CHAMPLAIN BANK CORPORATION AND SUBSIDIARY

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS With Independent Auditor s Report

2 INDEPENDENT AUDITOR S REPORT The Board of Directors Champlain Bank Corporation and Subsidiary We have audited the accompanying consolidated financial statements of Champlain Bank Corporation and Subsidiary (the Company), which comprise the consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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4 Consolidated Balance Sheets ASSETS Cash and due from banks $ 5,183,143 $ 5,095,733 Federal funds sold 81,237 26,145 Securities availableforsale 83,791,767 78,096,687 Securities heldtomaturity 4,066,933 2,556,650 Loans receivable, net of allowance for loan losses of $3,000,584 in 2015 and $2,830,017 in ,229, ,185,670 Accrued interest receivable 814, ,566 Federal Home Loan Bank stock, at cost 328, ,100 Premises and equipment, net 4,080,851 4,254,392 Other real estate owned 238,536 83,473 Other assets 12,810,388 12,072,787 $ 280,625,970 $ 250,338,203 The accompanying notes are an integral part of these consolidated financial statements. 3

5 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits Advances from Federal Home Loan Bank Accrued expenses and other liabilities Total liabilities $ 249,470,194 $ 222,033,634 1,700,000 7,775,838 7,289, ,946, ,323,170 Stockholders' equity Preferred stock, $1 par value; 100,000 shares authorized; none issued Common stock, $1 par value; 200,000 shares authorized; 28,284 shares issued; 24,226 shares outstanding at December 31, 2015 and 24,224 shares outstanding at December 31,2014 Surplus Retained earnings Accumulated other comprehensive (loss) income Net unrealized appreciation on securities availableforsale, net of deferred income taxes Net unrecognized loss on pension and other postretirement benefit costs, net of deferred income taxes Net unrealized loss on derivative instrument, net of deferred income taxes Treasury stock, at cost, 4,058 shares in 2015 and 4,060 shares in 2014 Total stockholders' equity 28,284 28,284 1,070,883 1,070,883 24,145,080 22,982, ,706 1,118,953 (2,654,892) (2,844,548) (106,711) (53,967) (1,286,412) (1,287,346) 21,679,938 21,015,033 $ 280,625,970 $ 250,338,203

6 Consolidated Statements of Income Years Ended Interest and dividend income Loans $ 7,666,770 $ 7,156,243 Investment securities Taxable 1,621,546 1,510,338 Taxexempt 770, ,435 Other interestearning assets Total interest and dividend income 10,058,635 9,606,252 Interest expense Deposits 387, ,862 Borrowed funds 5, Total interest expense 393, ,772 Net interest income 9,665,541 9,235,480 Provision for loan losses 249, ,000 Net interest income after provision for loan losses 9,416,541 8,985,480 Noninterest income Service charges and fees 1,255,341 1,256,795 Loan servicing fees 292, ,603 Net gain on sales of securities availableforsale 121, ,585 Other 208, ,541 Total noninterest income 1,877,931 1,915,524 Noninterest expenses Salaries and employee benefits 5,580,541 5,111,701 Occupancy 657, ,025 Other 3,060,295 2,798,521 Total noninterest expenses 9,298,322 8,575,247 Income before income taxes 1,996,150 2,325,757 Income tax expense 460, ,309 Net income $ 1,535,371 $ 1,700,448 Basic and diluted earnings per share $ $ The accompanying notes are an integral part of these consolidated financial statements. 4

7 Consolidated Statements of Comprehensive Income Years Ended Net income $ 1,535,371 $ 1,700,448 Other comprehensive loss, net of tax Unrealized (losses) gains on availableforsale securities: Unrealized holding (losses) gains arising during the period Reclassification adjustment for gains included in net income(1) Tax effect (937,546) (121,199) (1,058,745) 423,498 2,324,528 (161,585) 2,162,943 (865,177) (635,247) 1,297,766 Pension and other postretirement plans: Unrecognized gain (loss) on pension and other post retirement plans 316,094 (3,230,699) Tax effect (126,438) 1,292,280 Derivative instrument: Unrealized loss on derivative instrument Tax effect 189,656 (1,938,419) (87,907) 35,163 (89,944) 35,977 (52,744) (53,967) Total other comprehensive loss (498,335) (694,620) Total comprehensive income $ 1,037,036 $ 1,005,828 (1) Reclassified into the consolidated statements of income in net gain on sales of securities availableforsale. The accompanying notes are an integral part of these consolidated financial statements. 5

8 Consolidated Statements of Changes in Stockholders' Equity Years Ended Common Stock Surplus Retained Earnings Net Unrealized Appreciation (Depreciation) on Securities Availablefor Sale Net Unrecognized Loss on Pension and Other Postretirement Benefit Costs Net Unrealized Loss on Derivative Instrument Treasury Stock Total Balance, December 31, 2013 $ 28,284 $ 1,070,883 $ 21,649,290 $ (178,813) $ (906,129) $ $ (1,289,214) $ 20,374,301 Net income 1,700,448 1,700,448 Other comprehensive loss 1,297,766 (1,938,419) (53,967) (694,620) Issuance of treasury stock (4 shares) 1,868 1,868 Cash dividends declared (366,964) (366,964) Balance, December 31, ,284 1,070,883 22,982,774 1,118,953 (2,844,548) (53,967) (1,287,346) 21,015,033 Net income 1,535,371 1,535,371 Other comprehensive loss (635,247) 189,656 (52,744) (498,335) Issuance of treasury stock (2 shares) Cash dividends declared (373,065) (373,065) Balance, December 31, 2015 $ 28,284 $ 1,070,883 $ 24,145,080 $ 483,706 $ (2,654,892) $ (106,711) $ (1,286,412) $ 21,679,938 The accompanying notes are an integral part of these consolidated financial statements. 6

9 Consolidated Statements of Cash Flows Years Ended Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation (Accretion) amortization of discounts and premiums on investments Provision for loan losses Net realized gain on sales of securities availableforsale Writedown of other real estate owned Gain on sale of other real estate owned Deferred income tax (benefit) expense (Increase) decrease in accrued interest receivable Decrease (increase) in other assets Increase in accrued expenses and other liabilities Net cash provided by operating activities Cash flows from investing activities Proceeds from sale of premises and equipment Additions to premises and equipment Loan originations and principal collections, net Net (increase) decrease in federal funds sold (Purchase) redemption of Federal Home Loan Bank stock Purchase of securities availableforsale Proceeds from sales of securities availableforsale Proceeds from sale of other real estate owned Maturities of securities availableforsale Purchase of securities heldtomaturity Maturities of securities heldtomaturity Net cash used by investing activities Cash flows from financing activities Net increase in deposits Net increase (decrease) in shortterm borrowings Issuance of treasury stock Cash dividends paid on common stock Net cash provided by financing activities $ 1,535, ,541 (335,601) 249,000 (121,199) 13,967 (352,783) (93,231) 175, ,302 2,006,958 (276,000) (22,528,148) (55,092) (83,400) (22,772,740) 4,256,028 65,970 12,219,688 (4,658,139) 3,147,856 (30,683,977) 27,436,560 1,700, (373,065) 28,764,429 $ 1,700, , , ,000 (161,585) 53,483 (34,283) 71,643 34,671 (1,403,547) 542,508 1,684,993 8,500 (1,835,347) (4,227,048) 21, ,000 (9,350,458) 3,190, ,110 8,690,492 (3,778,492) 3,431,874 (3,388,164) 3,598,395 (1,400,000) 1,868 (366,964) 1,833,299 Net increase in cash and cash equivalents 87, ,128 Cash and cash equivalents, beginning of year 5,095,733 4,965,605 Cash and cash equivalents, end of year $ 5,183,143 $ 5,095,733 Supplementary cash flow information: Interest paid on deposits and borrowed funds $ 387,670 $ 370,774 Income taxes paid $ $ 600,761 Noncash transactions: Transfer from loans to other real estate owned $ 235,000 $ 3,537 The accompanying notes are an integral part of these consolidated financial statements. 7

10 Nature of Business Champlain Bank Corporation (the Company) is a onebank holding company organized in 1986 and headquartered in Willsboro, New York. The Company maintains offices in Essex and Clinton Counties of New York from which it provides a variety of financial services to individuals and small businesses in Northeastern New York, Western New York and Northern Vermont. Its primary deposit products are demand, savings and term certificate accounts and its primary lending products are consumer and commercial mortgage loans. The Company is subject to the regulations of certain federal and state agencies as well as examinations by those regulatory authorities. 1. Summary of Significant Accounting Policies Basis of Presentation and Consolidation The consolidated financial statements include the accounts of the Company and its whollyowned subsidiary, Champlain National Bank (the Bank). All significant intercompany balances and transactions have been eliminated in consolidation. The Company follows accounting standards as set by the Financial Accounting Standards Board (FASB). FASB sets U.S. generally accepted accounting principles (GAAP) that management follows to help ensure they consistently report the Company s financial condition, results of operations and cash flows. Use of Estimates In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other real estate owned, otherthantemporary impairment losses on securities and the accumulated benefit obligation for the defined benefit plan. In connection with the determination of the allowance for loan losses and the carrying value of other real estate owned, management obtains independent appraisals for significant properties. Significant Group Concentrations of Credit Risk The Company's loans are collateralized by real estate in the Essex and Clinton Counties of New York, Western New York and Northern Vermont. Accordingly, the ultimate collectability of a substantial portion of the Company's loan portfolio is susceptible to changes in economic conditions in these areas. 8

11 Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks. The Company's due from bank accounts, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant risk on cash and cash equivalents. Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as "heldtomaturity" and recorded at amortized cost. Securities not classified as heldtomaturity are classified as "availableforsale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income or loss, net of related income taxes. Declines in the fair value of individual equity securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. For declines in the fair value of individual debt securities availableforsale below their cost that are deemed to be other than temporary, where the Company does not intend to sell the security and it is morelikelythannot that the Company will not be required to sell the security before recovery of its amortized cost basis, the otherthantemporary decline in the fair value of the debt security related to 1) credit loss is recognized in earnings, and 2) other factors are recognized in other comprehensive income or loss. Credit loss is deemed to exist if the present value of expected future cash flows using the effective rate at acquisition is less than the amortized cost basis of the debt security. For individual debt securities where the Company intends to sell the security or morelikelythannot will be required to sell the security before recovery of its amortized cost, the otherthantemporary impairment is recognized in earnings equal to the entire difference between the security s cost basis and its fair value at the balance sheet date. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Nonmarketable equity securities, such as Federal Home Loan Bank of New York (FHLB) stock and Federal Reserve Bank of New York (FRB) stock, are stated at cost. FRB stock is included in other assets on the consolidated balance sheets. These securities are periodically evaluated for impairment. The investments in FHLB stock and FRB stock are required for membership. 9

12 Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are generally reported at their outstanding unpaid principal balances adjusted for chargeoffs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using a method that approximates the interest method. Loans past due 30 days or more are considered delinquent. The accrual of interest on mortgage, commercial real estate and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. Residential real estate loans are generally written down to the collectible amount when the loan is delinquent for 180 consecutive days. Commercial and commercial real estate loans are charged off in part or in full if they are considered uncollectible. Consumer loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. For all loan segments, interest accrued but not collected for loans that are placed on nonaccrual or chargedoff is reversed against interest income. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value. Increases or decreases in the carrying value, due to changes in estimates of future payments and due to the passage of time, are reported as provision for loan losses. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for Loan Losses The allowance for loan losses is based on estimates and ultimate losses may vary from the current estimates. The adequacy of the allowance is evaluated regularly by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. As adjustments become necessary, they are reported in operations for the period in which they become known. Factors considered in evaluating the adequacy of the allowance include previous loss experience, current economic conditions and their effect on borrowers, the performance of individual loans in relation to contract terms, and the estimated fair values of properties to be foreclosed. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Key elements of the above estimates, including those used in independent appraisals, are dependent on the economic conditions prevailing at the time of the estimates. The inherent uncertainties in the assumptions relative to projected sale prices or rental rates of properties may result in the ultimate realization of amounts on certain loans which are different from the amounts reflected in these consolidated financial statements. 10

13 The allowance consists of general, allocated and unallocated components, as further described below. General Component The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following portfolio segments: residential real estate, commercial real estate, commercial and consumer. Management does not further segregate loan segments into loan classes. Management considers historical losses based on a time frame appropriate to capture relevant loss data for each portfolio segment. Management deems 60 months to be an appropriate time frame on which to base historical losses for each portfolio segment. The 60 months may be adjusted to use the most recent 12 months or the maximum 12 months within the 60 month period, whichever is greater. This historical loss factor is adjusted for qualitative factors for each portfolio segment including, but not limited to: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and changes in lending policies; experience, ability, depth of lending management and staff; and national and local economic conditions. Management follows a similar process to estimate its liability for offbalancesheet commitments to extend credit. The qualitative factors are determined based on the various risk characteristics of each portfolio segment. Risk characteristics relevant to each portfolio segment are as follows: Residential real estate All loans in this segment are collateralized by owneroccupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality of this segment. Commercial real estate Loans in this segment are primarily incomeproducing properties or properties occupied by businesses. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates or a general slowdown in business which, in turn, will have an effect on the credit quality of this segment. Management obtains rent rolls and business financial statements on an annual basis at least and continually monitors the cash flows of these loans. Commercial Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment. Consumer Repayment of loans in this segment is generally dependent on the credit quality of the individual borrower. 11

14 Allocated Component The allocated component relates to loans that are classified as impaired. Impairment is measured on a loanbyloan basis for residential real estate, commercial real estate and commercial loans by either the present value of expected future cash flows discounted at the loan s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. The Company recognizes the change in present value attributable to the passage of time as provision for loan losses. Large groups of smaller balance homogenous loans are collectively evaluated for impairment, and the resulting allowance is reported as the general component, as described above. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a casebycase basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (TDR). All TDRs are classified as impaired and measured using the present value of expected future cash flows or appraised value if the property is collateral dependent. Unallocated Component An unallocated component is maintained to cover uncertainties that could affect management s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. There were no changes in the Company s accounting policies or methodology pertaining to the allowance for loan losses during the current period. Credit Related Financial Instruments In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under linesofcredit. Such financial instruments are recorded when they are funded. 12

15 Other Real Estate Owned Assets acquired through, or in lieu of, loan foreclosure are heldforsale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Losses arising from the acquisition of such property are charged against the allowance for loan losses. After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell. Revenues and expenses from operations and changes in the valuation allowance are included in net expenses from other real estate owned in other noninterest expenses. Premises and Equipment Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation computed on the straightline and various accelerated methods over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the life of the improvement or the related lease term. Earnings per Share Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. The Company has a simple capital structure with no dilutive or potentially dilutive instruments outstanding as of December 31, 2015 and The weighted average number of shares outstanding, for both basic and diluted earnings per share, were 24,225 in 2015 and 24,221 in Derivative Financial Instruments The Company recognizes derivatives in the consolidated balance sheets at fair value. On the date the Company enters into the derivative contract, the Company designates the derivative as a hedge of either a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge) or a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge). The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company also assesses, both at the hedge s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows or fair values of hedged items. Changes in fair value of a derivative that is effective and that qualifies as a cash flow hedge are recorded in other comprehensive income or loss and are reclassified into earnings when the forecasted transaction or related cash flows affect earnings. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, that it is unlikely that the forecasted transaction will occur, or that the designation of the derivative as a hedging instrument is no longer appropriate. The Company does not have any fair value hedges. 13

16 Income Taxes Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. FASB Accounting Standards Codification (ASC) 740, Income Taxes, defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company s financial statements. ASC 740 prescribes a recognition threshold of morelikelythannot, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company has adopted these provisions and there was no material effect on the financial statements. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2012 through It is the Company s policy to record interest and penalties to income tax expense. Comprehensive Income or Loss Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized appreciation and depreciation on securities availableforsale, are reported as a separate component of the equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income or loss. 2. Cash and Due from Banks The Company is required to maintain certain reserves of vault cash or deposits with the Federal Reserve Bank. The amount of this reserve requirement, included in cash and due from banks, was approximately $404,000 and $286,000 as of, respectively. 14

17 3. Securities The amortized cost and fair value of securities as of December 31 are as follows: Securities AvailableforSale Debt securities U.S. Government and government sponsored enterprises State and municipal Corporate Mortgagebacked securities Collateralized mortgage obligations Amortized Cost $ 1,500,436 25,000, ,821 53,599,208 1,943,284 Gross Unrealized Gains 2015 $ $ 814, ,269 87,319 Gross Unrealized Losses Fair Value 18,181 $ 1,482, ,275 25,561,465 86, , ,212 53,914,265 51,821 1,978,782 Total securities availableforsale $82,985,590 $ 1,706,487 $ 900,310 $ 83,791,767 Securities HeldtoMaturity Debt securities State and municipal $ 4,066,933 $ 125,691 $ $ 4,192,624 Total securities heldtomaturity $ 4,066,933 $ 125,691 $ $ 4,192,624 Securities AvailableforSale Debt securities U.S. Government and government sponsored enterprises State and municipal Corporate Mortgagebacked securities Collateralized mortgage obligations Amortized Cost $ 1,500,542 25,969, ,484 44,367,171 3,456,213 Gross Unrealized Gains 2014 Gross Unrealized Losses Fair Value $ $ 37,394 $ 1,463,148 1,083,689 48,303 27,004,742 95, ,500 1,172, ,902 45,293,824 91,575 55,315 3,492,473 Total securities availableforsale $76,231,766 $ 2,347,819 $ 482,898 $ 78,096,687 Securities HeldtoMaturity Debt securities State and municipal $ 2,556,650 $ 9,093 $ 4,730 $ 2,561,013 Total securities heldtomaturity $ 2,556,650 $ 9,093 $ 4,730 $ 2,561,013 15

18 At, securities with a carrying value of $61,357,153 and $73,802,063, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. The amortized cost and fair value of debt securities by contractual maturity at December 31, 2015, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. AvailableforSale HeldtoMaturity Amortized Fair Amortized Fair Cost Value Cost Value Within 1 year $ 166,565 $ 166,947 $ 2,993,200 $ 3,000,627 Over 1 year through 5 years 5,010,103 5,007,411 35,000 35,698 Over 5 years through 10 years 7,954,300 8,227, , ,701 Over 10 years 14,312,130 14,497, , ,598 Mortgagebacked securities and collateralized mortgage obligations 55,542,492 55,893,047 $82,985,590 $83,791,767 $ 4,066,933 $ 4,192,624 For the years ended, proceeds from sales of securities availableforsale amounted to $4,256,028 and $3,190,206, respectively. Gross realized gains amounted to $134,570 and $169,621 for 2015 and 2014, respectively. There were $13,371 and $8,036 in realized losses from sales of securities during 2015 and 2014, respectively. There were no sales of securities heldtomaturity during 2015 and Investments with continuous unrealized losses for a period of less than twelve months and twelve months or greater as of December 31, 2015 are as follows: Less than 12 months 12 months or greater Total Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses U.S. Government and government sponsored enterprises $ 1,482,255 $ 18,181 $ $ $ 1,482,255 $ 18,181 State and municipal 5,806, ,275 5,806, ,275 Corporate 855,000 86, ,000 86,821 Mortgagebacked securities 20,697, ,563 8,237, ,649 28,935, ,212 Collateralized mortgage obligations 1,122,626 51,821 1,122,626 51,821 $ 27,986,192 $ 502,019 $10,215,546 $ 398,291 $38,201,738 $ 900,310 16

19 Investments with continuous unrealized losses for a period of less than twelve months and twelve months or greater as of December 31, 2014 are as follows: Less than 12 months 12 months or greater Total Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses U.S. Government and government sponsored enterprises $ $ $ 1,463,148 $ 37,394 $ 1,463,148 $ 37,394 State and municipal 863,902 1,537 2,816,262 51,496 3,680,164 53,033 Corporate 842,500 95, ,500 95,984 Mortgagebacked securities 2,137,563 2,686 10,299, ,216 12,437, ,902 Collateralized mortgage obligations 1,338,852 55,315 1,338,852 55,315 $ 3,001,465 $ 4,223 $16,760,210 $ 483,405 $19,761,675 $ 487,628 Management evaluates securities for otherthantemporary impairment when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and nearterm prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. As of December 31, 2015, the Company had seven securities that had been in a continuous unrealized loss position for 12 months or more. As of December 31, 2014, the Company had 16 securities that had been in a continuous unrealized loss position for 12 months or more. Management believes the unrealized loss positions are primarily due to the changes in the interest rate environment relative to the time of purchase, and general market conditions and there is little risk of loss or default from the counterparties. Because the decline is not attributable to credit quality and the Company has the ability and intent to hold the securities for the foreseeable future to allow for recovery, management has determined the unrealized loss positions are not other than temporarily impaired. 17

20 4. Loans and Allowance for Loan Losses A summary of loans as of December 31 is as follows: Commercial $ 29,305,838 $ 23,576,340 Commercial real estate 88,202,285 75,048,459 Residential real estate 50,854,695 47,026,424 Consumer 2,984,048 3,594, ,346, ,245,242 Allowance for loan losses (3,000,584) (2,830,017) Net deferred loan costs 883, ,445 Loans, net $ 169,229,818 $ 147,185,670 The following summarizes changes in the allowance for loan losses, by portfolio segment, for the year ended December 31, 2015: Commercial Residential Commercial Real Estate Real Estate Consumer Unallocated Total Balance at beginning of year $ 445,439 $ 1,194,529 $ 351,186 $ 315,444 $ 523,419 $ 2,830,017 Loans charged off (56,465) (82,677) (139,142) Recoveries of loans previously charged off 19,037 1,650 40,022 60,709 Provision for loan losses 78,482 2,036 31,899 8, , ,000 Balance at end of year $ 486,493 $ 1,196,565 $ 384,735 $ 281,252 $ 651,539 $ 3,000,584 The following summarizes changes in the allowance for loan losses, by portfolio segment, for the year ended December 31, 2014: Commercial Residential Commercial Real Estate Real Estate Consumer Unallocated Total Balance at beginning of year $ 547,532 $ 1,091,830 $ 386,929 $ 279,593 $ 341,521 $ 2,647,405 Loans charged off (2,003) (30,462) (64,175) (96,640) Recoveries of loans previously charged off 45 3,586 25,621 29,252 Provision (reduction) for loan losses (100,135) 102,699 (8,867) 74, , ,000 Balance at end of year $ 445,439 $ 1,194,529 $ 351,186 $ 315,444 $ 523,419 $ 2,830,017 18

21 The following table presents the allowance for loan losses and select loan information for the year ended December 31, 2015: Commercial Commercial Real Estate Residential Real Estate Consumer Unallocated Total Allowance for loan losses Individually evaluated for impairment Collectively evaluated for impairment $ 194, ,788 $ 30,810 1,165,755 $ 12, ,119 $ 30, ,252 $ $ 268, ,539 2,732,453 Ending balance $ 486,493 $ 1,196,565 $ 384,735 $ 281,252 $ 651,539 $ 3,000,584 Loans Individually evaluated for impairment Collectively evaluated for impairment $ 704,061 28,601,777 $ 259,878 87,942,407 $ 46,006 50,808,689 $ 78,466 2,905,582 $ 1,088, ,258,455 Ending balance $ 29,305,838 $ 88,202,285 $ 50,854,695 $ 2,984,048 $ 171,346,866 The following table presents the allowance for loan losses and select loan information for the year ended December 31, 2014: Commercial Residential Commercial Real Estate Real Estate Consumer Unallocated Total Allowance for loan losses Individually evaluated for impairment $ 110,500 $ 64,803 $ 13,205 $ 60,000 $ $ 248,508 Collectively evaluated for impairment 334,939 1,129, , , ,419 2,581,509 Ending balance $ 445,439 $ 1,194,529 $ 351,186 $ 315,444 $ 523,419 $ 2,830,017 Loans Individually evaluated for impairment $ 714,588 $ 1,206,146 $ 115,065 $ 129,029 $ 2,164,828 Collectively evaluated for impairment 22,861,752 73,842,313 46,911,359 3,464, ,080,414 Ending balance $ 23,576,340 $ 75,048,459 $ 47,026,424 $ 3,594,019 $ 149,245,242 Management s judgment of the likelihood of a loss is demonstrated by the internal risk rating assigned to each loan in the commercial, commercial real estate, residential real estate, and consumer portfolios. 19

22 The commercial, commercial real estate and residential real estate loans are monitored for quality and the likelihood of loss. Based on current information surrounding the facts and circumstances of the loan, an internal credit rating is assigned. Credit ratings 13W are deemed to be a performing loan with no significant likelihood of loss. The ratings are further measured as follows: 4 special mention, 5 substandard, 6 doubtful, and 7 loss. Each of these ratings is supported by the facts and circumstances surrounding the loan that would cause a higher probability of some loss and thus, as the rating progresses up the scale, a higher reserve for loan loss is allocated to the particular group mentioned. Loans rated 1 Loans in this category are secured by cash or cash equivalent securities held by the Bank. In the event of default, the instrument would be liquidated to satisfy any unpaid balance. Loans rated 2 Loans in this category include borrowers of unquestioned credit standing and a consistently strong financial condition as evidenced by earnings, liquidity, leverage and cash flow. Loans rated 3 These loans include borrowers that have most of the characteristics of a loan rated 2, but the financial condition, management, or industry is not quite as strong. Loans rated 3W These loans are considered watch list. While these loans are creditworthy, they exhibit some characteristics which require special attention by the loan officer. This is the lowest permissible rating for a new loan. Loans rated as 3W are closely monitored as any deterioration may be cause for prompt rerating to 4 or lower. Principal areas of concern may be management problems, industry stress, financial deterioration, operating losses, inadequate cash flow, highly cyclical industries, or any other area that would negatively affect the borrower's ability to repay the obligation in full on a timely basis. Loans rated 4 Loans in this category are considered special mention. These loans are considered protected but may have potential weaknesses, which may weaken the asset or inadequately protect the Bank's credit position at some future date. Loans rated 5 Loans in this category are considered substandard. These loans might be inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified often have welldefined weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans rated 6 Loans in this category are considered doubtful. Loans classified as doubtful have all the weaknesses inherent in a loan classified as substandard with the added characteristic that the weaknesses may make collection in full improbable on the basis of currently existing facts, conditions and values. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may strengthen the asset; its rating as 7 is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. 20

23 Loans rated 7 Loans in this category are considered loss or uncollectible. For these loans it is not practical or desirable to defer writing off the loan even though partial recovery may be affected in the future. Consumer loans are credit rated as either a pass or substandard. A loan is typically rated substandard when it becomes 90 days past due or in circumstances such as bankruptcy or excessive tax liens. Higher reserves are allocated to substandard consumer loans as there would be a higher probability of loss. Consumer loans that reach 180 days delinquent are charged off. The following table summarizes credit risk indicators by portfolio segment as of December 31, 2015: Credit Risk Exposure Credit Risk Profile by Internally Assigned Grade Commercial Residential Commercial Real Estate Real Estate Consumer Pass $ 26,336,444 $ 86,823,282 $ 50,768,770 $ 2,935,743 Special mention 1,487, ,815 5,741 48,305 Substandard 1,482, ,188 80,184 Doubtful Loss Total $ 29,305,838 $ 88,202,285 $ 50,854,695 $ 2,984,048 The following table summarizes credit risk indicators by portfolio segment as of December 31, 2014: Credit Risk Exposure Credit Risk Profile by Internally Assigned Grade Commercial Residential Commercial Real Estate Real Estate Consumer Pass $ 20,360,725 $ 72,990,761 $ 46,855,076 $ 3,594,019 Special mention 2,501, ,382 11,861 Substandard 714,588 1,351, ,487 Doubtful Loss Total $ 23,576,340 $ 75,048,459 $ 47,026,424 $ 3,594,019 21

24 The following table presents an aging analysis of past due loans as of December 31, 2015: 3059 Days Past Due 6089 Days Past Due 90 Days Total and Greater Past Due Current Total Loans Loans on Nonaccrual Commercial Commercial real estate Residential real estate Consumer $ $ 183,274 54,629 $ $ $ 29,305,838 $ 29,305,838 $ 16, , ,733 87,994,552 88,202,285 42,411 17, ,038 50,653,657 50,854,695 14,541 53, ,577 2,875,471 2,984,048 63,926 Total $ 237,903 $ 225,497 $ 53,948 $ 517,348 $ 170,829,518 $ 171,346,866 $ 137,244 The following table presents an aging analysis of past due loans as of December 31, 2014: 3059 Days 6089 Days 90 Days Total Total Loans on Past Due Past Due and Greater Past Due Current Loans Nonaccrual Commercial Commercial real estate Residential real estate Consumer $ $ 281,499 22, , ,532 36,183 8,400 $ 24,832 $ 454,620 68,021 1,526 24,832 $ 23,551,508 $ 23,576,340 $ 954,651 74,093,808 75,048, ,539 46,899,885 47,026, ,392 3,440,627 3,594, ,972 68,021 29,609 Total $ 447,300 $ 263,115 $ 548,999 $ 1,259,414 $ 147,985,828 $ 149,245,242 $ 791,602 There were two loans greater than ninety days past due and still accruing interest at December 31, Neither loan was placed on nonaccrual status subsequent to the balance sheet date. There were no loans greater than ninety days past due and still accruing interest at December 31,

25 The following table presents a summary of information pertaining to impaired loans by loan segment as of and for the years ended December 31: 2015 Recorded Investment Unpaid Principal Balance Average Recorded Investment Related Allowance With no related allowance recorded: Commercial Commercial real estate Residential real estate Consumer $ 14,989 42,411 30,161 $ 14,989 42,411 30,161 $ 19,072 46,536 33,744 $ With an allowance recorded: Commercial Commercial real estate Residential real estate Consumer $ 689, ,467 46,006 48,305 $ 689, ,467 46,006 48,305 $ 735, ,563 46,525 49,962 $ 194,705 30,810 12,616 30,000 Total: Commercial Commercial real estate Residential real estate Consumer $ 704, ,878 46,006 78,466 $ 704, ,878 46,006 78,466 $ 754, ,099 46,525 83,706 $ 194,705 30,810 12,616 30, Recorded Investment Unpaid Principal Balance Average Recorded Investment Related Allowance With no related allowance recorded: Commercial $ $ $ $ Commercial real estate 693, , ,381 Residential real estate 68,021 68,021 77,107 Consumer 29,609 29,609 33,041 With an allowance recorded: Commercial $ 714,588 $ 714,588 $ 799,698 $ 110,500 Commercial real estate 512, , ,490 64,803 Residential real estate 47,044 47,044 47,544 13,205 Consumer 99,420 99,420 99,881 60,000 Total: Commercial $ 714,588 $ 714,588 $ 799,698 $ 110,500 Commercial real estate 1,206,146 1,206,146 1,236,871 64,803 Residential real estate 115, , ,651 13,205 Consumer 129, , ,922 60,000 Interest income recognized on impaired loans is deemed immaterial to the consolidated financial statements. No additional funds are committed to be advanced in connection with impaired loans. No loans were restructured during the years ended. 23

26 5. Premises and Equipment A summary of the cost and accumulated depreciation of premises and equipment follows: Land and improvements Buildings and improvements Furniture and equipment Construction in progress Accumulated depreciation $ 550,119 5,347,810 5,062,203 9,722 10,969,854 (6,889,003) $ 550,119 5,290,037 4,881,645 44,010 10,765,811 (6,511,419) $ 4,080,851 $ 4,254,392 Pursuant to the terms of noncancelable lease agreements in effect at December 31, 2015, pertaining to office space for two Plattsburgh branches, future minimum rent commitments under various operating leases are as follows: 2016 $ 87, ,275 Total $ 150,629 The leases contain options to renew. The cost of such renewals is not included above. Total rent expense for the years ended, amounted to $99,575 and $111,989, respectively. 6. Deposits The aggregate amount of time deposits in denominations of $250,000 or more at December 31, 2015 and 2014, was $11,246,750 and $9,594,161, respectively. At December 31, 2015, the scheduled maturities of time deposits are as follows: 2016 $ 50,501, ,574, ,867, , ,800 Total $60,772,312 24

27 7. Advances from Federal Home Loan Bank Pursuant to collateral agreements with the FHLB, advances are collateralized by all stock in the FHLB, qualifying first mortgages and specific securities availableforsale. At December 31, 2015, the Bank had a fixed rate advance of $1,700,000 with an interest rate of.52% and a maturity date of January 4, The Bank had no outstanding advances at December 31, At December 31, 2015, the Bank's total FHLB borrowing capacity was $75,782,911 of which $74,082,911 was unused and available for additional borrowings. The Bank's total borrowing capacity from the Federal Reserve Bank was $25,840,461 at December 31, The Bank also had $7,000,000 available under longterm lines of credit at December 31, 2015 from two financial institutions. There were no amounts outstanding under these lines of credit at December 31, 2015 or Income Taxes Allocation of federal and state income tax expense between current and deferred portions is as follows: Current tax expense Federal State $ , ,725 $ ,754 88,912 Deferred tax (benefit) expense 813,562 (352,783) 553,666 71,643 $ 460,779 $ 625,309 25

28 The income tax provision differs from the expense that would result from applying federal statutory rates to income before income taxes, as follows: Computed tax expense $ 678,691 $ 790,757 Increase (reduction) in income taxes resulting from: Taxexempt interest State taxes, net of federal benefit (265,721) 132,478 (324,414) 58,682 Income from life insurance Other (67,150) (17,519) (12,022) 112,306 $ 460,779 $ 625,309 The components of the net deferred income tax asset, included in other assets, are as follows: Deferred tax assets Allowance for loan losses $ 1,061,254 $ 1,014,120 Deferred compensation plans 1,731,959 1,663,615 AMT credit carryforward 616, ,194 Net unrealized loss on derivative instrument 71,140 35,977 Other 209,630 61,612 3,690,229 3,433,518 Deferred tax liabilities Prepaid pension and other postretirement benefits 1,148,241 1,186,750 Depreciation 421, ,085 Net unrealized gain on securities availableforsale 322, ,968 1,892,505 2,320,803 Net deferred income tax asset $ 1,797,724 $ 1,112,715 26

29 9. Financial Instruments with OffBalanceSheet Risk The Company is a party to creditrelated financial instruments with offbalancesheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company's exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for onbalancesheet instruments. At, the following financial instruments were outstanding whose contract amounts represent credit risk: Contract Amount Commitments to grant loans $ 7,017,295 $ 5,719,274 Unfunded commitments under lines of credit 27,231,213 25,173,646 Commercial and standby letters of credit 187, ,000 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management's credit evaluation of the customer. Unfunded commitments under revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed. Standby letters of credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. To reduce credit risk related to the use of creditrelated financial instruments, the Company might deem it necessary to obtain collateral. The amount and nature of the collateral obtained is based on the Company's credit evaluation of the customer. Collateral held varies, but may include cash, securities, accounts receivable, inventory, property, plant and equipment, and real estate. 27