Table of Contents
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended September 30, 2024
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to ______
Commission file number 001-35021
EVANS BANCORP, INC.
(Exact name of registrant as specified in its charter)
New York 16-1332767
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6460 Main St. Williamsville, NY 14221
(Address of principal executive offices) (Zip Code)
(716) 926-2000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.50 par value
EVBN
NYSE American
Indicate 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 check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes 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 ¨
Accelerated filer ¨
Non-accelerated filer x
Smaller reporting company x
Emerging growth company ¨
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.50 par value, 5,534,239 shares as of October 31, 2024.
INDEX
EVANS BANCORP, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
PAGE
Item 1.
Financial Statements
Unaudited Consolidated Balance Sheets – September 30, 2024 and December 31, 2023
1
Unaudited Consolidated Statements of Income – Three months ended September 30, 2024 and 2023
2
Unaudited Consolidated Statements of Income – Nine months ended September 30, 2024 and 2023
3
Unaudited Consolidated Statements of Comprehensive (Loss) Income – Three months ended September 30, 2024 and 2023
4
Unaudited Consolidated Statements of Comprehensive (Loss) Income – Nine months ended September 30, 2024 and 2023
Unaudited Consolidated Statements of Changes in Stockholders’ Equity – Three months ended September 30, 2024 and 2023
5
Unaudited Consolidated Statements of Changes in Stockholders’ Equity – Nine months ended September 30, 2024 and 2023
6
Unaudited Consolidated Statements of Cash Flows – Nine months ended September 30, 2024 and 2023
7
Notes to Unaudited Consolidated Financial Statements
9
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
32
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
41
Item 4.
Controls and Procedures
42
PART II. OTHER INFORMATION
Legal Proceedings
43
Item 1A.
Risk Factors
45
Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
Defaults Upon Senior Securities
Mine Safety Disclosure
Item 5.
Other Information
Item 6.
Exhibits
46
Signatures
47
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2024 AND DECEMBER 31, 2023
(in thousands, except share and per share amounts)
September 30,
December 31,
2024
2023
ASSETS
Cash and due from banks
$
20,786
19,669
Interest-bearing deposits at banks
107,296
3,798
Securities:
Available for sale, at fair value
271,232
275,680
Held to maturity, at amortized cost
4,376
2,059
(fair value: $4,351 at September 30, 2024; $1,988 at December 31, 2023)
Federal Home Loan Bank common stock, at cost
4,396
4,914
Federal Reserve Bank common stock, at cost
3,690
3,097
Loans, net of allowance for credit losses of $23,091 at September 30, 2024
and $22,114 at December 31, 2023
1,764,866
1,698,832
Properties and equipment, net of accumulated depreciation of $13,747 at September 30, 2024
and $12,538 at December 31, 2023
14,467
15,397
Goodwill
1,768
Intangible assets
82
94
Bank-owned life insurance
43,509
42,758
Operating lease right-of-use asset
4,062
3,781
Other assets
39,476
36,816
TOTAL ASSETS
2,280,006
2,108,663
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand
435,358
390,238
NOW
372,462
345,279
Savings
706,849
649,621
Time
386,049
333,623
Total deposits
1,900,718
1,718,761
Securities sold under agreement to repurchase
8,282
9,475
Other borrowings
128,000
145,123
Operating lease liability
4,314
4,063
Other liabilities
21,591
21,845
Subordinated debt
31,254
31,177
Total liabilities
2,094,159
1,930,444
STOCKHOLDERS' EQUITY:
Common stock, $0.50 par value, 10,000,000 shares authorized; 5,609,507 and 5,601,308 shares issued at
September 30, 2024 and December 31, 2023, respectively, and 5,534,239 and 5,499,772 shares outstanding at
September 30, 2024 and December 31, 2023, respectively.
2,807
2,803
Capital surplus
83,009
82,712
Treasury stock, at cost, 75,268 and 101,536 shares at September 30, 2024 and
December 31, 2023, respectively
(2,576)
(3,656)
Retained earnings
139,297
138,631
Accumulated other comprehensive loss, net of tax
(36,690)
(42,271)
Total stockholders' equity
185,847
178,219
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See Notes to Unaudited Consolidated Financial Statements
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
Three Months Ended September 30,
INTEREST INCOME
Loans
25,393
21,936
1,567
132
Taxable
1,673
2,173
Non-taxable
65
51
Total interest income
28,698
24,292
INTEREST EXPENSE
Deposits
11,495
7,544
1,600
1,932
559
560
Total interest expense
13,654
10,036
NET INTEREST INCOME
15,044
14,256
PROVISION FOR (RECAPTURE OF) CREDIT LOSSES
570
506
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES
14,474
13,750
NON-INTEREST INCOME
Deposit service charges
699
665
Insurance service and fees
186
3,498
253
239
Interchange fee income
529
516
Gain on sale of other real estate owned
598
-
Other
729
638
Total non-interest income
2,994
5,556
NON-INTEREST EXPENSE
Salaries and employee benefits
7,539
8,735
Occupancy
1,088
1,109
Advertising and public relations
327
348
Professional services
992
869
Technology and communications
1,423
1,517
Amortization of intangibles
100
FDIC insurance
340
350
Merger related
600
1,274
1,379
Total non-interest expense
13,587
14,407
INCOME BEFORE INCOME TAXES
3,881
4,899
INCOME TAX PROVISION
938
1,281
NET INCOME
2,943
3,618
Net income per common share-basic
0.53
0.66
Net income per common share-diluted
Weighted average number of common shares outstanding
5,527,343
5,481,566
Weighted average number of diluted shares outstanding
5,542,694
5,490,600
NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
Nine Months Ended September 30,
72,931
64,424
3,650
308
5,128
6,719
178
194
81,887
71,645
32,112
17,840
4,839
4,917
1,665
1,626
38,616
24,383
43,271
47,262
1,133
(264)
42,138
47,526
2,047
1,923
511
8,648
751
702
1,500
1,537
2,254
1,561
7,661
14,371
22,706
26,796
3,334
3,428
752
911
2,757
2,560
4,428
4,414
12
300
965
1,050
3,518
3,623
39,072
43,082
10,727
18,815
2,504
4,465
8,223
14,350
1.49
2.63
2.62
5,520,291
5,464,741
5,531,680
5,481,514
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gain (loss) on available-for-sale securities:
8,370
(8,813)
Defined benefit pension plans:
Amortization of prior service cost
Amortization of actuarial loss
17
20
Total
8,387
(8,793)
COMPREHENSIVE INCOME (LOSS)
11,330
(5,175)
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unrealized gain (loss) on available-for-sale securities
5,530
(9,472)
60
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
5,581
(9,412)
COMPREHENSIVE INCOME
13,804
4,938
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Accumulated
Common
Capital
Retained
Comprehensive
Treasury
Stock
Surplus
Earnings
Loss
Balance, June 30, 2023
2,795
81,777
128,465
(49,897)
159,484
Net Income
Other comprehensive loss
Cash dividends ($0.66 per common share)
(3,615)
Stock compensation expense
238
Issued 2,360 restricted shares/units, net of forfeitures
Issued 113 shares in stock option exercises
Balance, September 30, 2023
2,796
82,017
128,468
(58,690)
150,935
Balance, June 30, 2024
82,700
140,107
(45,077)
(2,888)
177,649
Other comprehensive income
(3,648)
292
Reissued 8,250 shares in stock option exercises
(105)
312
207
Issued 832 shares in stock option exercises
Forfeitures of 680 shares of restricted stock
Balance, September 30, 2024
Balance, December 31, 2022
2,775
81,031
123,356
(49,278)
(3,891)
153,993
Cumulative effect of change in accounting principle— credit losses
(2,026)
Beginning balance after cumulative effect adjustment
121,330
151,967
Cash dividends ($1.32 per common share)
(7,212)
772
Reissued 6,228 restricted shares
(235)
235
Issued 12,534 shares in stock option exercises
116
123
Issued 14,135 restricted shares, net of forfeitures
(6)
Issued 4,545 shares in Dividend Reinvestment Plan
152
154
Issued 9,101 shares in Employee Stock Purchase Plan
187
193
Balance, December 31, 2023
(7,282)
913
Repurchased 7,000 shares of Common Stock
(204)
Issued 3,365 shares in stock option exercises
48
50
Reissued 26,803 restricted shares, net of forfeitures
(798)
(170)
968
Reissued 8,404 shares in stock option exercises
(4)
316
Issued 4,834 shares in Dividend Reinvestment Plan
138
140
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES:
Interest received
81,035
71,171
Fees received
6,283
12,501
Interest paid
(38,125)
(23,372)
Cash paid to employees and vendors
(39,387)
(43,228)
Income taxes paid
(8,963)
(7,669)
Proceeds from sale of loans held for sale
15,089
7,498
Originations of loans held for sale
(14,732)
(7,341)
Net cash provided by operating activities
1,200
9,560
INVESTING ACTIVITIES:
Available for sales securities:
Purchases
(2,616)
Proceeds from sales, maturities, calls, and payments
14,697
24,278
Held to maturity securities:
(3,816)
(2,292)
Proceeds from maturities, calls, and payments
1,499
Purchases of Federal Reserve Bank Stock
(593)
(18)
Redemption of FHLB Stock
518
7,089
Additions to properties and equipment
(279)
(575)
Cash investment in tax credit
(674)
Proceeds from sales of assets
370
Proceeds from tax credit investment
155
Proceeds from the sale of other real estate owned
Net increase in loans
(66,324)
(31,528)
Net cash used by investing activities
(56,835)
(2,664)
FINANCING ACTIVITIES:
Proceeds from long-term borrowings
40,000
Repayments from long-term borrowings
(6,078)
(13,374)
Repayments from short-term borrowings, net
(52,196)
(21,900)
Net increase in deposits
181,965
33,745
Dividends paid
(3,634)
(3,597)
Repurchase of treasury stock
Issuance of common stock
190
470
Reissuance of treasury stock
Net cash provided (used) in financing activities
160,250
(4,656)
Net increase in cash and cash equivalents
104,615
2,240
CASH AND CASH EQUIVALENTS:
Beginning of period
23,467
23,054
End of period
128,082
25,294
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
952
1,216
Deferred tax (benefit) expense
(457)
136
Provision for credit losses
Loss on sales of assets
31
Gain on the sale of other real estate owned
(598)
Gain on loans sold
(355)
(156)
Changes in assets and liabilities affecting cash flow:
(3,091)
(2,042)
(5,877)
(4,640)
NET CASH PROVIDED BY OPERATING ACTIVITIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2024 AND 2023
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies followed by Evans Bancorp, Inc. (the “Company”), a financial holding company, and its two direct, wholly-owned subsidiaries: (i) Evans Bank, National Association (the “Bank”), and the Bank’s subsidiary, Evans National Holding Corp. (“ENHC”); and (ii) Evans National Financial Services, LLC (“ENFS”), and ENFS’s subsidiary, The Evans Agency, LLC (“TEA”), in the preparation of the accompanying interim unaudited consolidated financial statements conform with U.S. generally accepted accounting principles (“GAAP”) and with general practice within the industries in which it operates. 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 other substantial business.
On September 9, 2024, Evans Bancorp, Inc. entered into an agreement and plan of merger with NBT Bancorp Inc. (“NBT”) and NBT Bank, National Association, pursuant to which NBT will acquire Evans Bancorp, Inc. Under the terms of the merger agreement, each outstanding share of Evans common stock will be converted into the right to receive 0.91 shares of NBT common stock. The merger is subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of Evans, and is expected to close in the second quarter of 2025. Expenses related to the merger are included on the “merger related” expense line in the consolidated statements of income for the three and nine month periods ended September 30, 2024. For further information on the merger agreement, see the Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on September 9, 2024.
On November 30, 2023 the Company sold substantially all of the assets of TEA to Gallagher and ceased TEA’s insurance business. For comparative purposes it should be noted that insurance business activity from TEA is included within prior year balances throughout this Quarterly Report on Form 10-Q. For further information on the sale of TEA see Note 2 to the Company’s Consolidated Financial Statements included under Item 8 of the 2023 Annual Report on Form 10-K.
The Financial Accounting Standards Board (“FASB”) establishes changes to 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 adopted by the Company during the current fiscal year are not expected to have a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures.
The results of operations for the nine month period ended September 30, 2024 are not necessarily indicative of the results to be expected for the full year.
The accompanying unaudited consolidated financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “10-K”).
2. SECURITIES
The amortized cost of securities and their approximate fair value at September 30, 2024 and December 31, 2023 were as follows:
September 30, 2024
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
Available for Sale:
Debt securities:
U.S. treasuries and government agencies
109,290
(14,888)
94,402
States and political subdivisions
5,499
(136)
5,364
Total debt securities
114,789
(15,024)
99,766
Mortgage-backed securities:
FNMA
63,317
(9,570)
53,751
FHLMC
36,409
24
(4,879)
31,554
GNMA
38,977
(6,986)
31,992
SBA
19,122
(1,757)
17,365
CMO
46,080
(9,276)
36,804
Total mortgage-backed securities
203,905
29
(32,468)
171,466
Total securities designated as available for sale
318,694
30
(47,492)
Held to Maturity:
Debt securities
23
(48)
4,351
Total securities designated as held to maturity
December 31, 2023
114,152
(17,912)
96,240
6,258
(231)
6,029
120,410
(18,143)
102,269
66,262
(11,294)
54,970
36,743
(5,569)
31,174
38,793
(7,683)
31,110
20,776
(2,291)
18,485
47,741
(10,069)
37,672
210,315
(36,906)
173,411
330,725
(55,049)
(72)
1,988
Available for sale securities with a total fair value of $100 million and $172 million were pledged as collateral to secure public deposits and for other purposes required or permitted by law at September 30, 2024 and December 31, 2023, respectively.
The scheduled maturities of debt and mortgage-backed securities at September 30, 2024 are summarized below. All maturity amounts are contractual maturities. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call premiums.
Estimated
cost
fair value
Debt securities available for sale:
Due in one year or less
737
733
Due after one year through five years
46,954
44,103
Due after five years through ten years
43,102
37,201
Due after ten years
23,996
17,729
Mortgage-backed securities
available for sale
Debt securities held to maturity:
2,751
2,760
497
489
1,128
1,102
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.
There were no gross realized gains or losses from sales of investment securities for the three and nine month periods ended September 30, 2024 and 2023.
Management has assessed the securities available for sale in an unrealized loss position at September 30, 2024 and determined that it expected to recover the amortized cost basis of its securities. As of September 30, 2024, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its impaired 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. As a result, the Company does not hold an allowance for credit losses relating to securities. 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 creditworthiness of the Company’s portfolio is largely reliant on the ability of U.S. government agencies such as Federal Home Loan Bank (“FHLB”), Federal National Mortgage Association (“FNMA”), 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.
Information regarding unrealized losses within the Company’s available for sale and held to maturity securities at September 30, 2024 and December 31, 2023 is summarized below. The securities are primarily U.S. government sponsored entities securities or municipal securities. All unrealized losses are related to market interest rate fluctuations and not indicative of credit loss.
Less than 12 months
12 months or longer
4,683
99,085
53,397
29,811
1,263
30,594
(6,982)
31,857
17,364
36,803
167,969
(32,464)
169,232
512
Total temporarily impaired
securities
267,566
(47,536)
268,829
(47,540)
95,240
878
(2)
4,194
(229)
5,072
99,434
(18,141)
100,312
54,831
37,674
173,274
444
(1)
643
(71)
1,087
1,322
(3)
273,351
(55,118)
274,673
(55,121)
3. LOANS AND THE ALLOWANCE FOR CREDIT LOSSES
Loan Portfolio Composition
The following table presents selected information on the composition of the Company’s loan portfolio as of the dates indicated:
Mortgage loans on real estate:
Residential mortgages
438,731
443,788
Commercial and multi-family
880,014
854,565
Construction-Residential
5,579
3,255
Construction-Commercial
128,569
114,623
Home equities
78,916
81,412
Total real estate loans
1,531,809
1,497,643
Commercial and industrial loans
256,333
223,100
Consumer and other loans
1,006
1,066
Unaccreted yield adjustments*
(1,191)
(863)
Total gross loans
1,787,957
1,720,946
Allowance for credit losses
(23,091)
(22,114)
Loans, net
* Includes net premiums and discounts on acquired loans and net deferred fees and costs on loans originated.
As of September 30, 2024, the outstanding principal balance and the carrying amount of acquired credit-deteriorated loans totaled $0.8 million and $0.7 million, respectively. There were no valuation allowances for specifically identified impairment attributable to acquired credit-deteriorated loans at September 30, 2024.
There were $920 million and $566 million in residential and commercial mortgage loans pledged to FHLBNY to serve as collateral for potential borrowings as of September 30, 2024 and December 31, 2023, respectively.
The Company may also sell certain fixed rate residential mortgages to FNMA, FHLMC and FHLB while maintaining the servicing rights for those mortgages. At September 30, 2024 and December 31, 2023, the Company had loan servicing portfolio principal balances of $118 million and $113 million, respectively, upon which it earned servicing fees. In the three and nine month periods ended September 30, 2024, the Company sold $9.2 million and $14.7 million, respectively, of residential mortgages. In the three and nine month period ended September 30, 2023, the Company sold $2.8 million and $7.3 million, respectively, of residential mortgages.
The fair value of the mortgage servicing rights for that portfolio was $1.0 million at September 30, 2024 and $1.1 million at December 31, 2023. There were no residential mortgages held for sale at September 30, 2024 and December 31, 2023.
Credit Quality Indicators
The Company monitors the credit risk in its loan portfolio by reviewing certain credit quality indicators (“CQI”). The primary CQI for the commercial mortgage and commercial and industrial 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 credit losses:
Acceptable or better
Watch
Special Mention
Substandard
Doubtful
Loss
“Special mention” and “substandard” loans are weaker credits with a higher risk of loss and are categorized as “criticized” assets.
The Company’s consumer loans, including residential mortgages and home equities, are not individually risk rated or reviewed in the Company’s loan review process. Unlike commercial customers, consumer loan customers are not required to provide the Company with updated financial information. Consumer loans also carry smaller balances. Given the lack of updated information after the initial
underwriting of the loan and small size of individual loans, the Company uses delinquency status as the primary credit quality indicator for consumer loans. However, once a consumer loan is identified as nonaccrual, it is individually evaluated for impairment.
The following tables summarize amortized cost of loans by year of origination and internally assigned credit grades:
Term Loans Amortized Cost Basis by Origination Year
As of September 30, 2024
2022
2021
2020
Prior
Revolving Loans Amortized Cost Basis
Risk rating
Pass
43,661
25,187
31,532
17,007
10,133
9,886
89,118
226,524
Special Mention
840
3,325
793
299
19,471
25,641
Substandard
68
420
141
10
399
3,148
4,186
Doubtful/Loss
43,729
26,027
35,277
17,941
10,442
11,198
111,737
256,351
Current period gross writeoffs
59
8
67
Commercial real estate mortgages*
96,703
150,015
189,900
137,319
93,621
297,693
965,251
351
1,990
6,470
16,757
25,568
5,415
11,939
524
17,878
150,366
197,305
155,728
314,974
1,008,697
Consumer and other
Payment performance
Performing
325
376
109
18
124
970
Nonperforming
139
27
167
Residential mortgages*
24,885
37,212
68,505
94,023
65,047
149,362
439,034
303
652
660
243
3,249
5,107
37,515
69,157
94,683
65,290
152,611
444,141
6,169
2,348
388
2,267
62,799
77,263
535
63,334
77,798
*Includes construction loans
As of December 31, 2023
2019
24,338
42,967
21,614
12,174
5,686
6,539
86,459
199,777
1,955
2,739
510
268
1,867
11,705
19,054
460
838
2,955
4,258
24,348
44,924
24,356
13,144
5,954
9,244
101,119
223,089
132,525
194,197
169,943
95,264
66,243
263,628
921,800
6,634
397
861
9,988
8,094
25,974
11,737
6,733
3,617
22,087
200,831
182,077
96,125
82,964
275,339
969,861
597
176
13
144
989
145
165
37,536
72,624
100,308
69,454
17,829
144,499
442,250
156
270
576
204
3,044
4,601
37,692
72,894
100,884
69,805
18,033
147,543
446,851
7,833
2,768
590
588
571
2,126
65,165
79,641
514
515
2,127
65,679
80,156
25
*Includes construction loans
The amortized cost of criticized assets of $73 million included $6 million of loans in the Company’s hotel loan portfolio at September 30, 2024. At December 31, 2023 the amortized cost of criticized assets was $72 million including $19 million of loans in the Company’s hotel loan portfolio.
Past Due Loans
The following tables provide an analysis of the age of the amortized cost of loans that are past due as of the dates indicated:
Current
Non-accruing
Balance
30-59 days
60-89 days
90+ days
Commercial and industrial
248,252
6,500
1,586
Residential real estate:
Residential
431,914
1,527
438,548
Construction
5,593
Commercial real estate:
Commercial
858,890
2,046
4,957
13,877
879,770
128,927
76,114
870
279
954
Total Loans
1,750,644
896
3,855
11,457
21,105
220,602
130
1,839
437,471
1,173
341
4,602
443,587
3,264
831,375
4,360
134
19,000
854,869
110,727
2,326
671
1,268
114,992
77,080
1,906
655
959
1,681,478
10,310
1,800
27,224
Allowance for Credit Losses
ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments requires an allowance for credit losses to be deducted from the amortized cost basis of financial assets to present the net carrying value at the amount that is expected to be collected over the contractual term of the asset. In determining the allowance for credit losses, accruing loans with similar risk characteristics are generally evaluated collectively. The Company utilizes discounted cash flow models considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount to project principal balances over the remaining contractual lives of the loan portfolios and to determine estimated credit losses through a reasonable and supportable forecast period. The models have been statistically developed based on historical correlations of credit losses with prevailing economic metrics, including unemployment and gross domestic product. The Company utilizes a reasonable and supportable forecast period of one year. Subsequent to this forecast period the Company reverts, on a straight-line basis over a one-year period, to historical loss experience to inform its estimate of losses for the remaining contractual life of each portfolio. Model forecasts may be adjusted for inherent limitations of biases that have been identified through independent validation and back-testing of model performance to actual realized results. The Company also considered the impact of qualitative factors, including portfolio concentrations, changes in underwriting practices, imprecision in its economic forecasts, geopolitical conditions and other risk factors that might influence its loss estimation process.
The Company also estimates losses attributable to specific troubled credits identified through both normal and targeted credit review processes and includes all loans on nonaccrual status. The amounts of individually analyzed losses are determined through a loan-by-loan analysis. Such loss estimates are typically based on expected future cash flows, collateral values and other factors that may impact the borrower’s ability to pay. To the extent that those loans are collateral-dependent, they are evaluated based on recent estimations of the fair value of the loan’s collateral. In those cases where current appraisals may not yet be available, prior appraisals are utilized with adjustments, as deemed necessary, for estimates of subsequent declines in values as determined by line of business and/or loan workout personnel. Those adjustments are reviewed and assessed for reasonableness by the Company’s credit risk personnel. Accordingly, for real estate collateral securing larger nonaccrual commercial loans and commercial real estate loans, estimated collateral values are based
on current appraisals and estimates of value. For non-real estate loans, collateral is assigned a discounted estimated liquidation value and, depending on the nature of the collateral, is verified through field exams or other procedures. In assessing collateral, real estate and non-real estate values are reduced by an estimate of selling costs. Charge-offs are based on recent indications of value from external parties that are generally obtained shortly after a loan becomes nonaccrual. Loans to consumers that file for bankruptcy are generally charged-off to estimated net collateral value shortly after the Company is notified of such filings. When evaluating individual home equity loans and lines of credit for charge off and for purposes of estimating losses in determining the allowance for credit losses, the Company considers the required repayment of any first lien positions related to collateral property.
The following tables present the activity in the allowance for credit losses according to portfolio segment for the three month periods ended September 30, 2024 and 2023.
Three months ended September 30, 2024
Commercial and Industrial
Commercial Real Estate Mortgages*
Consumer and Other
Residential Mortgages*
Home Equities
Allowance for credit losses:
Beginning balance
5,755
12,623
3,773
403
22,562
Charge-offs
(50)
Recoveries
Provision
592
(92)
54
(29)
Ending balance
6,349
12,531
3,829
374
23,091
Three months ended September 30, 2023
4,973
12,633
3,465
290
21,368
(47)
(51)
61
280
102
21
5,036
12,913
3,574
21,846
* Includes construction loans
The following tables present the activity in the allowance for credit losses according to portfolio segment for the nine month periods ended September 30, 2024 and 2023.
Nine months ended September 30, 2024
5,241
12,548
3,883
434
22,114
(67)
(167)
(234)
11
62
78
1,170
(17)
(116)
(60)
Nine months ended September 30, 2023
4,980
11,595
153
2,102
608
19,438
Adoption of new accounting
standard
324
1,145
(147)
1,618
(205)
2,735
Beginning balance after
cumulative effect adjustment
5,304
12,740
3,720
22,173
(126)
(25)
93
(323)
173
104
(151)
The following tables present the allowance for credit losses and recorded investment on loans by segment as of September 30, 2024 and December 31, 2023:
Allowance for credit
losses:
Ending balance:
Individually evaluated for impairment
208
540
760
Collectively evaluated for impairment
6,141
11,991
3,817
22,331
Loans:
1,961
15,921
5,855
816
24,553
254,372
992,662
438,455
78,100
1,764,595
1,008,583
444,310
1,789,148
36
719
755
5,205
11,829
21,359
1,869
23,044
5,146
761
30,820
221,231
946,144
441,897
80,651
1,690,989
969,188
447,043
1,721,809
Nonaccrual Loans
The following tables provide amortized costs, at the class level, for nonaccrual loans as of the dates indicated:
Three Months Ended
Nine Months Ended
Amortized Cost with Allowance
Amortized Cost without Allowance
Interest Income Recognized
468
1,118
4,804
14
6,570
7,307
35
Total nonaccrual loans
7,341
13,764
55
96
September 30, 2023
73
1,766
22
34
6,568
12,432
147
219
7,909
19,315
177
273
Collateral-dependent loans are loans that we expect the repayment to be provided substantially through the operation or sale of the collateral of the loan and we have determined that the borrower is experiencing financial difficulty. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for selling costs. As of September 30, 2024 and December 31, 2023 there were $19 million and $27 million, respectively, of collateral-dependent loans secured mainly by real estate and equipment.
Modifications to Borrowers Experiencing Financial Difficulty
The amendments in ASU 2022-02 eliminated the recognition and measurement of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.
The tables below detail the amortized cost of gross loans held for investment made to borrowers experiencing financial difficulty that were modified during the three and nine month periods ended September 30, 2024 and September 30, 2023:
Three months ended
Nine months ended
Term Extension
Total Class of Receivable
%
0.02
625
0.14
Commercial real estate
0.00
0.03
451
0.20
454
0.10
558
0.13
905
0.05
1,009
0.06
The financial impacts of the residential mortgage modifications made to borrowers experiencing financial difficulty during the three months ended September 30, 2024 was a maturity extensions of 67 months. Residential mortgage modifications made to borrowers experiencing financial difficulties during the nine months ended September 30, 2024 were maturity extensions ranging from 6 months to 67 months. Commercial and industrial loan modifications made to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2023, was a maturity extension of six months. Residential mortgage loan modifications made to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2023 were maturity extensions ranging from 159 months to 164 months.
The company has not committed to lend any additional amounts to the borrowers included in the previous table.
As of September 30, 2024 and September 30, 2023, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the first nine months of 2024 and 2023 that subsequently defaulted. Payment default is defined as movement to nonperforming status, foreclosure or charge-off, whichever occurs first.
The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The payment status of all loans modified to borrowers experiencing financial difficulties were current during the three and nine month periods of 2024 and 2023.
4. COMMON EQUITY AND EARNINGS PER SHARE DATA
The common stock per share information is based upon the weighted average number of shares outstanding during each period. For the three and nine month periods ended September 30, 2024 the Company had an average of 15,351 and 11,389 dilutive shares outstanding, respectively. For the three and nine month periods ended September 30, 2023 the company had an average of 9,034 and 16,773 diluted shares outstanding, respectively.
Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and not included in calculating diluted earnings per share. For the three and nine month periods ended September 30, 2024, there was an average of 77,550 and 77,807 potentially anti-dilutive shares outstanding, respectively. Potentially anti-dilutive shares outstanding were not included in calculating diluted earnings per share because their effect was anti-dilutive.
5. OTHER COMPREHENSIVE INCOME (LOSS)
The following tables summarize the changes in the components of accumulated other comprehensive income (loss) during the three and nine month periods ended September 30, 2024 and 2023:
Balance at June 30, 2024
Net Change
Balance at September 30, 2024
Net unrealized loss on investment securities
(43,581)
(35,211)
Net defined benefit pension plan adjustments
(1,496)
(1,479)
Balance at June 30, 2023
Balance at September 30, 2023
(48,007)
(56,820)
(1,890)
(1,870)
Balance at December 31, 2023
(40,741)
(1,530)
Balance at December 31, 2022
(47,348)
(1,930)
Before-Tax Amount
Income Tax (Provision) Benefit
Net-of-Tax Amount
Unrealized gain (loss) on investment
securities:
11,291
(2,921)
(11,904)
3,091
Defined benefit pension plan
adjustments:
(8)
(7)
Net change
Other comprehensive income (loss)
11,316
(2,929)
(11,877)
3,084
7,583
(2,053)
(12,822)
3,350
75
(24)
81
(21)
7,658
(2,077)
(12,741)
3,329
6. NET PERIODIC BENEFIT COSTS
On January 31, 2008, the Bank froze its defined benefit pension plan. The plan covered substantially all Bank employees. The plan provides benefits that are based on the employees’ compensation and years of service. Under the freeze, eligible employees will receive, at retirement, the benefits already earned through January 31, 2008, but have not accrued any additional benefits since then. As a result, service cost is no longer incurred.
The Bank uses an actuarial method of amortizing prior service cost and unrecognized net gains or losses which result from actual expense and assumptions being different than those that are projected. The amortization method the Bank used recognized the prior service cost and net gains or losses over the average remaining service period of active employees.
The Bank also maintains a nonqualified supplemental executive retirement plan covering certain members of the Company’s senior management. The Bank uses an actuarial method of amortizing unrecognized net gains or losses which result from actual expense and assumptions being different than those that are projected. The amortization method the Bank uses recognizes the net gains or losses over the average remaining service period of active employees.
The following table presents the net periodic cost for the Bank’s defined benefit pension plan and supplemental executive retirement plan for the three and nine month periods ended September 30, 2024 and 2023:
Three months ended September 30,
Supplemental Executive
Pension Benefits
Retirement Plan
Service cost
Interest cost
57
63
Expected return on plan assets
(64)
Amortization of the net loss
Net periodic cost
98
Nine months ended September 30,
108
171
188
(191)
(201)
281
295
The components of net periodic cost other than the service cost component are included in the line item “other expense” in the income statement.
7. REVENUE RECOGNITION OF NON-INTEREST INCOME
Insurance Service and Fees: Insurance services revenue relates to various revenue streams from services provided by TEA and the Bank.
As a result of the sale of TEA in November 2023, insurance services revenue recognized during 2024 is a result of services provided by the Banks’ wealth management department. TEA and the Bank’s wealth management activity are both included in the comparative 2023 balances. See Note 2 to the Company’s Consolidated Financial Statements included under Item 8 of the 2023 Annual Report on Form 10-K for more information on the sale of TEA.
A description of the Company’s material revenue streams in non-interest income accounted for under ASC 606 follows:
TEA earned commission revenue from selling commercial and personal property and casualty (“P&C”) insurance as well as employee benefits solutions to commercial customers.
TEA had agreements with various insurance companies to sell policies to customers on behalf of the carriers. The performance obligation for TEA was to sell annual P&C policies to commercial customers and consumers. This performance obligation was met when a new policy was sold or when an existing policy renewed. The policies were generally one year terms. In the agreements with the respective insurance companies, a commission rate was agreed upon. The commission was recognized at the time of the sale of the policy or when a policy renewed.
TEA had signed contracts with insurance carriers that enabled TEA to sell benefit plans to commercial customers on behalf of the insurance carriers. The performance obligation for TEA was to sell the plans to commercial customers. After the initial sale when the customer signed an agreement to purchase the offered benefit plan, the performance obligation was met each month when a customer continues utilizing benefit plans from the carrier. The customer did not commit to a specific length of time with the carrier. In the agreements with the respective insurance companies, a commission rate was agreed upon. Revenue was recognized each month when the customer continued with the benefit plan sold by TEA.
TEA earned contingent profit sharing revenue. The insurance companies measured the loss ratio for TEA’s customers and pay TEA according to how profitable TEA customers were.
TEA had signed written agreements with insurance carriers that documented payouts to TEA based on the loss ratios of its customers. The performance obligation for TEA was 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 were documented. The consideration was variable as loss ratios vary based on customer experience. TEA’s performance obligation was over the course of the year as its customers’ performance with insurance carriers was measured throughout the year as losses occur. Due to the variable nature of contingent profit sharing revenue, TEA accrued contingent profit sharing revenue throughout the year based on historical results. As loss events occurred and overall performance became known to TEA, accrual adjustments were made until the cash was 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.
A disaggregation of the total insurance service and other fees for the three and nine months ended September 30, 2024 and 2023 is provided in the tables below:
Commercial property and casualty insurance commissions
1,670
Personal property and casualty insurance commissions
978
Employee benefits sales commissions
Profit sharing and contingent revenue
398
Wealth management and other financial services
Other insurance-related revenue
26
Total insurance service and other fees
3,723
2,716
640
1,024
436
8. FAIR VALUE MEASUREMENT
Fair value is defined in ASC Topic 820 “Fair Value Measurement” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
There are three levels of inputs to fair value measurement:
Level 1 inputs are quoted prices for identical instruments in active markets;
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
Level 3 inputs are unobservable inputs.
Observable market data should be used when available.
FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A RECURRING BASIS
The following table presents, for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023, respectively:
Level 1
Level 2
Level 3
Fair Value
Securities available-for-sale:
US treasuries and government agencies
Securities available for sale
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.
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 a quarterly 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.
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.
ASSETS AND LIABILITIES 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 qualitative information about Level 3 fair value measurements for financial instruments which are measured at fair value on a nonrecurring basis at September 30, 2024 and December 31, 2023:
(In thousands)
Valuation Technique
Unobservable Input(s)
Range
(Weighted Average)
Individually evaluated collateral dependent loans:
Commercial Real Estate
6,030
Income approach
Capitalization rate
8.50%
261
Cost approach
Book value
50.00%
Residential Real Estate
296
Sales comparison approach
Adjustment to comparables
(14%) - 1%
-4.60%
Unobservable Input
7,110
(0.6%) - 16%
8.82%
37
N/A
Individually evaluated collateral dependent loans
When a loan is individually evaluated, it is valued at the lower of cost or fair value. Collateral dependent loans which are individually evaluated and carried at fair value have been partially charged off or receive provisions in the allowance for credit losses. For collateral dependent loans, fair value is generally based on appraisal values performed by licensed appraisers, except for certain circumstances in which book value is used. Appraisals have multiple valuation methodologies to arrive at the fair value, these methodologies include the sales comparison approach, cost approach, and the income capitalization approach. The methodology chosen is reliant on the data available, and adjustments are made by independent appraisers to reflect differences between the asset valued and the comparable data used. These adjustments result in Level 3 classification for determining fair value. Collateral may be adjusted or discounted based on management's historical knowledge, changes in market conditions, management's expertise, and knowledge of the customer and related business. Individually analyzed loans are evaluated on a quarterly basis for additional impairment, and valuations for collateral dependent loans are updated by a new independent appraisal or a validation of the existing appraisal by an internal licensed appraiser, in accordance with Company policy. 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 individually analyzed 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 individually analyzed, whichever occurs first. Subsequent to the downgrade or reaching 90 days past due, if the loan remains outstanding and individually analyzed for at least one year or 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.
Three types of valuation techniques generally used: 1. Income approach valuations typically use the net operating income of the business divided by the capitalization rate as determined by the appraiser. Management applies a 10% discount to income approach values which management expects will cover disposition costs, including selling costs. 2. Sales comparison approach valuations typically use the values of similar sales of listings in the market area, adjusted for differences in the assets sold as determined by the appraiser. Management applies a 10% discount to income approach values which management expects will cover disposition costs, including selling costs. 3. Cost comparison approach valuations are based on either the existing book value in which appraisals are not obtained, or the cost necessary to replace or reproduce the asset based on current prices. Management applies a discount dependent on the underlying asset, according to policy which ranges from 10%-50%.
Collateral dependent individually evaluated loans had a gross value of $7.3 million, with an allowance for credit loss of $0.8 million, at September 30, 2024 compared with $7.9 million and $0.8 million, respectively, at December 31, 2023.
The table below depicts the estimated fair values of the Company’s financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis.
Carrying
Amount
Financial assets:
Level 1:
Cash and cash equivalents
Level 2:
Available for sale securities
FHLB and FRB stock
8,086
8,011
Level 3:
Held to maturity securities
1,689,406
1,606,666
Financial liabilities:
Demand deposits
NOW deposits
Savings deposits
Securities sold under agreement to
repurchase
Other borrowed funds
129,231
145,055
30,462
29,563
Time deposits
384,850
331,675
9. SEGMENT INFORMATION
Prior to the sale of TEA, the Company was comprised of two primary business segments, banking and insurance agency activities. For comparative purposes the following tables set forth information regarding these segments for the three and nine month periods ended September 30, 2024 and 2023. For further information on the sale of TEA see Note 2 to the Company’s Consolidated Financial Statements included under Item 8 of the 2023 Annual Report on Form 10-K.
Banking
Insurance Agency
Activities
Net interest income
Net interest income after
provision for credit losses
Other non-interest income
2,808
Amortization expense
Other non-interest expense
13,583
Income before income taxes
Income tax provision
121
3,377
2,058
95
12,527
1,780
14,307
3,397
1,502
890
391
2,507
1,111
7,150
39,060
8,250
5,723
286
37,311
5,471
42,782
16,322
2,493
3,847
618
12,475
1,875
10. CONTINGENT LIABILITIES AND COMMITMENTS
The unaudited consolidated financial statements do not reflect various commitments and contingent liabilities, which arise in the normal course of business, and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities consist of commitments to extend credit and standby letters of credit. A summary of the Bank’s commitments and contingent liabilities is as follows:
Commitments to extend credit
446,348
431,085
Standby letters of credit
2,598
448,946
434,968
Commitments to extend credit and standby letters of credit include some exposure to credit loss in the event of nonperformance by the customer. The Bank’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded on the Company’s unaudited consolidated balance sheets. Because these instruments have fixed maturity dates, and because they may expire without being drawn upon, they do not necessarily represent cash requirements of the Bank. The Bank did not incur any losses on its commitments during the first nine months of 2024 and 2023.
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.
11. RECENT ACCOUNTING PRONOUNCEMENTS
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. The Company did not adopt any accounting pronouncements during its current fiscal year that had a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures. The following accounting standards have been recently issued but are not yet required to be adopted as of September 30, 2024. Management is currently evaluating the effect of the updated guidance these accounting standards will have on the Company’s financial statement disclosures.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The updated accounting guidance requires expanded reportable segment disclosures, primarily related to significant segment expenses which are regularly provided to the company’s Chief Operating Decision Maker. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within annual periods beginning after December 15, 2024. Retrospective application is required.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The updated accounting guidance requires expanded income tax disclosures, including the disaggregation of existing disclosures related to the tax rate reconciliation and income taxes paid. The guidance is effective for annual periods beginning after December 15, 2024. Prospective application is required, with retrospective application permitted.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” and similar expressions identify such forward-looking statements. These forward-looking statements include statements regarding the Company’s business plans, prospects, growth and operating strategies, statements regarding the asset quality of the Company’s loan and investment portfolios, and estimates of the Company’s risks and future costs and benefits.
These forward-looking statements are based largely on the expectations of the Company’s management and are subject to a number of risks and uncertainties, including but not limited to: our proposed merger with NBT Bancorp Inc. (“NBT”), which may not be consummated or may take longer or be more expensive to accomplish than expected, and which may divert our resources and management’s attention from ongoing business operations and opportunities; adverse changes in general economic conditions, either nationally or in the Company’s market areas; increased competition among depository or other financial institutions; inflation and changes in the interest rate environment which affect the Company’s margins or the fair value of financial instruments; the cost and availability of funds; changes in laws or government regulations affecting financial institutions, including changes in regulatory fees, monetary policy, and capital requirements; the Company’s ability to enter new markets successfully and capitalize on growth opportunities; the Company’s ability to successfully integrate acquired entities; credit losses in excess of the Company’s allowance for credit losses; changes in accounting pronouncements and practices, as adopted by financial institution regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; the impact of such changes in accounting pronouncements and practices being greater than anticipated; the ability to realize the benefit of deferred tax assets; changes in tax policies, rates and regulations of federal, state and local tax authorities; changes in consumer spending, borrowing and saving habits; changes in the Company’s organization, compensation and benefit plans; and other factors discussed elsewhere in this Quarterly Report on Form 10-Q, as well as in the Company’s periodic reports filed with the Securities and Exchange Commission (the “SEC”), in particular the “Risk Factors” discussed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and this Quarterly Report on Form 10-Q. 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.
Management’s Discussion and Analysis of Financial Condition and Results of Operations that follows includes comparisons of the quarter ended September 30, 2024 to the quarter ended September 30, 2023 as well as the trailing quarter ended June 30, 2024. Financial information for the quarters ended September 30, 2023 and June 30, 2024 can be found in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, as filed with the SEC on October 30, 2023, and in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, as filed with the SEC on August 8, 2024, respectively.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The Company’s Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. GAAP and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the Company’s Unaudited Consolidated Financial Statements and Notes. These estimates, assumptions, and judgments are based on information available as of the date of the Unaudited Consolidated Financial Statements. Accordingly, as this information changes, the Unaudited Consolidated Financial Statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments, and as such, have a greater possibility of producing results that could be materially different than originally reported.
Significant accounting policies followed by the Company are presented in Note 1 – “Organization and Summary of Significant Accounting Policies” to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on March 4, 2024. These policies, along with the disclosures presented in the other Notes to the Company's Audited Consolidated Financial Statements contained in its Annual Report on Form 10-K and in this financial review, provide information on how significant assets and liabilities are presented in the Company’s Unaudited Consolidated Financial Statements and how those values are determined.
The more significant areas in which management of the Company applies critical assumptions and estimates includes the allowance for credit losses.
The ACL on loans is management’s estimate of expected lifetime credit losses on loans carried at amortized cost. The ACL on loans is established through a provision for credit losses recognized in the Consolidated Statements of Income. Additionally, the ACL on loans is reduced by charge-offs on loans and increased by recoveries of amounts previously charged-off. At September 30, 2024 the ACL on loans totaled $23.1 million, compared to $21.8 million at September 30, 2023. A significant portion of our ACL is allocated to the commercial portfolio (both commercial real estate and commercial and industrial (“C&I”) loans). As of September 30, 2024, December 31, 2023 and September 30, 2023, the ACL allocated to the total commercial portfolio was $18.9 million, $17.8 million and $17.9 million, respectively.
Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors consists of two basic components: pooling loans into portfolio segments for loans that share similar risk characteristics and identifying individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments.
For pooled loan portfolio segments, the Company utilizes a discounted cash flow (“DCF”) methodology to estimate credit losses over the expected life of the loan. The methodology incorporates a probability of default and loss given default framework. Loss given default is estimated based on historical credit loss experience. Probability of default is estimated utilizing a regression model that incorporates econometric factors. The model utilizes forecasted econometric factors with a one-year reasonable and supportable forecast period and one-year straight-line reversion period in order to estimate the probability of default for each loan portfolio segment. The DCF methodology combines the probability of default, the loss given default, prepayment speeds and the remaining life of the loan to estimate a reserve for each loan.
The ACL for individually analyzed loans is measured using a DCF method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan was collateral dependent, at the fair value of the collateral.
Quantitative loss factors are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. Qualitative loss factors are applied to each portfolio segment with the amounts determined by historical loan charge-offs of a peer group of similar-sized regional banks.
Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations. Deteriorating conditions or assumptions could lead to further increases in the ACL on loans; conversely, improving conditions or assumptions could lead to further reductions in the ACL on loans.
In estimating the ACL on loans, management considers the sensitivity of the model and significant judgments and assumptions that could result in an amount that is materially different from management’s estimate. Given the concentration of ACL allocation to the total commercial portfolio and the significant judgments made by management in deriving the qualitative loss factors, management analyzed the impact that changes in judgments could have. The result was an ACL allocated to the total commercial loan portfolio that ranged between $14.0 million and $29.9 million at September 30, 2024. The sensitivity and related range of impact is a hypothetical analysis and is not intended to represent management’s judgments or assumptions of qualitative loss factors that were utilized at September 30, 2024 in estimation of the ACL on loans recognized on the Consolidated Balance Sheet.
If the assumptions underlying the determination of the ACL prove to be incorrect, the ACL may not be sufficient to cover actual loan losses and an increase to the ACL may be necessary to allow for different assumptions or adverse developments. In addition, a problem with one or more loans could require a significant increase to the ACL.
Proposed Merger
On September 9, 2024, Evans Bancorp, Inc. and the Bank entered into an agreement and plan of merger with NBT and NBT Bank, National Association, pursuant to which NBT will acquire Evans Bancorp, Inc. Under the terms of the merger agreement, each outstanding share of Evans common stock will be converted into the right to receive 0.91 shares of NBT common stock. As of September 9, 2024, based on NBT’s closing stock price of $46.28 on September 6, 2024, the aggregate transaction value was approximately $236 million. The proposed merger is subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of Evans, and is expected to close in the second quarter of 2025. Expenses related to the merger are included on the “merger related” expense line in the consolidated statements of income for the three and nine months periods ended September 30, 2024. For further information on the merger agreement, see the Current Report on Form 8-K filed with the SEC on September 9, 2024. For the three and nine months ended September 30, 2024, merger related expenses were $0.6 million.
ANALYSIS OF FINANCIAL CONDITION
Loan Activity
Total gross loans were $1.8 billion at September 30, 2024, and $1.7 billion at December 31, 2023 and September 30, 2023. Loans secured by real estate were $1.5 billion at September 30, 2024, December 31, 2023 and September 30, 2023. Residential real estate loans, including construction loans, were $444 million at September 30, 2024 and September 30, 2023, compared with $447 million at December 31, 2023, a $3 million, or less than 1%, decrease. Commercial real estate loans, including construction loans, were $1 billion at September 30, 2024, $39 million or 4% higher than at December 31, 2023, and $52 million, or 5% higher than at September 30, 2023.
In the third quarter of 2024, residential mortgage originations were $16 million compared with originations of $15 million in the sequential quarter and $16 million in the third quarter of 2023. The Company originated $41 million in residential mortgages in the first nine months of 2024, compared with $34 million in the first nine months of 2023. The Company sold $9 million of residential mortgages in the third quarter of 2024 compared with $2 million in the second quarter of 2024 and $3 million in the third quarter of 2023. During the first nine months of 2024 and 2023 the Company sold $15 million and $7 million, respectively, of residential mortgages. Management decides whether to keep or sell residential mortgage loans at the time of origination based on interest rate risk management and the risk-adjusted return of alternative investment sources such as mortgage-backed securities.
The C&I portfolio was $256 million at September 30, 2024, representing a $33 million, or 15%, increase from December 31, 2023. When compared with September 30, 2023, C&I loans increased $33 million or 15%. Funding levels of C&I lines of credit have increased during the first nine months of 2024, contributing to the growth in the C&I portfolio.
Credit Quality of Loan Portfolio
Non-performing loans, defined as accruing loans greater than 90 days past due and nonaccrual loans, totaled $33 million, or 1.82% of total loans outstanding at September 30, 2024, compared with $27 million, or 1.59% of total loans outstanding, as of December 31, 2023 and $27 million, or 1.60% of total loans outstanding, as of September 30, 2023. Included in non-performing loans at September 30, 2024 was one C&I loan of $6.5 million that was 90 days past due and still accruing as it is expected to be renewed in early fourth quarter.
During the third quarter of 2024 the Company sold $6.9 million of other real estate owned that was acquired during the second quarter of 2024. The sale resulted in a gain on sale of other real estate owned of $0.6 million.
Internal risk ratings are the credit quality indicators used by management to monitor credit risk in the Company’s commercial loan portfolio. “Special mention” and “substandard” loans are weaker credits with a higher risk of loss and are categorized as “criticized” credits rather than “pass” or “watch” credits. Commercial credits graded as “special mention” and “substandard” were $73 million at September 30, 2024, a $2 million increase from $71 million at December 31, 2023, and a $3 million decrease from $76 million at September 30, 2023. The level of criticized loans can fluctuate as new information is constantly received on the Company’s borrowers and their financial circumstances change over time.
The Company recorded a $0.6 million provision for credit losses during the three months ended September 30, 2024, primarily due to loan growth as well as slower prepayment rates.
The allowance for credit losses totaled $23.1 million or 1.29% of total loans outstanding at September 30, 2024, compared with $22.1 million, or 1.28% of total loans outstanding as of December 31, 2023, and $21.8 million, or 1.28% of total loans outstanding at September 30, 2023.
Investing Activities
Total investment securities were $276 million at September 30, 2024, compared with $278 million at December 31, 2023 and $337 million at September 30, 2023. The decrease from the third quarter of 2023 was mainly due to the sale of $78 million of securities during the fourth quarter of 2023 as the company strategically repositioned the balance sheet. Interest-bearing deposits at banks, which consist of overnight funds kept at correspondent banks and the Federal Reserve, were $107 million at September 30, 2024 compared with $4 million at December 31, 2023, and $7 million at September 30, 2023. During the first quarter of 2024 management strategically strengthened the balance sheet by adding $55 million of brokered deposits at favorable rates and lengthened maturities of approximately $40 million in overnight borrowings to manage interest rate risk. As a result, interest-bearing deposits at banks increased significantly compared with the prior periods. The primary objectives of the Company’s investment portfolio are to provide liquidity, provide collateral to secure municipal deposits, and maximize income while preserving safety of principal. Average investment securities and interest-bearing cash were 19% of average interest-earning assets in each of the third and second quarters of 2024, compared with 18% in the third quarter of 2023.
The Company’s highest concentration in its securities portfolio was in available for sale U.S. government sponsored mortgage-backed securities which comprised 62% of total investment securities at each of September 30, 2024 and December 31, 2023, and 54% at September 30, 2023. Tax-advantaged debt securities issued by state and political subdivisions as a percent of the total investment securities portfolio were 4% in the third quarter of 2024, 3% in the second quarter of 2024, and 2% in the third quarter of 2023.
The total net unrealized loss position of the available for sale investment portfolio was $47 million at September 30, 2024, compared with $55 million at December 31, 2023 and $77 million at September 30, 2023. The securities in an unrealized loss position at the end of the third quarter of 2024 generally reflected increased market interest rates. Management believes that the credit quality of the securities portfolio as a whole is strong. In addition, the Company has the ability and intent to hold these securities until their fair value recovers to their amortized cost.
The Company monitors extension and prepayment risk in the securities portfolio to limit potential exposures. The Company has no direct exposure to subprime mortgages, nor does the Company hold private mortgage-backed securities, credit default swaps, or FNMA or FHLMC preferred stock investments in its investment portfolio.
Funding Activities
Total deposits at September 30, 2024 were $1.9 billion, a $182 million, or 11%, increase from December 31, 2023, and an increase of $95 million, or 5%, from September 30, 2023. From a product perspective, when compared to December 31, 2023, deposit increases were in demand deposits of $45 million, brokered time deposits of $44 million, municipal saving deposits of $27 million, NOW deposits of $27 million, consumer savings of $17 million, consumer time deposits of $9 million, and commercial savings deposits of $13 million. When compared to last year’s third quarter, there were increases in NOW deposits of $48 million, brokered time deposits of $44 million, consumer time deposits of $6 million and consumer savings deposits of $9 million, offset by lower demand deposits of $12 million.
Total other borrowings decreased from $145 million at December 31, 2023 to $128 million at September 30, 2024. At September 30, 2024 the Bank had $40 million in long-term Federal Home Loan Bank of New York (“FHLBNY”) advances compared with $6 million at each of December 31, 2023 and September 30, 2023. As of September 30, 2024 the Bank did not have overnight borrowings at the FHLB compared with $53 million at December 31, 2023 and $19 million at September 30, 2023. As of September 30, 2024, advances up to $373 million could be drawn from the FHLB via the Company’s overnight line of credit. Additionally, the Bank has the ability to borrow from the Federal Reserve. The Bank had $88 million, $86 million, and $126 million in short-term borrowings with the Federal Reserve at September 30, 2024, December 31, 2023, and September 30, 2023, respectively.
ANALYSIS OF RESULTS OF OPERATIONS
Average Balance Sheets
The following tables present the significant categories of the assets and liabilities of the Company, interest income and interest expense, and the corresponding yields earned and rates paid for the periods indicated. The assets and liabilities are presented as daily averages. The average loan balances include both performing and non-performing loans. Interest income on loans does not include interest on loans for which the Bank has ceased to accrue interest. Investments are included at book value. Yields are presented on a non-tax-equivalent basis.
Average
Interest
Outstanding
Earned/
Yield/
Paid
Rate
(dollars in thousands)
Interest-earning assets:
Loans, net(1)
1,743,042
25,392
5.80
1,658,132
5.25
Taxable securities
271,979
2.45
349,593
2.47
Tax-exempt securities
6,977
66
3.76
6,277
3.22
Interest bearing deposits at banks
117,326
5.31
9,883
5.29
Total interest-earning assets
2,139,324
5.34
2,023,885
4.76
Non interest-earning assets:
18,319
17,563
Premises and equipment, net
14,694
16,075
93,043
102,258
Total Assets
2,265,380
2,159,781
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
381,054
2,508
311,624
1,408
1.79
707,742
4,561
2.56
708,724
3,301
1.85
399,180
4,426
4.41
325,667
2,835
3.45
128,243
1,554
4.82
143,546
1,855
5.13
31,238
7.12
31,137
7.14
Securities sold U/A to repurchase
9,149
2.00
17,594
77
1.74
Total interest-bearing liabilities
1,656,606
3.28
1,538,292
2.59
Noninterest-bearing liabilities:
403,182
441,149
22,792
20,529
2,082,580
1,999,970
Stockholders' equity
182,800
159,811
Total Liabilities and Equity
Net interest margin
2.80
2.79
Interest rate spread
2.06
2.17
(1) Other loan fees included in interest earned were not material during the three months ended September 30, 2024 and 2023.
1,720,630
5.66
1,648,660
5.22
272,046
2.52
362,241
2.48
6,550
3.63
8,368
3.10
91,312
8,356
4.93
2,090,538
5.23
2,027,625
4.72
17,919
16,597
15,027
16,465
88,158
99,805
2,211,642
2,160,492
368,005
6,825
284,780
2,761
1.30
Regular savings
695,055
12,766
760,190
8,219
1.45
380,407
12,521
4.40
296,240
6,860
128,776
4,723
4.90
131,629
4,780
4.86
31,213
7.13
31,111
6.99
8,157
1.90
13,553
137
1.35
1,611,613
3.20
1,517,503
2.15
401,044
465,464
20,912
18,875
2,033,569
2,001,842
178,073
158,650
2.76
3.12
2.03
2.57
(1) Other loan fees included in interest earned were not material during the nine months ended September 30, 2024 and 2023.
Net income was $2.9 million, or $0.53 per diluted share, in the third quarter of 2024 and the second quarter of 2024, compared with $3.6 million, or $0.66 per diluted share, in last year’s third quarter. Net income for the third quarter of 2024, when compared to the sequential second quarter of 2024, reflected an increase in net interest income of $0.7 million and an increase in non-interest income of $0.6 million, offset by higher provision for credit losses of $0.3 million and an increase in non-interest expense of $1.0 million, which included $0.6 million of merger related costs associated with our proposed merger with NBT. The change in net income from the prior-year period primarily reflected a decrease in non-interest income of $2.6 million, resulting from the sale of TEA in 2023, partially offset by higher net interest income of $0.8 million and a decrease in non-interest expense of $0.8 million.
Return on average equity was 6.44% for the third quarter of 2024, compared with 6.76 % in the second quarter of 2024 and 9.06% in the third quarter of 2023.
Net income was $8.2 million, or $1.49 per diluted share, in the first nine months of 2024, compared with $14.4 million, or $2.62 per diluted share in the first nine months of 2023. The decrease from last year’s comparative period was due to lower net interest income of $4.0 million, a reduction of non-interest income of $6.7 million, and higher provision for credit losses of $1.4 million, partially offset by a decrease in non-interest expense of $4.0 million.
Other Results of Operations – Quarterly Comparison
Net interest income of $15.0 million for the third quarter of 2024 increased $0.7 million, or 5%, from the second quarter of 2024, and increased $0.8 million, or 6%, when compared with the prior year’s third quarter. The increase in net interest income over the second quarter was due to higher average loans and the Company’s investment strategy to strengthen the balance sheet at the end of the first quarter of 2024. The increase in net interest income when compared to the prior year’s third quarter was due to higher average loan balances and the stabilization of net interest margin.
Third quarter net interest margin of 2.80% increased 9 basis points from the second quarter of 2024 and 1 basis point from the third quarter of 2023. The yield on loans increased 17 basis points compared with the sequential quarter and 55 basis points year-over-year. The cost of interest-bearing liabilities was 3.28% compared with 3.27 % in the second quarter of 2024 and 2.59% in the third quarter of 2023.
The $0.6 million provision for credit losses during the third quarter of 2024 was largely due to loan growth as well as slower prepayment speeds.
Non-interest income was $3.0 million in the third quarter of 2024 compared with $2.4 million in the second quarter of 2024, and $5.6 million in the prior year’s third quarter. The increase of $0.6 million from the sequential quarter was due to a gain on the sale of one property that the company had in other real estate owned at the end of the second quarter. The decrease from the third quarter of 2023 was due to lower insurance service and fee revenue of $3.3 million mostly driven by the sale of TEA, partially offset by the sale of the other real estate owned.
Non-interest expense was $13.6 million in the third quarter of 2024 compared with $12.6 million in the second quarter of 2024 and $14.4 million in the third quarter of 2023. The $1.0 million increase from the second quarter of 2024 included merger related expenses of $0.6 million, and higher salaries and employee benefits expense due to the funding of employee health savings accounts during the third quarter.
The $0.8 million, or 6%, decrease in non-interest expense from the third quarter of 2023 was mostly due to a decrease of $1.5 million of salaries and employee benefits expense related to the sale of TEA, offset by merit increases given in the beginning of the current year.
The Company’s GAAP efficiency ratio, or noninterest expenses divided by the sum of net interest income and noninterest income, was 75.32% in the third quarter of 2024, 75.11% in the second quarter of 2024, and 72.72% in the third quarter of 2023.
Income tax expense was $0.9 million, for an effective tax rate of 24.2 % in the third quarter of 2024 compared with 23.8% in the second quarter of 2024 and 26.2% in last year’s third quarter.
Other Results of Operations – Year-to-Date Comparison
Net interest income was $43.3 million for the first nine months of 2024, a $4.0 million or 8% decrease from the first nine months of 2023. The decrease from last year’s comparative period was due to higher cost of interest-bearing liabilities, partially offset by higher interest earned on loans and interest-bearing deposits at banks. Average loans and average interest-bearing deposits at banks increased $72 million and $83 million, respectively, during the first nine months of 2024 when compared to the prior year period.
The Company’s net interest margin of 2.76% in the first nine months of 2024 was 36 basis points lower than the 3.12% margin in the first nine months of 2023. The yield on loans during the first nine months of 2024 increased 44 basis points, from 5.22% to 5.66% when compared with the first nine months of 2023. In the first nine months of 2024 the cost of interest-bearing liabilities increased 105 basis points to 3.20% when compared with the first nine months of 2023. The rate paid on average time deposits increased from 3.10% in the first nine months of 2023 to 4.40% during the first nine months of 2024. The rate paid on NOW deposits increased 118 basis points to 2.48% when compared with the first nine months of 2023.
The Company recorded a $1.1 million provision for credit losses in the nine-month period ended September 30, 2024 largely due to loan growth and slow down of prepayment rates, compared to a release of allowance for credit losses of $0.3 million for the nine-month period ended September 30, 2023.
Non-interest income for the first nine months of 2024 was $7.7 million compared with $14.4 million for the first nine months of 2023. The prior year period included insurance service and fee revenue of $8.3 million earned by TEA. Partially offsetting the decrease in insurance service and fee income were a gain on sale of other real estate owned of $0.6 million, $0.2 million revenue from loans sold and income from a historic tax credit investment of $0.2 million during the first nine months of 2024.
Total non-interest expense decreased to $39.1 million in the first nine months of 2024, $4.0 million, or 9%, lower than the nine-month period ended September 30, 2023. Included in the prior-year period was $4.5 million of salaries and employee benefits costs attributed to TEA. Partially offsetting the decrease in salaries and employee benefits were $0.6 million of merger related expenses incurred during the first nine months of 2024.
The Company’s GAAP efficiency ratio, or noninterest expenses divided by the sum of net interest income and noninterest income, was 76.7% in the first nine months of 2024, compared with 69.6% during the prior-year period.
The Company recorded income tax expense of $2.5 million for the nine-month period ended September 30, 2024, compared with $4.5 million in the first nine months of 2023. The effective tax rate for the first nine months of 2024 and 2023 was 23.3% and 23.7%, respectively.
CAPITAL
The Company consistently maintains regulatory capital ratios above the federal “well capitalized” standard, including a Tier 1 leverage ratio of 10.01% at September 30, 2024, compared with 10.04% at June 30, 2024 and 9.40% at September 30, 2023.
Book value per share was $33.58 at June 30, 2024 compared with $32.15 at June 30, 2024 and $27.52 at September 30, 2023. Reflected in the book value changes are the Federal Reserve’s aggressive interest rate hikes, which have resulted in significant changes in unrealized gains and losses on investment securities. As of September 30, 2024, this amounted to $6.36 per share impact to book value. 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 has issued subordinated capital notes and junior subordinated debentures associated with trust preferred securities to provide liquidity and enhance regulatory capital. As of September 30, 2024, the Company had $11.3 million of junior subordinated debentures associated with trust preferred securities outstanding, which are considered Tier 1 capital and includable in total regulatory capital. As of September 30, 2024, the Company also had $20 million of its 6.00% Fixed-to-Floating Rate Subordinated Notes due 2030 outstanding. During 2020, $15 million of the proceeds from the sale of the notes was contributed to Evans Bank as Tier 1 capital.
While we are currently classified as “well capitalized”, an extended economic recession could adversely impact our reported and regulatory capital ratios. The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt. If the Company’s subsidiary bank’s capital deteriorates such that it is unable to pay dividends to the Company for an extended period of time, the Company may not be able to service its debt that was issued.
LIQUIDITY
The Bank utilizes cash flows from the investment portfolio and federal funds sold balances to manage the liquidity requirements related to loan demand and deposit fluctuations. The Bank also has many borrowing options. The Company uses the FHLBNY as its primary source of overnight funds and has long-term advance with FHLBNY. The Company’s use of its overnight line of credit with FHLBNY varies depending on its ability to fund investment and loan growth with core deposits along with the line usage’s impact on interest rate risk. The Company has pledged sufficient collateral in the form of residential and commercial real estate loans at FHLBNY that meets FHLB collateral requirements. As a member of the FHLB, the Bank is able to borrow funds at competitive rates. As of September 30, 2024, advances of up to $373 million could be drawn on the FHLB via an Overnight Line of Credit Agreement between the Bank and
the FHLB. The Bank also has the ability to borrow from the Federal Reserve. At September 30, 2024 the Bank had $8 million in additional availability to borrow against collateral at the Federal Reserve. By placing sufficient collateral in safekeeping at the Federal Reserve Bank, the Bank could borrow at the discount window. The Bank’s liquidity needs also can be met by more aggressively pursuing time deposits, or accessing the brokered time deposit market, including the Certificate of Deposit Account Registry Service (“CDARS”) network.
Cash flows from the Bank’s investment portfolio are laddered, so that securities mature at regular intervals, to provide funds from principal and interest payments at various times as liquidity needs may arise. Contractual maturities are also laddered, with consideration as to the volatility of market prices. At September 30, 2024, approximately 1% of the Bank’s securities had contractual maturity dates of one year or less and approximately 17% had maturity dates of five years or less. Additionally, mortgage-backed securities, which comprised 62% of the investment portfolio at September 30, 2024, provide consistent cash flows for the Bank.
The Company’s primary source of liquidity is dividends from the Bank. Additionally, the Company has access to capital markets as a funding source.
Management, on an ongoing basis, closely monitors the Company’s liquidity position for compliance with internal policies and believes that available sources of liquidity are adequate to meet funding needs in the normal course of business. As part of that monitoring process, management calculates the 90-day liquidity position each month by analyzing the cash needs of the Bank. Included in the calculation are assumptions of some significant deposit run-off as well as funds needed for loan closings and investment purchases. In the Company’s internal stress test at September 30, 2024, the Company had net short-term liquidity of $351 million as compared with $333 million at December 31, 2023.
Management does not anticipate engaging in any activities, either currently or in the long term, for which adequate funding would not be available and which would therefore result in significant pressure on liquidity.
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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Additional information responsive to this Item is contained in the Liquidity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, which information is incorporated herein by reference.
Market risk is the risk of loss from adverse changes in market prices and/or interest rates of the Bank’s financial instruments. The primary market risk that the Company is exposed to is interest rate risk. The core banking activities of lending and deposit-taking expose the Bank to interest rate risk, which occurs when assets and liabilities reprice at different times and by different amounts as interest rates change. As a result, net interest income earned by the Bank is subject to the effects of changing interest rates. The Bank measures interest rate risk by calculating the variability of net interest income in future periods under various interest rate scenarios using projected balances for interest-earning assets and interest-bearing liabilities. Management’s philosophy toward interest rate risk management is to limit the variability of net interest income to changes in net interest rates. The balances of financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of loans, and expected maturities of investment securities, loans, and deposits. Management supplements the modeling technique described above with analysis of market values of the Bank’s financial instruments and changes to such market values given changes in the interest rates.
The Bank’s Asset-Liability Committee, which includes members of senior management, monitors the Bank’s interest rate sensitivity with the aid of a model that considers the impact of ongoing lending and deposit taking activities, as well as interrelationships in the magnitude and timing of the repricing of financial instruments, including the effect of changing interest rates on expected prepayments and maturities. When deemed prudent, management has taken actions, and intends to do so in the future, to mitigate exposure to interest rate risk through the use of on- or off-balance sheet financial instruments. Possible actions include, but are not limited to, changing the
pricing of loan and deposit products, and modifying the composition of interest-earning assets and interest-bearing liabilities, and reliance on other financial instruments used for interest rate risk management purposes.
The following table demonstrates the possible impact of changes in interest rates on the Bank’s net interest income over a 12-month period of time:
SENSITIVITY OF NET INTEREST INCOME TO CHANGES IN INTEREST RATES
Calculated increase (decrease)
in projected annual net interest income
Changes in interest rates
+200 basis points
(3,542)
(4,618)
+100 basis points
1,074
-100 basis points
(1,132)
(168)
-200 basis points
(2,416)
(310)
Many assumptions were utilized by management to calculate the impact that changes in interest rates may have on the Bank’s net interest income. The more significant assumptions related to the rate of prepayments of mortgage-related assets, loan and deposit volumes and pricing, and deposit maturities. The Bank assumed immediate changes in rates including 200 basis point rate changes. In the 200 basis point rate reduction scenario, the applicable rate changes may be limited to lesser amounts such that interest rates are not less than zero. The assumptions in the Company’s projections are inherently uncertain and, as a result, the Bank cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to the timing, magnitude, and frequency of interest rate changes in market conditions and interest rate differentials (spreads) between maturity/repricing categories, as well as any actions such as those previously described, which management may take to counter such changes. In light of the uncertainties and assumptions associated with the process, the amounts presented in the table and changes in such amounts are not considered significant to the Bank’s projected net interest income.
ITEM 4 - CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2024 (the end of the period covered by this Report). Based on that evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2024.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No changes in the Company’s internal control over financial reporting were identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the fiscal quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
The nature of the Company’s business generates a certain amount of litigation involving matters arising in the ordinary course of business.
In the opinion of management, there are no proceedings pending to which the Company is a party or to which its property is subject, which, if determined adversely, would have a material effect on the Company’s results of operations or financial condition.
ITEM 1A – RISK FACTORS
The following risk factors relating to the Company’s proposed merger with NBT Bancorp Inc. (“NBT”) represent a material update and addition to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as filed with the SEC on March 4, 2024:
The Company will be subject to business uncertainties and contractual restrictions while the merger is pending.
Uncertainty about the effect of the merger on the Company’s employees, suppliers and customers may have an adverse effect on the Company. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers, suppliers and others who deal with the Company to seek to change existing business relationships. Employee retention and recruitment may be particularly challenging prior to the effective time of the merger, as employees and prospective employees may experience uncertainty about their future roles with NBT.
The pursuit of the merger and the preparation for the integration may place a significant burden on management and internal resources. Any significant diversion of management attention away from ongoing business and any difficulties encountered in the transition and integration process could affect the financial results of the Company. In addition, the merger agreement requires that the Company operate in the ordinary course of business consistent with past practice and restricts the Company from taking certain actions prior to the effective time of the merger or termination of the merger agreement without NBT’s written consent. These restrictions may prevent the Company from retaining existing customers or pursuing attractive business opportunities that may arise prior to the completion of the merger.
The merger agreement contains provisions that limit the Company’s ability to pursue alternatives to the merger and may discourage other companies from trying to acquire the Company.
The merger agreement contains covenants that restrict the Company’s ability to, directly or indirectly, initiate, solicit, induce, knowingly encourage, or knowingly facilitate inquiries, offers or proposals with respect to, or, subject to certain exceptions generally related to the exercise of fiduciary duties by the Company’s Board of Directors, engage in any negotiations concerning, or provide any confidential or non-public information or data relating to, any alternative acquisition proposals. Additionally, the merger agreement provides for an $8.4 million termination fee payable by the Company to NBT under certain circumstances. Such provisions may discourage a potential third-party acquirer that might have an interest in acquiring all or a significant part of the Company from pursuing such acquisition.
The merger agreement may be terminated in accordance with its terms and the merger may not be completed.
NBT and the Company can mutually agree to terminate the merger agreement at any time before the merger has been completed, and either company can terminate the merger agreement if:
any regulatory approval required for consummation of the merger and the other transactions contemplated by the merger agreement has been denied by final, nonappealable action of any regulatory authority, or an application for regulatory approval has been permanently withdrawn at the request of a governmental authority;
the required approval of the merger agreement by the Company’s shareholders is not obtained;
the other party materially breaches any of its representations, warranties, covenants or other agreements set forth in the merger agreement (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained in the merger agreement), which breach is not cured within 30 days of written notice of the breach, or by its nature cannot be cured prior to the closing of the merger, and such breach would entitle the non-breaching party not to consummate the merger; or
merger is not consummated by September 15, 2025, unless the failure to consummate the merger by such date is due to a material breach of the merger agreement by the terminating party.
In addition, NBT may terminate the merger agreement if:
the Company materially breaches the non-solicitation provisions in the merger agreement; or
the Company’s Board of Directors:
ofails to recommend approval of the merger agreement, or withdraws, modifies or changes such recommendation in a manner adverse to NBT’s interests;
orecommends, proposes or publicly announces its intention to recommend or propose to engage in an acquisition transaction with any person other than NBT or any of its subsidiaries; or
ofails to call, give notice of, convene and hold its special meeting.
The merger is subject to a number of conditions, including the receipt of waivers and/or approvals from governmental authorities, that may delay the merger or adversely impact NBT’s and the Company’s ability to complete the merger.
The completion of the merger is subject to the satisfaction or waiver of a number of conditions. Before the merger may be completed, certain approvals, waivers or consents must be obtained from federal governmental authorities, including the Federal Reserve Bank of New York and the Office of the Comptroller of the Currency. Satisfying the requirements of these governmental authorities may delay the date of completion of the merger. In addition, these governmental authorities may include conditions on the completion of the merger or require changes to the terms of the merger. While it is currently anticipated that the merger will be completed promptly following the receipt of all required regulatory and shareholder approvals, there can be no assurance that the conditions to closing will be satisfied in a timely manner or at all, or that an effect, event, development or change will not transpire that could delay or prevent these conditions from being satisfied. The parties are not obligated to complete the merger should any regulatory approval contain a condition, restriction or requirement that NBT reasonably determines in good faith would, individually or in the aggregate, materially reduce the benefits of the merger to such a degree that NBT would not have entered into the merger agreement had such condition, restriction or requirement been known at the date of the merger agreement.
NBT and the Company cannot provide any assurances with respect to the timing of the closing of the merger, whether the merger will be completed at all and when Company shareholders would receive the consideration for the merger, if at all.
Failure to complete the merger could negatively impact the stock prices and future business and financial results of the Company.
Completion of the merger is subject to the satisfaction or waiver of a number of conditions, including approval by the Company’s shareholders of the merger. The Company cannot guarantee when or if these conditions will be satisfied or that the merger will be successfully completed. The consummation of the merger may be delayed, the merger may be consummated on terms different than those contemplated by the merger agreement, or the merger may not be consummated at all. If the merger is not completed, the ongoing businesses of the Company may be adversely affected, and the Company will be subject to several risks, including the following:
the Company may be required, under certain circumstances, to pay NBT a termination fee of $8.4 million;
the Company could incur substantial costs relating to the proposed merger, such as legal, accounting, financial advisor, filing, printing and mailing fees;
the Company is subject to certain restrictions on the conduct of its business prior to completing the merger, which may adversely affect its ability to execute certain of its business strategies; and
the Company’s management’s and employees’ attention may be diverted from our day-to-day business and operational matters as a result of efforts relating to the attempt to consummate the merger.
In addition, if the merger is not completed, the Company may experience negative reactions from the financial markets and from their respective customers and employees. The Company also could be subject to litigation related to any failure to complete the merger or to enforcement proceedings commenced against the Company to perform their respective obligations under the merger agreement. Such events could materially affect the Company’s stock prices and business and financial results.
Shareholder litigation could prevent or delay the closing of the merger or otherwise negatively affect the business and operations of the Company.
The Company may incur costs in connection with the defense or settlement of any shareholder lawsuits filed in connection with the proposed merger. Such litigation could have an adverse effect on the financial condition and results of operations of the Company and could prevent or delay the consummation of the merger.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
July 1, 2024 - July 31, 2024
Repurchase program(1)
180,932
Employee transactions
August 1, 2024 - August 31, 2024
272
33.71
September 1, 2024 - September 30, 2024
Total:
On February 25, 2021, the Board of Directors authorized the Company to repurchase up to 300,000 shares of the Company’s common stock (the “2021 Repurchase Program”). The 2021 Repurchase program does not expire and may be suspended or discontinued by the Board of Directors at any time. The remaining number of shares that may be purchased under the 2021 Repurchase Program as of September 30, 2024 was 180,932.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
(Not Applicable.)
ITEM 4 – MINE SAFETY DISCLOSURE
ITEM 5 – OTHER INFORMATION
During the three month period ended September 30, 2024, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement,” as that term is used in SEC regulations.
ITEM 6 – EXHIBITS
The following exhibits are filed as a part of this report:
EXHIBIT INDEX
Exhibit No.
Name
2.1
Agreement and Plan of Merger, dated September 9, 2024, by and among NBT Bancorp Inc., NBT Bank, National Association, Evans Bancorp, Inc. and Evans Bank, National Association (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (Registration No. 001-35021) filed on September 9, 2024).
3.1
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)
3.1.1
3.2
Amended and Restated Bylaws of the Company, effective as of January 24, 2023 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (Registration No. 001-35021) filed on January 30, 2023).
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Principal Executive Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Principal Financial Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
The following materials from Evans Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets – September 30, 2024 and December 31, 2023; (ii) Unaudited Consolidated Statements of Income – Three months ended September 30, 2024 and 2023; (iii) Unaudited Consolidated Statements of Income – Nine months ended September 30, 2024 and 2023; (iv) Unaudited Statements of Consolidated Comprehensive Income (Loss) – Three months ended September 30, 2024 and 2023; (v) Unaudited Statements of Consolidated Comprehensive Income (Loss) – Nine months ended September 30, 2024 and 2023; (vi) Unaudited Consolidated Statements of Stockholders' Equity – Three months ended September 30, 2024 and 2023; (vii) Unaudited Consolidated Statements of Stockholders' Equity – Nine months ended September 30, 2024 and 2023; (viii) Unaudited Consolidated Statements of Cash Flows – Nine months ended September 30, 2024 and 2023; and (ix) Notes to Unaudited Consolidated Financial Statements.
The cover page from the Evans Bancorp, Inc’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, formatted in Inline XBRL.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Evans Bancorp, Inc.
DATE
November 8, 2024
/s/ David J. Nasca
David J. Nasca
President and CEO
(Principal Executive Officer)
/s/ John B. Connerton
John B. Connerton
Treasurer
(Principal Financial Officer and Principal Accounting Officer)