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February 4, 2020 Bapk Dear Stockholder, saaGeneseeSueet ‘FN¢losed is our yearly stockholders’ packet of information. It Utica, NY 13502 includes this my twentieth annual President’s Letter, 2019 Financial Statements, Summary Statement of Condition, Notice of Annual Shareholders’ Meeting and, if you are a voting stockholder of record, a Proxy form. If you keep your stock in a brokerage account and you did not get this package of information in a timely fashion you should complain to your broker. We meet our legally prescribed ser aeseesdda time frame on when we FedEx this information to the proxy service 35.7872700 companies. It is then their responsibility to get it to the brokers, and in turn their responsibility to get it to you (as a beneficial owner) in a timely fashion. If you experience delays in getting this package of sepositoperaion: ‘formation you can always tell your broker to convert your stock 5.797276 into a physical certificate form in which case you would as opposed to being a beneficial owner become a stockholder of record on our books. We then would mail this package of information directly to you and there would be no proxy service company or stock broker *ysronarie. middlemen involved to screw things up. If you hold voting stock on the books of the Bank (i.e. are a stockholder of record) please sign and return the Proxy form to the ees Bank in the envelope provided so that your vote can be registered at the meeting. For those of you who own voting stock and safe-keep it with a broker, you can vote by following the instructions of whatever proxy service company your broker chooses to utilize. Typically you would thereby vote by internet, telephone, or a proxy card. In January we paid our 185t consecutive semi-annual dividend. It was $7.75 which would project to $15.50 for the year. If you are a stockholder of record the dividend was mailed to you on January 14* or, if you elected direct deposit, automatically deposited to your account on that date. If you do not yet utilize this faster and more WWW.BANKOFUTICA.coM MEMBER FDIC secure option, we recommend it - simply fill out the Stockholder Dividend Direct Deposit Authorization Form we sent you with your dividend (or contact us to get one) and return it to us. We can only direct deposit dividends into a stockholder’s (your) account. If you want your dividends to go to a person other than yourself, you would need us to directly pay your dividends to you by check which you could then in turn endorse over to whoever you wish. If you are rather a beneficial owner, i.e. hold your stock with a stockbroker, you would have received your dividend through it. We had another fine year in 2019 with our net operating income coming in at around $9 million. I’m guessing our profits will drop a bit this year as we currently intend to endeavor to hold onto our deposits which means it is unlikely we can lower the rates we pay on them too very much due to competition (primarily from local credit unions who have an edge over us community banks because they unfairly do not have to pay income taxes even though as a practical matter can pretty much do whatever we can do and have no membership requirements). On the other hand what we can earn on our investments is edging downwards. Due to United States Generally Accepted Accounting Principles (US GAAP) we now must show changes in market value of equity securities on our income statement. In past years such changes only had to be shown on the balance sheet. These market values go up and down. In 2019 they went up $15 million. This year they might go down that amount, or more. No one knows. By different historical measures the stock market is in a bubble, with the other side of the coin being there is so much money in the world it has to go somewhere. It’s just such a shame that the world’s wealth isn’t more evenly distributed as the disparity of wealth in America is the worst it has been since the days of the robber barons. If our stocks do plunge in value this year we might be reporting a loss on our comprehensive income for 2020. However were that to happen it wouldn’t mean that we are not doing well in our core business. | talked about this in a bit more detail in my President's Letter last year. Be prepared for us to potentially have wild swings in our reported comprehensive income in the future. Our capital planning is such that we want to have a sufficient level to weather a recession more pronounced than the 2007-2009 Great Recession which resulted in the worst economic downturn in our country in 90 years. Our total WWW.BANKOFUTICA.cOM risk based capital ratio is now 20% compared to, say, that of our main correspondent Bank of New York Mellon which sports a 13% ratio. We should thus be able to weather whatever may come our way. How we do this year will as usual for us, be determined to a good extent on conditions prevailing in the world capital markets, over which we have no control. We believe strongly in social responsibility, it is of the utmost importance to us. The idea that a corporation is not in business just to make money is becoming more and more prevalent. Most notably The Business Roundtable has been taking a position on this. It is the most prominent business group in our country comprising of America’s most powerful companies’ CEOs including, to name a few, Amazon, Apple, JP Morgan Chase, Coca-Cola, Black Rock, GM, Vanguard, IBM, Walmart, AT&T, Boeing, etc. This past August it issued a new “Statement on the Purpose of a Corporation” which was endorsed by 181 of its 188 members. It is nothing less than a call to rethink capitalism. It says companies should be concerned with: 1) “Delivering value to our customers”, 2) “Investing in our employees”, 3) “Dealing fairly and ethically with our suppliers’, 4) “Supporting the communities in which we work and 5) Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate”. Their statement pretty much espouses the same values as we do in our long-term Mission Statement. Will American capitalism really become more benign? BANK OF UTICA MISSON STATEMENT We have four basic components that govern how we function and define our corporate culture. We will endeavor to: + Treat ethically our customers and creditors, which is as we would want to be treated. + Treat our employees fairly, with our loyalty towards them engendering their loyalty to us. + Support and contribute to our Greater Utica community, recognizing all that we have is an outgrowth of it. + Earn as attractive a return as possible for our shareholders, commensurate with our unique risk profile, paying particular attention to the long-term interests of the Bank, so long as the above first three items are not compromised. WWW. BANKOFUTICA.COM We are a privately held bank and via this annual letter we provide to all of our shareholders as a group certain information about the Bank. We do not provide additional information, in particular on an individual or accelerated basis so that no preference or advantage is inadvertently conveyed. If you wish, you can track our financial performance by accessing the FDIC website www.fdic.gov as it is there that the government makes some seventy pages of our Call Report data public (only certain confidential sections are withheld) which you can analyze and interpret as you see fit. Sincerely, — ia } ~ Masmuadia Tom Sinnott President TES/enw Encls. WWW. BANKOFUTICA.COM BANK OF UTICA NOTICE OF 2020 ANNUAL MEETING OF SHAREHOLDERS The Annual Meeting of Shareholders will be held at the bank offices, 222 Genesee Street, Utica, New York Tuesday, February 18, 2020 at 3:00 p.m. ‘The meeting is private and not open to the public. Itis only open to those who are our stockholders as of January 31, 2020. The following items of business will be addressed: 1. Election of Directors. ‘The Board proposes for election and recommends the stockholders vote for the following slate of directors to serve until the next (2021) Annual Meeting and until their successors are elected and have qualified, or to serve until death or resignation if earlier: David S. Allen, Lawrence T. Gilroy IIL, R. Nichols Sheldon, Barry J. Sinnott, Tom E. Sinnott, Anthony Spiridigloizzi and Stephen L. Walthall. 2. Such other business as may properly come before the mecting of stockholders. FOR VOTING STOCKHOLDERS OF RECORD (Those holding their stock on the books of the Bank): ‘To ensure your vote is represented at the meeting we encourage you to promptly sign, date and return the accompanying proxy in the envelope provided. If you later decide to personally attend the meeting you can always revoke that proxy, and, with proper identification acceptable to the Inspector of Election, vote your shares yourself. You also may name another person as your proxy to attend the meeting and vote your shares by following the instructions on the proxy. Of course non-v stockholders are not eligible to appoint a proxy. FOR STOCKHOLDERS WHO HOLD THEIR STOCK AT BROKERS: © Ifyou hold your stock (whether voting or non-voting) at a broker, you are welcome to attend the meeting. However since you are thus not a stockholder of record on the books of the Bank, you must ‘contact your stock broker to arrange having proper identification (ID and account statement) so that the bank’s Inspector of Election can know that you are indeed a beneficial owner of Bank of Utica stock and allow you access into the meeting © Ifyou own voting stock, we encourage you to vote (typically by internet, telephone, or by signing, dating and returning a voter proxy card) as per the instructions of whatever proxy servicing company your broker utilizes. If you wish to attend the meeting and vote in person, check the box on their instruction card which allows you to do this, and they will issue you a LEGAL PROXY which ‘you must bring to the meeting, along with proper ID, so the bank’s Inspector of Election can know you are indeed our voting stockholder and eligible to vote your shares in person. If you have ‘questions regarding this process, contact your stock broker to walk you through whatever particular process their proxy servicing company chooses to utilize. in ‘Tom E. Sinnott, President Dated: February 4, 2020 December 31, 2019 ‘ Bank Utica in a league all our own. BANK OF UTICA AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS. YEARS ENDED DECEMBER 31, 2019 & 2018 Report of Independent Certified Public Accountants. Consolidated Statements of Financial Conditior Consolidated Statements of Income and Comprehensive Income. Consolidated Statements of Changes in Shareholders’ Equity. Consolidated Statements of Cash Flows.. Notes to Consolidated 14 9-31 MAZARS Independent Auditors’ Report To the Board of Directors and Stockholders of Bank of Utica and Subsidiary We have audited the accompanying consolidated financial statements of Bank of Utica and Subsidiary, which comprise the consolidated statement of financial condition as of December 31, 2019 and 2018, and the related consolidated statements of income and comprehensive income, changes in stockholders” equity, and cash flows for the years then ended, and the related notes to the consolidated 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 zenerally 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 financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ 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. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bank of Utica and Subsidiary as of December 31, 2019 and 2018, and the results of its ‘operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Mazas USA LLP ‘ys West sorn Sracer— New Yous, New York ~ 10020 Tex: 22.812 7000 ~ Fax: 312375.6888 — ww w.wazansuscom Praxity: Mazaas USA LLP san mocenoenr mewacs Fine oF Mazane Gnour. BREAN MAZARS Other Matter We also have audited, in accordance with auditing standards generally accepted in the United States of America, the intemal control over financial reporting of Bank of Utica and Subsidiary as of December 31, 2019, based on criteria established in the 2013 internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated January 30, 2020 expressed an ‘unqualified opinion thereon. Maxyene UA LP Mazars USA LLP New York, New York January 30, 2020 MAZARS Independent Auditors’ Report To the Board of Directors and Stockholders of Bank of Utica and Subsidiary We have audited the internal control over financial reporting of Bank of Utica and Subsidiary as of December 31, 2019, based on criteria established in the 2013 internal Control ~ Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management's Responsibility for Internal Control over Financial Reporting ‘Management is responsible for designing, implementing, and maintaining effective internal control over financial reporting, and for its assessment about the effectiveness of internal control over financial reporting, included in the accompanying “Management Report Regarding Combined Statement of Management’s Responsibilities, Report on Management’s Assessment of Compliance with Designated Laws and Regulations, and Report on Management's Assessment of Internal Control Over Financial Reporting,” Auditors’ Responsibility ‘Our responsibility is to express an opinion on the Institution’s internal control over financial reporting based on ‘our audit. We conducted our audit 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 effective internal control over financial reporting was maintained in all material respect. An audit of intemal control over financial reporting involves performing procedures to obtain audit evidence about whether a material weakness exists. The procedures selected depend on the auditor's judgment, including the assessment of the risks that a material weakness exists. An audit includes obtaining an understanding of internal control over financial reporting and testing and evaluating the design and operating effectiveness of internal control over financial reporting based on the assessed risk. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Definition and Inherent Limitations of Internal Control over Financial Reporting An institution’s internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with accounting principles generally accepted in the United States of America, Because management's assessment and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), our audit of Bank of Utica and subsidiary internal control over financial reporting included controls over the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and with the Federal Financial Institutions Examination Council Instructions for Consolidated Reports of Condition and Income (call report instructions). An institution's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the institution; (2) provide reasonable assurance that transactions are Mazans USA LLP 135 Wear sor Srnezr ~ New Yons, New Yonx ~ 10020 TeL: 212.812.7000 ~ FAX: 212.375.6888 ~ Wwe MAZARSUSA.COM Mazaas USALLP fw WoceeNDENT MEMaCH ria OF Mazaas GROUP, ADAH BUBB Mazars recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the institution are being. made only in accordance with authorizations of management and those charged with governance; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use, or disposition of the institution's assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compli policies or procedures may deteriorate. Opinion In our opinion, Bank of Utica and subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 internal Control Integrated Framework issued by COSO. Report on Financial Statements We also have audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated financial statements of Bank of Utica and subsidiary as of and for the year ended December 31, 2019, and our report dated January 30, 2020 expressed an unqualified opinion on those consolidated financial statements. Margera UP LLP ‘Mazars USA LLP New York, New York January 30, 2020 BANK OF UTICA AND SUBSIDIARY Consolidated Statements of Financial Condition Assets Cash and Cash Equivalents Investment Securities Held to Maturity (fair value of $936,862,193 and $849,950,921 and includes $234,434,568 and $210,365,866 pledged securities as of December 31, 2019 & 2018, respectively) Equity Securities, at Fair Value Loans Receivable Allowance for Loan Losses Loans Receivable, net Premises and Equipment, net Accrued Interest Receivable Other Assets Total Assets Liabilities and Shareholders’ Equity Deposits Deferred Tax Liability, net Accrued Interest Payable Other Liabilities Total Liabilities ‘Commitments and Contingencies (Note 11) Shareholders’ Equity Voting Common Stock - $20 Par Value, Authorized 50,000 Shares, Outstanding 50,000 Shares Nonvoting Common Stock - $20 Par Value, Authorized 200,000 Shares, Outstanding 200,000 Shares Capital Surplus Retained Earnings Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity December 31, 2019 2018 $ 17,606,529 $33,259,289 920,574,660 861,196,312 86,491,015 71,677,254 89,561,340 75,657,634 (41,290,729) 1,804,784) 88,270,611 73,852,850 20,900,807 21,848,383 8,570,817 8,181,984 1,969,498 2,662,308 $1,144,383,937 $1,072,677,380, $ 885,922,413 $ 835,457,810 13,231,390 9,800,339 1,171,039 818,368 —— 2,635,136 __2,627,976 902,959,978 848,704,493 1,000,000 1,000,000 4,000,000 4,000,000 208,900,000 193,600,000 27,523,959 25,372,887 241,423,959 223,972,887 $1.144,303,997 $1,072,677,380 ‘The accompanying notes are an integral part of these consolidated financial statements Page 5 Interest and Dividend Income: Investment Securities: Taxable Exempt from Federal Income Tax Dividend Income Loans Interest Bearing Deposits in Banks Federal Funds Sold Total Interest and Dividend Income Interest Expense Interest on Deposits & Borrowed Funds Net Interest Income Non-interest Income Net Gain on Unrealized Gain/Loss of Investment Securities Net Gain on Disposal of Investment Securities Service Charges on Deposit Accounts Service Charges and Fees Other Total Non-interest Income Non-interest Expense Net Loss on Unrealized Gain/Loss of Investment Securities Salaries, Employee Benefits and Training Occupancy and Information Technology Regulatory - FDIC and NYS Banking Department Provision for Loan Loss Reserves Other Total Non-interest Expense Income Before Income Taxes Income Tax Expense Net Income. Net Income per Share of Common Stock Shares Outstanding Other Comprehensive Income Comprehensive Income BANK OF UTICA AND SUBSIDIARY Consolidated Statements of Income and Comprehensive Income ‘Year Ended December 31, 2019 $ 23,639,098 2,371,073 2,236,256 4,239,455 300 583,745 33,069,927 14,963,256 18,106,671 15,051,445 1,141,793 349,010 2,700 185,969 16,730,917 3,779,847 2,872,502 185,423 1,915,683 8,723,455 26,114,133 4,850,561 21,263,572 $ 85.05 250,000 $_21,263,572 2018 $ 19,524,130 2,557,258 2,278,491 3,530,102 527 349,854 28,240,362 9,412,469 18,827,893 15,850,064 384,696 2,700 120,596 16,358,056 19,773,690 3,538,627 2,776,770 399,898 210,000 4,769,925 28,468,910 6,717,039 480,438 6,236,601 $_ 2495 250,000 $6,236,601 ‘The accompanying notes are an integral part of these consolidated financial statements Page 6 BANK OF UTICA AND SUBSIDIARY Consolidated Statements of Changes in Shareholders’ Equity Years Ended December 31, 2019 and 2018 ‘Accumulated Other Voting _Non-Voting Comprehensive Total Common Common Capital Retained Income,Net_ Shareholders’ Stock Stock Surplus Earnings of Tax Equity Balance at December 31, 2017 $ 1,000,000 $ 4,000,000 $ 146,900,000 $ 30,103,767 $ 39,407,519 $ 221,411,286 Comprehensive Income: Net Income - - - 6,236,601 - 6,236,601 Other Comprehensive Income - - - - - - Total Comprehensive Income 6,236,601 Dividends Declared - : - (8,675,000) - (3,875,000) Transfer = = __ 48,700,000 (7,292,481) __ (39,407,519) : Balance at December 31, 2018 41,000,000 4,000,000 193,600,000 25,372,887 : 223,972,887 Comprehensive Income: Net Income - - : 21,263,572 - 21,263,572 Other Comprehensive Income - - : - - = Total Comprehensive Income 21,263,872 Dividends Dectared : - - 8,812,500) : (8,812,500) Transfer : = __15,300,000 (1,300,000) : = Balance at December 31, 2019 $1,000,000 $4,000,000 $_ 208,900,000 $ _27,523,959 $ __- ‘$_241,423,959 ‘The accompanying notes are an integral part of these consolidated financial statements Page7 BANK OF UTICA AND SUBSIDIARY Consolidated Statements of Cash Flows Cash Flows from Operating Activities: Net Income ‘Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Depreciation and Amortization Deferred Income Tax (Benefit) Investment Securities Amortization, net Net Gain on Disposal of Investment Securities Net (Gain) Loss on Unrealized Gain/Loss of Investment Securities Donation of Equity Securities (Increase) Decrease in Accrued Interest Receivable and Other Assets Increase (Decrease) in ‘Accrued Interest Payable and Other Liabilities Net Cash Provided by Operating Activities: Cash Flows from Investing Activities: Proceeds from Redemptions, Principal Payments, Maturities and Sales of Securities Held to Maturity Purchase of Securities Held to Maturity Proceeds from Sales of Equity Securities Increase in Loans, net Purchases of Premises and Equipment Net Cash Provided by (Used in) Investing Activities: Cash Flows from Financing Activities: Increase in Deposits, net Dividends Paid Net Cash Provided by Financing Activities: Net increase (Decrease) in Cash and Cash Equivalents Cash and Equivalents at Beginning of Year Cash and Equivalents at End of Year ‘Supplemental Disclosures Cash Paid for Interest Cash Paid for Taxes. Non-Cash Financing Activities Dividends Declared and Payable Year Ended December 31, 2019 $ 21,263,572 1,565,192 3,431,051 4,771,904 (1,141,793) (15,051,445) 1,114,120 303,977 297,331 16,553,909 188,465,069 (252,405,109) 54,145 (14,417,761) (617,616) (78,921,272) 50,464,603 (3,750,000) 46,714,603 (15,652,760) 33,259,289 $_17,606,529 $14,610,585 $ 67,093 $_ 1,937,500 2018 $ 6,236,601 1,444,461 (4,043,697) 7,609,586 (15,850,064) 19,773,690 1,086,836 674,562 82,601 17,014,776 181,570,546 (194,740,513) 24,493,535 (8,107,923) (2,674,747) 540,898 12,390,242 (3,600,000) 8,790,242 26,345,916 6,913,373 $_33,250,289 $_9,226,450 $_4070,273 $_1,875,000 The accompanying notes are an integral part of these consolidated financial statements Page 8 BANK OF UTICA AND SUBSIDIARY ‘Notes to Consolidated Financial Statements December 31, 2019 and 2018 Note 1 -Nature of Operations and Summary of Significant Accounting Policies Nature of Operations - The Bank of Utica (the “Bank”) is a privately held full service commercial Bank and accepts deposits, and generates loans primarily in the Utica, New York region, and invests in securities. ‘Summary of Significant Accounting Policies — The accompanying consolidated financial statements have been prepared in all material respects in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and practices within the Banking industry. A description of the more significant policies follo A. Consolidation — The accompanying consolidated financial statements include the accounts of the Bank of Utica and Bank of Utica Investment Subsidiary, Ltd., its wholly-owned subsidiary. Intercompany transactions and balances have been eliminated in consolidation. B. Use of Estimates — The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities atthe date of the consolidated financial statements and the reported amounts of revenue and expense 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, the valuation of deferred tax assets, the fair value of financial instruments, and other-than-temporary impairments of securities. . Cash and Cash Equivalents ~ For the purposes of presentation in the Consolidated Statements of Cash Flows, cash and cash equivalents include cash and due from banks. Cash and cash equivalents have ‘original maturities of three months or less, and accordingly, the carrying amount of these instruments is, deemed to be a reasonable estimate of fair value. D. Investment Securities — Investments in securities are designated as available for sale, held-to-maturity or ‘equity, depending on the nature, and the intent and ability to hold the securities. The initial designation is ‘made at the time of purchase. The Bank did not have a trading securities portfolio as of December 31, 2019 and 2018. ‘On January 1, 2018, the Bank adopted Accounting Standards Update (ASU) No. 2016-01, Recognition and ‘Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 affects all entities that hold financial assets or owe financial liabilities. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of financial statements. For commercial banks, the new guidance primarily affected the measurement of available for sale and equity investments that are at fait value, Changes in fair value are recognized in net income rather than through other comprehensive income as in prior practice. Debt securities that management has both the intent and ability to hold to ‘maturity are carried at amortized cost, adjusted for amortization of premium and accretion of discount ‘computed by the average yield method over their contractual lives. ‘Management conducts periodic evaluations of securities held-to-maturity to determine if the amortized cost basis of a security has been other-than-temporarily impaired. These evaluations of other than temporary impairment (OTTI) consider numerous factors and thei relative significance will vary from case to case. The evaluations consider all attributes of a particular security. Debt securities are deemed to be OTTI if (1) management has the intent to sell the security ata loss, (2) itis more likely than not it will have to sell the security before recovery of its amortized cost, (3) a credit loss has been incurred, or (4) Page 9 BANK OF UTICA AND SUBSIDIARY ‘Notes to Consolidated Financial Statements December 31, 2019 and 2018 there is a probability that a credit loss will be incurred. Credit loss is measured by reference to the present value of expected cash flows discounted at the security's effective interest rate. If a debt security is, deemed to be OTTI, the debt security is written down to fair value by a charge to non- interest income for the credit loss component with any other component of loss recognized through accumulated other comprehensive income (loss), net of tax. Premiums (discounts) on debt securities are amortized (accreted) to income using the level yield method to the contractual maturity date adjusted for actual prepayment experience. Realized gains and losses are determined using the specific identification method and are reported in noninterest income. E. Loans Receivable — The Bank’s loan balance is comprised of loans held in the portfolio, including commercial loans, consumer loans, and residential loans. Loans are reported at their outstanding principal balances adjusted for the allowance for loan losses. Interest income on all types of loans, except those classified as nonacerual, is accrued based upon the outstanding principal amounts. ‘The accrual of interest on loans is discontinued after 90 days delinquent unless such loans are well secured and are in process of collection. Loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Upon discontinuance of accrual of interest, all ‘unpaid accrued interest is reversed. Subsequent receipts of interest are recorded as interest income on a cash basis unless collectability is in doubt, in which case cash payments are applied to principal. Loans may be retumed to accrual status, if and when borrowers demonstrate the ability to repay a loan in accordance with the contractual terms. F. Allowance for Loan Losses — The allowance for loan losses has been determined in accordance with US. GAAP, principally FASB ASC 450, “Contingencies”, (“ASC 450”) and FASB ASC 310, “Receivables”, (“ASC 310”). Under the above accounting principles, management is required to maintain an allowance for probable losses at the balance sheet date. Management is responsible for the timely and periodic determination of the amount of the allowance required. Management believes that the allowance for loan losses is adequate to cover specifically identifiable losses, as well as estimated losses inherent in the pportfotio for which certain losses are probable but not specifically identifiable. The allowance is maintained at a level adequate to absorb losses that have occurred. Management determines the adequacy of the allowance based upon reviews of individual credits, recent loss experience, current economic conditions, the risk characteristics of the various segmentations of loans and other pertinent factors. Credits deemed uncollectible are charged against the allowance. Provisions for credit losses, if any, and recoveries on loans previously charged-off are added to the allowance. ‘The determination of the adequacy of the provision for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. The Bank's charge-off policy meets or is more stringent than regulatory minimums. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part oftheir examination process, periodically review the estimated loan losses. Page 10 BANK OF UTICA AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2019 and 2018 ‘The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established ‘when the discounted cash flows or observable market price or collateral value less liquidation costs, for collateral dependent loans, of the impaired loan is lower than the carrying value of that loan, The general ‘component covers non-classified loans and is based on historical charge-off experience and expected loss S984 $ eux ing summarizes the fair value and unrealized losses for those held to maturity securities which are ‘temporarily impaired. The Bank owned 27 and 280 individual securities that have been in continuous unrealized loss position for less than twelve months and 44 and 382 individual securities that have been in a continuous unrealized loss position for twelve months or longer as of December 31, 2019 and 2018, respectively. Page 16 BANK OF UTICA AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2019 and 2018, December34208 Tess Than Toes Moms Toes Months orlanger Tol ‘Amores —«“Fa—=«Uhealnd ~~ Amorined=—= Far Umeaed—Amoried=—=—=SPa=—=—=—Unralnd cost Whe tosses Cost wie Losses Cost abe losses MongageBucked —§ on at 4 as ee 5 os : : : aes 29nm =e) 8usN aa 309) 45309538 _ 4590356 _(w6.82) _ 709585 _roosae _ HET) _ MOIS _HS9H6BHZ_OHABB) $F W5309598 $ 459G35 $M § TAKER § IATL FDO $ we § mssO 5 OB3—H Decenber312018 Tiss Tan Toes Monte Tene Months or Longer Toul “Amorized—~=Fak~=~=«Calind—Amorned— wealad—Amoniond—~Fak~—~—Unealand con Vike tastes cost Ve tastes Cost vate lesees Mongage Ss oss .4 os ee os : Munkpulsecuies 5090469 sageinss—(@3UHES)—SLT9SO—SIRADG MA) mRAIRAD —BUINDETO. OKA) Cononte Bonds _ 269434974 _266609595 _ SAH) _395540989 _3U4905341 _ LOSER) _ 6477S _6594N92 _ (MBSE) Lampyevore § 30370357 $ ANE FUTLERY $ GROMLNT F —WRTID § TOLATEOM $ 1853900 §_(DOESED ‘The temporary impairment of securities held-to-maturity is primarily attributable to changes in overall market interest rates and/or changes in credit spreads since the investments were acquired. In general, as market interest rates rise and/or credit spreads widen, the fair value of fixed rate securities will decrease, and as market interest rates fall and/or credit spreads tighten, the fair value of fixed rate securities will increase. As of December 31, 2019, the Bank has the ability and intent to hold these securities to maturity or until such time as they are called or prepaid. As of December 31, 2019, management expects to collect all amounts due according to the contractual terms of these securities and does not believe that there are any cases of unrecorded OTTI as of December 31, 2019. During 2019 and 2018, the Bank recognized no other-than-temporary impairment losses (charged against income) related to held to maturity securities. Note 4 — Loans Receivable and Allowance for Loan Losses ‘The components of loans in the consolidated statements of financial condition were as follows: 2019 2018. (Commercial Loans 3 41875007 3 33485269 ‘Commercial Real Estate Loans 35,863,674, 35,346,207 Residential Real Estate Loans 1967498 2,293,109 Consumer Loans 4.658230 4,101,145 Government Guaranteed Loans 4,746,958, - Overdrafts ‘449973 471884 S_ 09561340 S_75.657.634 ‘The Bank evaluates the credit quality of its loan portfolio based on internal credit risk ratings using numerous factors, including rating agency information, collateral, collection experience, and other internal metrics. Ratings are updated at least annually or more frequently if there is a material change in credit worthiness. Page 17 BANK OF UTICA AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2019 and 2018 ‘The rating classifications in use by the Bank are as follows: ass ~ Primary source of loan repayment is satisfactory or better, with secondary sources very likely to be realized if necessary; loan within normal credit standards. ‘Special Mention — An asset classified as special mention have a potential weakness that deserves ‘management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank's credit position at some future date. Substandard — A substandard asset is inadequately protected by the current sound worth and paying, capacity of the obligor or ofthe collateral pledged, if any. Assets so classified must have a well-defined ‘weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibilty thatthe institution will sustain some loss if the deficiencies are not corrected. Doubtful — An asset classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loss — An asset classified loss is considered uncollectable and of such little value that continuance as bankable assets is not warranted. This classification does not mean thatthe asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing-off this basically ‘worthless asset even though partial recovery may be affected in the future, ‘The following table sets forth the loans by credit quality indicator: December 31, 2019 Commercial Residential Government Commercial _Real Estate RealEstate ___Consumer__Gusranteed__Overdrafts___ Total (Credit Rating Pass $ 41,305,434 $ 34,388,101 $1,967,498 $ 4,658,230 $ 4.746958 S$ 449.973 $ 87,516,194 ‘Special Mention - : s é . a - ‘Substandard 5695731475573 qi : - = 2,085,146 Doubtful - - : : - : : Loss : . : : . : $41,875,007 $ 35,863,674 $1,967,498 $ 4658230 $ 4.746958 $89,561,340 December 31,2018 ‘Commercial Residential Government Commercial Real Estate ___RealEstate__Consumer__Guaranteed__Overdrafts___ Total (Credit Rating Pass S$ 32,091,787 $ 34,494,866 $ 2,204,470 $ 4,101,145 S = S$ 471888 $ 73,364,152 Special Mention : : : : . : 5 Substandard 1,353,482 851,361 88,639 : - = 2203,482 Doubtful : : : : : : - Loss : : : : : : : $33,485,269 $ 35346227 $ 293109 $ 410,45 = S_471884 $75,657,634 Page 18 BANK OF UTICA AND SUBSIDIARY ‘Notes to Consolidated Financial Statements December 31, 2019 and 2018 ‘The Bank tracks loan payment activity for the loan portfolio. The payment status for the loan portfolio at December 31, 2019 and 2018 is shown in the table below: December31,2019 309 Days BOF Days, Total Toul 4 ae eee ee Curent a CommercialLoans $226,960 $ ©=—298904- «$525,864 —$ ~—41349,143 $41,875 007 ‘Commercial Real Estate Loans : 6843870 684370 35,178,804 35,863,674 Residential Real Estate Loans 162,588 - 162.588 1.804910 1.967498 ‘Consumer Loans 20068 800 20368 4637362 4,658,230 Government Guaranteed Loans : - : 4.746958 46958 Overdrafts 219806 152498 372304 7,669 449973 Soar. $3702 $_1766494 «SATIN BMG |S _—89,561340 December 31,2018 3089 Days 90% Days Total Total Past Due Past Due Past Due Curent Loans Commercialoans “S—1068665. = S 1064665 “S_32380604 S$ 33,445,200 (Commercial Real Estate Loans 632,745 : 632,745 34,713,482 35,6227 Residential Real Estate Loans 175347 - 115347 217,782 2,293,109 Consumer Loans : 500 ‘300 4,100,645 4,101,145, Government Guaranteed Loans : : . 7 : Overdrafis 36791 394.476 431,267 40617 4734 S__ 1909548 $ 394975 «SF __—2 304524 § 7335.0 F__75,657,634 Performing and non-performing assets are shown in the following table: December 31,2019 December31,2018 ‘Accrual ‘Non-Acsrual ‘Aecwal Non-Accrual Commercial Loans $ 41370102 $ So4gos $33,445,269 S : Commercial RealEstate Loans 35,178,804 684.870 35,346,227 : Residential Real Estate Loans 1.967498 : 2,293,109 - Consumer Loans 300 4,100,645 500 Govemment Guaranteed Loans : . . Overdratis 471884 s S_bios7s $75 657134 500 probable that the Bank will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the agreement. Certain Commercial and Page 19 BANK OF UTICA AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2019 and 2018 Residential loans and those loans whose terms have been modified in a TDR are i idually evaluated for impairment. Smaller balance homogenous loans are collectively evaluated for impairment. Impaired Loans With No Related Allowance Recorded: (Commercial & Commercial Real Estate Residential Overdrafs Impaired Loans With An ‘Allowance Recorded: (Commercial & Commercial Real Estate Residential Overdrafts ‘Total Impaired Loans Impaired Loans With No Related Allowance Recorded: Commercial & Commercial Real Estate Residential Overdratts Impaired Loans With An Allowance Recorded: ‘Commercial & Commercial Real Estate Total Impaired Loans As of December31, 2019 Unpaid ‘Average Principal Allowance ‘Recorded Balance ___Recorded Loan S$ 2598102 = $ 2950032 = __ 2.950032 517301 19813 533322 517301 19813 533,322 S314 $ 19813 $3,483,354 ‘As of December 31,2018 Unpaid ‘Avenge Principal Allowance Recorded. Balance ___Recorded Loan S 1505658 = S$ 1870856 98,639 - 93,994 ae 1.964.850 1,841,045 310858 2,177,166 1,841,045, $_343532 310858 $ 4169048 Page 20 S_ 159.087 YearEnded December31,2019 Tanterest Income Recognized Interest Income —Total__ _Cash Basis__Foregone _ S 100713 $ 110560 $ 115091 110560 __ 115091 18.925 18974 : 18,925 18.974 S_ 119638 $ 129534 $ 115091 ‘Year Ended December31,2018 Tnterest Income Tnterest Recognized Income Total____Cash Basis __Foregone S 71493 S$ 71,30 $ 2788 4606 4575 a 76099 75705 __77.883 2988 nos 32218 BANK OF UTICA AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2019 and 2018 ‘During the normal course of business, the Bank modifies loans to maximize recovery efforts. Ifthe borrower is ‘experiencing financial difficulty and a concession is granted, the Bank considers such modifications as troubled debt restructuring (TDR’s). The types of concessions that the Bank grants typically include forgiveness of principal and interest rate concessions. ‘The following table summarizes the Bank’s loan modification activities that were considered to be troubled debt restructurings during the year ended December 31, 2019: Pre-Modification Post-Modification Loan Type Number Recorded Investment Recorded Investment ‘Commercial & (Commercial Real Estate 6 & 1.147203 s 1,147,203, ‘The Bank had no loan modification activities that were considered troubled debt restructurings for the year ended December 31, 2018. As of December 31, 2019 and 2018, the Bank had commercial loans of $3,115,443 and $2,057,890 that were considered TDR’s with recorded allowances of $19,813 and $22,046, respectively. ‘The Bank does not have a significant concentration of risk to any individual client. However, a geographic concentration arises because the Bank operates primarily in the Central New York region. The Bank does not ‘engage in any intemational banking activities. In its normal course of business, the Bank does not offer interest only loans, other than demand notes, or loans ‘other features that may increase the Bank’s exposure to credit risk and result in a concentration of credit risk. ‘The allowance for loan losses is composed of specific allowances for certain loans and general allowances grouped into loan pools based on similar characteristics. The allowance for loan losses is allocated at year end based on the ALLL Reserve Adequacy Report of required reserves. Additionally, the Bank does not record an allowance for loans that are guaranteed by government agencies, as there is nominal risk of principal loss. ‘An analysis of the change in the allowance for credit losses follows: December 31,2019 ‘Commercial & Commercial Real Estate Consumer Total Beginning Balance Sneeze “S160 SHS CRO TEN ALLL Allocation (18361) aso24 34385 : Charge-Ofs (600 909) - 2.21) (629530) Provision for Loss Reserves - : - : Recoveries 13,100 : 2315 13475 Ending Balance 126.154 § 5 Sey Ge) Page 21 BANK OF UTICA AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2019 and 2018 Decemiber31,2018 ‘Commercial & Commercial Real Estate Residential Consumer Total Beginning Balance r 7 ALLL Allocation (14,332) (490) 14,822 : Charge-Ofis 630,714) : 45,704) G46,18) Provision for Loss Reserves 210,000 - - 210,000 Recoveries 164,229 : 1513 165,742 Ending Balance $1793 § 6m 19436 $1,804,784 ‘The Bank’s loan portfolio and related allowance for loan losses at December 31, 2019 and 2018 are shown in the tables below: December 31,2019 Commercial & ‘Commercial Real Estate Residential Consumer Total Book Value Allowance Book Value Allowance Book Value Allowance Book Value Allowance ‘Loans individually evaluated for impairment $3,115,443 $ 19813 $ -$ -s $+ $ 3115483 $19,813 Loans collectively ‘evaluated for impairment —_ 75,073,209 _1,243,341 _1,967.498 = 4658231 __27575 _ 81,698,938 __1,270916 ‘Total loans evaluated for impairment $78,188,652 $_ 1,263,154 $_1,967498 = $4658231 $ 27575 $ 84814381 $ 1,290,729 December 31,2018 ‘Commercial ‘Commercial Real Estate Residential Consumer Total Book Value Allowance Book Value Allowance _ Book Value Allowance _ Book Value Allowance Loans individually a evaluated for impairment $3,346,703 $ 310858 $88,639 $ -3 = $+ $ 343530 $310,858 Loans coletively evaluated for impairment _ 65,916,677 _ 1.458.466 _2,204470 __16,024 4,101,145 19436 _72.222.292 _1,493,926 Tota loans ‘evaluated for Impairment $69,263,380 $1,769,324 $ 2.293.109 $ 16,024 $ 4,101,145 $ 19436 $ 75,657,634 $_1,804,784 Page 22 BANK OF UTICA AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2019 and 2018 Note 5 — Premises and Equipment ‘Components of premises and equipment included in the consolidated statements of financial condition at December 31, 2019 and 2018 were as follows: Cost: Land Bank Premises & Improvements, Fumiture & Equipment Total Cost, Less Accumulated Depreciation ‘Net Book Value December 31 2019 2018 s 793,540 s 79540 25074,748 24508499 4,482,209 430,838 29/6363 29018877 8,735,686 7.170894 $_20300,807 S_ 21,848,383 Depreciation and amortization charged to equipment and occupancy expense amounted to $1,565,192 in 2019 and $1,444,461 in 2018. Note 6 - Deposits ‘Components of deposits included in the consolidated statements of financial condition at December 31, were as follows: Demand Deposit Accounts Savings & Other Time Money Market Centifcates of Deposit of Under $250,000 Certificates of Deposit of $250,000 and Over Total Deposits December 31, 20197 2018 S 152331570 $ 149,328,388 92,112,008 85,885,068 184,705,571, 201,197,323 381,899,205, 341,258,380 74874059 57,788,651 S__ 88592413 $35,457,810 Certificates of deposit maturing in years ending December 31 2020 2021 2022 2023 2024 S 135,591,711 100,116,649 61,086,558 74,193,746, 85,784,601 Page 23, BANK OF UTICA AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2019 and 2018 Interest expense by deposit type is as follows: December 3, 2019 2018 Demand Deposit Accounts s 455908 Ss 419374 Savings & Other Time 986,473 643,684 ‘Money Market 1878,761 1327057 Certificates of Deposit of Under $250,000 9,719,153 629,228 Certificates of Deposit of $250,000 and Over 1922256 721933 Total Expense S$ 9an776 Note 7 - Borrowed Funds ‘At December 31, 2019 and 2018, borrowed funds consist of overnight borrowings from the Federal Reserve Bank Discount Window and are collateralized by a pledge of securities. The following table summarizes certain information regarding borrowed funds as of and for the years ended December 31, 2019 and 2018: December 31, 2019) 2018, As ofDecember 31: ‘Canying Value s - 8 - Fair Value of Underlying Collateral s - $s - Weighted Average Stated Interest Rate 238% 21% During the Year Ended December 31: ‘Average Balance During the Year s 2000S 44,000 ‘Maximum Month-End Balance During the Year s = s - Interest Expense s “ss 1193 As of December 31, 2019 and 2018, there were no assets and associated liabilities related to transfers of financial assets accounted for as secured borrowings. Note 8— Income Taxes The provision for income taxes consisted of the following: December, 2019 2018 Curent Federal S 1314989 S 4219354 State 104,521 1 1,419,510 4524135 Deferred Federal 3,246,576 7163885) ‘State 184,475, (266812) 431,051 (4.043.697) 3 4850561 S___ 480438 Page 24 BANK OF UTICA AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2019 and 2018 For tax years beginning January 1, 2018, the maximum corporate rate of 35% was reduced to a flat rate of 21%. ‘The primary impact of this change on the Bank's consolidated financial statements included revaluation of deferred tax assets and liabilities at the new corporate tax rate as of the date of enactment. ‘The provision for income taxes is less than that computed by applying the federal statutory rate of 21%, as indicated in the following analysis: December3, 2019 2018 ‘Tares Based on Statutory Rate 3 34968 «= S__1AlOSTB State Income Tax, Net of TaxBenefit 245,104 (24761) Effect of Tax Exempt Income 497,925) 637,024) Dividends Received Deduction (234,807) (239242) Effect of Federal & State TaxLaw Changes 35,334 (166) Other (181,113) 028347) S__ 485056, $480,438 effects of the temporary differences are as follows: December 31, 2019 2018 Deferred Tax Assets ‘Allowance for Loan Losses S 239399 «$398,276 Interest on Nonacerual Loans 8.847 u 202,786 308287 Deferred TaxLiabiliies ‘Net Unrealized Gain on Securities ‘Availabe for Sale 12,769,720 9,488,509 Depreciation and Amortization 754.456 710,117 46 10,198,626 [Net Deferred Tax (Liabilities) $_(323139) §__(9.800339) ‘The Bank has performed an evaluation of its tax positions and has concluded that as of December 31, 2019, there ‘were no significant uncertain tax positions requiring additional recognition in its consolidated financial statements. ‘The Bank is subject to regular examination by Federal and State taxing authorities. As of December 31, 2019, the tax years ended December 31, 2016, 2017, 2018 and 2019 remain subject to examination by all of the Bank’s relevant tax jurisdicti Page 25 BANK OF UTICA AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2019 and 2018 Note 9— Employee Benefits ‘The Bank has a cash profit sharing and defined contribution pension plan in effect for substantially all full-time employees. These expenses totaled $586,712 in 2019 and $566,118 in 2018, and are included within salaries and employee benefits. Contributions are made annually at the discretion of the Board of Directors. Note 10 — Related Parties ‘The Bank has entered into transactions and commitments to extend credit with its directors, officers, and their affiliations, including companies under their control. Such transactions were made in the ordinary course of business, and did not, in the opinion of management, involve more than normal eredit risk or present other unfavorable features. The aggregate amount of loans and commitments to such related parties at December 31, 2019 and 2018 was approximately $357,000 and $387,000, and related party deposits amounted to approximately $6,982,000 and $5,899,000, respectively. Note 11 — Contingent Liabilities and Commitments ‘The Bank's consolidated financial statements do not reflect various commitments and contingent li arise in the normal course of business and which involve elements of credit risk, interest rate risk and liquidity risk. A summary of the Bank’s commitments and contingent liabilities at December 31, 2019 and 2018, is as follows: 2019 2018. ‘Commitments to Extend Credit (Commercial) 5 40,483,000 5 29,246,000 Open Letters of Credit $6413.00 $6,174,000 ‘Unused Check Credit Lines S 2,095,000 S 2,147,000 ‘The Bank’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extension of credit that are recorded on the statement of condition. The commitments to extend credit are non ‘contractual in nature. Because letters of credit have fixed maturity dates, and they almost always expire without being drawn upon, they do not generally present any significant lic As of December 31, 2019 and 2018, the Bank had no reserves related to credit risk inherent in off balance sheet credit commitments and financial guarantees. ion and claims arising in the normal course of business. Management, after 3s, if any, arising from such litigation and claims will not be material to its financial position. Note 12 ~ Concentrations of Credit Risk Concentrations of credit risk exist when changes in economic, industry or geographic factors similarly affect ‘groups of counterparties whose aggregate credit exposure is material in relation to the Bank's total credit exposure. Although the Bank's portfolio of financial instruments is broadly diversified along industry, product, and geographic lines, material transactions are completed with other financial institutions, particularly in the securities business. Page 26 BANK OF UTICA AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2019 and 2018 In connection with the Bank's efforts to maintain a diversified portfolio, the Bank limits its exposure to any one ‘geographic region, country or individual creditor and monitors this exposure on a continuous basis. The consolidated Bank’s investment policy includes segment limits that prescribe the maximum investment in each market segment based on a percentage of Bank assets or capital. At December 31, 2019, the Bank’s most significant concentration of credit risk was with United States and foreign corporations. The Bank's exposure, which primarily results from debt securities issued by United States and foreign corporations, amounted to approximately $78,316,000 and $704,621,000 at December 31, 2019 and 2018, respectively. All debt securities are rated investment grade atthe time of acquisition and the Bank was well below the maximum percentage allowed by bank policy for investments in United States and foreign corporate debt as of December 31, 2019 and 2018. Note 13 — Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly ‘transaction between market participants at the measurement date. ‘The fair value hierarchy established under ASC 820-10 is summarized as follows: Level 1- Quoted prices (unadjusted) for identical assets or liabilities in active markets that the reporting. entity has the ability to access at the measurement date. Level 2- Significant other observable inputs such as any of the following: (1) quoted prices for si assets or liabilities in active markets, (2) quoted prices for identical or similar assets or liabilities in markets that are not active, (3) inputs other than quoted prices that are observable for the asset or liability (e.g, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates), or 4) inputs that or other are derived principally from or corroborated by observable market data by corre ‘means (market-corroborated inputs). Level 3- Significant unobservable inputs for the asset or liability. Significant unobserv the reporting entity's own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). Significant unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is litle, if any, market activity for the asset or liability at the measurement date, ‘The following tables present the assets that are reported on the consolidated statements of financial condition at fair value as of the date indicated by level within the fair value hierarchy. Financial assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Page 27 BANK OF UTICA AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2019 and 2018 Assets Measured at Fair Value on a Recurring Basis at December 31, 2019, Fair Value Level Level? Level Equity Securities S SANS “S$ 864755 S 1580S = ‘Assets Measured at Fair Value on a Recuring Basis at December 31,2018 Fair Value Level 1 Level? evel Equity Securities S Tera STs S 158% S zi During the years ended December 31, 2019 and 2018, there were no transfers of financial instruments between Level 1 and Level 2. The Bank had no Level 3 securities measured on a recurring basis as of December 31, 2019 and 2018, Assets Measured at Fair Value on a Non-Recuring Basis at December 31,2019 Fair Value, Level 1 Level Level Impaired Loans Commercial & CommercialReal Estate $ 3095630 $ sl = $3,095,630 Residential Real Estate $s 8 3 - 8 - ‘Assets Measured at Fair Value on a Non- Recurring Basis at December 31,2018 Fair Value Level 1 Level Teveld Impaired Loans Commercial & Commercial Real Estate $= 3035845 S$ 3 = $3,085,845 Residential Real Estate 8 88639 S - 8 = S$ 88639 Impaired Loans - Loans with certain characteristics are evaluated individually for impairment. A loan is considered impaired when, based upon existing information and events, it is probable that the Bank will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement. The Bank’s impaired loans at December 31, 2019 and 2018 were collateralized by real estate and were thus carried at the lower of the outstanding principal balance or the estimated fair value of the collateral. Fair value is estimated through either a negotiated note sale value (Level 2 input), or, more commonly, a recent real estate appraisal (Level 3 input). These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. ‘An appraisal is generally ordered for all impaired commercial real estate and residential real estate loans for which the most recent appraisal is more than one year old. Adjustments for potential disposal costs are also ‘considered when determining the final appraised value. Page 28 BANK OF UTICA AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2019 and 2018 ‘The following table presents quantitative informs measurements for Level 3 assets and liabi n about significant unobservable inputs used in the fair value ies at December 31, 2019: ‘Unobservable Fair Value at Valuation Inpul) December 31,2019 Technique Assumption Non-Recurring Fair ‘Value Measurements Underlying Probability of Default Impaired Loans 3095630 Collateral Discount. ‘The carrying amounts and estimated at fair values of financial instruments at December 31, 2019 and 2018 are as follows: December 31, 2019 2018, Canying Fair Canying Fair Financial Assets: Amount Value. Amount Value. Cash and Equivalents S 1760659 S$ 17606529 S$ 33259289 S 33,259,289 ‘Securities Held to Maturity S 920574660 $ 936862,193 $ 861,195,312 $ 849950921 Equity Securities S GADDIS $ HALOS. $ 71677254 $ T1671 254 Loans Receivable S 89,561,340 $ 83,406,662 $ 75,657,634 $ 70,825,759 ‘Acenued Interest Receivable S 8570817 -$ ~~ BSTOBIT. $s BIBL.IBA SIIB Financial Liabilities: Deposits S 885922413 S — 861803,777 S$ 835,457,810 S$ 782,278,860 ‘Acenued Interest Payable S$ LI7L39 «$$ 1171039S 818,368 S 818368 ‘Commitments to Extend Credit S 48,989,000 $ 4898.00 $ 37,567,000 $ 37,567,000 ‘The methods and assumptions used to estimate fair values for financial assets and liabilities other than those previously discussed were determined as follows: ‘Cash and equivalents, accrued interest receivable and accrued interest payable — due to the short-term nature of these assets and liabilities the Bank estimated that carrying value approximates fair value. Securities held-to-maturity and equity securities — investment securities fair values were based on quoted market prices and significant other observable inputs, such as interest rates and yield curves observable at commonly ‘quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates. determined by discounting the estimated cash flows using the current rate at which similar loans would be made to borrowers with similar credit ratings and maturities. ‘The estimated fair value of variable rate loans approximate carrying value as the portfolio reprices frequently. Page 29 BANK OF UTICA AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2019 and 2018 Deposits — the estimated fair value of demand deposit, savings and money market accounts is, by definition, equal to the amount payable on demand at the reporting date (ce. their carrying amount). The fair value of certificates of deposits is estimated using a discounted cash flow calculation that applies current interest rates to aggregated expected maturities. Borrowed funds — estimated fair value is based on carrying value because of the short-term nature of the borrowing. ‘Commitments to extend credit ~The fair value of commitments to extend credit is estimated as the fully refundable fees charged as of the valuation date to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current interest rates and the committed rates. Note 14— Minimum Regulatory Capital Requirements ‘The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must ‘meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off- balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, the risk profile of the particular institution, and other factors. In July 2013, the Federal Reserve Board and other federal bank regulatory agencies issued a final rule to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in “Basel IMI: A Global Regulatory Framework for More Resilient Banks and Banking Systems” and certain provisions of the Dodd-Frank Act (“Basel III”). Basel III applies to all depository institutions, bank holding companies with total consolidated assets of $500 million or more, and savings and loan holding companies. Among other things, the rule establishes a new minimum “common equity Tier | capital” requirement of 4.5% of risk-weighted assets, raises the minimum “Tier I risk-based capital” requirement to 6% of risk-weighted assets and assigns higher risk ‘weightings (150%) to exposures that are more than 90 days past due or are on non-accrual status and certain ‘commercial realestate facilities that finance the acquisition, development or construction of real property. Basel II became effective for the Bank on January 1, 2015. Basel III amended the prompt corrective action rules to incorporate a “common equity Tier 1 capital” requirement and to raise the capital requirements for certain capital categories. In order to be adequately capitalized for purposes of the prompt corrective action rules, a banking organization will be required to have at least a 4.5% “common equity Tier 1 risk-based capital” ratio, an 8% “total risk-based capital” ratio, a 6% “Tier I risk-based capital” ratio and a 4% “Tier I leverage capital” ratio. As of December 31, 2019, the most recent notification from the Federal Deposit Insurance Corporation ‘categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total common equity Tier I risk-based, risk- based, Tier I risk-based and Tier I leverage ratios of 6.5%, 10%, 8% and 5%, respectively. Page 30 BANK OF UTICA AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2019 and 2018 ‘The actual and required regulatory capital amounts and ratios at December 31, 2019 and 2018 are as follows: Ratio 200% 20.1% 200% 211% ‘Actual ‘Amount December 31,2019: ‘Connon equity Tier 1 capital (to risk-weighted assets) $ 241424 Total capital (to risk-weighted assets) $22,714 Tier Leverage (to risk-weighted assets): S 241824 Tier 1 leverage (to average assets): S 2414%4 December 31,2018: Common equity Tier 1 capital (to risk-weighted assets) $ 223973, Total capital (to risk-weighted assets): S$ 25,78 Tier 1 leverage (to risk-weighted assets): S$ 23973 Tier I leverage (to average assets): 8 23973 209% 211% 209% 21.0% ‘These rates exceed the minimum FDIC requirements for a “well capitalized” institution for both years. Note 15— Subsequent Events ired To Be Well Capitalized Under Prompt Corrective For Capital ‘Action Provisions _ _Adequacy Purposes ‘Amount Ratio — Amount _ Ratio (Dollars in thousands) S TASS 65% S$ SM3IS 45% $ 120700 10.0% $ 95,560 80% S 96560 80% $ 7242 60% $ STS 50% $ 45716 40% S SSS 65% S$ 48153 4.5% $ 107007 100% $ 85,606 80% S 85606 80% $ 64204 6.0% S 53465 50% $ 42772 40% ‘The Bank has evaluated its December 31, 2019 consolidated financial statements for subsequent events through. January 30, 2020, the date the consolidated financial statements were available to be issued. The Bank is not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements, Page 31