EVANS BANCORP INC - Quarter Report: 2021 March (Form 10-Q)

evbn-20210331x10q

Table of Contents

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended March 31, 2021

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to ______

Commission file number 001-35021

EVANS BANCORP, INC.

(Exact name of registrant as specified in its charter)

New York 16-1332767

(State or other jurisdiction of (I.R.S. Employer

incorporation or organization) Identification No.)

6460 Main St. Williamsville, NY 14221

(Address of principal executive offices) (Zip Code)

(716) 926-2000

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed

since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.50 par value	EVBN	NYSE American

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer x		Smaller reporting company x
Emerging growth company ¨

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.50 par value, 5,433,604 shares as of April 29, 2021.

‎

Table of Contents

INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES



PART 1. FINANCIAL INFORMATION		PAGE

Item 1.	Financial Statements

	Unaudited Consolidated Balance Sheets – March 31, 2021 and December 31, 2020	1

	Unaudited Consolidated Statements of Income – Three months ended March 31, 2021 and 2020	2

	Unaudited Consolidated Statements of Comprehensive Income – Three months ended March 31, 2021 and 2020	3

	Unaudited Consolidated Statements of Changes in Stockholders’ Equity – Three months ended March 31, 2021 and 2020	4

	Unaudited Consolidated Statements of Cash Flows – Three months ended March 31, 2021 and 2020	5

	Notes to Unaudited Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4.	Controls and Procedures	45

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosure	46

Item 5.	Other Information	46

Item 6.	Exhibits	47

	Signatures	48

Table of Contents


PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2021 AND DECEMBER 31, 2020
(in thousands, except share and per share amounts)
	March 31,		December 31,
	2021		2020
ASSETS
Cash and due from banks	$	10,562	$	13,702
Interest-bearing deposits at banks		105,658		83,902
Securities:
Available for sale, at fair value (amortized cost: $192,352 at March 31, 2021;		190,338		162,396
$159,157 at December 31, 2020)
Held to maturity, at amortized cost (fair value: $4,697 at March 31, 2021;		4,674		4,204
$4,271 at December 31, 2020)
Federal Home Loan Bank common stock, at cost		3,551		3,470
Federal Reserve Bank common stock, at cost		2,782		2,323
Loans, net of allowance for loan losses of $20,701 at March 31, 2021
and $20,415 at December 31, 2020		1,726,527		1,673,379
Properties and equipment, net of accumulated depreciation of $20,436 at March 31, 2021
and $19,963 at December 31, 2020		19,065		19,305
Goodwill		12,713		12,713
Intangible assets		2,104		2,238
Bank-owned life insurance		34,152		33,989
Operating lease right-of-use asset		5,058		5,282
Other assets		27,081		27,212

TOTAL ASSETS	$	2,144,265	$	2,044,115

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand	$	486,386	$	436,157
NOW		238,769		230,751
Savings		924,781		825,947
Time		222,002		278,554
Total deposits		1,871,938		1,771,409

Securities sold under agreement to repurchase		5,682		4,093
Other borrowings		41,699		44,698
Operating lease liability		5,463		5,694
Other liabilities		21,612		18,444
Subordinated debt		30,897		30,872
Total liabilities		1,977,291		1,875,210

STOCKHOLDERS' EQUITY:
Common stock, $0.50 par value, 10,000,000 shares authorized; 5,428,993
and 5,411,384 shares issued at March 31, 2021 and December 31, 2020,
respectively, and 5,428,993 and 5,411,384 outstanding at March 31, 2021
and December 31, 2020, respectively		2,716		2,708
Capital surplus		76,673		76,394
Retained earnings		92,117		90,522
Accumulated other comprehensive income (loss), net of tax		(4,532)		(719)
Total stockholders' equity		166,974		168,905

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,144,265	$	2,044,115

See Notes to Unaudited Consolidated Financial Statements

‎

Table of Contents


EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2021 AND 2020
(in thousands, except share and per share amounts)
	Three Months Ended March 31,
	2021		2020
INTEREST INCOME
Loans	$	17,066	$	14,546
Interest-bearing deposits at banks		16		181
Securities:
Taxable		832		1,049
Non-taxable		56		47
Total interest income		17,970		15,823
INTEREST EXPENSE
Deposits		886		2,876
Other borrowings		88		47
Subordinated debt		399		124
Total interest expense		1,373		3,047
NET INTEREST INCOME		16,597		12,776
PROVISION FOR LOAN LOSSES		313		2,999
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		16,284		9,777
NON-INTEREST INCOME
Deposit service charges		572		628
Insurance service and fees		2,502		2,425
Gain on loans sold		-		51
Bank-owned life insurance		163		160
Loss on tax credit investment		-		(2,475)
Refundable state historic tax credit		-		1,857
Interchange fee income		490		382
Other		839		310
Total non-interest income		4,566		3,338
NON-INTEREST EXPENSE
Salaries and employee benefits		9,044		7,797
Occupancy		1,187		861
Advertising and public relations		263		269
Professional services		959		914
Technology and communications		1,264		1,096
Amortization of intangibles		135		130
FDIC insurance		300		179
Merger-related		-		460
Other		1,213		1,164
Total non-interest expense		14,365		12,870
INCOME BEFORE INCOME TAXES		6,485		245
INCOME TAX PROVISION		1,633		41
NET INCOME	$	4,852	$	204
Net income per common share-basic	$	0.89	$	0.04
Net income per common share-diluted	$	0.89	$	0.04
Weighted average number of common shares outstanding		5,421,837		4,936,947
Weighted average number of diluted shares outstanding		5,463,674		4,992,214

See Notes to Unaudited Consolidated Financial Statements

‎

Table of Contents



EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2021 AND 2020
(in thousands)
	Three Months Ended March 31,
		2021		2020

NET INCOME		$	4,852	$	204

OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
Unrealized (loss) gain on available-for-sale securities			(3,889)		1,835
Defined benefit pension plans:
Amortization of prior service cost			6		5
Amortization of actuarial loss			70		82
Total			76		87
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX			(3,813)		1,922
COMPREHENSIVE INCOME		$	1,039	$	2,126

See Notes to Unaudited Consolidated Financial Statements

‎

Table of Contents




EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2021 AND 2020
(in thousands, except share and per share amounts)
							Accumulated
							Other
	Common		Capital		Retained		Comprehensive
	Stock		Surplus		Earnings		Loss		Total
Balance, December 31, 2019	$	2,467	$	63,302	$	85,267	$	(2,583)	$	148,453
Net Income						204				204
Other comprehensive income								1,922		1,922
Cash dividends ($0.58 per common share)						(2,867)				(2,867)
Stock compensation expense				257						257
Reissued 310 restricted shares										-
Issued 5,930 restricted shares, net of forfeitures		3		(3)						-
Issued 7,279 shares in stock option exercises		4		123						127
Balance, March 31, 2020	$	2,474	$	63,679	$	82,604	$	(661)	$	148,096

Balance, December 31, 2020	$	2,708	$	76,394	$	90,522	$	(719)	$	168,905
Net Income						4,852				4,852
Other comprehensive income								(3,813)		(3,813)
Cash dividends ($0.60 per common share)						(3,257)				(3,257)
Stock compensation expense				233						233
Issued 8,280 restricted shares, net of forfeitures		4		(4)						-
Issued 9,329 shares in stock option exercises		4		50						54
Balance, March 31, 2021	$	2,716	$	76,673	$	92,117	$	(4,532)	$	166,974

See Notes to Unaudited Consolidated Financial Statements

‎

Table of Contents



EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2021 AND 2020
(in thousands)
	Three Months Ended March 31,
		2021		2020
OPERATING ACTIVITIES:
Interest received	$	17,080	$	15,968
Fees received		5,183		4,113
Interest paid		(1,790)		(2,248)
Cash paid to employees and vendors		(15,000)		(11,362)
Income taxes paid		(187)		(103)
Proceeds from sale of loans held for sale		-		3,739
Originations of loans held for sale		-		(3,335)

Net cash provided by operating activities		5,286		6,772

INVESTING ACTIVITIES:
Available for sales securities:
Purchases		(40,301)		(46,322)
Proceeds from sales, maturities, calls, and payments		6,421		17,430
Held to maturity securities:
Purchases		(515)		(511)
Proceeds from maturities, calls, and payments		45		50
Additions to properties and equipment		(233)		(491)
Purchase of tax credit investment		-		(3,116)
Net cash used in acquisitions		-		(683)
Sale of other real estate		129		-
Net increase in loans		(51,764)		(20,449)

Net cash used in investing activities		(86,218)		(54,092)

FINANCING ACTIVITIES:
Proceeds from short-term borrowings, net		897		147
Repayments from long-term borrowings, net		(2,131)		-
Net increase in deposits		100,728		60,157
Issuance of common stock		54		127

Net cash provided by financing activities		99,548		60,431

Net increase in cash and cash equivalents		18,616		13,111

CASH AND CASH EQUIVALENTS:
Beginning of period		97,604		38,857
End of period	$	116,220	$	51,968

See Notes to Unaudited Consolidated Financial Statements

‎

Table of Contents



EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2021 AND 2020
(in thousands)
	Three Months Ended March 31,
		2021		2020

RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:

Net income	$	4,852	$	204

Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		440		538
Deferred tax benefit		(1,971)		(1,001)
Provision for loan losses		313		2,999
Loss on tax credit investment		-		2,475
Changes in refundable state historic tax credit		-		(1,857)
Loss on sales of assets		22		-
Gain on loans sold		-		(51)
Stock compensation expense		233		257
Proceeds from sale of loans held for sale		-		3,739
Originations of loans held for sale		-		(3,335)
Changes in assets and liabilities affecting cash flow:
Other assets		(1,553)		(225)
Other liabilities		2,950		3,029

NET CASH PROVIDED BY OPERATING ACTIVITIES	$	5,286	$	6,772

See Notes to Unaudited Consolidated Financial Statements

‎

Table of Contents

EVANS BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTH PERIODS ENDED MARCH 31, 2021 AND 2020

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies followed by Evans Bancorp, Inc. (the “Company”), a financial holding company, and its two direct, wholly-owned subsidiaries: (i) Evans Bank, National Association (the “Bank”), and the Bank’s subsidiaries, Evans National Leasing, Inc. (“ENL”), and Evans National Holding Corp. (“ENHC”); and (ii) Evans National Financial Services, LLC (“ENFS”), and ENFS’s subsidiary, The Evans Agency, LLC (“TEA”), and TEA’s subsidiaries, Frontier Claims Services, Inc. (“FCS”) and ENB Associates Inc. (“ENBA”), in the preparation of the accompanying interim unaudited consolidated financial statements conform with U.S. generally accepted accounting principles (“GAAP”) and with general practice within the industries in which it operates. Except as the context otherwise requires, the Company and its direct and indirect subsidiaries are collectively referred to in this report as the “Company.”

The Financial Accounting Standards Board (“FASB”) establishes changes to GAAP in the form of accounting standards updates (“ASUs”) to the FASB Accounting Standards Codification. The Company considers the applicability and impact of all ASUs when they are issued by FASB. ASUs adopted by the Company during the current fiscal year are not expected to have a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures.

The results of operations for the three month period ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year.

The accompanying unaudited consolidated financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “10-K”). There have been no significant changes to the Company’s significant accounting policies as disclosed in Note 1 to the 10-K.

COVID-19 – Risks & Uncertainties

The Company’s operations and financial results have been significantly impacted by the COVID-19 pandemic. The spread of COVID-19 has caused significant economic disruption throughout the United States as state and local governments issued stay at home orders and temporarily closed non-essential businesses. The full financial impact from the pandemic is unknown at this time, however prolonged disruption may adversely impact several industries within the Company's geographic footprint and impair the ability of the Company’s customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on business operations, asset valuations, financial condition and results of operations. Material adverse impacts may include all or a combination of valuation impairments on the Company’s intangible assets, investments, loans and mortgage servicing rights.

‎

Table of Contents

2. ACQUISITIONS

On May 1, 2020, the Company completed the acquisition of FSB Bancorp, Inc., a Maryland corporation and the parent holding company of Fairport Savings Bank (“FSB”). On that date, FSB was merged into Evans Bank, a wholly owned banking subsidiary of the Company. At the time of closing, FSB had $321.7 million in total assets, including $272.1 million in net loans receivable and $21.4 million in securities, and $293.1 million in total liabilities, including $237.7 million in deposits and $50.6 million in borrowings. FSB operated 5 banking offices in New York at the date of acquisition. After application of the election, allocation and proration procedures contained in the merger agreement, the Company paid $17.1 million in cash and issued 422,475 shares of Evans Bancorp, Inc. common stock in exchange for all of the shares of common stock of FSB Bancorp, Inc. outstanding at the time of the acquisition. The $11.7 million fair value of the shares issued as part of the consideration paid for FSB was determined on the basis of the closing market price of the Company’s shares on April 30, 2020.

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. Management engaged a third-party specialist to develop the fair value estimate of certain FSB’s assets and liabilities as of the acquisition date. The assets and liabilities, both tangible and intangible were recorded at their fair values as of May 1, 2020. The application of the acquisition method of accounting resulted in the recognition of goodwill of $1.8 million and a core deposit intangible of $0.2 million. Goodwill arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the operations of the companies and is not tax deductible.
‎

Table of Contents

The Company recorded the assets acquired and liabilities assumed through the merger at fair value as summarized in the following table:


		As Recorded		Fair Value			As Recorded
		by FSB		Adjustments			at Acquisition
				(in thousands)
Cash and due from banks	$	1,978	$	-		$	1,978
Interest-bearing deposit at banks		9,339		-			9,339
Securities		21,371		106	(a)		21,477
FHLB Stock		2,614		-			2,614
Loans receivable		273,869		(2,484)	(b)		271,385
Allowance for loan losses		(1,706)		1,706	(c)		-
Premises and equipment		2,303		(56)	(d)		2,247
Intangible assets		-		166	(e)		166
Bank owned life insurance		3,891		-			3,891
Operating lease right-of-use asset		2,020		374	(f)		2,394
Other assets		6,033		1,640	(g)		7,673
Total assets acquired	$	321,712	$	1,452		$	323,164

Deposits		237,688		1,485	(h)		239,173
Other borrowed funds		50,597		1,929	(i)		52,526
Operating lease liability		2,217		176	(j)		2,393
Other liabilities		2,557		(573)	(k)		1,984
Total liabilities assumed	$	293,059	$	3,017		$	296,076

Net assets acquired							27,088
Purchase price							28,856
Goodwill recorded in merger						$	1,768

Explanation of certain fair value related adjustments:

(a)Represents the fair value adjustments on investment securities.

(b)Represents the fair value adjustments on the net book value of loans, which includes an interest rate mark and credit mark adjustment and the write-off of deferred fees/costs and premiums.

(c)Represents the elimination of FSB’s allowance for loan losses.

(d)Represents the fair value adjustments to reflect the fair value of land and buildings and premises and equipment, which will be amortized on a straight-line basis over the estimated useful lives of the individual assets.

(e)Represents the intangible assets recorded to reflect the fair value of core deposits. The core deposit asset was recorded as an identifiable intangible asset and will be amortized on an accelerated basis over the estimated average life of the deposit base.

(f)Represents the fair value adjustments on operating lease right of use assets.

(g)Represents an adjustment to other assets acquired. The largest adjustment was to net deferred tax assets resulting from the fair value adjustments related to the acquired assets, liabilities assumed and identifiable intangible assets recorded.

(h)Represents fair value adjustments on time deposits, which will be treated as a reduction of interest expense over the remaining term of the time deposits.

(i)Represents the fair value adjustments on FHLB borrowings, which will be treated as a decrease to interest expense over the life of the borrowings.

(j)Represents the fair value adjustments on operating lease liabilities.

(k)Represents an adjustment to other liabilities assumed.

Table of Contents

The fair value of loans acquired from FSB were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. There was no carryover of FSB’s allowance for loan losses associated with the loans that were acquired, as the loans were initially recorded at fair value on the date of the FSB merger.

The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years and the amortization is based on dollar weighted deposit runoff on an annualized basis.

Goodwill is not amortized for book purposes; however, it is reviewed at least annually for impairment and is not deductible for tax purposes.

The fair value of land and buildings was estimated using appraisals. Acquired equipment was not material. Buildings are amortized over their estimated useful lives of approximately 39 years. Improvements and equipment are amortized or depreciated over their estimated useful lives ranging up to 10 years.

The fair value of retail demand and interest bearing deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities.

Other borrowed funds include borrowings from the Federal Home Loan Bank (“FHLB”). The fair value of these borrowings was estimated by discounting the contractual future cash flows using FHLB rates offered of similar maturities.

Direct acquisition and other charges incurred in connection with the FSB merger were expensed as incurred and totaled $0.5 million for the three months ended March 31, 2020. These expenses were recorded in merger-related expense on the consolidated statements of income. There were no merger-related expenses during the three months ended March 31, 2021.

The following table presents selected unaudited pro forma financial information reflecting the FSB merger assuming it was completed as of January 1, 2020. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had the FSB merger actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full year period. The unaudited pro forma information is based on the actual financial statements of the Company for the periods presented, and on the actual financial statements of FSB for the three months ended March 31, 2020.


	Three months ended
	March 31, 2020
	(in thousands)
Net interest income after provision	$	12,000
Non-interest income		3,751
Non-interest expense		14,944
Net income		620

The unaudited supplemental pro forma information for the three months ended March 31, 2020 set forth above reflects adjustments related to (a) purchase accounting fair value adjustments; (b) amortization of core deposit; and (c) adjustments to interest income and expense due to amortization of premiums and accretion of discounts. Direct merger-related expenses incurred in the three months ended March 31, 2020 are assumed to have occurred prior to January 1, 2020. Furthermore, the unaudited supplemental pro forma information does not reflect management’s estimate of any revenue enhancement opportunities or anticipated potential cost savings.

‎

Table of Contents

3. SECURITIES

The amortized cost of securities and their approximate fair value at March 31, 2021 and December 31, 2020 were as follows:



	March 31, 2021
	(in thousands)

	Amortized		Unrealized				Fair
	Cost		Gains		Losses		Value

Available for Sale:
Debt securities:
U.S. treasuries and government agencies	$	75,224	$	418	$	(2,946)	$	72,696
States and political subdivisions		7,164		133		(3)		7,294
Total debt securities		82,388		551		(2,949)		79,990

Mortgage-backed securities:
FNMA		38,045		533		(508)		38,070
FHLMC		7,443		97		(145)		7,395
GNMA		5,726		45		(60)		5,711
SBA		20,197		411		(98)		20,510
CMO		38,553		556		(447)		38,662
Total mortgage-backed securities		109,964		1,642		(1,258)		110,348

Total securities designated as available for sale	$	192,352	$	2,193	$	(4,207)	$	190,338

Held to Maturity:
Debt securities
States and political subdivisions	$	4,674	$	30	$	(7)	$	4,697

Total securities designated as held to maturity	$	4,674	$	30	$	(7)	$	4,697



	December 31, 2020
	(in thousands)

	Amortized		Unrealized				Fair
	Cost		Gains		Losses		Value

Available for Sale:
Debt securities:
U.S. treasuries and government agencies	$	67,619	$	731	$	(252)	$	68,098
States and political subdivisions		7,362		169		(7)		7,524
Total debt securities		74,981		900		(259)		75,622

Mortgage-backed securities:
FNMA		24,265		654		(50)		24,869
FHLMC		3,739		111		(1)		3,849
GNMA		2,006		58		(1)		2,063
SBA		20,949		914		(33)		21,830
CMO		33,217		946		-		34,163
Total mortgage-backed securities		84,176		2,683		(85)		86,774

Total securities designated as available for sale	$	159,157	$	3,583	$	(344)	$	162,396

Held to Maturity:
Debt securities
States and political subdivisions	$	4,204	$	67	$	-	$	4,271

Total securities designated as held to maturity	$	4,204	$	67	$	-	$	4,271

Table of Contents

Available for sale securities with a total fair value of $164 million and $135 million at March 31, 2021 and December 31, 2020, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

The scheduled maturities of debt and mortgage-backed securities at March 31, 2021 are summarized below. All maturity amounts are contractual maturities. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call premiums.




	March 31, 2021
	Amortized		Estimated
	cost		fair value
	(in thousands)

Debt securities available for sale:

Due in one year or less	$	1,779	$	1,781
Due after one year through five years		7,995		8,163
Due after five years through ten years		35,125		35,104
Due after ten years		37,489		34,942
		82,388		79,990

Mortgage-backed securities
available for sale		109,964		110,348

Total	$	192,352	$	190,338

Debt securities held to maturity:

Due in one year or less	$	3,738	$	3,741
Due after one year through five years		448		471
Due after five years through ten years		45		47
Due after ten years		443		438
Total	$	4,674	$	4,697

Contractual maturities of the Company’s mortgage-backed securities generally exceed ten years; however, the effective lives may be significantly shorter due to prepayments of the underlying loans and due to the nature of these securities.

There were no gross realized gains or losses from sales of investment securities for the three month periods ended March 31, 2021 and 2020. Information regarding unrealized losses within the Company’s available for sale securities at March 31, 2021 and December 31, 2020 is summarized below. The securities are primarily U.S. government-guaranteed agency securities or municipal securities.

‎

Table of Contents



	March 31, 2021

		Less than 12 months				12 months or longer				Total
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses
		(in thousands)
Available for Sale:
Debt securities:
U.S. treasuries and government agencies	$	50,680	$	(2,946)	$	-	$	-	$	50,680	$	(2,946)
States and political subdivisions		205		(3)		-		-		205		(3)
Total debt securities		50,885		(2,949)		-		-		50,885		(2,949)

Mortgage-backed securities:
FNMA		20,847		(507)		27		(1)		20,874		(508)
FHLMC		4,045		(145)		-		-		4,045		(145)
GNMA		4,083		(60)		-		-		4,083		(60)
SBA		4,257		(65)		1,377		(33)		5,634		(98)
CMO		14,166		(447)		-		-		14,166		(447)
Total mortgage-backed securities		47,398		(1,224)		1,404		(34)		48,802		(1,258)

Held to Maturity:
Debt securities:
States and political subdivisions		361		(7)		-		-		361		(7)

Total temporarily impaired
securities	$	98,644	$	(4,180)	$	1,404	$	(34)	$	100,048	$	(4,214)


	December 31, 2020

		Less than 12 months				12 months or longer				Total
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses
		(in thousands)
Available for Sale:
Debt securities:
U.S. treasuries and government agencies	$	33,801	$	(252)	$	-	$	-	$	33,801	$	(252)
States and political subdivisions		207		(1)		180		(6)		387		(7)
Total debt securities		34,008		(253)		180		(6)		34,188		(259)

Mortgage-backed securities:
FNMA		3,354		(39)		1,391		(11)		4,745		(50)
FHLMC		182		(1)		-		-		182		(1)
GNMA		154		(1)		-		-		154		(1)
SBA		-		-		1,392		(33)		1,392		(33)
CMO		121		-		-		-		121		-
Total mortgage-backed securities		3,811		(41)		2,783		(44)		6,594		(85)

Held to Maturity:
Debt securities:
States and political subdivisions		-		-		-		-		-		-

Total temporarily impaired
securities	$	37,819	$	(294)	$	2,963	$	(50)	$	40,782	$	(344)

‎

Table of Contents

Management has assessed the securities available for sale in an unrealized loss position at March 31, 2021 and December 31, 2020 and determined the decline in fair value below amortized cost to be temporary. In making this determination, management considered the period of time the securities were in a loss position, the percentage decline in comparison to the securities’ amortized cost, and the financial condition of the issuer (primarily government or government-sponsored enterprises). In addition, management does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost. Management believes the decline in fair value is primarily related to market interest rate fluctuations and not to the credit deterioration of the individual issuers.

The Company has not recorded any other-than-temporary impairment (“OTTI”) charges during the three months ended March 31, 2021 and did not record any OTTI charges during 2020. The credit worthiness of the Company’s securities portfolio is largely reliant on the ability of U.S. government sponsored agencies such as Federal Home Loan Bank (“FHLB”), Federal National Mortgage Association (“FNMA”), Government National Mortgage Association (“GNMA”), and Federal Home Loan Mortgage Corporation (“FHLMC”), and municipalities throughout New York State to meet their obligations. In addition, dysfunctional markets could materially alter the liquidity, interest rate, and pricing risk of the portfolio. The stable past performance is not a guarantee for similar performance of the Company’s securities portfolio in future periods.

4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Loan Portfolio Composition

The following table presents selected information on the composition of the Company’s loan portfolio as of the dates indicated:


	March 31, 2021		December 31, 2020
Mortgage loans on real estate:	(in thousands)
Residential mortgages	$	375,253	$	365,351
Commercial and multi-family		721,658		706,276
Construction-Residential		5,632		7,509
Construction-Commercial		118,080		106,559
Home equities		82,450		82,602
Total real estate loans		1,303,073		1,268,297

Commercial and industrial loans		450,961		430,350
Consumer and other loans		678		151
Unaccreted yield adjustments*		(7,484)		(5,004)
Total gross loans		1,747,228		1,693,794
Allowance for loan losses		(20,701)		(20,415)
Loans, net	$	1,726,527	$	1,673,379

* Includes net premiums and discounts on acquired loans and net deferred fees and costs on loans originated, including $6.9 million and $4.6 million of PPP fees at March 31, 2021 and December 31, 2020, respectively.

On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) established a loan program administered through the U.S. Small Business Administration (“SBA”), referred to as the Paycheck Protection Program (“PPP”). PPP loans are 100% guaranteed by the SBA and are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. At March 31, 2021, the Company had originated PPP loans totaling $292 million, included in commercial and industrial loans. As of March 31, 2021, $55 million in PPP loans had received SBA forgiveness. PPP loans did not impact the Company’s allowance for loan loss as a result of the SBA guarantees. Fees collected from the SBA for these loans totaled $11.5 million as of March 31, 2021, including $4.1 million collected in the three month period ended March 31, 2021. These fees are deferred and amortized into interest income over the contractual period of the loan. Upon SBA forgiveness or sale of a PPP loan, unamortized fees are then recognized into interest income. In the three month period ended March 31, 2021 the total amount of PPP fees recognized into interest income was $1.7 million.

In connection with the FSB acquisition, the Company acquired $271 million in total loans, primarily residential real estate loans. At March 31, 2021, the outstanding principal balance and the carrying amount of acquired credit-impaired loans totaled $0.8 million. The Company is not recording interest on the acquired credit-impaired loans due to the uncertainty of the cash flows relating to such loans. There was less than $0.1 million of valuation allowances for specifically identified impairment attributable to acquired credit-impaired

Table of Contents

loans at March 31, 2021. At December 31, 2020, the outstanding principal balance and carrying amount of acquired credit-impaired loans totaled $0.9 million and $0.8 million, respectively.

Also in connection with the FSB acquisition, the Company acquired a loan serving portfolio of $107 million in principal balances in which residential real estate loans were sold to FHLMC and the servicing rights are retained by the Company. No loans were sold to FHLMC by the Company during the three months periods ending March 31, 2021 and 2020.

The Company may also sell certain fixed rate residential mortgages to FNMA while maintaining the servicing rights for those mortgages. In the three month period ended March 31, 2021, the Company did not sell mortgages to FNMA. In the three month period ended March 31, 2020, the Company sold mortgages to FNMA totaling $3.7 million.

At March 31, 2021 and December 31, 2020, the Company had loan servicing portfolio principal balances of $158 million and $171 million, respectively, upon which it earned servicing fees. The fair value of the mortgage servicing rights for that portfolio was $1.1 million and $0.9 million at March 31, 2021 and December 31, 2020, respectively. At March 31, 2021 there were no residential mortgages held for sale. At December 31, 2020 there were $0.8 million in residential mortgages held for sale.

There were $643 million and $630 million in residential and commercial mortgage loans pledged to FHLBNY to serve as collateral for potential borrowings as of March 31, 2021 and December 31, 2020, respectively.

Disclosures related to the basis for accounting for loans, the method for recognizing interest income on loans, the policy for placing loans on nonaccrual status and the subsequent recording of payments and resuming accrual of interest, the policy for determining past due status, a description of the Company’s accounting policies and methodology used to estimate the allowance for loan losses, the policy for charging-off loans, the accounting policies for impaired loans, the accounting policy for loans acquired in a business combination, and more descriptive information on the Company’s credit risk ratings are all contained in the Notes to the Audited Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Credit Quality Indicators

The Company monitors the credit risk in its loan portfolio by reviewing certain credit quality indicators (“CQI”). The primary CQI for the commercial mortgage and commercial and industrial portfolios is the individual loan’s credit risk rating. The following list provides a description of the credit risk ratings that are used internally by the Bank when assessing the adequacy of its allowance for loan losses:

Acceptable or better

Watch

Special Mention

Substandard

Doubtful

Loss

“Special mention” and “substandard” loans are weaker credits with a higher risk of loss and are categorized as “criticized” assets.

The Company’s consumer loans, including residential mortgages and home equities, are not individually risk rated or reviewed in the Company’s loan review process. Unlike commercial customers, consumer loan customers are not required to provide the Company with updated financial information. Consumer loans also carry smaller balances. Given the lack of updated information after the initial underwriting of the loan and small size of individual loans, the Company uses delinquency status as the primary credit quality indicator for consumer loans. However, once a consumer loan is identified as impaired, it is individually evaluated for impairment.

The Company continues to evaluate its loan portfolio in response to the economic impact of the COVID-19 pandemic on its clients. The increase in the watch category during 2020 was a result of the Company reclassifying all commercial loans that received a deferral into the watch or criticized categories. As the loans continue to pay as contracted the Company will reassess the watch classification. During the third quarter of 2020, the Company identified a well-defined weakness in the hotel industry and classified the loans to clients within that industry as substandard. As of March 31, 2021, the Company’s hotel loan portfolio was $82 million, or approximately 6.3% of total commercial loans. Total criticized assets were $154 million at March 31, 2021 and $140 million at the end of the 2020.

Table of Contents

The following tables provide data, at the class level, of credit quality indicators of certain loans for the dates specified:



March 31, 2021
(in thousands)
Corporate Credit Exposure – By Credit Rating	Commercial Real Estate Construction		Commercial and Multi-Family Mortgages		Total Commercial Real Estate		Commercial and Industrial
Acceptable or better	$	69,738	$	369,883	$	439,621	$	352,836
Watch		16,541		254,897		271,438		72,927
Special Mention		2,842		25,261		28,103		12,261
Substandard		28,959		71,617		100,576		12,937
Doubtful/Loss		-		-		-		-
Total	$	118,080	$	721,658	$	839,738	$	450,961


December 31, 2020
(in thousands)
Corporate Credit Exposure – By Credit Rating	Commercial Real Estate Construction		Commercial and Multi-Family Mortgages		Total Commercial Real Estate		Commercial and Industrial
Acceptable or better	$	59,020	$	317,854	$	376,874	$	314,322
Watch		17,218		300,061		317,279		95,117
Special Mention		2,041		17,656		19,697		6,555
Substandard		28,280		70,705		98,985		14,356
Doubtful/Loss		-		-		-		-
Total	$	106,559	$	706,276	$	812,835	$	430,350

‎

Table of Contents

Past Due Loans

The following tables provide an analysis of the age of the recorded investment in loans that are past due as of the dates indicated:



March 31, 2021
(in thousands)

		Current							Non-accruing		Total
		Balance	30-59 days		60-89 days		90+ days		Loans		Balance

Commercial and industrial	$	435,191	$	10,021	$	52	$	-	$	5,697	$	450,961
Residential real estate:
Residential		367,490		4,320		-		-		3,443		375,253
Construction		5,278		354		-		-		-		5,632
Commercial real estate:
Commercial		681,899		24,614		-		117		15,028		721,658
Construction		108,005		6,502		-		-		3,573		118,080
Home equities		80,895		260		74		-		1,221		82,450
Consumer and other		656		15		6		1		-		678
Total Loans	$	1,679,414	$	46,086	$	132	$	118	$	28,962	$	1,754,712

Note: Loan balances do not include $(7.5) million of unaccreted yield adjustments as of March 31, 2021.



December 31, 2020
(in thousands)

		Current							Non-accruing		Total
		Balance	30-59 days		60-89 days		90+ days		Loans		Balance

Commercial and industrial	$	419,409	$	4,240	$	122	$	94	$	6,485	$	430,350
Residential real estate:
Residential		357,135		4,156		1,262		109		2,689		365,351
Construction		7,509		-		-		-		-		7,509
Commercial real estate:
Commercial		667,426		20,024		4,166		-		14,660		706,276
Construction		94,030		5,616		4,062		-		2,851		106,559
Home equities		80,044		744		604		14		1,196		82,602
Consumer and other		111		6		14		17		3		151
Total Loans	$	1,625,664	$	34,786	$	10,230	$	234	$	27,884	$	1,698,798

Note: Loan balances do not include $(5.0) million of unaccreted yield adjustments as of December 31, 2020.

‎

Table of Contents

Allowance for loan losses

The following tables present the activity in the allowance for loan losses according to portfolio segment for the three month periods ended March 31, 2021 and 2020.



March 31, 2021
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total

Allowance for loan			(in thousands)
losses:
Beginning balance	$	4,882	$	13,249	$	45	$	1,658		581	$	20,415
Charge-offs		-		-		(60)		-		-		(60)
Recoveries		21		-		12		-		-		33
Provision (Credit)		(513)		819		60		51		(104)		313
Ending balance	$	4,390	$	14,068	$	57	$	1,709	$	477	$	20,701

*Includes construction loans



March 31, 2020
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total

Allowance for loan			(in thousands)
losses:
Beginning balance	$	4,547	$	9,005	$	155	$	1,071	$	397	$	15,175
Charge-offs		(17)		-		(15)		(29)		(4)		(65)
Recoveries		32		-		16		-		-		48
Provision (Credit)		1,013		1,583		(65)		376		92		2,999
Ending balance	$	5,575	$	10,588	$	91	$	1,418	$	485	$	18,157

* Includes construction loans

‎

Table of Contents

The following table presents the allocation of the allowance for loan losses according to portfolio segment summarized on the basis of the Company’s impairment methodology as of March 31, 2021 and December 31, 2020:



March 31, 2021
(in thousands)
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Ending balance:
Loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	28	$	-	$	28

Individually evaluated for impairment		1,190		1,272		-		-		11		2,473

Collectively evaluated for impairment		3,200		12,796		57		1,681		466		18,200
Total	$	4,390	$	14,068	$	57	$	1,709	$	477	$	20,701

Loans:
Ending balance:
Loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	839	$	-	$	839

Individually evaluated for impairment		5,697		19,088		-		3,620		1,619		30,024

Collectively evaluated for impairment		445,264		820,650		678		376,426		80,831		1,723,849
Total	$	450,961	$	839,738	$	678	$	380,885	$	82,450	$	1,754,712

Note: Loan balances do not include $(7.5) million of unaccreted yield adjustments as of March 31, 2021.

* Includes construction loans

‎

Table of Contents



December 31, 2020
(in thousands)
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Ending balance:
Loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-

Individually evaluated for impairment		994		539		3		-		11		1,547

Collectively evaluated for impairment		3,888		12,710		42		1,658		570		18,868
Total	$	4,882	$	13,249	$	45	$	1,658	$	581	$	20,415

Loans:
Ending balance:
Loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	860	$	-	$	860

Individually evaluated for impairment		6,485		18,004		3		2,874		1,624		28,990

Collectively evaluated for impairment		423,865		794,831		148		369,126		80,978		1,668,948
Total	$	430,350	$	812,835	$	151	$	372,860	$	82,602	$	1,698,798

Note: Loan balances do not include $(5.0) million of unaccreted yield adjustments as of December 31, 2020.

* Includes construction loans

Impaired Loans

The following tables provide data, at the class level, for impaired loans as of the dates indicated:



		At March 31, 2021
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:		(in thousands)
Commercial and industrial	$	1,234	$	1,402	$	-	$	1,344	$	3
Residential real estate:
Residential		3,613		3,967		-		4,542		17
Construction		-		-		-		-		-
Commercial real estate:
Commercial		12,572		13,792		-		11,929		12
Construction		1,284		1,352		-		1,085		-
Home equities		1,510		1,733		-		1,719		2
Consumer and other		-		-		-		-		-
Total impaired loans	$	20,213	$	22,246	$	-	$	20,619	$	34

Table of Contents


		At March 31, 2021
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With a related allowance recorded:		(in thousands)
Commercial and industrial	$	4,463	$	4,655	$	1,190	$	4,139	$	-
Residential real estate:
Residential		764		853		28		627		-
Construction		-		-		-		-		-
Commercial real estate:
Commercial		2,943		2,953		153		2,943		-
Construction		2,289		2,293		1,119		2,528		2
Home equities		109		109		11		109		-
Consumer and other		-		-		-		-		-
Total impaired loans	$	10,568	$	10,863	$	2,501	$	10,346	$	2


		At March 31, 2021
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Total:		(in thousands)
Commercial and industrial	$	5,697	$	6,057	$	1,190	$	5,483	$	3
Residential real estate:
Residential		4,377		4,820		28		5,169		17
Construction		-		-		-		-		-
Commercial real estate:
Commercial		15,515		16,745		153		14,872		12
Construction		3,573		3,645		1,119		3,613		2
Home equities		1,619		1,842		11		1,828		2
Consumer and other		-		-		-		-		-
Total impaired loans	$	30,781	$	33,109	$	2,501	$	30,965	$	36

‎

Table of Contents



		At December 31, 2020
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:		(in thousands)
Commercial and industrial	$	1,706	$	1,947	$	-	$	1,952	$	8
Residential real estate:
Residential		3,703		4,069		-		3,754		60
Construction		-		-		-		-		-
Commercial real estate:
Commercial		12,210		12,840		-		12,397		209
Construction		1,295		1,352		-		1,315		-
Home equities		1,515		1,741		-		1,565		23
Consumer and other		-		-		-		-		-
Total impaired loans	$	20,429	$	21,949	$	-	$	20,983	$	300


		At December 31, 2020
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With a related allowance recorded:		(in thousands)
Commercial and industrial	$	4,779	$	4,993	$	994	$	4,938	$	25
Residential real estate:
Residential		-		-		-		-		-
Construction		-		-		-		-		-
Commercial real estate:
Commercial		2,943		2,953		153		2,943		10
Construction		1,556		1,556		386		1,556		53
Home equities		109		109		11		109		1
Consumer and other		3		3		3		3		-
Total impaired loans	$	9,390	$	9,614	$	1,547	$	9,549	$	89

Table of Contents


		At December 31, 2020
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Total:		(in thousands)
Commercial and industrial	$	6,485	$	6,940	$	994	$	6,890	$	33
Residential real estate:
Residential		3,703		4,069		-		3,754		60
Construction		-		-		-		-		-
Commercial real estate:
Commercial		15,153		15,793		153		15,340		219
Construction		2,851		2,908		386		2,871		53
Home equities		1,624		1,850		11		1,674		24
Consumer and other		3		3		3		3		-
Total impaired loans	$	29,819	$	31,563	$	1,547	$	30,532	$	389

Troubled debt restructurings

The following tables summarize the loans that were classified as troubled debt restructurings (“TDRs”) as of the dates indicated:



		March 31, 2021
		(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	1,472	$	1,472	$	-	$	309
Residential real estate:
Residential		1,652		637		1,015		-
Construction		-		-		-		-
Commercial real estate:
Commercial and multi-family		3,367		2,880		487		-
Construction		-		-		-		-
Home equities		518		120		398		-
Consumer and other		-		-		-		-
Total TDR loans	$	7,009	$	5,109	$	1,900	$	309

Table of Contents



		December 31, 2020
		(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	1,722	$	1,722	$	-	$	370
Residential real estate:
Residential		1,632		587		1,045		-
Construction		-		-		-		-
Commercial real estate:
Commercial and multi-family		3,408		2,915		493		-
Construction		-		-		-		-
Home equities		552		124		428		-
Consumer and other		-		-		-		-
Total TDR loans	$	7,314	$	5,348	$	1,966	$	370

Any TDR that is placed on non-accrual is not reverted back to accruing status until the borrower makes timely payments as contracted for at least six months and future collection under the revised terms is probable. All of the Company’s restructurings were allowed in an effort to maximize its ability to collect on loans where borrowers were experiencing financial difficulty.

The reserve for a TDR is based upon the present value of the future expected cash flows discounted at the loan’s original effective interest rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent. This reserve methodology is used because all TDR loans are considered impaired.

The Company’s TDRs have various agreements that involve deferral of principal payments, or interest-only payments, for a period (usually 12 months or less) to allow the borrower time to improve cash flow or sell the property. Other common concessions leading to the designation of a TDR are lines of credit that are termed-out and/or extensions of maturities at rates that are less than the prevailing market rates given the risk profile of the borrower.

In late March 2020, federal banking regulators issued guidance that modifications made to a borrower affected by the COVID-19 pandemic and governmental shutdown orders do not need to be identified as a TDR if the loan was current at the time a modification plan was implemented. The CARES Act also addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs. The Company had applied this guidance and during 2020 had made 381 modifications of commercial loans with principal balances totaling $368 million, and approximately 298 modifications of consumer loans with principal balances totaling $37 million. COVID-19 related modifications made during the three months ended March 31, 2021 were not material.

The following tables present TDR activity by the type of concession granted to the borrower for the three periods ended March 31, 2021 and 2020:


	Three months ended March 31, 2021					Three months ended March 31, 2020
	(Recorded Investment in thousands)					(Recorded Investment in thousands)
Troubled Debt Restructurings by Type of Concession	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial and Industrial	-	$	-	$	-	-	$	-	$	-
Residential Real Estate & Construction:
Combination of concessions	-		-		-	1		56		56
Commercial Real Estate & Construction	-		-		-	-		-		-
Home Equities	-		-		-	-		-		-
Consumer and other loans	-		-		-	-		-		-
Other	-		-		-	-		-		-

Table of Contents

The general practice of the Bank is to work with borrowers so that they are able to repay their loan in full. If a borrower continues to be delinquent or cannot meet the terms of a TDR and the loan is determined to be uncollectible, the loan will be charged-off to its collateral value. A loan is considered in default when the loan is 90 days past due. Loans which were classified as TDRs during the previous 12 months which defaulted during the three month periods ended March 31, 2021 and 2020 were not material.

5. COMMON EQUITY AND EARNINGS PER SHARE DATA

The common stock per share information is based upon the weighted average number of shares outstanding during each period. For the three month periods ended March 31, 2021 and 2020, the Company had an average of 41,837 and 55,267 dilutive shares outstanding, respectively.

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and not included in calculating diluted earnings per share. For the three month periods ended March 31, 2021 and 2020, there was an average of 81,770 potentially anti-dilutive shares outstanding, that were not included in calculating diluted earnings per share because their effect was anti-dilutive.

‎

Table of Contents

6. OTHER COMPREHENSIVE INCOME

The following tables summarize the changes in the components of accumulated other comprehensive income during the three months ended March 31, 2021 and 2020:


	Balance at December 31, 2020		Net Change		Balance at March 31, 2021
	(in thousands)
Net unrealized gain (loss) on investment securities	$	2,397	$	(3,889)	$	(1,492)
Net defined benefit pension plan adjustments		(3,116)		76		(3,040)
Total	$	(719)	$	(3,813)	$	(4,532)


	Balance at December 31, 2019		Net Change		Balance at March 31, 2020
	(in thousands)
Net unrealized gain on investment securities	$	522	$	1,835	$	2,357
Net defined benefit pension plan adjustments		(3,105)		87		(3,018)
Total	$	(2,583)	$	1,922	$	(661)



	Three months ended March 31, 2021						Three months ended March 31, 2020
	(in thousands)						(in thousands)
	Before-Tax Amount		Income Tax (Provision) Benefit		Net-of-Tax Amount		Before-Tax Amount		Income Tax (Provision) Benefit		Net-of-Tax Amount
Unrealized (loss) gain on investment
securities:
Unrealized (loss) gain on investment
securities	$	(5,253)	$	1,364	$	(3,889)	$	2,475	$	(640)	$	1,835

Defined benefit pension plan
adjustments:
Amortization of prior service cost		8		(2)		6		8		(3)		5
Amortization of actuarial loss		95		(25)		70		113		(31)		82
Net change		103		(27)		76		121		(34)		87

Other comprehensive (loss) income	$	(5,150)	$	1,337	$	(3,813)	$	2,596	$	(674)	$	1,922

‎

Table of Contents

7. NET PERIODIC BENEFIT COSTS

On January 31, 2008, the Bank froze its defined benefit pension plan. The plan covered substantially all Bank employees. The plan provides benefits that are based on the employees’ compensation and years of service. Under the freeze, eligible employees will receive, at retirement, the benefits already earned through January 31, 2008, but have not accrued any additional benefits since then. As a result, service cost is no longer incurred.

The Bank uses an actuarial method of amortizing prior service cost and unrecognized net gains or losses which result from actual expense and assumptions being different than those that are projected. The amortization method the Bank used recognized the prior service cost and net gains or losses over the average remaining service period of active employees.

The Bank also maintains a nonqualified supplemental executive retirement plan covering certain members of the Company’s senior management. The Bank uses an actuarial method of amortizing unrecognized net gains or losses which result from actual expense and assumptions being different than those that are projected. The amortization method the Bank uses recognizes the net gains or losses over the average remaining service period of active employees.

The following table presents the net periodic cost for the Bank’s defined benefit pension plan and supplemental executive retirement plan for the three month periods ended March 31, 2021 and 2020:




		Three months ended March 31,

		(in thousands)
					Supplemental Executive
	Pension Benefits				Retirement Plan

	2021		2020		2021		2020

Service cost	$	-	$	-	$	37	$	39
Interest cost		41		50		25		38
Expected return on plan assets		(89)		(81)		-		-
Amortization of prior service cost		-		-		8		8
Amortization of the net loss		24		25		71		88
Net periodic (benefit) cost	$	(24)	$	(6)	$	141	$	173

The components of net periodic benefit cost other than the service cost component are included in the line item “other expense” in the income statement.

‎

Table of Contents

8. REVENUE RECOGNITION OF NON-INTEREST INCOME

A description of the Company’s material revenue streams in non-interest income accounted for under ASC 606 follows:

Insurance Service and Fees: Insurance services revenue relates to various revenue streams from services provided by TEA and the Bank:

TEA earns commission revenue from selling commercial and personal property and casualty (“P&C”) insurance as well as employee benefits solutions to commercial customers.

TEA has agreements with various insurance companies to sell policies to customers on behalf of the carriers. The performance obligation for TEA is to sell annual P&C policies to commercial customers and consumers. This performance obligation is met when a new policy is sold or when an existing policy renews. The policies are generally one year terms. In the agreements with the respective insurance companies, a commission rate is agreed upon. The commission is recognized at the time of the sale of the policy or when a policy renews.

TEA has signed contracts with insurance carriers that enable TEA to sell benefit plans to commercial customers on behalf of the insurance carriers. The performance obligation for TEA is to sell the plans to commercial customers. After the initial sale when the customer signs an agreement to purchase the offered benefit plan, the performance obligation is met each month when a customer continues utilizing benefit plans from the carrier. The customer does not commit to a specific length of time with the carrier. In the agreements with the respective insurance companies, a commission rate is agreed upon. Revenue is recognized each month when the customer continues with the benefit plan sold by TEA.

TEA also earns contingent profit sharing revenue. The insurance companies measure the loss ratio for TEA’s customers and pay TEA according to how profitable TEA customers are.

TEA has signed written agreements with insurance carriers that document payouts to TEA based on the loss ratios of its customers. The performance obligation for TEA is to maintain a customer base with loss ratios below the agreed upon thresholds. In the contracts with the insurance companies, payout rates based on loss ratios are documented. The consideration is variable as loss ratios vary based on customer experience. TEA’s performance obligation is over the course of the year as its customers’ performance with insurance carriers is measured throughout the year as losses occur. Due to the variable nature of contingent profit sharing revenue, TEA will accrue contingent profit sharing revenue throughout the year based on recent historical results. As loss events occur and overall performance becomes known to TEA, accrual adjustments will be made until the cash is ultimately received.

Financial services commission revenue from the Bank related to wealth management such as life insurance, annuities, and mutual funds sales is also included in the “insurance service and fees” line of the income statement.

The Company earns wealth management fees from its contracts with customers for certain financial services. Fees that are transaction-based are recognized at the point in time that the transaction is executed. Other related services provided include financial planning services and the fees the Bank earns are recognized when the services are rendered.

Insurance claims services revenue is recorded at FCS.

FCS has signed agreements with insurance companies to perform claims services including investigative and adjustment services related to residential and commercial lines. The performance obligation is for FCS to investigate the insurance claims and inspecting the damage to determine the extent of the insurance company’s liability. FCS is paid based on time and materials expended to investigate the claim. The rates paid are determined in the agreement between FCS and the respective insurance companies. Upon completion of its claims inspection work, FCS bills the insurance company for services rendered and recognizes the revenue earned.

‎

Table of Contents

A disaggregation of the total insurance service and other fees for the three months ended March 31, 2021 and 2020 is provided in the tables below:



		Three months ended March 31,
		2021		2020
		(in thousands)
Commercial property and casualty insurance commissions	$	797	$	867
Personal property and casualty insurance commissions		740		754
Employee benefits sales commissions		244		379
Profit sharing and contingent revenue		402		206
Wealth management and other financial services		180		121
Insurance claims services revenue		81		55
Other insurance-related revenue		58		43
Total insurance service and other fees	$	2,502	$	2,425

‎

Table of Contents

9. FAIR VALUE MEASUREMENT

Fair value is defined in ASC Topic 820 “Fair Value Measurement” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

There are three levels of inputs to fair value measurement:


			Level 1 inputs are quoted prices for identical instruments in active markets;
			Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
			Level 3 inputs are unobservable inputs.

Observable market data should be used when available.

FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A RECURRING BASIS

The following table presents, for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020, respectively:


(in thousands)		Level 1		Level 2		Level 3		Fair Value

March 31, 2021
Securities available-for-sale:
US treasuries and government agencies	$	-	$	72,696	$	-	$	72,696
States and political subdivisions		-		7,294		-		7,294
Mortgage-backed securities		-		110,348		-		110,348
Mortgage servicing rights		-		-		1,113		1,113

December 31, 2020
Securities available-for-sale:
US treasuries and government agencies	$	-	$	68,098	$	-	$	68,098
States and political subdivisions		-		7,524		-		7,524
Mortgage-backed securities		-		86,774		-		86,774
Mortgage servicing rights		-		-		917		917

‎

Table of Contents

Securities available for sale

Fair values for securities are determined using independent pricing services and market-participating brokers. The Company’s independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, the evaluated pricing applications apply information as applicable through processes, such as benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations. In addition, model processes, such as the Option Adjusted Spread model, are used to assess interest rate impact and develop prepayment scenarios. The models and the process take into account market convention. For each asset class, a team of evaluators gathers information from market sources and integrates relevant credit information, perceived market movements and sector news into the evaluated pricing applications and models. The Company’s service provider may occasionally determine that it does not have sufficient verifiable information to value a particular security. In these cases the Company will utilize valuations from another pricing service.

On a quarterly basis, the Company reviews changes in the market value of its security portfolio. Individual changes in valuations are reviewed for consistency with general interest rate movements and any known credit concerns for specific securities. Additionally, on a quarterly basis, the Company has its entire security portfolio priced by a second pricing service to determine consistency with another market evaluator. If, during the Company’s review or when comparing with another servicer, a material difference between pricing evaluations were to exist, the Company would submit an inquiry to the service provider regarding the data used to value a particular security. If the Company determines it has market information that would support a different valuation than the initial evaluation it can submit a challenge for a change to that security’s valuation.

Securities available for sale are classified as Level 2 in the fair value hierarchy as the valuation provided by the third-party provider uses observable market data.

Mortgage servicing rights

Mortgage servicing rights (“MSRs”) do not trade in an active, open market with readily observable prices. Accordingly, the Company obtains the fair value of the MSRs using a third-party pricing provider. The provider determines the fair value by discounting projected net servicing cash flows of the remaining servicing portfolio. The valuation model used by the provider considers market loan prepayment predictions and other economic factors which management considers to be significant unobservable inputs. The fair value of MSRs is mostly affected by changes in mortgage interest rates since rate changes cause the loan prepayment acceleration factors to increase or decrease. MSRs are classified within Level 3 of the fair value hierarchy as the valuation is model driven and primarily based on unobservable inputs.

The following table summarizes the changes in fair value for MSRs:


	Three months ended March 31,
(in thousands)	2021		2020
Mortgage servicing rights - January 1	$	917	$	555
Gains/(Losses) included in earnings		196		(103)
Additions from loan sales		-		33
Mortgage servicing rights - March 31	$	1,113	$	485

‎

Table of Contents

Quantitative information about the significant unobservable inputs used in the fair value measurement of MSRs at the respective dates is as follows:


	March 31, 2021		December 31, 2020
Servicing fees	0.25	%	0.25	%
Discount rate	9.03	%	9.04	%
Prepayment rate (CPR)	8.12	%	9.73	%

FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

The Company is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets using fair value measurements. The following table presents for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a nonrecurring basis March 31, 2021 and December 31, 2020:



(in thousands)		Level 1		Level 2		Level 3		Fair Value

March 31, 2021
Collateral dependent impaired loans	$	-	$	-	$	7,147	$	7,147

December 31, 2020
Collateral dependent impaired loans	$	-	$	-	$	7,496	$	7,496

Collateral dependent impaired loans

The Company evaluates and values impaired loans at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy. Each loan’s collateral has a unique appraisal and management’s discount of the value is based on factors unique to each impaired loan. The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan. Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business.

The Company has an appraisal policy in which appraisals are obtained upon a commercial loan being downgraded on the Company’s internal loan rating scale to a special mention or a substandard depending on the amount of the loan, the type of loan and the type of collateral. All impaired commercial loans are graded substandard or worse on the internal loan rating scale. For consumer loans, the Company obtains appraisals when a loan becomes 90 days past due or is determined to be impaired, whichever occurs first. Subsequent to the downgrade or reaching 90 days past due, if the loan remains outstanding and impaired for at least one year more, management may require another follow-up appraisal. Between receipts of updated appraisals, if necessary, management may perform an internal valuation based on any known changing conditions in the marketplace such as sales of similar properties, a change in the condition of the collateral, or feedback from local appraisers. Collateral dependent impaired loans had a recorded investment of $9.5 million, with an allowance for loan loss of $2.4 million, at March 31, 2021 compared with $8.8 million and $1.3 million, respectively, at December 31, 2020.

‎

Table of Contents

FAIR VALUE OF FINANCIAL INSTRUMENTS

The table below depicts the estimated fair values of the Company’s financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis.


	March 31, 2021				December 31, 2020
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
		(in thousands)				(in thousands)
Financial assets:
Level 1:
Cash and cash equivalents	$	116,220	$	116,220	$	97,604	$	97,604
Level 2:
Available for sale securities		190,338		190,338		162,396		162,396
FHLB and FRB stock		6,333		N/A		5,793		N/A
Level 3:
Held to maturity securities		4,674		4,697		4,204		4,271
Loans, net		1,726,527		1,754,522		1,673,379		1,720,878
Mortgage servicing rights		1,113		1,113		917		917

Financial liabilities:
Level 1:
Demand deposits	$	486,386	$	486,386	$	436,157	$	436,157
NOW deposits		238,769		238,769		230,751		230,751
Savings deposits		924,781		924,781		825,947		825,947
Level 2:
Securities sold under agreement to
repurchase		5,682		5,682		4,093		4,093
Other borrowed funds		41,699		42,151		44,698		45,547
Subordinated debt		30,897		31,393		30,872		31,394
Level 3:
Time deposits		222,002		223,015		278,554		280,059

‎

Table of Contents

10. SEGMENT INFORMATION

The Company comprises two primary business segments, banking and insurance agency activities. The following tables set forth information regarding these segments for the three month periods ended March 31, 2021 and 2020.




	Three months ended March 31, 2021
		Banking		Insurance Agency
		Activities		Activities		Total
		(in thousands)

Net interest income (expense)	$	16,600	$	(3)	$	16,597
Provision for loan losses		313		-		313
Net interest income (expense) after
provision for loan losses		16,287		(3)		16,284
Insurance service and fees		164		2,338		2,502
Other non-interest income		2,064		-		2,064
Amortization expense		5		130		135
Other non-interest expense		12,213		2,017		14,230
Income before income taxes		6,297		188		6,485
Income tax provision		1,584		49		1,633
Net income	$	4,713	$	139	$	4,852




	Three months ended March 31, 2020
		Banking		Insurance Agency
		Activities		Activities		Total
		(in thousands)

Net interest income (expense)	$	12,779	$	(3)	$	12,776
Provision for loan losses		2,999		-		2,999
Net interest income (expense) after
provision for loan losses		9,780		(3)		9,777
Insurance service and fees		113		2,312		2,425
Other non-interest income		913		-		913
Amortization expense		-		130		130
Other non-interest expense		10,720		2,020		12,740
Income before income taxes		86		159		245
Income tax provision		-		41		41
Net income	$	86	$	118	$	204

‎

Table of Contents

11. CONTINGENT LIABILITIES AND COMMITMENTS

The unaudited consolidated financial statements do not reflect various commitments and contingent liabilities, which arise in the normal course of business, and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities consist of commitments to extend credit and standby letters of credit. A summary of the Bank’s commitments and contingent liabilities is as follows:



	March 31,		December 31,
	2021		2020
	(in thousands)

Commitments to extend credit	$	372,744	$	359,152
Standby letters of credit		4,248		3,803
Total	$	376,992	$	362,955

Commitments to extend credit and standby letters of credit include some exposure to credit loss in the event of nonperformance by the customer. The Bank’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded on the Company’s unaudited consolidated balance sheets. Because these instruments have fixed maturity dates, and because they may expire without being drawn upon, they do not necessarily represent cash requirements of the Bank. The Bank did not incur any losses on its commitments and did not record a reserve for its commitments during the first three months of 2021 or during 2020.

Certain lending commitments for construction residential mortgage loans are considered derivative instruments under the guidelines of GAAP. The changes in the fair value of these commitments, due to interest rate risk, are not recorded on the consolidated balance sheets as the fair value of these derivatives is not considered to be material.

12. RECENT ACCOUNTING PRONOUNCEMENTS

ASUs adopted by the Company during the current fiscal year are not expected to have a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures. The following standard will be adopted in a future period. ASUs not listed below are not expected to have a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures.

ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments – Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. Both financial institutions and users of their financial statements expressed concern that current GAAP restricts the ability to record credit losses that are expected, but do not yet meet the “probable” threshold. The main objective of this ASU (commonly known as the Current Expected Credit Loss Impairment Model, or CECL, in the industry) is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in CECL replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company is developing its approach for determining expected credit losses under the new guidance, including the licensing of new software and the development of processes to track loan performance. The total impact of CECL to the Company’s financial statements is unknown but may be material. On October 16, 2019, the FASB affirmed its decision to amend the effective date for the amendments in CECL for smaller reporting companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is allowed for fiscal years beginning after December 15, 2018. The Company intends to adopt CECL effective January 1, 2023.

‎

Table of Contents

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” and similar expressions identify such forward-looking statements. These forward-looking statements include statements regarding the Company’s business plans, prospects, growth and operating strategies, statements regarding the asset quality of the Company’s loan and investment portfolios, and estimates of the Company’s risks and future costs and benefits.

These forward-looking statements are based largely on the expectations of the Company’s management and are subject to a number of risks and uncertainties, including but not limited to: general economic conditions, either nationally or in the Company’s market areas, that are worse than expected; increased competition among depository or other financial institutions; inflation and changes in the interest rate environment that reduce the Company’s margins or reduce the fair value of financial instruments; changes in laws or government regulations affecting financial institutions, including changes in regulatory fees, monetary policy, and capital requirements; the Company’s ability to enter new markets successfully and capitalize on growth opportunities; the Company’s ability to successfully integrate acquired entities; loan losses in excess of the Company’s allowance for loan losses; changes in accounting pronouncements and practices, as adopted by financial institution regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; the impact of such changes in accounting pronouncements and practices being greater than anticipated; the ability to realize the benefit of deferred tax assets; changes in tax policies, rates and regulations of federal, state and local tax authorities; changes in consumer spending, borrowing and saving habits; changes in the Company’s organization, compensation and benefit plans; and other factors discussed elsewhere in this Quarterly Report on Form 10-Q, as well as in the Company’s periodic reports filed with the SEC, in particular the “Risk Factors” discussed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as supplemented by the disclosures in Part II – Item 1A – Risk Factors - of this Quarterly Report on Form 10-Q. Many of these factors are beyond the Company’s control and are difficult to predict.

Because of these and other uncertainties, the Company’s actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to publicly update or revise forward-looking information, whether as a result of new, updated information, future events or otherwise, except to the extent required by law.

The Discussion and Analysis of Financial Condition and Results of Operations that follows includes comparisons to the quarter ended March 31, 2020 as well as the trailing quarter ended December 31, 2020. Information with respect to the trailing quarter ended December 31, 2020 is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC.

Impact of COVID-19

The Company's operations and financial results have been substantially influenced by the COVID-19 pandemic since the United States issued a state of emergency on March 13, 2020. The most notable financial impact to our results of operations was a higher provision for loan losses during 2020, primarily reflecting the substantial increase in economic uncertainty and the resultant potential for increased credit losses in future periods as a consequence of the COVID-19 pandemic.

The CARES Act established the PPP loan program which is administered through the SBA. PPP loans are 100% guaranteed by the SBA and are forgivable, in whole or in part, if the proceeds are used in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole. Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. The Company originated PPP loans totaling $203 million during 2020 and $89 million during the first quarter of 2021, included in commercial and industrial loans.

Fees collected from the SBA for the PPP loans totaled $11.5 million. These fees are deferred and amortized into interest income over the contractual period of the loan. Upon SBA forgiveness or sale of a PPP loan, unamortized fees are then recognized into interest income. As of March 31, 2021, PPP loans had received SBA forgiveness that totaled $55 million. PPP fees recognized during the first quarter of 2021 were $1.7 million. PPP loans did not impact the Company’s allowance for loan loss as a result of the SBA guarantees.

During 2020, federal banking regulators issued guidance providing that qualifying modifications made to a borrower affected by the COVID-19 pandemic and governmental shutdown orders do no need to be identified as a TDR. During 2020, the Company had applied this guidance and had modified approximately 381 commercial loans with principal balances totaling $368 million, and approximately

Table of Contents

298 consumer loans with principal balances totaling $37 million. Modifications included payment deferrals (including maturity extensions), fee waivers and covenant waivers. Loans in COVID-19 modification related deferral periods at March 31, 2021 were not material.

The Company expects that the COVID-19 pandemic could continue to have a significant impact on our business. In particular, it is anticipated that a significant portion of the Company’s borrowers in the hotel industry will continue to endure significant economic distress, which has caused, and may continue to cause, them to draw on their existing lines of credit and adversely affect their ability to repay existing indebtedness, and may adversely impact the value of collateral. During 2020, the Company identified a well-defined weakness in the hotel industry as a result of the impact of the pandemic and classified the loans to clients within that industry as substandard. While the Company has noted some improvement during the three months ended March 31, 2021, the classification of the hotel industry loan portfolio has not changed. As of March 31, 2021, the Company’s hotel loan portfolio was $82 million, or approximately 6.3% of total commercial loans.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

The Company’s Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. GAAP and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the Company’s Unaudited Consolidated Financial Statements and Notes. These estimates, assumptions, and judgments are based on information available as of the date of the Unaudited Consolidated Financial Statements. Accordingly, as this information changes, the Unaudited Consolidated Financial Statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments, and as such, have a greater possibility of producing results that could be materially different than originally reported.

Significant accounting policies followed by the Company are presented in Note 1 – “Organization and Summary of Significant Accounting Policies” to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K for the year ended December 31, 2020. These policies, along with the disclosures presented in the other Notes to the Company's Audited Consolidated Financial Statements contained in its Annual Report on Form 10-K and in this financial review, provide information on how significant assets and liabilities are presented in the Company’s Unaudited Consolidated Financial Statements and how those values are determined.

Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses, business combinations and valuation of goodwill to be the accounting areas that require the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of probable incurred losses in the Bank’s loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment on the part of management and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the Company’s Unaudited Consolidated Balance Sheets. Note 1 to the Audited Consolidated Financial Statements included in Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 describes the methodology used to determine the allowance for loan losses.

‎

Table of Contents

Business Combinations

Mergers and acquisitions are accounted for in accordance with ASC 805 “Business Combinations” using the acquisition method of accounting. Assets and liabilities acquired and assumed are generally recorded at their fair values as of the date of the transaction. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill.

Determining the fair value of assets and liabilities acquired often involves estimates based on internal estimate or third-party valuations using a discounted cash flow analysis or other valuation technique that may include the use of estimates. In addition, the determination of the useful lives over which intangible assets will be amortized is subjective in nature.

Changes to estimates and judgments used in business combinations could result in a significant difference in the fair value of assets and liabilities acquired which would impact total goodwill recorded. A change in the useful life of intangible assets could impact amortization amounts which could have an impact on our earnings.

Goodwill

The amount of goodwill reflected in the Company’s Unaudited Consolidated Financial Statements is required to be tested by management for impairment on at least an annual basis or whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying value. The annual goodwill impairment testing is performed as of December 31. The test for impairment of goodwill on the identified reporting unit is considered a critical accounting estimate because it requires judgment on the part of management and the use of estimates related to the growth assumptions and market multiples used in the valuation model.

At March 31, 2021, the Company had $12.7 million in goodwill, all of which stems from the acquisition of various insurance agencies and the most recent acquisition of FSB. In connection with the FSB acquisition, the Company recognized $1.8 million in goodwill in its banking reporting unit. The remaining $10.9 million of goodwill is recorded in the Company’s insurance agency reporting unit. There have been no purchases of diverse companies in which goodwill was subjectively allocated to different reporting units.

The valuation methodology used for the goodwill in the banking reporting unit is a five year discounted cash flow analysis. The Company used two valuation methodologies to calculate the fair value of the insurance agency reporting unit. The first methodology is a five year discounted cash flow analysis. The second was to measure fair value using an EBITDA (“Earnings Before Interest, Taxes, Depreciation, Amortization) multiple. These valuation methodologies utilize key assumptions that include forecasts of revenues and expenses derived from Company projections for a period of five years, changes in working capital estimates, company specific discount rate derived from a rate build up approach, externally sourced bank peer group market multiples and externally sourced bank peer group change in control premium, all of which are highly subjective and require significant management judgment. Changes in these key assumptions could materially affect our estimate of the reporting unit fair value and could affect our conclusion regarding the existence of potential impairment.

No impairment to the Company’s goodwill was recorded in 2020 or in the first quarter of 2021.

ANALYSIS OF FINANCIAL CONDITION

Loan Activity

Total gross loans were $1.7 billion at March 31, 2021 and December 31, 2020 and $1.2 billion at March 31, 2020. The year-over-year increase reflects the addition of $271 million of loans upon the acquisition of FSB in the second quarter of 2020 and organic loan growth over the last year, including the origination of $292 million of PPP loans, of which $55 million have been forgiven by the SBA as of March 31, 2021.

Loans secured by real estate were $1.3 billion at March 31, 2021 and December 31, 2020 and $987 million at March 31, 2020. Residential real estate loans were $381 million at March 31, 2021, $8 million or 2% higher than at December 31, 2020, and $225 million or 143% higher than at March 31, 2020, reflecting the benefit of the acquired loan portfolio. Commercial real estate loans, including construction loans, were $840 million at March 31, 2021, $27 million or 3% higher than the balance at December 31, 2020 and $76 million or 10% higher than the balance at March 31, 2020, also having benefitted from the FSB acquisition. Commercial real estate is the largest part of the Company’s loan portfolio and has historically been the highest growth segment of the portfolio.

In the first quarter of 2021, residential mortgage originations were $32 million compared with the previous quarter’s originations of $40 million and $5 million in the first quarter of 2020. The increases from the prior year first quarter were primarily due to the acquired FSB mortgage real estate division during the second quarter of 2020 as well as refinancing activity as customers are able to benefit from lower interest rates. The Company did not sell any residential mortgages during the first quarter of 2021, compared with $0.6 million during the previous quarter and $3.7 million during the first quarter of 2020. Management decides to keep or sell residential mortgage

Table of Contents

loans at the time of origination based on interest rate risk management and the risk-adjusted return of alternative investment sources such as mortgage-backed securities.

The Company has also focused on growth opportunities in commercial and industrial (“C&I”) lending as a way to diversify its overall loan portfolio. The C&I portfolio was $451 million at March 31, 2021, representing a $21 million or 5% increase from December 31, 2020, and a $195 million or 76% increase from March 31, 2020. The increase from last year is primarily the result of $292 million of PPP loans originated of which $89 million were originated during the first quarter of 2021. At March 31, 2021, a total of $55 million of the PPP loans have been forgiven by the SBA. C&I lending is a critical component of the Company’s strategy as C&I relationships can often include core deposits.

Credit Quality of Loan Portfolio

Non-performing loans, defined as accruing loans greater than 90 days past due and nonaccrual loans, totaled $29 million, or 1.66% of total loans outstanding at March 31, 2021, compared with $28 million, or 1.66% of total loans outstanding, as of December 31, 2020 and $17 million, or 1.34% of total loans outstanding, as of March 31, 2020. The increase in non-performing loans from the first quarter of 2020 reflected higher C&I and commercial real estate nonaccrual loans.

Commercial credits graded as “special mention” and “substandard,” or the criticized loan portfolio, were $154 million at March 31, 2021, a $14 million increase from $140 million at December 31, 2020 and a $98 million increase from $56 million at March 31, 2020. The Company continues to classify loans to clients within the hotel industry as criticized given their level of seasonality and ongoing challenges during the COVID-19 pandemic. As of March 31, 2021, the Company’s hotel loan portfolio was $82 million, or approximately 6.3%, of total commercial loans. The Company continues to monitor each client in that industry including on-going conversations with the borrowers. The level of criticized loans can fluctuate as new information is constantly received on the Company’s borrowers and their financial circumstances change over time. Internal risk ratings are the credit quality indicators used by the Company’s management to determine the appropriate allowance for loan losses for commercial credits. “Special mention” and “substandard” loans are weaker credits with a higher risk of loss and are categorized as “criticized” credits rather than “pass” or “watch” credits.

The Company maintains an allowance for loan losses that in management’s judgment appropriately reflects losses inherent in the loan portfolio. Loans acquired in a business combination are recorded at fair value with no carry-over of an acquired entity’s previously established allowance for credit losses. The allowance for loan losses totaled $20.7 million or 1.18% of total loans outstanding at March 31, 2021, compared with $20.4 million or 1.21% of total loans outstanding as of December 31, 2020 and $18.2 million or 1.46% of total loans outstanding at March 31, 2020. The Company recorded $0.3 million in provision for loan losses during the first quarter of 2021, compared with a release of $0.1 million of allowance for loan losses in the fourth quarter of 2020, and a provision of $3.0 million in the first quarter of 2020. The first quarter of 2021 provision for loan losses reflects $1.1 million in specific reserves associated with a single commercial customer relationship, partially offset by continued positive macroeconomic trends. The higher provision during the first quarter of 2020 was the result of deterioration of economic trends and conditions related to the COVID-19 pandemic at that time.

Investing Activities

Total investment securities were $195 million at March 31, 2021, compared with $167 million at December 31, 2020 and $162 million at March 31, 2020. The increases reflect the use of excess cash balances. Interest-bearing deposits at other banks, which consist of overnight funds kept at correspondent banks and the Federal Reserve, were $106 million at March 31, 2021 compared to $84 million at December 31, 2020, and $41 million at March 31, 2020. The primary objectives of the Company’s investment portfolio are to provide liquidity, provide collateral to secure municipal deposits, and maximize income while preserving safety of principal. Average investment securities and interest-bearing cash were 13% of average interest-earning assets in the first quarter of 2021 and fourth quarter of 2020, compared with 14% in last year’s first quarter.

The Company’s highest concentration in its securities portfolio was in available for sale U.S. government sponsored mortgage-backed securities which comprised 57%, 52% and 75% of total investment securities at March 31, 2021, December 30, 2020 and March 31, 2020, respectively. The concentration in tax-advantaged debt securities issued by state and political subdivisions was 6%, 7% and 4% of the total securities portfolio at March 31, 2021, December 31, 2020, and March 31, 2020, respectively. The concentration in U.S. government-sponsored agency bonds was 37% of the total securities portfolio as of March 31, 2021 compared with 41% of the total securities portfolio at December 31, 2020 and 22% at March 31, 2020.

The total net unrealized loss position of the available-for-sale investment portfolio was $2.0 million at March 31, 2021, compared with a net unrealized gain position of $3.2 million at December 31, 2020 and March 31, 2020. The securities in an unrealized loss position at the end of the first quarter of 2021 generally reflect an increase in market interest rates. Management believes that the credit quality of the securities portfolio as a whole is strong.

Table of Contents

The Company monitors extension and prepayment risk in the securities portfolio to limit potential exposures. The Company has no direct exposure to subprime mortgages, nor does the Company hold private mortgage-backed securities, credit default swaps, or FNMA or FHLMC preferred stock investments in its investment portfolio.

Funding Activities

Total deposits at March 31, 2021 were $1.9 billion, a $101 million or 6% increase from December 31, 2020 and a $544 million or 41% increase from March 31, 2020. The increase from the sequential fourth quarter largely reflects commercial deposits related to the second round of PPP loans and an increase in consumer deposits from government stimulus payments and lower consumer spending. Specifically, the increase from year end reflects increases in total demand deposits of $50 million or 12%, municipal savings deposits of $50 million or 31%, consumer savings deposits of $29 million or 6%, commercial savings deposits of $20 million or 11%, and total NOW deposits of $8 million or 3%. These increases were offset by a decrease in time deposits of $57 million or 20%. The increase from the prior year reflects the addition of $239 million of deposits upon the FSB acquisition and an accumulation of liquidity by commercial customers in response to the pandemic, including deposits related to PPP loans, and increases in consumer deposits from government stimulus payments and lower consumer spending. Specifically, the year over year increase reflects increases in total demand deposits of $213 million or 78%, consumer savings deposits of $174 million or 51%, total NOW deposits of $80 million or 50%, commercial savings deposits of $67 million or 52%, and municipal savings deposits of $59 million or 38%. These increases were offset by a decrease in time deposits, including brokered, of $47 million or 17%. Average demand deposits were $465 million in the first quarter of 2021, a 6% increase from $440 million in the fourth quarter of 2020, and a 65% increase from $282 million in the first quarter of 2020.

The Company had $42 million in other borrowings at March 31, 2021. This represents long-term advances from the Federal Home Loan Bank of New York (“FHLBNY”) that were acquired in the FSB acquisition. At March 31, 2020 the Company had $10 million in other borrowings representing a single long-term advance with the FHLBNY that matured during the second quarter of 2020. The Company’s use of its overnight line of credit with FHLBNY varies depending on its ability to fund investment and loan growth with deposits along with the line usage’s impact on interest rate risk. There were no overnight borrowings at March 31, 2021.

During 2020, the Company entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers and institutional accredited investors pursuant to which the Company issued and sold $20.0 million in aggregate principal amount of its 6.00% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “Notes”). During 2020, $15 million of the proceeds from the sale of the Notes were moved to the Company’s Evans Bank N.A. subsidiary as Tier 1 capital.

‎

Table of Contents

ANALYSIS OF RESULTS OF OPERATIONS

Average Balance Sheet

The following tables present the significant categories of the assets and liabilities of the Company, interest income and interest expense, and the corresponding yields earned and rates paid for the periods indicated. The assets and liabilities are presented as daily averages. The average loan balances include both performing and non-performing loans. Investments are included at book value. Yields are presented on a non-tax-equivalent basis.




	Three months ended March 31, 2021						Three months ended March 31, 2020
	Average		Interest				Average		Interest
	Outstanding		Earned/		Yield/		Outstanding		Earned/		Yield/
	Balance		Paid		Rate		Balance		Paid		Rate
	(dollars in thousands)						(dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net	$	1,706,325	$	17,066	4.06	%	$	1,219,230	$	14,546	4.80	%
Taxable securities		168,699		832	2.00	%		129,966		1,049	3.25	%
Tax-exempt securities		11,774		56	1.93	%		6,063		47	3.12	%
Interest bearing deposits at banks		76,651		16	0.08	%		57,319		181	1.27	%

Total interest-earning assets		1,963,449	$	17,970	3.71	%		1,412,578	$	15,823	4.51	%

Non interest-earning assets:

Cash and due from banks		17,338						14,424
Premises and equipment, net		19,210						13,807
Other assets		78,652						61,573

Total Assets	$	2,078,649					$	1,502,382

LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW	$	230,627	$	76	0.13	%	$	144,564	$	181	0.50	%
Savings		866,991		421	0.20	%		605,103		1,316	0.87	%
Time deposits		246,120		389	0.64	%		274,576		1,379	2.02	%
Other borrowed funds		42,767		86	0.82	%		10,000		45	1.81	%
Subordinated debt		30,883		399	5.24	%		11,330		124	4.40	%
Securities sold U/A to repurchase		4,634		2	0.18	%		3,378		2	0.24	%

Total interest-bearing liabilities		1,422,022	$	1,373	0.39	%		1,048,951	$	3,047	1.17	%

Noninterest-bearing liabilities:
Demand deposits		464,579						281,624
Other		23,031						22,127
Total liabilities	$	1,909,632					$	1,352,702

Stockholders' equity		169,017						149,680

Total Liabilities and Equity	$	2,078,649					$	1,502,382

Net interest income			$	16,597					$	12,776

Net interest margin					3.43	%					3.64	%

Interest rate spread					3.32	%					3.34	%

Net Income

Net income was $4.9 million, or $0.89 per diluted share, in the first quarter of 2021, compared with $6.0 million, or $1.11 per diluted share, in the fourth quarter of 2020 and $0.2 million, or $0.04 per diluted share, in last year’s first quarter. The increase from the prior-year period included higher net interest income of $3.8 million reflecting the impacts of the FSB acquisition and fees earned in connection with PPP lending, along with a $2.7 million decrease in the provision for loan loss reflecting the deterioration of economic trends and conditions related to the outbreak of COVID-19 during the prior year’s quarter. Partially offsetting these increases was a $1.5 million increase in non-interest expenses primarily due to the addition of FSB’s operations. The decrease in net income from the previous quarter reflected a $0.7 million gain on sale of assets recorded in the fourth quarter and a $0.4 million increase in provision for loan loss, largely reflecting specific reserves on loans associated with a single commercial customer relationship.

Return on average equity was 11.48% for the first quarter of 2021, compared with 14.51% in the fourth quarter of 2020 and 0.55% in the first quarter of 2020.

Table of Contents

Other Results of Operations – Quarterly Comparison

Net interest income increased $3.8 million, or 30%, from the prior-year first quarter, due to higher average interest-earning assets as the Company recognized the benefits of the FSB acquisition and PPP lending. As PPP loans are forgiven, the Company is accelerating the recognition of the fees that were being amortized over the original life of the loan. PPP fees recognized in interest income were $1.7 million and $1.4 million during the first quarter of 2021 and fourth quarter of 2020, respectively. There were no PPP fees recognized during the first quarter of 2020. Net interest income increased $0.2 million, or 1%, from the fourth quarter of 2020.

First quarter net interest margin of 3.43% increased 5 basis points from the fourth quarter of 2020, reflecting the accelerated PPP fee amortization and reduced interest expense as the Company continued to align rates on deposits. Net interest margin was down 21 basis points from the first quarter of 2020 due to the Federal Reserve’s decrease of the federal funds rate by 150 basis points early in 2020, and changes in the mix of interest-earning assets, including greater interest earning cash balances, low-yielding PPP loans and residential mortgages from FSB. The yield on loans decreased 3 basis points when compared with the fourth quarter of 2020 and decreased 74 basis points when compared with the first quarter of 2020. The cost of interest-bearing liabilities decreased to 0.39% compared with 0.49% in the fourth quarter of 2020 and 1.17% in the first quarter of 2020.

Provision for loan losses was $0.3 million in the first quarter of 2021, compared with a release of $0.1 million of allowance for loan losses in the fourth quarter of 2020 and a provision of $3.0 million in the first quarter of 2020. The $0.3 million provision for loan losses during the first quarter of 2021 reflects $1.1 million in specific reserves associated with a single commercial customer relationship, partially offset by continued positive macroeconomic trends. The $2.7 million decrease in provision for loan loss from prior year reflects the deterioration of economic trends and conditions related to the COVID-19 pandemic in the prior year quarter.

Non-interest income was $4.6 million in the first quarter of 2021, compared with $4.8 million in the fourth quarter of 2020 and $3.3 million in the prior year first quarter. The decrease from the sequential fourth quarter was largely due to a $0.7 million gain recognized on the sale of the Company’s former administrative headquarters during the fourth quarter of 2020. The increase in non-interest income compared with prior year period is due to $0.3 million increase in loan fees resulting from higher volume and a $0.3 million increase in income from the changes in the fair value of mortgage servicing rights. In addition, the first quarter of 2020 included a $0.6 million net reduction of non-interest income related to an investment in an historic rehabilitation tax credit. There were no historic tax credit transactions in the first quarter of 2021 or fourth quarter of 2020.

‎

Table of Contents

Non-interest expenses of $14.4 million in the first quarter of 2021 were relatively flat from the fourth quarter of 2020 non-interest expense of $14.5 million but increased $1.5 million, or 12% from the prior-year period. The primary component of the increase from the prior year’s first quarter was salaries and employee benefits costs due to the addition of personnel related to the FSB acquisition. Salaries and employee benefits expense increased $1.2 million, or 16% to $9.0 million in the first quarter of 2021. Technology and communications increased $0.2 million from the prior year period due to higher software costs primarily due to the FSB acquisition and additional expenditures related to the COVID-19 pandemic. FDIC insurance expense was higher during the first quarter of 2021 compared with first quarter of 2020 reflecting higher total average assets as a result of the FSB acquisition and higher insurance assessment rates. During the first quarter of 2020 the Company recognized $0.5 million in legal expenses in connection with the FSB acquisition. There were no merger-related expenses during the first quarter of 2021.

The Company’s GAAP efficiency ratio, or noninterest expenses divided by the sum of net interest income and noninterest income, was 67.9% in the first quarter of 2021, 68.3% in the fourth quarter of 2020, and 79.9% in the first quarter of 2020. The Company’s non-GAAP efficiency ratio, excluding amortization expense, gains and losses from investment securities, and merger-related expenses, was 67.2% in the first quarter of 2021 compared with 67.7% in the fourth quarter of 2020 and 73.4% in last year’s first quarter.

Income tax expense was $1.6 million, or an effective tax rate of 25.2%, for the first quarter of 2021 compared with 12.0% in the fourth quarter of 2020 and 16.7% in last year’s first quarter. Excluding the impact of the first quarter 2020 historic tax credit transaction, the effective tax rate was 22.1% and 25.4% in the fourth and first quarters of 2020, respectively.

CAPITAL

The Company consistently maintains regulatory capital ratios significantly above the federal “well capitalized” standard, including a Tier 1 leverage ratio of 8.19% at March 31, 2021, compared with 8.21% at December 31, 2020 and 9.92% at March 31, 2020. Book value per share was $30.76 at March 31, 2021, compared with $31.21 at December 31, 2020 and $29.96 at March 31, 2020.

On February 25, 2021, the Company declared a semi-annual cash dividend of $0.60 per share on the Company’s outstanding common stock. The dividend was paid on April 6, 2021 to shareholders of record as of March 16, 2021. The semi-annual dividend represented a $0.02, or 3% increase from the previous semi-annual dividend paid in October 2020.

The Company has also issued subordinated capital notes and junior subordinated debentures associated with trust preferred securities to provide liquidity and enhance regulatory capital ratios. The Company had $11.3 million of junior subordinated debentures associated with trust preferred securities outstanding at March 31, 2021 and December 31, 2020 which are considered Tier 1 capital and are includable in total regulatory capital. On July 9, 2020, the Company executed a private offering of $20 million of its 6.00% Fixed-to-Floating Rate Subordinated Notes due 2030. During 2020, $15 million of the proceeds from the sale of the Notes were moved to the Company’s Evans Bank, N.A. subsidiary as Tier 1 capital.

While we are currently classified as well capitalized, an extended economic recession brought about by COVID-19 could adversely impact our reported and regulatory capital ratios by credit losses. The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt. If the Company’s subsidiary bank’s capital deteriorates such that it is unable to pay dividends to the Company for an extended period of time, the Company may not be able to service its debt that was issued.

LIQUIDITY

The Bank utilizes cash flows from the investment portfolio and federal funds sold balances to manage the liquidity requirements related to loan demand and deposit fluctuations. The Bank also has many borrowing options. The Company uses the FHLBNY as its primary source of overnight funds and has long-term advance with FHLBNY. The Company’s use of its overnight line of credit with FHLBNY varies depending on its ability to fund investment and loan growth with core deposits along with the line usage’s impact on interest rate risk. The Company’s funding strategy has resulted in significant deposit growth, resulting in less usage of the FHLBNY overnight line of credit. The Company has pledged sufficient collateral in the form of residential and commercial real estate loans at FHLBNY that meets FHLB collateral requirements. As a member of the FHLB, the Bank is able to borrow funds at competitive rates. As of March 31, 2021, advances of up to $495 million could be drawn on the FHLB via an Overnight Line of Credit Agreement between the Bank and the FHLB. As of March 31, 2021, the Bank also had the ability to purchase up to $18 million in federal funds from its correspondent banks. By placing sufficient collateral in safekeeping at the Federal Reserve Bank, the Bank could borrow at the discount window. The Bank’s liquidity needs also can be met by more aggressively pursuing time deposits, or accessing the brokered time deposit market, including the Certificate of Deposit Account Registry Service (“CDARS”) network.

Table of Contents

Cash flows from the Bank’s investment portfolio are laddered, so that securities mature at regular intervals, to provide funds from principal and interest payments at various times as liquidity needs may arise. Contractual maturities are also laddered, with consideration as to the volatility of market prices. At March 31, 2021, approximately 3% of the Bank’s securities had contractual maturity dates of one year or less and approximately 7% had maturity dates of five years or less. Additionally, mortgage-backed securities, which comprise 57% of the investment portfolio at March 31, 2021, provide consistent cash flows for the Bank.

The Company’s primary source of liquidity is dividends from the Bank. Additionally, the Company has access to capital markets as a funding source.

Management, on an ongoing basis, closely monitors the Company’s liquidity position for compliance with internal policies and believes that available sources of liquidity are adequate to meet funding needs in the normal course of business. As part of that monitoring process, management calculates the 90-day liquidity each month by analyzing the cash needs of the Bank. Included in the calculation are liquid assets and potential liabilities. Management stresses the potential liabilities calculation to ensure a strong liquidity position. Included in the calculation are assumptions of some significant deposit run-off as well as funds needed for loan closings and investment purchases. In the Company’s internal stress test at March 31, 2021, the Company had net short-term liquidity of $598 million as compared with $410 million at December 31, 2020. Available assets of $301 million, divided by public and purchased funds of $410 million, resulted in a long-term liquidity ratio of 73% at March 31, 2021, compared with 70% at December 31, 2020.

Management does not anticipate engaging in any activities, either currently or in the long term, for which adequate funding would not be available and which would therefore result in significant pressure on liquidity.

The Company believes that the Bank maintains a sufficient level of U.S. government and government agency securities and New York State municipal bonds that can be pledged as collateral for municipal deposits.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Additional information responsive to this Item is contained in the Liquidity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, which information is incorporated herein by reference.

Market risk is the risk of loss from adverse changes in market prices and/or interest rates of the Bank’s financial instruments. The primary market risk that the Company is exposed to is interest rate risk. The core banking activities of lending and deposit-taking expose the Bank to interest rate risk, which occurs when assets and liabilities reprice at different times and by different amounts as interest rates change. As a result, net interest income earned by the Bank is subject to the effects of changing interest rates. The Bank measures interest rate risk by calculating the variability of net interest income in future periods under various interest rate scenarios using projected balances for interest-earning assets and interest-bearing liabilities. Management’s philosophy toward interest rate risk management is to limit the variability of net interest income to changes in net interest rates. The balances of financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of loans, and expected maturities of investment securities, loans, and deposits. Management supplements the modeling technique described above with analysis of market values of the Bank’s financial instruments and changes to such market values given changes in the interest rates.

The Bank’s Asset-Liability Committee, which includes members of senior management, monitors the Bank’s interest rate sensitivity with the aid of a model that considers the impact of ongoing lending and deposit taking activities, as well as interrelationships in the magnitude and timing of the repricing of financial instruments, including the effect of changing interest rates on expected prepayments and maturities. When deemed prudent, management has taken actions, and intends to do so in the future, to mitigate exposure to interest rate risk through the use of on- or off-balance sheet financial instruments. Possible actions include, but are not limited to, changing the pricing of loan and deposit products, and modifying the composition of interest-earning assets and interest-bearing liabilities, and reliance on other financial instruments used for interest rate risk management purposes.

‎

Table of Contents

The following table demonstrates the possible impact of changes in interest rates on the Bank’s net interest income over a 12-month period of time:

SENSITIVITY OF NET INTEREST INCOME TO CHANGES IN INTEREST RATES



	Calculated increase (decrease)
	in projected annual net interest income
	(in thousands)

		March 31, 2021		December 31, 2020
Changes in interest rates

+200 basis points	$	700	$	(681)
+100 basis points		3,643		2,717

-100 basis points		(1,683)		(1,169)
-200 basis points		NM		NM

Many assumptions were utilized by management to calculate the impact that changes in interest rates may have on the Bank’s net interest income. The more significant assumptions related to the rate of prepayments of mortgage-related assets, loan and deposit volumes and pricing, and deposit maturities. The Bank assumed immediate changes in rates including 200 basis point rate changes. In the 200 basis point rate reduction scenario, the applicable rate changes may be limited to lesser amounts such that interest rates are not less than zero. The assumptions in the Company’s projections are inherently uncertain and, as a result, the Bank cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to the timing, magnitude, and frequency of interest rate changes in market conditions and interest rate differentials (spreads) between maturity/repricing categories, as well as any actions such as those previously described, which management may take to counter such changes. In light of the uncertainties and assumptions associated with the process, the amounts presented in the table and changes in such amounts are not considered significant to the Bank’s projected net interest income.

ITEM 4 - CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2021 (the end of the period covered by this Report). Based on that evaluation, the Company’s principal executive and principal financial officers concluded that as of March 31, 2021 the Company’s disclosure controls and procedures were not effective due to the material weaknesses disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 19, 2021.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Except as noted above, no changes in the Company’s internal control over financial reporting were identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the fiscal quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The remediation plan with respect to the material weaknesses has been implemented, however the material weaknesses will not be considered remediated until new internal controls are operational for a period of time and are tested, and management concludes that these controls are operating effectively. Management is currently in the process of testing the remediation and expects to conclude that testing in the near future.

‎

Table of Contents

PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

The nature of the Company’s business generates a certain amount of litigation involving matters arising in the ordinary course of business.

In the opinion of management, there are no proceedings pending to which the Company is a party or to which its property is subject, which, if determined adversely, would have a material effect on the Company’s results of operations or financial condition.

ITEM 1A – RISK FACTORS

There have been no material changes to the risk factors previously disclosed in Item 1A. Part I of the Company’s Annual Report on Form 10- K for the fiscal year ended December 31, 2020.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities



Period	Total Number of Shares Purchased ₍₁₎		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that may yet be Purchased Under the Plans or Programs ₍₂₎
January 2021:
January 1, 2021 - January 31, 2021		-	$	-	-	300,000

February 2021:
February 1, 2021 - February 28, 2021		4,679	$	30.39	-	300,000
March 2021:
March 1, 2021 - March 31, 2021		-	$	-	-	300,000

Total:		4,679	$	30.39	-	300,000

(1)The total shares purchased in the period consist of shares constructively tendered to the Company by attestation in satisfaction of the exercise price due upon exercise of options issued pursuant to the Company’s 2019 Long-Term Incentive Plan. The “average price paid per share” reported in the table above, with respect to such shares, reflects the fair market value of the Company’s common stock on the exercise date, which was the closing sales price of the Company’s common stock as reported on the NYSE American on that date.

(2)On February 25, 2021, the Board of Directors authorized the Company to repurchase up to 300,000 shares of the Company’s common stock (the “2021 Repurchase Program”). The 2021 Repurchase program does not expire and may be suspended or discontinued by the Board of Directors at any time. The maximum number of shares that may be purchased under the 2021 Repurchase Program as of March 31, 2021 was 300,000.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

(Not Applicable.)

ITEM 4 – MINE SAFETY DISCLOSURE

(Not Applicable.)

ITEM 5 – OTHER INFORMATION

(Not Applicable.)

ITEM 6 – EXHIBITS

The following exhibits are filed as a part of this report:

‎

Table of Contents


		EXHIBIT INDEX

Exhibit No.		Name

10.1		Evans Bank Excels Plan (incorporated by reference to Exhibit 10.1 to Evans Bancorp, Inc.’s Current Report on Form 8-K, as filed on February 22, 2021)

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Principal Financial Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from Evans Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets – March 31, 2021 and December 31, 2020; (ii) Unaudited Consolidated Statements of Income – Three months ended March 31, 2021 and 2020; (iii) Unaudited Consolidated Statements of Income – Three months ended March 31, 2021 and 2020; (iv) Unaudited Statements of Consolidated Comprehensive Income – Three months ended March 31, 2021 and 2020; (v) Unaudited Consolidated Statements of Stockholders' Equity – Three months ended March 31, 2021 and 2020; (vi) Unaudited Consolidated Statements of Cash Flows – Three months ended March 31, 2021 and 2020; and (vii) Notes to Unaudited Consolidated Financial Statements.

104		The cover page from the Evans Bancorp, Inc’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline XBRL.

‎

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Evans Bancorp, Inc.

DATE

May 3, 2021

/s/ David J. Nasca

David J. Nasca

President and CEO

(Principal Executive Officer)

DATE

May 3, 2021

/s/ John B. Connerton

John B. Connerton

Treasurer

(Principal Financial Officer and Principal Accounting Officer)