in the Proxy Statement.
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information called for by this item is incorporated herein by reference to the material under the caption "Independent Registered Public
Accounting Firm" in the Proxy Statement.
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PART IV
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Report on Form 10-K:
1.
2.
3.
Financial statements: The following audited consolidated financial statements and notes thereto and the material under the
caption "Report of Independent Registered Public Accounting Firm" in Part II, Item 8 of this Annual Report on Form 10-K are
incorporated herein by reference:
Report of Independent Registered Public Accounting Firm (internal control over financial reporting)
Report of Independent Registered Public Accounting Firm (consolidated financial statements)
Consolidated Balance Sheets - December 31, 2019 and 2018
Consolidated Statements of Income - Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows - Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
All other financial statement schedules are omitted because they are not applicable or the required information is included in the
Company’s Consolidated Financial Statements or Notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K.
Exhibits
The following exhibits are filed as a part of this report:
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Exhibit No.
3.1
3.1.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
EXHIBIT INDEX
Exhibit Description
Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3a to the Company’s Registration
Statement on Form S-4 (Registration No. 33-25321), as filed on November 7, 1988). (Filed on paper – hyperlink is not
required pursuant to Rule 105 of Regulation S-T)
Certificate of Amendment to the Company’s Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to
the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997, as filed on May 14,
1997). (Filed on paper – hyperlink is not required pursuant to Rule 105 of Regulation S-T)
Amended and Restated Bylaws of the Company, effective as of September 20, 2016 (incorporated by reference to
Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on September 22, 2016).
Indenture between the Company, as Issuer, and Wilmington Trust Company, as Trustee, dated as of October 1,
2004 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2004, as filed on November 4, 2004).
Form of Floating Rate Junior Subordinated Debt Security due 2034 (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004, as filed on November 4,
2004).
Amended and Restated Declaration of Trust of Evans Capital Trust I, dated as of October 1, 2004 (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,
2004, as filed on November 4, 2004).
Guarantee Agreement of the Company, dated as of October 1, 2004 (incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004, as filed on November 4,
2004).
Description of Evans Bancorp, Inc. Securities (filed herewith)
Evans Bancorp, Inc. Dividend Reinvestment Plan, as amended (incorporated by reference to the Company's
Registration Statement on Form S-3 (Registration No. 333-166264), as filed on April 23, 2010).
Evans Bancorp, Inc. 2013 Employee Stock Purchase Plan (incorporated by reference to Appendix A to the
Company’s Definitive Proxy Statement on Schedule 14A, as filed on March 21, 2013).
Evans Bancorp, Inc. 2009 Long-Term Equity Incentive Plan (incorporated by reference to Appendix A to the
Registrant’s Definitive Proxy Statement on Schedule 14A, as filed on April 1, 2009).
Evans National Bank Deferred Compensation Plan for Officers and Directors (incorporated by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, as filed on March
18, 2004).
Form of Deferred Compensation Participatory Agreement (incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, as filed on March 28, 2005).
Evans National Bank Executive Life Insurance Plan (incorporated by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2003 as filed on March 18, 2004).
Form of Executive Life Insurance Split-Dollar Endorsement Participatory Agreement (incorporated by reference to
Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, as filed on
March 28, 2005).
First Amendment to the Evans National Bank Executive Life Insurance Plan (incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K, as filed on May 2, 2007).
Evans National Bank Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.11 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, as filed on March 18, 2004).
Form of Supplemental Executive Retirement Participatory Agreement (incorporated by reference to Exhibit 10.15 to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, as filed on March 28,
2005).
Summary of Evans Excels Plan (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2017, as filed on March 1, 2018).
Evans Bank, N.A. Supplemental Executive Retirement Plan for Senior Executives (incorporated by reference to
Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed on
March 3, 2014).
Restricted Stock Award Agreement granted by Evans Bancorp, Inc. to Directors under the Evans Bancorp, Inc.
2009 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30, 2010, as filed on August 4, 2010).
Stock Option Agreement granted by Evans Bancorp, Inc. to Directors under the Evans Bancorp, Inc. 2009 Long-
Term Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 2010, as filed on August 4, 2010).
121
Table of Contents
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
21.1
23.1
24
31.1
31.2
32.1
32.2
101
Restricted Stock Award Agreement granted by Evans Bancorp, Inc. to Employees under the Evans Bancorp, Inc.
2009 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30, 2010, as filed on August 4, 2010).
Employment Agreement by and among Evans Bank, N.A., the Company and David J. Nasca, executed and delivered
by the Company and the Bank on September 14, 2009 and effective as of September 9, 2009 (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed on September 17, 2009).
Stock Option Agreement granted by Evans Bancorp, Inc. to Employees under the Evans Bancorp, Inc. 2009 Long-
Term Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 2010, as filed on August 4, 2010).
Letter Agreement Regarding Insurance Coverage for James Tilley (incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007, as filed on August 14, 2007).
Evans Bancorp, Inc. Executive Severance Plan, as revised on July 26, 2016 (incorporated by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K, as filed on July 29, 2016).
Evans Bancorp, Inc. Change in Control Agreement (incorporated by reference to Exhibit 10.30 to the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2015, as filed on March 3, 2016).
Evans Bank, N.A. 2010 Amended and Restated Executive Incentive Retirement Plan on September 24, 2010 and
effective October 1, 2010 (incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2015, as filed on March 3, 2016).
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, as filed on April 26, 2019).
Employment Agreement, dated as of July 1, 2018, by and between The Evans Agency, LLC and Aaron Whitehouse
(filed herewith).
Form of Employee Restricted Stock Award Agreement granted by Evans Bancorp, Inc. under the Evans Bancorp,
Inc. Amended and Restated 2019 Long Term Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the
Company’s Form S-8 Registration Statement, filed on May 20, 2019).
Form of Employee Stock Option Award Agreement granted by Evans Bancorp, Inc. under the Evans Bancorp, Inc.
Amended and Restated 2019 Long Term Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the
Company’s Form S-8 Registration Statement, filed on May 20, 2019).
Form of Director Restricted Stock Award Agreement granted by Evans Bancorp, Inc. under the Evans Bancorp, Inc.
Amended and Restated 2019 Long Term Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the
Company’s Form S-8 Registration Statement, filed on May 20, 2019).
Form of Director Stock Option Award Agreement granted by Evans Bancorp, Inc. under the Evans Bancorp, Inc.
Amended and Restated 2019 Long Term Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the
Company’s Form S-8 Registration Statement, filed on May 20, 2019).
Subsidiaries of the Company (filed herewith).
Independent Registered Public Accounting Firm’s Consent from KPMG LLP (filed herewith).
Power of Attorney (included on the signature page of this Annual Report on Form 10-K).
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to section
302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to section
302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Principal Executive Officer pursuant to 18 USC Section 1350 Chapter 63 of Title18, United States
Code, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Principal Financial Officer pursuant to 18 USC Section 1350 Chapter 63 of Title18, United States
Code, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
The following materials from Evans Bancorp, Inc.’s Annual Report on Form 10-K for the year ended December 31,
2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets – December
31, 2018 and 2017; (ii) Consolidated Statements of Income – years ended December 31, 2018, 2017, and 2016; (iii)
Consolidated Statements of Stockholder’s Equity – years ended December 31, 2018, 2017, and 2016; (iv)
Consolidated Statements of Cash Flows – years ended December 31, 2018 and 2017; and (vi) Notes to Consolidated
Financial Statements.
* Indicates a management contract or compensatory plan or arrangement.
Item 16.
FORM 10-K SUMMARY
Not applicable
122
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized:
EVANS BANCORP, INC.
By:
/s/ David J. Nasca
David J. Nasca
President and Chief Executive Officer
Date: March 12, 2020
123
Table of Contents
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, David
J. Nasca and John B. Connerton and each of them, as his true and lawful attorneys-in-fact and agents, each with full power of substitution, for him, and in
his name, place and stead, in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with Exhibits thereto and
other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing requisite or necessary to be done as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
Signature
Title
President and Chief Executive Officer/ Director
(Principal Executive Officer)
Date
March 12, 2020
Treasurer (Principal Financial Officer and Principal Accounting
Officer)
March 12, 2020
Chairman of the Board / Director
March 12, 2020
Vice Chairman of the Board / Director
March 12, 2020
/s/ David J. Nasca
David J. Nasca
/s/ John B. Connerton
John B. Connerton
/s/ Lee C. Wortham
Lee C. Wortham
Oliver H. Sommer
/s/ Michael A. Battle
Michael A. Battle
/s/ James E. Biddle, Jr.
James E. Biddle, Jr.
/s/ Jody L. Lomeo
Jody L. Lomeo
/s/ Robert G. Miller, Jr.
Robert G. Miller, Jr.
/s/ Kimberley A. Minkel
Kimberley A. Minkel
Christina P. Orsi
/s/ David R. Pfalzgraf, Jr.
David R. Pfalzgraf, Jr.
Michael J. Rogers
Nora B. Sullivan
/s/ Thomas H. Waring, Jr.
Thomas H. Waring, Jr.
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
Exhibit 4.5
(Back To Top)
Section 2: EX-4.5 (EX-4.5)
124
Description of Evans Bancorp, Inc. Securities
Unless otherwise indicated or unless the context requires otherwise, all references in this prospectus to “Evans
Bancorp,” the “Company,” “we,” “us,” “our” or similar references mean Evans Bancorp, Inc.
Description of Common Stock
We are authorized to issue 10,000,000 shares of common stock, par value of $0.50 per share. Each share of
common stock has the same relative rights as, and is identical in all respects to, each other share of common stock. All of
our shares of common stock are duly authorized, fully paid and nonassessable.
Dividends
The holders of our common stock are entitled to receive and share equally in such dividends, if any,
declared by the board of directors out of funds legally available therefor. Under the New York Business Corporation Law,
we may pay dividends on our outstanding shares except when the Company is insolvent or would be made insolvent by
the dividend. In addition, we may pay dividends out of surplus only, so that our net assets remaining after such payment
shall at least equal the amount of stated capital.
Voting Rights
The holders of our common stock are generally entitled to one vote per share. Our bylaws provide that
a majority of the votes cast will be sufficient to take any corporate action, except as otherwise provided by law or
regulation. Directors are elected by a plurality of the votes cast by shareholders present at the annual shareholders’
meeting, or if the annual meeting is not held, at a special meeting called for the purpose of the election of
directors. Holders of our common stock are not entitled to cumulate their votes in the election of directors.
Board of Directors
Our bylaws provide that the board of directors must consist of not less than five nor more than 25 directors, the
exact number to be determined by the vote of the majority of directors or by resolution of the shareholders. Increases in
the board of directors between annual meetings of shareholders will be limited to not more than two additional members
per year.
The board of directors is divided into three classes – Class 1, consisting of not more than eight directors;
Class 2, consisting of not more than eight directors; and Class 3, not consisting of more than nine directors. The
members of each class are elected for a term of three years and only one class of directors is elected annually. Thus, it
would take at least two annual elections to replace a majority of the Board of Directors.
Liquidation
In the event of our liquidation, dissolution or winding up, the holders of our common stock would be entitled to
receive, after payment or provision for payment of all our debts and liabilities, all of our assets available for distribution.
No Preemptive or Redemption Rights
be issued. The common stock is not subject to redemption.
Holders of our common stock are not entitled to preemptive rights with respect to any shares that may
Certain Provisions in Our Certificate of Incorporation, Our Bylaws, and Applicable Laws and Regulations
Our certificate of incorporation, our bylaws, and applicable federal and New York laws and regulations contain a
number of provisions that might discourage future takeover attempts. As a result, shareholders who might desire to
participate in such transactions may not have an opportunity to do so. In addition, these provisions would also render
the removal of our board of directors or management more difficult. Such provisions include, among others, the
requirement of a supermajority vote of shareholders to approve certain business combinations and other corporate
actions, a classified board of directors, and a provision in our certificate of incorporation allowing the board of directors
to oppose a tender or other offer for our securities, including through the issuance of authorized but unissued securities
or treasury stock or granting stock options, based on a wide range of considerations.
Provisions in our Certificate of Incorporation and Bylaws
Election of Directors. Our board of directors is divided into three classes – Class 1, consisting of not more than
eight directors; Class 2, consisting of not more than eight directors; and Class 3, not consisting of more than nine
directors. The members of each class are elected for a term of three years and only one class of directors is elected
annually. Thus, it would take at least two annual elections to replace a majority of the Board of Directors. Further, our
bylaws establish qualifications for board members, including Company stock ownership requirements, and notice and
information requirements and procedures in connection with the nomination by stockholders of candidates for election to
the board of directors or the proposal by stockholders of business to be acted upon at a meeting of stockholders. Such
notice and information requirements are applicable to all stockholder business proposals and nominations, and are in
addition to any requirements under federal securities laws.
Prohibition of Cumulative Voting. Our shareholders are not entitled to cumulative voting in the election of
directors.
Restrictions on Call of Special Meetings. Our bylaws provide that special meetings of stockholders can be
called by the board of directors, the chairperson or vice chairperson of the board of directors, or the president of the
Company, and may be called by the secretary at the request of the holders of not less than 25% of all the outstanding
shares of Company common stock entitled to vote at the particular meeting.
Amendments to Certificate of Incorporation. Our certificate of incorporation provides that certain
provisions may only be amended by the approval of 80% of the shares entitled to vote on such amendment, unless such
amendment has been approved by an affirmative vote of 75% of directors then in office.
Business Combinations Involving Interested Shareholders. Our certificate of incorporation provides that an
“interested shareholder” (a person who owns or an affiliate or associate of the Company who has owned in the
previous two-year period more than 5% of the Company’s common stock) may engage in a business combination with
the Company (i) if approved by the affirmative vote of not less than 80% of the votes entitled to be cast by the holders or
(ii) (a) if approved by 80% or more of the continuing directors and (b) the value of the transaction is equal to the higher of
the highest per share price paid by the interested shareholder in acquiring Company common stock in the preceding two
years and the fair market value per share of common stock on the date on which the interested shareholder became an
interested shareholder.
Evaluation of Offers. Our certificate of incorporation provides that the board of directors may, in the context of
opposing a tender offer, take into account (i) the social and economic effects of the offer or transaction on the employees,
depositors, loan and other customers, creditors, shareholders and other elements of the communities in which we operate
or are located, and (ii) the business and financial condition and earnings prospects of the offer or, including the possible
effect of such conditions on the other elements of the communities in which we operate or are located.
Federal Laws and Regulations
The Bank Holding Company Act generally would prohibit any company that is not engaged in financial
activities and activities that are permissible for a bank holding company or a financial holding company from
acquiring control of us. “Control” is generally defined as ownership of 25% or more of the voting stock or other exercise
of a controlling influence. In addition, any existing bank holding company would need the prior approval of the Federal
Reserve before acquiring 5% or more of our voting stock. The Change in Bank Control Act of 1978, as amended,
prohibits a person or group of persons from acquiring control of a bank holding company unless the Federal Reserve has
been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal
Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities
registered under Section 12 of the Exchange Act, such as us, could constitute acquisition of control of the bank holding
company.
New York Business Corporation Law
The business combination provisions of the New York Business Corporation Law could prohibit or delay
mergers or other takeovers or change in control attempts with respect to the Company and, accordingly, may discourage
attempts to acquire the Company. In general such provisions prohibit an “interested shareholder” (i.e., a person who
owns 20% or more of our outstanding voting stock) from engaging in various business combination transactions with
our company, unless (a) the business combination transaction, or the transaction in which the interested shareholder
became an interested shareholder, was approved by the board of directors prior to the interested shareholder's stock
acquisition date, (b) the business combination transaction was approved by the disinterested shareholders at a meeting
called no earlier than five years after the interested shareholder's stock acquisition date, or (c) if the business combination
transaction takes place no earlier than five years after the interested stockholder's stock acquisition date, the price paid to
all the stockholders under such transaction meets statutory criteria.
(Back To Top)
Section 3: EX-10.23 (EX-10.23)
EMPLOYMENT AGREEMENT
This Agreement is made as of the 1st day of July 2018, by and between The Evans Agency, LLC
(hereinafter referred to as the “Employer” or “TEA”) and Aaron Whitehouse (hereinafter referred to as the
“Executive”), for the employment of Executive by the Employer.
W I T N E S S E T H :
WHEREAS, pursuant to that certain Agreement of Sale and Purchase of Assets dated as of May
14, 2018 (the “Purchase Agreement”), among The Evans Agency, LLC, Evans Bancorp, Inc. (the
“Company”), Richardson & Stout, Inc. (“Seller”) and the Executive, Ian Whitehouse, and Richard Ewell,
the stockholders of Seller, providing for the sale of substantially all of the assets of Seller to TEA, it is a
condition to the Closing (as defined in the Purchase Agreement), that Executive and Employer shall have
entered into this Agreement; and
WHEREAS, prior to the date hereof, Executive was employed by, and was a principal
stockholder of, Seller; and
WHEREAS, the Employer desires that Executive be employed to serve as a Vice President of
TEA, and Executive desires to be so employed upon the terms and subject to the conditions herein set
forth, effective as of the time of the Closing.
NOW, THEREFORE, in consideration of the premises and of the mutual promises,
representations and covenants herein contained, the parties hereto agree as follows:
1.
EMPLOYMENT: The Employer hereby employs Executive and Executive hereby
accepts such employment, subject to the terms and conditions herein set forth. Executive shall serve as a
Vice President of TEA.
2.
TERM OF EMPLOYMENT: Unless terminated pursuant to the terms of this
Agreement, the Employer and Executive agrees that the Initial Term of Executive’s employment hereunder
shall be for a period commencing on July 1, 2018 and terminating July 1, 2021 (the “Employment Period”).
Following the expiration of the Employment Period, Executive’s employment with Employer shall be on
an at-will basis.
3.
COMPENSATION: As compensation for the employment services to be rendered by
Executive hereunder, the Employer agrees to pay, or cause to be paid, to Executive, and Executive agrees
to accept, payable in equal installments in accordance with the Employer normal payroll practice, an annual
base salary of $150,000.00 (“Base Salary”). Executive’s Base Salary may be increased at any time, but
shall not be reduced below the rate set forth in the preceding sentence.
4.
DUTIES:
A. During the Employment Term, Executive agrees to serve as a Vice President of the
Employer and be primarily responsible for the servicing of existing and transferred property and casualty
insurance accounts, marketing, recruiting and training as requested by the Employer and the solicitation,
negotiation, placement and procurement of additional insurance
business for which the Employer is licensed and authorized to sell. Further, the Executive has no authority
to bind Employer to any contract unless such authority has been given to Executive by Employer. In
addition, the Executive shall have such other duties and responsibilities as may be reasonably assigned to
him from time to time by the Employer, consistent with duties of a Vice President. Executive also agrees to
perform his services and duties consistent with the office or offices in which he is serving and its
responsibilities as may from time to time be prescribed by the Employer.
B. During the Employment Period, except for periods of absence occasioned by illness,
reasonable vacation periods, and reasonable leaves of absence approved by the Chief Executive Officer of
Employer, Executive shall devote substantially all his business time, attention, skill, and efforts to the faithful
performance of his duties hereunder including activities and services related to the organization, operation
and management of the Employer; provided, however, that, with the approval of the Chief Executive
Officer, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices
or positions in, business companies or business organizations, which, in Chief Executive Officer’s judgment,
will not present any conflict of interest with the Employer, or materially affect the performance of
Executive’s duties pursuant to this Agreement, it being understood that membership in and service on
boards or committees of social, religious, charitable or similar organizations does not require Chief
Executive Officer approval pursuant to this Section.
C. All property and casualty insurance business secured by the Executive will be placed
through the Employer. The Executive will use his best efforts to place all other insurance business (including,
but not limited to, life insurance products, long-term care or medical insurance products and group
insurance, annuities and Executive benefit plans) secured by him with the Employer or its affiliates. All
insurance business placed by the Executive with the Employer shall be conducted in the name of Employer
or its affiliates.
D. The Executive agrees that during the term of this Agreement, he will comply with all
regulations and guidelines and will do nothing to jeopardize or impair the Employer’s insurance licenses, and
will comply with all rules and regulations of the Insurance Department and the statutes of the State of New
York or any other state which regulates the business of the Employer, pertaining to the Employer’s
business.
E. Executive shall maintain any and all licenses and permits required to be owned or
possessed by him under applicable law (including NASD License) in order to perform the duties required
by him hereunder. Employee shall keep and maintain all of such licenses and permits in full force and effect.
The Employer will pay any required license or permit fees.
F. Executive shall, except as otherwise provided herein, be subject to the Employer’s rules,
practices and policies applicable to the Employer’s executives and employees.
5.
BENEFITS:
A. Executive shall participate in all employee benefit programs, including medical, health
and other insurance plans, 401(k) plan, incentive compensation and other similar plans which the Employer
may have or may establish from time to time and in which employees
2
of Employer in general are entitled to participate and, except as otherwise expressly provided in the
Agreement, on the same basis as other employees are entitled to participate. The foregoing, however, shall
not be construed to require TEA to establish any such plans, or to prevent the Employer from modifying or
terminating such plans in its application to all employees, or to establish individual performance targets under
any incentive plan, and no such action or failure thereof shall affect this Agreement. Executive shall be
eligible to participate in such plans upon the attainment of applicable service periods, provided that as to
medical and health insurance plans, participation shall start upon employment, and as to the 401(k) plan,
Executive will receive credit for prior service with Seller for purposes of eligibility and vesting.
A. Executive shall be entitled to vacation as determined in accordance with Employer’s
vacation policy applicable to executives. For purpose of the vacation policy, Executive will receive credit
for prior service with Seller.
B. Without limiting the foregoing, Executive shall specifically be entitled to the following
benefits:
1.
2.
TEA will assume Executive’s current auto lease.
Fully paid medical and health insurance premiums for Executive and his
family, under the Employer’s HDHP 2600 plan (or future equivalent plan).
3.
Participation in the Excels Performance Incentive Plan (or equivalent
program), which is a short-term incentive compensation plan intended to reward
performance of officers by providing the opportunity to receive significant cash incentives
upon achievement of performance goals. Executive shall participate in the Excels
Performance Plan on a pro-rata basis with respect to calendar year 2018.
C. To the extent not specifically provided in this Agreement, any compensation or
reimbursements payable to Executive shall be paid or provided no later than March 15 of the year
following the calendar year in which such compensation is no longer subject to a substantial risk of
forfeiture within the meaning of Treasury Regulation Section 1.409A-1(d).
6.
WORKING AND OTHER FACILITIES:
During the term of this Agreement,
Executive shall be furnished with such working facilities, secretarial help and other services, as the Employer
determines are reasonably necessary and suitable to his position and adequate for the performance of his
duties.
7.
EXPENSES:
The Employer will reimburse Executive for reasonable expenses,
including traveling expenses, incurred by him in connection with his employment in the business of the
Employer upon the presentation by Executive of appropriate substantiation, as determined by the Employer,
for such expenses. All reimbursements shall be paid as soon as practicable by the Employer upon
presentation to the Employer of an itemized account of such expenses in such form as the Employer may
reasonably require; provided, however, that no payment shall be made later than March 15 of the year
immediately following the year in which the expense was incurred.
3
8.
EVENT OF TERMINATION:
A. Upon the occurrence of an Event of Termination (as herein defined), the provisions of
this section shall apply. As used in this Agreement, an “Event of Termination’’ shall mean and include any
one or more of the following:
1.
the involuntary termination by the Employer of Executive’s full-time
employment hereunder for any reason other than a Termination for Cause, as defined in
Section 11 hereof, or a termination for Death or Disability as set forth in Section 10 hereof;
2.
Executive’s resignation from the Employer’s employ upon any of the
following events (which shall be treated as termination of employment for “Good Reason”),
unless consented to by Executive:
(i)
failure to appoint Executive as a Vice President of TEA;
(ii)
a material reduction in the compensation, benefits and
perquisites, including Base Salary, paid/provided to Executive from those being
paid/provided in the Agreement as of the Effective Date (except for any reduction
that is part of a reduction in pay or benefits that is generally applicable to executives
or employees of TEA);
(iii) a relocation by Employer of Executive’s principal workplace greater than 50
miles from its then current location, without the consent of Executive; or
(iv)
a material breach of this Agreement by the Employer.
Notwithstanding the foregoing, Good Reason will be considered to exist only if (1) the
Executive provides written notice to the Employer within 90 days after the event giving rise
to Good Reason under this Section 8(A)(2); (2) if the event or condition can be remedied,
the Employer fails to remedy the event or condition within 30 days of receiving written
notice from the Executive of the existence of the event or condition; and (3) the Executive
resigns from employment with the Employer within 60 days of the earlier of (a) the
expiration of the 30-day cure period under (2), or (b) the Executive’s receipt of written
notice from the Employer that it cannot, does not intend to, cure the event or condition
under this Section 8(A)(2).
D. Within 60 days following the occurrence of an Event of Termination, the Employer shall
pay Executive, as severance pay or liquidated damages, or both, a lump sum cash amount equal to the sum
of the (x) Base Salary that would be paid to Executive for the remainder of the Employment Period, and (y)
the annual incentive bonus paid to Executive during the calendar year preceding the Event of Termination
(or, in the case of an Event of Termination occurring during 2018, ($11,625), divided by twelve and then
multiplied the number of full months remaining in the Employment Period; provided, however, that such
payment is conditioned upon the Executive signing a general release acceptable to the Employer, in
substantially the form set forth as Appendix A to this Agreement (the “Release”). The Release must be
executed and become
4
irrevocable by the 60th day following the Event of Termination, provided that if the 60-day period spans two
(2) calendar years, then, to the extent necessary to comply with Code Section 409A, the payments
described in this Section 4(b) will be paid, or commence, in the second calendar year. Upon an Event of
Termination, the Executive shall have such rights as specified in any other employee benefit plans or
programs maintained by the Employer, as may be in effect from time to time.
E. Upon the occurrence of an Event of Termination, the Employer will continue to provide,
under the same terms as is in effect upon the Event of Termination, life insurance and non-taxable medical
and health insurance coverage substantially comparable, as reasonably or customarily available, to the
coverage maintained by the Employer for Executive prior to his termination, except to the extent such
coverage may be changed in its application to all Employer employees. Such coverage shall cease upon the
expiration of the Employment Period. If either (i) the Employer cannot provide Executive or Executive’s
dependents any continued health insurance or other welfare benefits as required by this Agreement because
Executive is no longer an employee, applicable rules and regulations prohibit such benefits or the payment
of such benefits in the manner contemplated, or it would subject the Employer to penalties, or (ii) the value
of any reimbursements under medical and health plan would result in a taxable benefit to the Executive
under Code Section 105(h) or any successor or similar provision under the Code, then the Employer shall
pay Executive or Executive’s beneficiary or estate in the event of death a cash lump sum payment equal to
(i) the reasonably estimated monthly cost (to Employer) of the life, medical and health insurance coverage
maintained by the Employer for Executive immediately prior to Executive’s date of termination, times (ii) the
number of whole months remaining in the Employment Period, provided such payment is exempt from
Code Section 409A or complies with the requirements of Treasury Regulation Section 1.409A-3(j)
(4). Such cash payment shall be made in a lump sum within 60 days after the later of Executive’s Event of
Termination or the effective date of the rules or regulations prohibiting such benefits or subjecting the
Employer to penalties. Notwithstanding the foregoing, if such cash payment would violate the requirements
of Treasury Regulation Section 1.409A-3(j), the Executive’s cash payment in lieu of the continued health
insurance or welfare benefits as required by this Agreement shall be payable at the same time the related
premium payments would have been paid by the Employer and will be payable for the duration of the
applicable coverage period.
F. Notwithstanding the foregoing, in the event the Executive is a Specified Employee (as
defined herein), solely to the extent necessary to avoid penalties under Code Section 409A, payment to the
Executive’s benefit pursuant to Sections 8(b) and 8(c), if applicable, shall be made to the Executive on the
first day of the seventh month following the Executive’s Event of Termination; provided, however, that the
six-month delay for such payment shall not apply in the event that such payments are exempt from the
requirements of Code Section 409A, including that the separation pay is due to an involuntary Separation
from Service or a Good Reason Separation from Service, the amount of the separation pay does not
exceed two times the lesser of (i) the Executive’s annualized compensation based upon his annual rate of
pay for the taxable year preceding the year in which the Separation from Service occurs; or (ii) the limit set
forth in Section 401(a)(17) of the Internal Revenue Code for the year in which the Separation from Service
occurs (i.e. for 2018, $275,000), as provided in Treasury Regulation Section 1.409A-1(b)(9)(iii) (which
separation pay, if in excess of the limit, shall be made as provided herein up to the amount of the limit) and
such separation pay is paid no later than the last day of the second calendar year
5
following the calendar year during which the Separation from Service occurs. “Specified Employee” shall
be interpreted to comply with Code Section 409A and shall mean a key employee within the meaning of
Code Section 416(i) (without regard to paragraph 5 thereof), but an individual shall be a “Specified
Employee” only if the Company or the Bank or any affiliate is a publicly traded company.
G. For purposes of this Agreement, Event of Termination shall be construed to require a
“Separation from Service” as defined in Code Section 409A and the Treasury Regulations promulgated
thereunder, such that the Employer and Executive reasonably anticipate that the level of bona fide services
Executive would perform after termination would permanently decrease to a level that is less than 50% of
the average level of bona fide services performed (whether as an employee or an independent contractor)
over the immediately preceding 36-month period.
9.
CHANGE IN CONTROL:
A. For purposes of this Agreement, a Change in Control shall mean:
(i)
A change in control of the Company that would be required to be
reported in response to Item 5.01 of the current report on Form 8-K, as in effect on the
date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
“Exchange Act”); or
(ii)
Any event that results in a Change in Control of the Company within the
meaning of the Bank Holding Company Act, as amended, and applicable rules and
regulations promulgated thereunder by the Federal Reserve Board (collectively, the
“BHCA”), or under the Change in Bank Control Act and the rules and regulations
promulgated thereunder by the Federal Reserve Board, as in effect at the time of the
Change in Control; or
(iii)
without limitation such a Change in Control shall be deemed to have
occurred at such time as (a) any “person” (as the term is used in Sections 13(d) and 14(d)
of the Exchange Act) or one or more persons acting as a group, is or becomes the
“beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 50% or more of the combined voting
power or Company’s outstanding securities; or (b) a plan of reorganization, merger,
consolidation, sale of all or substantially all the assets of the Company or Evans Bank, NA
(the “Bank”) or similar transaction in which the Bank or Company is not the surviving
institution occurs or is implemented; or (c) a tender offer is made for 50% or more of the
voting securities of the Company or the Bank and the shareholders owning beneficially or of
record 50% or more of the outstanding securities of the Company have tendered or offered
to sell their shares pursuant to such tender offer and such tendered shares have been
accepted by the tender offeror; or (d) the Company disposes of 50% or more of its
ownership, or the assets of, TEA to an unaffiliated third party, whether by merger or sale of
assets or otherwise.
6
B. Notwithstanding the preceding paragraphs of this Section, if any payment or benefit
under this Agreement, when combined with any other payment or benefit owed by the Employer to
the Executive, would (i) constitute a “parachute payment” within the meaning of Code Section 280G, and
(ii) but for this sentence, be subject to the excise tax imposed by Code Section 4999 (the “Excise Tax”),
then any payment or benefits under this Agreement will be reduced to the Reduced Amount. The
“Reduced Amount” will be either (x) the largest portion of the payment or benefits that would result in no
portion of the payments or benefits under this Agreement being subject to the Excise Tax, or (y) the total of
the payment or benefits under this Agreement, whichever amount, after taking into account all applicable
federal, state, and local employment taxes, income taxes (computed at the highest marginal rate), and the
Excise Tax, results in the Executive’s receipt, on an after-tax basis, of the greatest amount of the payment
or benefits under this Agreement, notwithstanding that all or some portion of the payment or benefits may
be subject to the Excise Tax. For purposes of making this determination, any cash severance under Section
8(B) will be reduced before any other payments or benefits under this Agreement that give rise to a
parachute payment.
10.
TERMINATION UPON DEATH OR DISABILITY:
A. Termination of Executive’s employment based on “Disability” shall be construed to
comply with Code section 409A and shall be deemed to have occurred if (i) Executive is eligible to receive
disability benefits under the Employer’s long-term disability policy, or (ii) Executive is determined to be
totally disabled by the Social Security Administration.
B. Employer may terminate Executive’s employment upon Disability in which event
Executive shall be entitled to receive the compensation and vested benefits due Executive as of the date of
Executive’s termination, but except as provided herein, shall have no right to receive any other
compensation or benefits under this Agreement. Upon Termination for Disability, Executive shall participate
in the short and long-term disability plans and benefits offered by the Employer to executives.
C. This Agreement shall terminate upon Executive’s death, in which event Executive’s
estate or beneficiary shall be entitled to receive the compensation and vested benefits due Executive as of
the date of Executive’s death, and neither Executive, nor Executive’s estate or beneficiary, shall have a right
to receive any compensation or benefits under this Agreement thereafter. Executive’s beneficiaries may be
entitled to receive other benefits under and in accordance with the terms of other employee benefit plans
maintained by the Employer for the benefit of the Executive.
11.
TERMINATION FOR CAUSE: Termination for “Cause” shall mean termination
because of the (i) Executive’s personal dishonesty, willful misconduct, or breach of fiduciary duty involving
personal profit, (ii) a material breach by Executive of the Code of Conduct of TEA (as it may be amended
from time to time), (iii) Executive’s willfully engaging in actions that in the reasonable opinion of the Board
will likely cause substantial financial harm or substantial injury to the business reputation of TEA, (iv)
Executive’s failure to perform stated duties after receiving written notice of Executive’s failure to perform
assigned duties, (v) Executive’s willful violation of any law, rule or regulation (other than routine traffic
violations or similar offenses) or final cease-
7
and-desist order, or (vi) a material breach of any provision of the Agreement by the Executive, provided that
if such material breach is curable, Executive shall be given written notice of such breach and 30 days to
cure. Employer may place Executive on paid leave for up to 60 days while it is determining whether there is
a basis to terminate Executive’s employment for Cause. Except as otherwise provided in Section 12 as to
Deferred Consideration, Executive shall have no right to receive compensation or other benefits under this
Agreement upon Termination for Cause. Any purported Termination for Cause shall be communicated to by
Notice of Termination to Executive, specifying the grounds on which the Termination for Cause is based.
12.
DEFERRED CONSIDERATION UNDER PURCHASE AGREEMENT: In the
event that, prior to the expiration of the Employment Period, Executive’s employment is terminated by the
Employer for any reason whatsoever (except for certain terminations for Cause as set forth below), the
Executive resigns or otherwise terminates his employment in each case for Good Reason, the Executive’s
employment terminates as a result of his death or Disability pursuant to Section 10, or a Change of Control
occurs, then Executive (or his estate) shall automatically and immediately be entitled to receive the Deferred
Consideration (as defined in the Purchase Agreement) as set forth in Section 2.4(B) of the Purchase
Agreement (including accrued cash dividends on the EVBN Shares (as defined in the Purchase Agreement)
and interest on the cash portion through the date of payment), with such payment to be made in its entirety
as soon as administratively feasible following the Executive’s termination of employment or the occurrence
of a Change in Control, as applicable, but in all cases during the short-term deferral period as defined under
Treasury Regulation Section 1.409A-1(b)(4) such that it is excepted from compliance with Code Section
409A. In the event that the Executive remains employed by Employer through the end of the Employment
Period, the Deferred Consideration will be paid to the Executive as soon as administratively feasible
following the end of the Employment Period, but in all cases during the short-term deferral period under
Treasury Regulation Section 1.409A-1(b)(4). In the event that, prior to the earlier of the expiration of the
Employment Period or the occurrence of a Change in Control, Executive voluntarily resigns or otherwise
voluntarily terminates his employment with the Employer without Good Reason, or Executive’s employment
is terminated by the Employer pursuant to clause (ii) or clause (iv) of the definition of Cause set forth in
Section 11, then Executive’s right to receive the Deferred Consideration shall be forfeited.
13.
CONFIDENTIALITY: In the course of his employment by the Employer, Executive
shall have and has had access to confidential or proprietary data or information of the Employer. Executive
shall not at any time, divulge or communicate to any person, nor shall they direct any Executives to divulge
or communicate to any person (other than to a person bound by confidentiality obligation similar to those
contained herein, and other than is necessary in performing his duties hereunder) or used to the detriment of
the Employer or for the benefit of any other person, any of such data or information. The provision of this
Section 13 shall survive Executive’s employment hereunder, whether by the normal expiration thereof or
otherwise. The term “confidential” or “proprietary data or information” as used in this Agreement, shall
mean information not generally available to the public including, without limitation, personnel information,
financial information, customer lists, computer programs, marketing and advertising data. Executive
acknowledges and agrees that any confidential or proprietary data or information heretofore acquired was
received in confidence.
8
The Employer and Executive agrees that the customer lists, files, records and other material relating
to the insurance customers of the Employer, the trade secrets, operational processes and techniques (all of
which are hereinafter referred to as the “Confidential Information”) are valuable and unique assets of the
Employer and the Executive has no right or interest in such Confidential Information. The Executive agrees
not to disclose the Confidential Information to any person or entity other than the Employer (and its
employees and agents) and to use the Confidential Information solely for the business and benefit of the
Employer. The Executive also agrees to return all of the Confidential Information and all copies thereof to
the Employer upon the termination of employment. The Employer agrees to use its best efforts to prevent
disclosure of Confidential Information to any person or entity.
Notwithstanding anything in this Agreement to the contrary, Executive understands that nothing
contained in this Agreement limits Executive’s ability to file a charge or complaint with the Securities and
Exchange Commission or any other federal, state or local governmental agency or commission
(“Government Agencies”) about a possible securities law violation without approval of the Employer (or
any affiliate). Executive further understands that this Agreement does not limit Executive’s ability to
communicate with any Government Agency or otherwise participate in any investigation or proceeding that
may be conducted by any Government Agency, including providing documents or other information,
without notice to the Employer (or any affiliate) related to the possible securities law violation. This
Agreement does not limit Executive’s right to receive any resulting monetary award for information provided
to any Government Agency.
14.
NON-COMPETITION AND NON-SOLICITATION: Until the later of the (i)
expiration of the Employment Period, or (ii) two years following any termination of employment, Executive
agrees that he will not, on his own behalf or on behalf of any other person, firm, partnership, association,
corporation, or other entity, as an owner, partner, employee, officer, agent, advisor, consultant or
otherwise, directly or indirectly, do or cause to be done any of the following acts:
A.
Solicit, attempt to obtain, or in any way transact insurance business from any
insurance accounts or customers which, at the time of his/her termination, were held or maintained by or on
behalf of the Employer or any affiliated companies.
or customers.
B.
C.
D.
Aid or assist any other party in the solicitation of any such customer or account.
Serve as an insurance advisor, consultant or risk manager for any of said accounts
Attempt to hire or entice away any employee of Employer or induce any employee
to terminate his or her employment with Employer or to otherwise interfere with the Employer’s or any of
the affiliated companies’ relationships with any of their respective customers or accounts, wherever located,
by soliciting such customers or inducing them to discontinue their relationships with the Employer or any of
the affiliated companies.
agreement with the Employer.
E.
Induce any employee or former employee of the Employer to breach any
9
15.
ARBITRATION:
A. Any dispute or controversy arising under or in connection with this Agreement shall be
settled exclusively by binding arbitration, as an alternative to civil litigation and without any trial by jury to
resolve such claims, conducted by a single arbitrator mutually acceptable to Employer and Executive, sitting
in a location selected by the Employer within 50 miles from the main office of the Employer, in accordance
with the rules of the American Arbitration Association’s National Rules for the Resolution of Employment
Disputes then in effect. Judgment may be entered on the arbitrator’s award in any court having
jurisdiction. The cost of the arbitrator shall be divided between the parties; all other cost of arbitration shall
be borne by the party incurring such cost.
B. If Termination For Cause is disputed by Executive, and if it is determined in arbitration
that Executive is entitled to either or both of (i) compensation and benefits under Section 8 of this
Agreement, and (ii) the Deferred Consideration under the Purchase Agreement, then (x) the payment of
such compensation and benefits by the Employer, and/or the Deferred Consideration shall commence
immediately following the date of resolution by arbitration, with interest due Executive on the cash amount
that was not paid pending arbitration (at the prime rate as published in The Wall Street Journal from time
to time), and (y) Employer shall promptly reimburse Executive for all costs and expense (including without
limitation reasonable attorneys’ fees and disbursements) incurred by Executive in connection with the
arbitration.
16.
MODIFICATION:
A.
This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
B.
No term or condition of this Agreement shall be deemed to have been waived, nor
shall there be any estoppel against the enforcement of any provision of this Agreement, except by written
instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the
specific term or condition waived and shall not constitute a waiver of such term or condition for the future as
to any act other than that specifically waived.
17.
ENTIRE AGREEMENT. This Agreement constitutes the full and complete
understanding of the parties and supersedes all prior agreements and understandings oral or written,
between the parties, with respect to the subject matter hereof, except with respect to the Deferred
Consideration, as to which the Purchase Agreement applies as well.
18.
SEVERABILITY:
The holding of any provision of this Agreement to be invalid or
unenforceable by a court of competent jurisdiction shall not affect any other provision of this Agreement,
which shall remain in full force and effect.
19.
WITHHOLDING:
The Employer may deduct and withhold from the payments to
be made to Executive hereunder any amounts required to be deducted and withheld by the Employer under
the provisions of any applicable statute, law, regulation or ordinance now or hereafter enacted.
10
20.
WAIVER OF BREACH:
The waiver by either party of a breach of any provision
of this Agreement shall not operate as, or be construed as, a waiver of any subsequent breach.
21.
NOTICE:
For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered, mailed by certified or registered mail, return receipt requested, postage
prepaid, or sent by facsimile or email of a scanned (pdf) document or other electronic means with receipt
acknowledged, addressed to the respective addresses set forth below:
To Employer:
To Executive:
The Evans Agency, LLC
One Grimsby Drive
Hamburg, New York 14075
To the most recent address on file with the
Employer.
22.
ASSIGNABILITY / BINDING EFFECT:
This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective legal representatives, heirs, distributors,
successors and assigns; provided, however, Executive shall not be entitled to assign or delegate any of his
rights or obligations hereunder without the prior written consent of the Employer. The Employer may assign
this Agreement and its rights hereunder to an affiliate of, or successor to the business of, the Employer.
23.
GOVERNING LAW:
All questions pertaining to the validity, construction,
execution and performance of this Agreement shall be construed and governed in accordance with the law
of the State of New York.
24.
MISCELLANEOUS: Employer may terminate Executive’s employment at any time, but
any termination other than termination for Cause shall not prejudice Executive’s right to compensation or
other benefits under this Agreement. Executive shall have no right to receive compensation or other benefits
for any period after Executive’s Termination for Cause.
25.
HEADINGS:
The headings in this Agreement are intended solely for convenience
of reference and shall be given no effect in the construction or interpretation of this Agreement.
[Signature Page Follows]
11
IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day and year
above written.
EMPLOYER:
THE
EVANS
AGENCY,
LLC
By:
/s/ Robert G. Miller, Jr.
Robert G. Miller, Jr.
President
EXECUTIVE:
/s/ Aaron Whitehouse
Aaron Whitehouse
12
(Back To Top)
Section 4: EX-21.1 (EX-21.1)
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
The following entities comprise the direct and indirect subsidiaries of the Registrant:
Evans Bank, N.A. (United States)
Evans National Financial Services, LLC
The Evans Agency, LLC
Frontier Claims Services, Inc.
Evans National Holding Corp.
Evans National Leasing, Inc.
Evans Capital Trust I (Delaware)
ENB Employers Insurance Trust
MMS Merger Sub, Inc. (Maryland)
The state of or jurisdiction of incorporation or organization (unless otherwise noted) is NY
(Back To Top)
Section 5: EX-23.1 (EX-23.1)
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors Evans Bancorp, Inc.:
We consent to the incorporation by reference in the registration statements (No. 333-160262, No. 333-181018, No. 333-188164,
and No. 333-231605) on Form S-8 and (No. 333-166264 and No. 333-230819) on Form S-3 of Evans Bancorp, Inc. of our reports
dated March 12, 2020, with respect to the consolidated balance sheets of Evans Bancorp, Inc. as of December 31, 2019 and
2018, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows
for each of the years in the three-year period ended December 31, 2019, and the related notes, and the effectiveness of internal
control over financial reporting as of December 31, 2019, which reports appear in the December 31, 2019 annual report on Form
10-K of Evans Bancorp, Inc.
/s/ KPMG LLP
Buffalo, New York
March 12, 2020
(Back To Top)
Section 6: EX-31.1 (EX-31.1)
Exhibit 31.1
Certification
I, David J. Nasca, certify that:
1.
I have reviewed this report on Form 10-K of Evans Bancorp, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
3.
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 12, 2020
/s/ David J. Nasca
David J. Nasca
President and Chief Executive Officer
(Principal Executive Officer)
(Back To Top)
Section 7: EX-31.2 (EX-31.2)
Exhibit 31.2
Certification
I, John B. Connerton, certify that:
1.
I have reviewed this report on Form 10-K of Evans Bancorp, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
2.
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
5.
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 12, 2020
/s/ John B. Connerton
John B. Connerton
Treasurer
(Principal Financial Officer and Principal Accounting Officer)
(Back To Top)
Section 8: EX-32.1 (EX-32.1)
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICERS
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, David J. Nasca, the President and Chief Executive Officer of Evans Bancorp, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) the Annual Report of Evans Bancorp, Inc. on Form
10-K for the fiscal year ended December 31, 2019 fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and (2) the information contained in such Annual Report on Form 10-K fairly presents, in all material
respects, the financial condition and results of operations of Evans Bancorp, Inc.
Date: March 12, 2020
By:
Name:
Title:
/s/ David J. Nasca
David J. Nasca
President and Chief Executive Officer
(Principal Executive Officer)
(Back To Top)
Section 9: EX-32.2 (EX-32.2)
Exhibit 32.2
CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICERS
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, John B. Connerton, the Treasurer of Evans Bancorp, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) the Annual Report of Evans Bancorp, Inc. on Form 10-K for the fiscal year
ended December 31, 2019 fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of
1934 and (2) the information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition
and results of operations of Evans Bancorp, Inc.
Date: March 12, 2020
By:
Name:
Title:
/s/ John B. Connerton
John B. Connerton
Treasurer
(Principal Financial Officer and Principal Accounting Officer)
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