Evans Bank(EVBN) - 2019 Q4 - Annual Report

PART I Forward-Looking Statements This section outlines the forward-looking statements within the Annual Report on Form 10-K, emphasizing that these statements involve substantial risks and uncertainties - Forward-looking statements are identified by words like 'will,' 'anticipate,' 'believe,' 'estimate,' 'expect,' 'intend,' 'may,' 'plan,' 'seek,' 'look to,' 'goal,' 'target' and similar expressions[16] - Key risks and uncertainties include general economic conditions, increased competition, inflation and interest rate changes, regulatory changes, ability to enter new markets, integration of acquired entities, loan losses, accounting changes, and changes in consumer habits[17] - The Company undertakes no obligation to publicly update or revise forward-looking information, except as required by law[18] Item 1. Business Evans Bancorp, Inc. is a financial holding company operating primarily through its banking subsidiary, Evans Bank, N.A., and its insurance agency subsidiary, The Evans Agency, LLC | Metric | Amount (Millions) | |:-------------------|:------------------| | Total Assets | $1,500 | | Deposits | $1,300 | | Stockholders' Equity | $148 | - The Company's primary business is the operation of its two direct wholly-owned subsidiaries: Evans Bank, N.A. (99% of consolidated assets) and Evans National Financial Services, LLC (1% of consolidated assets), which owns The Evans Agency, LLC[21] - On December 19, 2019, the Company announced a definitive agreement to acquire FSB Bancorp, Inc. for approximately $35 million, with consideration split 50% cash and 50% Evans Common Stock[22] - FSB Bancorp, Inc. reported $325 million of assets, $277 million of loans (predominantly residential real estate), $24 million of investment securities, and $233 million of deposits as of September 30, 2019[23] Evans Bancorp, Inc. Overview Evans Bancorp, Inc. is a New York-based financial holding company, tracing its banking business back to 1920 - Evans Bancorp, Inc. is a New York business corporation registered as a financial holding company under the BHCA, incorporated on October 28, 1988[20] - The Company's common stock is traded on the NYSE American, LLC under the symbol 'EVBN'[20] Evans Bank, N.A. Evans Bank, N.A. is a nationally chartered bank headquartered in Hamburg, NY, with 15 full-service banking offices in Western New York - The Bank operates 15 full-service banking offices across Erie, Niagara, and Chautauqua Counties, NY[25] Evans Bank, N.A. Financials (December 31, 2019 vs. 2018) | Metric | 2019 (Millions) | 2018 (Millions) | |:---------------------|:----------------|:----------------| | Total Assets | $1,400 | $1,400 | | Investment Securities| $130 | $134 | | Net Loans | $1,200 | $1,100 | | Deposits | $1,300 | $1,200 | | Stockholders' Equity | $145 | $127 | - The Bank's operations are significantly influenced by general economic conditions and monetary/fiscal policies of banking regulatory agencies (FRB, FDIC, OCC)[27] The Evans Agency, LLC (TEA) The Evans Agency, LLC (TEA) is a wholly-owned insurance agency subsidiary, offering a full range of personal, commercial, and financial services products across Western New York - TEA is a wholly-owned subsidiary of ENFS, headquartered in Hamburg, NY, with offices throughout Western New York[29] - TEA offers personal insurance (automobile, homeowners), commercial insurance (property, liability, workers compensation), and financial services (employee benefits, life/disability insurance, retirement programs)[30] The Evans Agency, LLC Revenue | Year | Total Revenue (Millions) | |:-----|:-------------------------| | 2019 | $10 | - TEA acquired the assets of Richardson and Stout, Inc. for $5 million on July 1, 2018[31] Other Subsidiaries Beyond the Bank and TEA, the Company has several other wholly-owned subsidiaries including Evans National Holding Corp. (a real estate investment trust), Evans National Financial Services, LLC (non-banking financial services), Frontier Claims Services, Inc. (claims adjusting), and MMS Merger Sub, Inc. (formed for the FSB merger) - Evans National Holding Corp. (ENHC): Wholly-owned subsidiary of the Bank, operates as a real estate investment trust holding commercial real estate loans and residential mortgages[32] - Evans National Financial Services, LLC (ENFS): Wholly-owned subsidiary of the Company, owns non-banking financial services subsidiaries[33] - Frontier Claims Services, Inc. (FCS): Wholly-owned subsidiary of TEA, provides claims adjusting services[33] - MMS Merger Sub, Inc.: Newly formed Maryland corporation for the anticipated merger with FSB Bancorp, Inc[34] - Special purpose entities: Evans Capital Trust I (issues securities, invests in debentures) and ENB Employers Insurance Trust (holds BOLI policies)[35] Market Area The Company's primary market area for banking and insurance services is concentrated in Erie, Niagara, northern Chautauqua, and northwestern Cattaraugus Counties in New York - The Company's primary market area is Erie County, Niagara County, northern Chautauqua County and northwestern Cattaraugus County, NY[37] Competition The Company faces intense competition from various financial institutions and insurance providers in its Western New York market, many of which are larger and have greater resources - The Company competes with local, regional, and national financial institutions, including commercial banks, savings banks, internet banks, credit unions, and non-depository competitors[40] - Many competitors are significantly larger and have greater financial resources than the Company[40] - As of June 30, 2019, Evans Bank had the sixth most deposits in the Buffalo, NY metropolitan statistical area, holding 3% of the total market's $46 billion in deposits[41] Supervision and Regulation The Company and its subsidiaries are extensively regulated by federal and state laws and agencies, including the FRB, OCC, FDIC, NYSDFS, and SEC - The Company and its subsidiaries are subject to extensive regulation by the OCC, FRB, FDIC, NYSDFS, and SEC[42][111] - Regulatory requirements impact lending practices, capital structure, investment practices, dividend policy, and growth[111] Bank Holding Company Regulation (BHCA) As a financial holding company under the BHCA, Evans Bancorp, Inc. is regulated by the FRB, requiring periodic reports, examinations, and prior approval for mergers or acquisitions - The Company is regulated by the FRB under the BHCA, requiring periodic reports and examinations[43] - FRB approval is required for mergers or acquisitions of more than 5% of voting shares of a bank or bank holding company[44] - The Company has elected to be regulated as a financial holding company, allowing it to engage in a broader range of non-banking financial activities[46] Supervision and Regulation of Bank Subsidiaries Evans Bank, N.A. is primarily supervised by the OCC, with backup authority from the FDIC - The Bank is primarily supervised, examined, and regulated by the OCC, with the FDIC having backup regulatory authority[51] - Operations are subject to statutes and regulations on required reserves, investments, loans, mergers, dividends, branches, and consumer laws (e.g., Truth in Lending, Fair Housing, USA PATRIOT Act)[52][84] - Sections 23A and 23B of the Federal Reserve Act limit transactions between the Bank and its affiliates (including the Company) to 10% of the Bank's capital and surplus for any single affiliate, and 20% for all affiliates combined[53] - The Bank is prohibited from certain tying arrangements and is subject to restrictions on extensions of credit to executive officers, directors, and principal stockholders[54] - The FDIC imposes risk-based deposit insurance premiums and can take enforcement actions, including terminating deposit insurance for unsafe practices[55][57] Capital Adequacy The Company and its subsidiary bank must comply with federal capital adequacy standards - The Company (as a holding company with less than $3 billion in consolidated assets) is generally not subject to the Capital Rules since August 2018, but the Bank remains subject to them[63] - The Capital Rules implemented Basel III, introducing Common Equity Tier 1 (CET1) and revising definitions for Tier 1 and Total capital[65][66] Minimum Capital Ratios under Capital Rules | Capital Ratio | Minimum Requirement | |:--------------------------------------------|:--------------------| | CET1 to risk-weighted assets | 4.5% | | Tier 1 capital to risk-weighted assets | 6.0% | | Total capital to risk-weighted assets | 8.0% | | Tier 1 capital to average consolidated assets (leverage ratio) | 4.0% | - An additional capital conservation buffer of 2.5% of CET1 is required, effectively raising minimum ratios for the Bank to 7% CET1, 8.5% Tier 1, and 10.5% Total capital to risk-weighted assets[68] - The Bank made a one-time, permanent election to exclude Accumulated Other Comprehensive Income (AOCI) from capital calculations[70] Prompt Corrective Action Capital Categories | Category | CET1 Ratio | Leverage Ratio | Tier 1 Capital Ratio | Total Capital Ratio | |:-----------------------------|:-----------|:---------------|:---------------------|:--------------------|\n| Well-Capitalized | 6.5% | 5% | 8% | 10% |\n| Adequately Capitalized | 4.5% | 4% | 6% | 8% |\n| Undercapitalized | <4.5% | <4% | <6% | <8% |\n| Significantly Undercapitalized | <3% | <3% | <4% | <6% |\n| Critically Undercapitalized | - | - | - | - |\n\nCritically Undercapitalized: Tangible equity to total assets less than 2% Regulation of Insurance Agency Subsidiary The Evans Agency, LLC (TEA) is regulated by the New York State Department of Financial Services and complies with all licensing and continuing education requirements - TEA is regulated by the New York State Department of Financial Services and meets all licensing and continuing education requirements[82] Monetary Policy and Economic Control The Company's commercial banking business is significantly influenced by the Federal Reserve Board's monetary policies, which affect interest rates, loan and deposit growth, and overall economic conditions - The Company's business is affected by FRB monetary policies, including changes in discount rates, open market operations, and reserve requirements[83] - These policies influence bank loans, investments, deposits, and interest rates, with unpredictable future effects on the Company's business and earnings[83] Consumer Laws and Regulations The Bank is subject to various consumer protection laws and regulations, including the USA PATRIOT Act, Bank Secrecy Act, Truth in Lending Act, and Fair Housing Act, which govern customer interactions for deposits and loans - The Bank is subject to consumer laws and regulations such as the USA PATRIOT Act, Bank Secrecy Act, Truth in Lending Act, and Fair Housing Act[84] - These laws regulate how financial institutions handle customer deposits and loans[84] Tax Cuts and Jobs Act (TCJA) The TCJA, enacted in December 2017, significantly reduced the Company's marginal federal tax rate from 35% to 21%, resulting in a $2.1 million deferred tax asset remeasurement expense in 2017 - The TCJA reduced the Company's marginal federal tax rate from 35% to 21%, leading to a $2.1 million expense for deferred tax asset remeasurement as of December 31, 2017[86] - Historic rehabilitation tax credits (HTCs) now spread the 20% deduction over 5 years for new projects, negatively impacting pricing. Net income from HTC investments was less than $0.1 million in 2019, down from $1.2 million in 2018[87] - The TCJA expanded the definition of 'covered employees' for Section 162(m) executive compensation deductibility limits, impacting the SERP for one executive[88] - Allows 100% deduction for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023, expected to delay tax payments but not materially affect operations[89] Available Information The Company's SEC filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, are available free of charge on its website (www.evansbancorp.com) and the SEC's website (www.sec.gov) - Company's SEC filings (10-K, 10-Q, 8-K) are available on www.evansbancorp.com and www.sec.gov[91](index=91&type=chunk) Item 1A. Risk Factors This section details significant risks that could adversely affect the Company's operations, including economic downturns, concentration in commercial real estate and local markets, insufficient allowance for loan losses, interest rate fluctuations, and reliance on other financial institutions - Financial performance is highly dependent on economic conditions in Western New York and the U.S. A slowdown could adversely affect loan quality and financial results[94] - High concentration in commercial real estate (61% of total loans) and C&I loans (20% of total loans) exposes the Company to increased credit risks, as repayment depends on borrower operations and collateral values[95] - The Company's primary market area concentration in Western New York makes it vulnerable to regional economic downturns[96] - The allowance for loan losses may not be sufficient to cover actual losses, potentially decreasing earnings, especially with increased commercial lending[98] - Changes in interest rates significantly affect net interest income and the value of the securities portfolio. FRB rate reductions in 2019 have already pressured net interest margin[99][100][102] - Soundness of other financial institutions, particularly FHLBNY, poses a risk to liquidity and borrowing costs[103][105][106] - A decline in the value of deferred tax assets could adversely affect operating results and regulatory capital ratios[107][108] - Strong competition in the market area may limit growth and profitability[109] - Expansion of the branch network may not be accretive to earnings[110] - Operating in a highly regulated environment means changes in laws and regulations, or noncompliance, could have a material adverse impact[111][114][115] - Lack of system integrity or credit quality related to funds settlement could result in financial loss[116] - Dependence on the accuracy and completeness of customer and counterparty information exposes the Company to risks of unfavorable transactions[117] - Loss of key employees may disrupt customer relationships and lead to loss of business[118] - Future FDIC insurance premium increases may adversely affect earnings[119] - As a financial holding company, the Company depends on its subsidiaries for dividends and other payments, which are subject to statutory and regulatory limitations[121] - Significant operational risks exist due to the high volume of transactions, including fraud, errors, control breaches, and business continuation issues[122] - Information systems may experience interruptions or security breaches, leading to reputational damage, financial loss, or regulatory scrutiny[123][124] - Potential for business interruption from technical failures, pandemics (like COVID-19), or loss of key personnel[126] - Environmental factors may create liability for clean-up costs on acquired properties[127] - Anti-takeover laws and charter provisions could adversely affect share value by making acquisitions more difficult[128] - Damage to the Company's reputation could significantly harm its business[129] - Mergers and acquisitions, including the proposed FSB acquisition, involve risks such as delayed regulatory approvals, substantial expenses, business uncertainties during integration, potential litigation, and reduced ownership/voting interest for current stockholders[131][132][133][134][135][136][137] - Regulators may impose limitations on commercial real estate lending activities if concentrations are too high (e.g., non-owner occupied CRE loans exceeding 300% of total risk-based capital), which could adversely affect earnings. The Company's non-owner occupied CRE level was 352% of total risk-based capital at December 31, 2019[139] - The Company is required to transition from LIBOR by December 31, 2021, which introduces uncertainty regarding alternative rates, potential impact on LIBOR-based instruments, and transition costs[140] Item 1B. Unresolved Staff Comments There are no unresolved staff comments from the SEC Item 2. Properties As of December 31, 2019, Evans Bank operated from an administrative office and 15 branch offices in New York - As of December 31, 2019, the Bank operated from its administrative office and 15 full-service branch offices[144] - The Bank owns its 26,000 sq ft administrative office in Hamburg, NY, and a 50,000 sq ft building in Williamsville, NY (purchased in 2019 for a new administrative office in 2020)[144] - Of the 15 branch locations, the Bank owns five, leases nine, and one is leased by TEA[145] - TEA operates from a 10,000 sq ft office in Derby, NY (owned by the Bank) and eight retail locations (three owned by the Bank, one owned by TEA, and four leased)[145] Item 3. Legal Proceedings The Company is involved in litigation arising in the ordinary course of business, but management believes no pending proceedings would have a material adverse effect on its financial statements - The Company is involved in litigation in the ordinary course of business[146] - Management believes no pending proceedings would have a material effect on the Company's financial statements[146] Item 4. Mine Safety Disclosures This item is not applicable to the Company PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock is listed on the NYSE American under 'EVBN', with 1,149 record holders as of March 4, 2020 - The Company's common stock is listed on the NYSE American under the symbol 'EVBN'[150] - As of March 4, 2020, there were approximately 1,149 holders of record of the Company's common stock[150] - Dividends are primarily funded by dividends from Evans Bank, N.A., which are subject to legal and regulatory limitations (e.g., OCC approval for amounts exceeding retained net income of the current and prior two years). Approximately $32 million was available for dividends without prior OCC approval as of December 31, 2019[151] Cumulative Total Stockholder Return (December 31, 2014 - December 31, 2019) | Index | 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | |:--------------------------------|:---------|:---------|:---------|:---------|:---------|:---------| | Evans Bancorp, Inc. | 100.00 | 109.01 | 137.64 | 186.55 | 147.65 | 187.47 | | NASDAQ Bank | 100.00 | 108.84 | 150.17 | 158.37 | 132.75 | 165.11 | | NYSE American - Composite Index | 100.00 | 90.59 | 100.23 | 118.83 | 104.85 | 119.23 | - No shares were purchased by the issuer or affiliated purchasers during October, November, or December 2019[160] Item 6. Selected Financial Data This section provides a five-year summary of key financial data, including balance sheet items, income statement figures, per-share data, performance ratios, capital ratios, and asset quality ratios, for the years ended December 31, 2015 through 2019 Selected Financial Data (2015-2019, in thousands except per share data) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | |:------------------------------------------------|:------------|:------------|:------------|:------------|:------------| | Balance Sheet Data: | | | | | | | Assets | $1,460,230 | $1,388,207 | $1,295,633 | $1,100,709 | $939,107 | | Loans and leases, net | $1,211,356 | $1,141,146 | $1,051,296 | $928,596 | $761,101 | | Deposits | $1,267,440 | $1,215,058 | $1,051,229 | $939,974 | $802,982 | | Stockholders' equity | $148,453 | $131,646 | $118,342 | $96,748 | $91,256 | | Income Statement Data: | | | | | | | Net interest income | $52,055 | $48,107 | $42,017 | $35,248 | $31,804 | | Non-interest income | $18,082 | $15,227 | $13,003 | $11,252 | $13,720 | | Net income | $17,014 | $16,356 | $10,479 | $8,272 | $7,843 | | Per Share Data: | | | | | | | Earnings per share - basic | $3.47 | $3.40 | $2.21 | $1.93 | $1.85 | | Cash dividends | $1.04 | $0.92 | $0.80 | $0.76 | $0.72 | | Book value | $30.12 | $27.13 | $24.74 | $22.50 | $21.44 | | Performance Ratios: | | | | | | | Return on average assets | 1.17% | 1.20% | 0.89% | 0.80% | 0.87% | | Return on average equity | 12.08% | 13.20% | 9.11% | 8.74% | 8.82% | | Net interest margin | 3.82% | 3.77% | 3.80% | 3.67% | 3.80% | | Efficiency ratio (Non-GAAP) | 67.21% | 66.87% | 68.50% | 74.03% | 71.83% | | Asset Quality Ratios: | | | | | | | Total non-performing assets to total assets | 0.99% | 1.37% | 1.06% | 1.09% | 1.71% | | Allowance for loan and lease losses to total loans and leases | 1.24% | 1.28% | 1.32% | 1.48% | 1.66% | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed analysis of the Company's financial condition and results of operations for the years ended December 31, 2019 and 2018, with comparative data for 2017 - Net income increased 4% to $17.0 million in 2019 from $16.4 million in 2018, driven by higher net interest income from commercial loan growth and improved net interest margin[171] - Net interest income rose 8% to $52.1 million in 2019, with net interest margin improving to 3.82% from 3.77% in 2018[171] - Provision for loan losses decreased significantly to $0.1 million in 2019 from $1.4 million in 2018, reflecting improved asset quality and a decrease in net loan charge-offs[172] - Non-interest income increased to $18.1 million in 2019 from $15.2 million in 2018, primarily due to a $1.3 million increase in insurance service revenue[173] - Non-interest expense increased $4.5 million to $47.8 million in 2019, mainly due to higher salaries and benefits, professional services (including merger-related costs), and technology expenses[174] - Total assets grew 5% to $1.5 billion at December 31, 2019, with net loans increasing 6% to $1.2 billion[232] Overview The Company's strategy focuses on increasing market share, improving profitability, and returning value to shareholders, primarily through commercial and small business lending and enhancing non-interest income from its insurance agency - The Company's goal is to increase market share, achieve scale, improve profitability, and return value to shareholders[175] - Primary earnings driver is commercial and small business lending, with continued focus on personnel additions in this area[175] - Non-interest income is bolstered through agency and talent acquisition for The Evans Agency (TEA), and building employee benefits and financial services businesses[175] - Strategies include targeting smaller businesses, middle market commercial businesses, commercial real estate lending, retail customers, and municipal customers, with an overarching goal to cross-sell services[179] Application of Critical Accounting Estimates The preparation of the Company's financial statements requires significant management estimates and judgments, particularly for the allowance for loan losses and the valuation of goodwill - Critical accounting estimates include the determination of the allowance for loan losses and the valuation of goodwill[185] - Estimates are based on management's best judgment, historical experience, and current economic environment, and are subject to change[182] Allowance for Loan Losses The allowance for loan losses is a critical accounting estimate, representing management's judgment of probable losses in the loan portfolio - The allowance for loan losses is management's estimate of probable losses inherent in the Bank's loan portfolio[187] - Determining the allowance requires significant judgment and estimates related to future cash flows on impaired loans, historical loss experience, and current economic trends[187] Goodwill and Intangible Assets Goodwill, primarily from insurance agency acquisitions, is tested for impairment annually using cash flow modeling and earnings multiple techniques - Goodwill of $10.5 million at December 31, 2019, is entirely within the insurance agency activities segment (TEA) and is tested for impairment annually[188][495] - Impairment testing for TEA uses cash flow modeling and earnings multiple techniques, with the fair value substantially higher than carrying value in 2019[189][496] - Acquired intangible assets, net of amortization, totaled $2.0 million at December 31, 2019, primarily customer relationships (7-year amortization) and a trade name (5-year amortization)[190] - No impairment was recognized for goodwill in 2019 or 2018[496] Results of Operations for the Years Ended December 31, 2019 and December 31, 2018 The Company's net income increased 4% in 2019 to $17.0 million, driven by an 8% rise in net interest income to $52.1 million, reflecting strong commercial loan growth and an improved net interest margin of 3.82% Net Income (2019 vs. 2018) | Metric | 2019 (Millions) | 2018 (Millions) | Change (%) | |:-------------------------------------|:----------------|:----------------|:-----------| | Total Net Income | $17.0 | $16.4 | 4% | | Net Income from Banking Activities | $16.0 | $15.5 | 3.2% | | Net Income from Insurance Activities | $1.0 | $0.8 | 25% | | Diluted EPS | $3.42 | $3.32 | 3% | Net Interest Income and Margin (2019 vs. 2018) | Metric | 2019 (Millions) | 2018 (Millions) | Change (%) | |:------------------|:----------------|:----------------|:-----------| | Net Interest Income | $52.1 | $48.1 | 8% | | Net Interest Margin | 3.82% | 3.77% | +0.05 pp | Provision for Loan Losses (2019 vs. 2018) | Metric | 2019 (Millions) | 2018 (Millions) | Change (Millions) | |:--------------------------|:----------------|:----------------|:------------------| | Provision for Loan Losses | $0.1 | $1.4 | -$1.3 | Non-Interest Income (2019 vs. 2018) | Metric | 2019 (Millions) | 2018 (Millions) | Change (Millions) | |:----------------------------|:----------------|:----------------|:------------------| | Total Non-Interest Income | $18.1 | $15.2 | +$2.9 | | Insurance Service Revenue | $10.7 | $9.4 | +$1.3 | | Deposit Service Charges | $2.6 | $2.2 | +$0.4 | | Loss on Historic Tax Credit | -$0.2 | -$2.9 | +$2.7 | Non-Interest Expense (2019 vs. 2018) | Metric | 2019 (Millions) | 2018 (Millions) | Change (Millions) | |:--------------------------------|:----------------|:----------------|:------------------| | Total Non-Interest Expense | $47.8 | $43.3 | +$4.5 | | Salaries and Employee Benefits | $29.6 | $27.4 | +$2.2 | | Professional Services | $3.7 | $2.5 | +$1.2 | | Technology and Communications | $4.1 | $3.4 | +$0.7 | | FDIC Insurance | $0.4 | $1.0 | -$0.6 | Efficiency Ratios (2019 vs. 2018) | Metric | 2019 | 2018 | |:----------------------------|:------|:------| | GAAP Efficiency Ratio | 68.2% | 68.4% | | Non-GAAP Efficiency Ratio | 67.2% | 66.9% |\n\nExcludes amortization of intangibles, gains/losses from investment securities, merger-related expenses, and historic tax credit transactions. Income Tax Expense and Effective Tax Rate (2019 vs. 2018) | Metric | 2019 (Millions) | 2018 (Millions) | Effective Tax Rate 2019 | Effective Tax Rate 2018 | |:------------------------|:----------------|:----------------|:------------------------|:------------------------| | Income Tax Expense | $5.2 | $2.3 | 23.5% | 12.2% | Net Income Net income for 2019 increased by 4% to $17.0 million, with banking activities contributing $16.0 million and insurance agency activities contributing $1.0 million Net Income by Segment (2019 vs. 2018) | Segment | 2019 (Millions) | 2018 (Millions) | |:-----------------------|:----------------|:----------------| | Banking Activities | $16.0 | $15.5 | | Insurance Agency Activities | $1.0 | $0.8 | | Total Net Income | $17.0 | $16.4 | | Diluted EPS | $3.42 | $3.32 | Net Interest Income Net interest income increased by $3.9 million (8%) to $52.1 million in 2019, primarily due to higher loan volume and yields, partially offset by increased time deposit balances and rates Net Interest Income and Margin (2019 vs. 2018) | Metric | 2019 (Millions) | 2018 (Millions) | Change (Millions) | |:------------------|:----------------|:----------------|:------------------| | Net Interest Income | $52.1 | $48.1 | +$3.9 | | Net Interest Margin | 3.82% | 3.77% | +0.05 pp | - 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[199] Average Loan Portfolio Growth (2019 vs. 2018) | Loan Type | 2019 Average Balance (Millions) | 2018 Average Balance (Millions) | Change (Millions) | Change (%) | |:--------------------------|:--------------------------------|:--------------------------------|:------------------|:-----------| | Commercial Loan Portfolio | $970 | $901 | +$69 | 8% | | Consumer Loans | $232 | $218 | +$14 | 6% | - Total average deposits increased $93 million (7%) year-over-year to $1.3 billion in 2019, driven by commercial demand deposits, municipal savings, and consumer deposits[201] - Net interest spread decreased from 3.55% in 2018 to 3.52% in 2019, as the yield on interest-earning assets increased 23 basis points to 4.75%, while the cost of interest-bearing liabilities increased 26 basis points to 1.23%[203] - The increase in interest-earning asset yields is primarily due to the impact of a higher average target federal funds rate on the Bank's variable rate loan portfolio[203] Average Balance Sheet Information This section presents detailed average balance sheet data, including interest-earning assets and interest-bearing liabilities, along with their respective interest earned/paid and yields/rates for 2019, 2018, and 2017 Average Balance Sheet Information (2019, 2018, 2017, in thousands) | Metric | 2019 Average Balance | 2019 Interest Earned/Paid | 2019 Yield/Rate | 2018 Average Balance | 2018 Interest Earned/Paid | 2018 Yield/Rate | 2017 Average Balance | 2017 Interest Earned/Paid | 2017 Yield/Rate | |:--------------------------------------|:---------------------|:--------------------------|:----------------|:---------------------|:--------------------------|:----------------|:---------------------|:--------------------------|:----------------| | Interest-earning assets: | | | | | | | | | | | Loans, net | $1,188,436 | $60,193 | 5.06% | $1,105,426 | $53,282 | 4.82% | $961,876 | $44,379 | 4.61% | | 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% | | Interest-bearing liabilities: | | | | | | | | | | | NOW accounts | $126,628 | $540 | 0.43% | $115,193 | $317 | 0.28% | $93,881 | $206 | 0.22% | | Regular savings | $595,605 | $5,248 | 0.88% | $572,921 | $3,707 | 0.65% | $536,862 | $2,593 | 0.48% | | Time deposits | $286,181 | $6,151 | 2.15% | $246,588 | $4,392 | 1.78% | $160,440 | $2,088 | 1.30% | | Total interest-bearing liabilities | $1,034,020 | $12,685 | 1.23% | $983,179 | $9,505 | 0.97% | $839,704 | $5,731 | 0.68% | | Net interest earnings | | $52,055 | | | $48,107 | | | $42,017 | | | Net interest margin | | | 3.82% | | | 3.77% | | | 3.80% | | Interest rate spread | | | 3.52% | | | 3.55% | | | 3.64% | Changes in Interest Earned/Paid Due to Volume and Rate (2019 vs. 2018, in thousands) | Metric | Volume Change | Rate Change | Total Change | |:-----------------------------------|:--------------|:------------|:-------------| | Interest earned on: | | | | | Loans | $4,122 | $2,789 | $6,911 | | Total interest-earning assets | $4,227 | $2,901 | $7,128 | | Interest paid on: | | | | | NOW accounts | $34 | $189 | $223 | | Savings deposits | $152 | $1,388 | $1,540 | | Time deposits | $770 | $989 | $1,759 | | Total interest-bearing liabilities | $349 | $2,831 | $3,180 | Provision for Loan Losses The provision for loan losses decreased significantly to $0.1 million in 2019 from $1.4 million in 2018 Provision for Loan Losses (2019 vs. 2018) | Metric | 2019 (Millions) | 2018 (Millions) | |:--------------------------|:----------------|:----------------| | Provision for Loan Losses | $0.1 | $1.4 | - Decrease primarily due to improved asset quality of impaired loans, including the successful restructure and payoff of an $8 million commercial construction loan, and a $0.7 million commercial loan recovery[206] - Non-performing loans as a percentage of total loans decreased from 1.64% at December 31, 2018, to 1.17% at December 31, 2019[172][206] - Criticized loans collectively evaluated for impairment increased to $36.8 million at December 31, 2019, from $20.1 million at December 31, 2018[206] Non-accrual, Past Due and Restructured Loans Total non-performing loans decreased by $4.6 million to $14.4 million at December 31, 2019, primarily due to the payoff of a large commercial construction loan Non-Accruing Loans and Leases (December 31, 2019 vs. 2018, in thousands) | Loan Type | 2019 | 2018 | |:--------------------------------|:--------|:--------| | Residential mortgages | $1,438 | $1,463 | | Commercial and multi-family | $5,659 | $5,945 | | Construction-commercial | $1,575 | $8,636 | | Home equities | $890 | $1,253 | | Commercial and industrial loans | $4,834 | $1,694 | | Total non-accruing loans | $14,396 | $18,991 | - Non-performing loans decreased $4.6 million from $19.0 million at December 31, 2018, to $14.4 million at December 31, 2019, mainly due to the restructuring and payoff of an $8.6 million non-accruing commercial loan[212] - There were no accruing loans categorized as 90 days past due at December 31, 2019 and 2018[212] Troubled Debt Restructurings (TDRs) (December 31, 2019 vs. 2018, in thousands) | Loan Type | 2019 Total | 2019 Nonaccruing | 2019 Accruing | 2019 Related Allowance | |:--------------------------------|:-----------|:-----------------|:--------------|:-----------------------| | Commercial and industrial | $2,052 | $328 | $1,724 | $26 | | Residential real estate | $1,815 | $449 | $1,366 | $0 | | Commercial and multi-family | $3,632 | $3,075 | $557 | $0 | | Home equities | $738 | $175 | $563 | $0 | | Consumer and other loans | $21 | $0 | $21 | $21 | | Total TDR loans | $8,258 | $4,027 | $4,231 | $47 |\n\n| Loan Type | 2018 Total | 2018 Nonaccruing | 2018 Accruing | 2018 Related Allowance | |:--------------------------------|:-----------|:-----------------|:--------------|:-----------------------| | Commercial and industrial | $2,282 | $275 | $2,007 | $154 | | Residential real estate | $1,617 | $266 | $1,351 | $14 | | Commercial and multi-family | $4,164 | $3,571 | $593 | $0 | | Construction | $8,753 | $8,637 | $116 | $716 | | Home equities | $756 | $122 | $634 | $0 | | Consumer and other | $23 | $0 | $23 | $23 | | Total TDR loans | $17,595 | $12,871 | $4,724 | $907 | - The decrease in TDR loans reflects the restructuring and payoff of a non-accruing construction loan[213] Allowance for Loan and Lease Losses The allowance for loan losses increased to $15.2 million at December 31, 2019, from $14.8 million in 2018, but its ratio to total loans decreased to 1.24% from 1.28% Allowance for Loan and Lease Losses Activity (2019 vs. 2018, in thousands) | Metric | 2019 | 2018 | |:---------------------------|:--------|:--------| | Balance, beginning of year | $14,784 | $14,019 | | Charge-offs | $(525) | $(691) | | Recoveries | $841 | $54 | | Net Charge-offs (Recoveries) | $316 | $(637) | | Provision for Loan Losses | $75 | $1,402 | | Balance, end of year | $15,175 | $14,784 | - The Company had net loan recoveries of $0.3 million in 2019, compared to net loan charge-offs of $0.6 million in 2018, primarily due to a $0.7 million recovery on a previously charged-off commercial loan[219] Allowance for Loan Losses by Portfolio Type (December 31, 2019 vs. 2018, in thousands) | Portfolio Type | 2019 Allowance | 2019 % of Total Loans | 2018 Allowance | 2018 % of Total Loans | |:--------------------------|:---------------|:----------------------|:---------------|:----------------------| | Residential mortgages | $1,071 | 13% | $1,121 | 14% | | Commercial mortgages* | $9,005 | 61% | $8,844 | 60% | | Home equities | $397 | 6% | $345 | 6% | | Commercial loans | $4,547 | 20% | $4,368 | 20% | | Consumer loans** | $155 | 0% | $106 | 0% | | Total | $15,175 | 100% | $14,784 | 100% |\n\n*includes construction loans, **includes other loans - C&I loans comprised 30% of the allowance for loan losses despite being only 20% of the loan portfolio, reflecting their highest historical loss experience[221] - The ratio of allowance for loan losses to total loans decreased from 1.28% at December 31, 2018, to 1.24% at December 31, 2019[222] Non-Interest Income Total non-interest income increased by $2.9 million (19%) to $18.1 million in 2019, primarily driven by a 14% increase in insurance service fees to $10.7 million Non-Interest Income (2019 vs. 2018, in thousands) | Metric | 2019 | 2018 | Change (Millions) | |:----------------------------|:--------|:--------|:------------------| | Total Non-Interest Income | $18,082 | $15,227 | +$2.9 | | Insurance Service and Fees | $10,688 | $9,365 | +$1.3 | | Deposit Service Charges | $2,569 | $2,176 | +$0.4 | | Loss on Tax Credit Investments | $(158) | $(2,870)| +$2.7 | - Insurance service revenue is the largest component of non-interest income, accounting for 59% of the total[224] - Increase in insurance service revenue reflected a full year of revenue from the R&S agency acquisition (July 1, 2018) and growth in employee benefits and commercial/personal insurance commissions[224][226] Non-Interest Expense Total non-interest expense increased by $4.5 million (10%) to $47.8 million in 2019 Non-Interest Expense (2019 vs. 2018, in thousands) | Metric | 2019 | 2018 | Change (Millions) | |:--------------------------------|:--------|:--------|:------------------| | Total Non-Interest Expense | $47,820 | $43,293 | +$4.5 | | Salaries and Employee Benefits | $29,628 | $27,412 | +$2.2 | | Professional Services | $3,742 | $2,466 | +$1.3 | | Technology and Communications | $4,124 | $3,394 | +$0.7 | | FDIC Insurance | $431 | $1,024 | -$0.6 | - The increase in salaries and employee benefits was due to new employees, merit increases, higher incentive compensation, and severance costs[229] - Professional services expenses increased due to atypical legal and accounting costs, including merger-related activities and a cyber incident[229] - FDIC insurance expense decreased due to lower assessment rates and the FDIC's small bank assessment credit[228] Taxes Income tax expense for 2019 was $5.2 million, resulting in an effective tax rate of 23.5%, a significant increase from 12.2% in 2018 Income Tax Expense and Effective Tax Rate (2019 vs. 2018) | Metric | 2019 (Millions) | 2018 (Millions) | Effective Tax Rate 2019 | Effective Tax Rate 2018 | |:------------------------|:----------------|:----------------|:------------------------|:------------------------| | Income Tax Expense | $5.2 | $2.3 | 23.5% | 12.2% | - The 2018 income tax expense included a tax benefit from historic tax credit transactions and a change in estimate for state historic tax credits[231] Financial Condition As of December 31, 2019, the Company's total assets increased by $72 million (5%) to $1.5 billion, driven by a 6% increase in net loans to $1.2 billion Key Financial Condition Metrics (December 31, 2019 vs. 2018, in millions) | Metric | 2019 | 2018 | Change (Millions) | Change (%) | |:---------------------|:--------|:--------|:------------------|:-----------| | Total Assets | $1,500 | $1,400 | +$72 | 5% | | Net Loans | $1,200 | $1,100 | +$70 | 6% | | Total Investment Securities | $130 | $134 | -$4 | -3% | | Deposits | $1,300 | $1,200 | +$52 | 4% | | Stockholders' Equity | $148 | $132 | +$17 | 13% | - Customer deposits are the primary source of funds, supplemented by loan repayments, investment income, and borrowings from FHLB and correspondent banks[275] Securities Activities The Bank's securities portfolio aims to provide liquidity and maximize income while preserving principal - Primary objectives of the securities portfolio are liquidity, income maximization, and principal safety[233] - Acceptable investments include U.S. Government obligations, federal agencies, mortgage-backed securities, and municipal obligations[234] - Securities are designated as 'held to maturity' (amortized cost, primarily local municipal investments) or 'available for sale' (fair market value)[240] - Fair values for available-for-sale securities are determined using independent pricing services and market-participating brokers, classified as Level 2 in the fair value hierarchy[241][601] Securities Portfolio Composition (December 31, 2019 vs. 2018, in millions) | Security Type | 2019 (Millions) | 2019 % of Portfolio | 2018 (Millions) | 2018 % of Portfolio | |:------------------------------------|:----------------|:--------------------|:----------------|:--------------------| | U.S. government-sponsored agency bonds | $28.2 | 22% | $33.9 | 25% | | Government-sponsored mortgage-backed securities | $96.4 | 74% | $76.0 | 57% | | Tax-advantaged municipal bonds | $3.4 | 4% | $22.2 | 18% | | Total Securities | $130.3 | 100% | $133.8 | 100% | - Net unrealized gains on available-for-sale securities amounted to $0.7 million at December 31, 2019, compared with an unrealized loss of $3.2 million at December 31, 2018, due to decreasing market interest rates[243] - The tax-exempt portfolio has significantly declined since 2017 due to reduced effectiveness of municipal bonds after the decrease in the Company's federal tax rate[248] - Management assessed all unrealized losses as temporary, primarily related to market interest rate fluctuations, not credit deterioration[245][442] Lending Activities The Bank's loan portfolio, net of allowances, grew 6% to $1.2 billion at December 31, 2019, representing 87% of average interest-earning assets - The Bank's loan portfolio, net of allowances, totaled $1.2 billion at December 31, 2019, up from $1.1 billion in 2018[256] - Interest income on loans represented 93% of total interest income in 2019[256] Major Loan Classifications (December 31, 2019 vs. 2018, in thousands) | Loan Classification | 2019 | 2018 | |:--------------------------------|:------------|:------------| | Residential Mortgages | $158,572 | $158,404 | | Commercial and multi-family | $645,036 | $592,507 | | Construction-Residential | $1,067 | $113 | | Construction-Commercial | $97,848 | $105,196 | | Home equities | $69,351 | $70,546 | | Total real estate loans | $971,874 | $926,766 | | Commercial and industrial loans | $251,197 | $226,057 | | Consumer and other loans | $1,926 | $1,520 | | Total gross loans and leases | $1,226,531 | $1,155,930 | | Allowance for loan and lease losses | $(15,175) | $(14,784) | | Loans and leases, net | $1,211,356 | $1,141,146 | - Approximately 79% of the total loan portfolio at December 31, 2019, consisted of real estate loans[259] Real Estate Loans Real estate loans, comprising 79% of the Bank's portfolio, increased 5% to $972 million in 2019 - Real estate loans totaled $972 million at December 31, 2019, an increase of 5% from 2018[259] - Commercial mortgage loans outstanding were $645 million at December 31, 2019 (53% of total loans), up 9% from 2018, driven by strong demand in Western New York[266] - Residential real estate loans remained relatively flat at $159 million in 2019. The Bank sold $13 million in mortgages to FNMA in 2019, retaining servicing rights on $76 million[265][261][262] - Adjustable rate construction loans outstanding totaled $85 million (7% of total loans) at December 31, 2019, reflecting a strong commercial construction market[268] Commercial and Industrial Loans The C&I loan portfolio increased by 11% to $251 million at December 31, 2019, representing 20% of total loans - C&I loan portfolio totaled $251 million at December 31, 2019, an 11% increase from $226 million in 2018[269] - C&I loans represented 20% of the Bank's total loans at the end of 2019[269] - 53% of C&I loans were at variable rates tied to the prime rate or LIBOR at December 31, 2019[270] Consumer Loans The Bank's consumer installment and other loan portfolio remained small at $2 million at December 31, 2019, representing less than 1% of total loans - Consumer installment and other loan portfolio totaled $2 million at December 31, 2019, representing less than 1% of total loans[271] - This portfolio is managed on an accommodation basis for customers, with no active growth strategy[271] Loan Maturities and Sensitivities of Loans to Changes in Interest Rates This section details the maturities of commercial and industrial loans and commercial real estate construction loans as of December 31, 2019, and their sensitivity to interest rate changes Maturities of Commercial and Industrial Loans and Commercial Real Estate Construction Loans (December 31, 2019, in thousands) | Loan Type | Within One Year | After One But Within Five Years | After Five Years | Total | |:--------------------------------|:----------------|:--------------------------------|:-----------------|:----------| | Commercial and industrial | $77,161 | $98,332 | $75,704 | $251,197 | | Commercial real estate construction | $32,429 | $14,269 | $51,150 | $97,848 | | Total | $109,590 | $112,601 | $126,854 | $349,045 |\n\n| Loans maturing after one year with: | | | | | |:------------------------------------|:----------------|:--------------------------------|:-----------------|:----------| | Fixed Rates | | $52,217 | $75,426 | | | Variable Rates | | $60,384 | $51,428 | | Sources of Funds The Bank's primary funding source is customer deposits, supplemented by loan repayments, investment income, and borrowings from the FHLB and correspondent banks General The Bank's funding primarily comes from customer deposits, with additional sources including loan repayments, investment income, and borrowings from the FHLB and correspondent banks - Customer deposits are the primary source of the Bank's funds for lending and other investment purposes[275] - Other sources include loan repayments, loan sales, interest/dividend income, matured investments, and borrowings from FHLB and correspondent banks[275] Deposits Total deposits increased by $52 million (4%) to $1.3 billion at December 31, 2019, driven by growth in commercial and municipal deposits Bank's Deposits (December 31, 2019 vs. 2018, in thousands) | Deposit Type | 2019 | 2018 | |:------------------------------|:------------|:------------| | Demand deposits | $263,717 | $231,902 | | NOW accounts | $140,654 | $110,450 | | Regular savings | $587,142 | $571,479 | | Time deposits, $250,000 and over | $58,002 | $59,525 | | Other time deposits | $217,925 | $241,702 | | Total | $1,267,440 | $1,215,058 | - Total deposits increased $52 million (4%) from 2018 to 2019, primarily due to higher commercial and municipal deposits[278] - Core transactional checking accounts (non-interest bearing demand deposits and NOW accounts) grew 18% to $404 million at December 31, 2019[279] - Time deposits decreased $25 million (8%) to $276 million at December 31, 2019, due to decreases in interest rates in the second half of 2019[281] Daily Average Deposits and Rates (2019 vs. 2018, in thousands) | Deposit Category | 2019 Average Balance | 2019 Weighted Average Rate | 2018 Average Balance | 2018 Weighted Average Rate | |:-----------------|:---------------------|:---------------------------|:---------------------|:---------------------------| | Demand deposits | $255,125 | 0% | $235,998 | 0% | | NOW accounts | $126,628 | 0.43% | $115,193 | 0.28% | | Regular savings | $595,605 | 0.88% | $572,921 | 0.65% | | Time deposits | $286,181 | 2.15% | $246,588 | 1.78% | | Total | $1,263,539 | 0.94% | $1,170,700 | 0.72% | Federal Funds Purchased and Other Borrowed Funds The Bank utilizes borrowings from the FHLB as a funding source, with a $10 million advance outstanding at a 1.73% rate maturing in 2020 - The Bank had a $10 million FHLB advance outstanding at a 1.73% rate, maturing in 2020, at December 31, 2019 and 2018[282] - The Company has $11.3 million in junior subordinated debentures, with a floating distribution rate of three-month LIBOR plus 2.65% (4.56% at December 31, 2019)[505][507][509] - The Capital Securities from the Trust are includable in the Company's Tier 1 (Core) capital[505] Securities Sold Under Agreements to Repurchase The Bank engages in securities sold under repurchase agreements with customers, totaling $2.4 million at December 31, 2019, down from $3.1 million in 2018 Securities Sold Under Repurchase Agreements (December 31, 2019 vs. 2018) | Metric | 2019 (Millions) | 2018 (Millions) | |:----------------------------------------|:----------------