EVANS BANCORP INC - Quarter Report: 2022 June (Form 10-Q)

evbn-20220630x10q

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 June 30, 2022

¨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, 5,508,663 shares as of July 26, 2022.

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INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES



PART 1. FINANCIAL INFORMATION		PAGE

Item 1.	Financial Statements

	Unaudited Consolidated Balance Sheets – June 30, 2022 and December 31, 2021	1

	Unaudited Consolidated Statements of Income – Three months ended June 30, 2022 and 2021	2

	Unaudited Consolidated Statements of Income – Six months ended June 30, 2022 and 2021	3

	Unaudited Consolidated Statements of Comprehensive (Loss) Income – Three months ended June 30, 2022 and 2021	4

	Unaudited Consolidated Statements of Comprehensive (Loss) Income – Six months ended June 30, 2022 and 2021	4

	Unaudited Consolidated Statements of Changes in Stockholders’ Equity – Three months ended June 30, 2022 and 2021	5

	Unaudited Consolidated Statements of Changes in Stockholders’ Equity – Six months ended June 30, 2022 and 2021	6

	Unaudited Consolidated Statements of Cash Flows – Six months ended June 30, 2022 and 2021	7

	Notes to Unaudited Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	43

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	44

Item 1A.	Risk Factors	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 3.	Defaults Upon Senior Securities	44

Item 4.	Mine Safety Disclosure	44

Item 5.	Other Information	44

Item 6.	Exhibits	45

	Signatures	46

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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2022 AND DECEMBER 31, 2021
(in thousands, except share and per share amounts)
	June 30,		December 31,
	2022		2021
ASSETS
Cash and due from banks	$	10,570	$	9,856
Interest-bearing deposits at banks		88,190		234,929
Securities:
Available for sale, at fair value (amortized cost: $438,669 at June 30, 2022;		395,620		305,959
$310,228 at December 31, 2021)
Held to maturity, at amortized cost (fair value: $7,619 at June 30, 2022;		7,702		3,165
$3,179 at December 31, 2021)
Federal Home Loan Bank common stock, at cost		2,774		3,045
Federal Reserve Bank common stock, at cost		3,059		3,039
Loans, net of allowance for loan losses of $18,819 at June 30, 2022
and $18,438 at December 31, 2021		1,595,015		1,553,467
Properties and equipment, net of accumulated depreciation of $10,852 at June 30, 2022
and $10,283 at December 31, 2021		17,282		17,789
Goodwill		12,702		12,702
Intangible assets		1,427		1,627
Bank-owned life insurance		34,614		34,295
Operating lease right-of-use asset		4,363		4,826
Other assets		35,036		25,941
TOTAL ASSETS	$	2,208,354	$	2,210,640

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand	$	550,079	$	492,864
NOW		265,181		259,908
Savings		1,015,511		1,019,925
Time		137,561		164,340
Total deposits		1,968,332		1,937,037
Securities sold under agreement to repurchase		5,070		4,112
Other borrowings		22,934		32,879
Operating lease liability		4,721		5,210
Other liabilities		13,598		16,536
Subordinated debt		31,024		30,974
Total liabilities		2,045,679		2,026,748

STOCKHOLDERS' EQUITY:
Common stock, $0.50 par value, 10,000,000 shares authorized; 5,532,458 and 5,482,756 shares issued at
June 30, 2022 and December 31, 2021, respectively, and 5,508,663 and 5,482,756 shares outstanding at
June 30, 2022 and December 31, 2021, respectively.		2,769		2,744
Capital surplus		80,072		78,795
Treasury stock, at cost, 23,795 and 0 shares at June 30, 2022 and
December 31, 2021, respectively		(849)		-
Retained earnings		114,982		108,024
Accumulated other comprehensive income (loss), net of tax		(34,299)		(5,671)
Total stockholders' equity		162,675		183,892
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,208,354	$	2,210,640

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2022 AND 2021
(in thousands, except share and per share amounts)
	Three Months Ended June 30,
	2022		2021
INTEREST INCOME
Loans	$	16,828	$	18,513
Interest-bearing deposits at banks		226		19
Securities:
Taxable		1,984		988
Non-taxable		59		56
Total interest income		19,097		19,576
INTEREST EXPENSE
Deposits		580		736
Other borrowings		42		86
Subordinated debt		423		404
Total interest expense		1,045		1,226
NET INTEREST INCOME		18,052		18,350
PROVISION (CREDIT) FOR LOAN LOSSES		267		(760)
NET INTEREST INCOME AFTER
PROVISION (CREDIT) FOR LOAN LOSSES		17,785		19,110
NON-INTEREST INCOME
Deposit service charges		703		607
Insurance service and fees		2,567		2,657
Bank-owned life insurance		171		172
Interchange fee income		539		547
Other		632		435
Total non-interest income		4,612		4,418
NON-INTEREST EXPENSE
Salaries and employee benefits		9,436		9,365
Occupancy		1,131		1,177
Advertising and public relations		438		405
Professional services		843		989
Technology and communications		1,237		1,432
Amortization of intangibles		100		135
FDIC insurance		250		279
Other		1,349		1,394
Total non-interest expense		14,784		15,176
INCOME BEFORE INCOME TAXES		7,613		8,352
INCOME TAX PROVISION		1,879		2,039
NET INCOME	$	5,734	$	6,313
Net income per common share-basic	$	1.04	$	1.16
Net income per common share-diluted	$	1.03	$	1.15
Weighted average number of common shares outstanding		5,512,741		5,434,803
Weighted average number of diluted shares outstanding		5,550,436		5,489,420

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(in thousands, except share and per share amounts)
	Six Months Ended June 30,
	2022		2021
INTEREST INCOME
Loans	$	32,552	$	35,579
Interest-bearing deposits at banks		296		35
Securities:
Taxable		3,661		1,820
Non-taxable		105		112
Total interest income		36,614		37,546
INTEREST EXPENSE
Deposits		1,148		1,622
Other borrowings		89		174
Subordinated debt		824		803
Total interest expense		2,061		2,599
NET INTEREST INCOME		34,553		34,947
PROVISION (CREDIT) FOR LOAN LOSSES		488		(447)
NET INTEREST INCOME AFTER
PROVISION (CREDIT) FOR LOAN LOSSES		34,065		35,394
NON-INTEREST INCOME
Deposit service charges		1,395		1,179
Insurance service and fees		4,866		5,159
Bank-owned life insurance		325		335
Interchange fee income		1,031		1,037
Other		1,426		1,274
Total non-interest income		9,043		8,984
NON-INTEREST EXPENSE
Salaries and employee benefits		18,906		18,409
Occupancy		2,311		2,364
Advertising and public relations		617		668
Professional services		1,715		1,948
Technology and communications		2,411		2,696
Amortization of intangibles		200		270
FDIC insurance		520		579
Other		2,564		2,607
Total non-interest expense		29,244		29,541
INCOME BEFORE INCOME TAXES		13,864		14,837
INCOME TAX PROVISION		3,382		3,672
NET INCOME	$	10,482	$	11,165
Net income per common share-basic	$	1.90	$	2.06
Net income per common share-diluted	$	1.89	$	2.04
Weighted average number of common shares outstanding		5,503,811		5,428,356
Weighted average number of diluted shares outstanding		5,548,533		5,477,567

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
THREE MONTHS ENDED JUNE 30, 2022 AND 2021
(in thousands)
	Three Months Ended June 30,
		2022		2021

NET INCOME		$	5,734	$	6,313
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
Unrealized (loss) gain on available-for-sale securities:			(12,033)		1,722
Defined benefit pension plans:
Amortization of prior service cost			5		5
Amortization of actuarial loss			50		70
Total			55		75
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:			(11,978)		1,797
COMPREHENSIVE (LOSS) INCOME		$	(6,244)	$	8,110

See Notes to Unaudited Consolidated Financial Statements



EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(in thousands)
	Six Month Ended June
	2022		2021

NET INCOME	$	10,482	$	11,165
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
Unrealized loss on available-for-sale securities		(28,738)		(2,167)
Defined benefit pension plans:
Amortization of prior service cost		10		11
Amortization of actuarial loss		100		140
Total		110		151
OTHER COMPREHENSIVE LOSS, NET OF TAX		(28,628)		(2,016)
COMPREHENSIVE (LOSS) INCOME	$	(18,146)	$	9,149

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED JUNE 30, 2022 AND 2021
(in thousands, except share and per share amounts)
							Accumulated
							Other
	Common		Capital		Retained		Comprehensive		Treasury
	Stock		Surplus		Earnings		Loss		Stock		Total
Balance, March 31, 2021	$	2,716	$	76,673	$	92,117	$	(4,532)	$	-	$	166,974
Net Income						6,313						6,313
Other comprehensive income								1,797				1,797
Stock compensation expense				201								201
Forfeitures 309 shares of restricted stock												-
Issued 4,611 shares under Dividend Reinvestment Plan		3		152								155
Issued 6,443 shares in Employee Stock Purchase Plan		3		200								203
Issued 3,753 shares in stock option exercises		2		44								46
Balance, June 30, 2021	$	2,724	$	77,270	$	98,430	$	(2,735)	$	-	$	175,689

Balance, March 31, 2022	$	2,762	$	79,396	$	109,366	$	(22,321)	$	-	$	169,203
Net Income						5,734						5,734
Other comprehensive loss								(11,978)				(11,978)
Cash dividends						(3)						(3)
Stock compensation expense				291								291
Issued 3,705 shares under Dividend Reinvestment Plan		2		141								143
Issued 6,902 shares in Employee Stock Purchase Plan		4		195								199
Reissued 6,660 restricted shares in stock option exercises						(115)				249		134
Issued 2,020 shares in stock option exercises		1		49								50
Repurchased 29,269 shares of common stock										(1,098)		(1,098)
Forfeitures 1,186 shares of restricted stock												-
Balance, June 30, 2022	$	2,769	$	80,072	$	114,982	$	(34,299)	$	(849)	$	162,675

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(in thousands, except share and per share amounts)
							Accumulated
							Other
	Common		Capital		Retained		Comprehensive		Treasury
	Stock		Surplus		Earnings		Loss		Stock		Total
Balance, December 31, 2020	$	2,708	$	76,394	$	90,522	$	(719)	$	-	$	168,905
Net Income						11,165						11,165
Other comprehensive loss								(2,016)				(2,016)
Cash dividends ($0.60 per common share)						(3,257)						(3,257)
Stock compensation expense				434								434
Issued 7,971 restricted shares, net of forfeitures		4		(4)								-
Issued 4,611 shares under Dividend Reinvestment Plan		3		152								155
Issued 6,443 shares in Employee Stock Purchase Plan		3		200								203
Issued 13,082 shares in stock option exercises		6		94								100
Balance, June 30, 2021	$	2,724	$	77,270	$	98,430	$	(2,735)	$	-	$	175,689

Balance, December 31, 2021	$	2,744	$	78,795	$	108,024	$	(5,671)	$	-	$	183,892
Net Income						10,482						10,482
Other comprehensive loss								(28,628)				(28,628)
Cash dividends ($0.62 per common share)						(3,409)						(3,409)
Stock compensation expense				624								624
Issued 18,244 restricted shares		9		(9)								-
Issued 20,851 shares in stock option exercises		10		326								336
Repurchased 29,269 shares of common stock										(1,098)		(1,098)
Reissued 6,660 restricted shares in stock option exercises						(115)				249		134
Forfeitures 1,186 shares of restricted stock												-
Reissued 3,705 shares through Dividend
Reinvestment Program		2		141								143
Issued 6,902 shares in Employee Stock
Purchase Plan		4		195								199
Balance, June 30, 2022	$	2,769	$	80,072	$	114,982	$	(34,299)	$	(849)	$	162,675

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(in thousands)
	Six Months Ended June 30,
		2022		2021
OPERATING ACTIVITIES:
Interest received	$	35,332	$	34,739
Fees received		9,236		9,511
Interest paid		(2,301)		(3,381)
Cash paid to employees and vendors		(32,005)		(29,182)
Income taxes paid		(1,801)		(3,884)
Proceeds from sale of loans held for sale		3,529		-
Originations of loans held for sale		(3,368)		(134)
Net cash provided by operating activities		8,622		7,669
INVESTING ACTIVITIES:
Available for sales securities:
Purchases		(144,413)		(88,822)
Proceeds from sales, maturities, calls, and payments		16,198		16,532
Held to maturity securities:
Purchases		(5,825)		(1,250)
Proceeds from maturities, calls, and payments		1,288		2,082
Proceeds from bank-owned life insurance claims		378		-
Additions to properties and equipment		(388)		(535)
Proceeds from tax credit investment		56		-
Sale of other real estate		-		129
Net (increase) decrease in loans		(40,854)		829
Net cash used in investing activities		(173,560)		(71,035)
FINANCING ACTIVITIES:
Repayments from long-term borrowings, net		(9,672)		(2,766)
Proceeds from short-term borrowings, net		958		295
Net increase in deposits		31,322		112,714
Dividends paid		(3,409)		(3,257)
Repurchase of treasury stock		(1,098)		-
Issuance of common stock		678		458
Reissuance of treasury stock		134		-
Net cash provided by financing activities		18,913		107,444
Net (decrease) increase in cash and cash equivalents		(146,025)		44,078

CASH AND CASH EQUIVALENTS:
Beginning of period		244,785		97,604
End of period	$	98,760	$	141,682

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(in thousands)
	Six Months Ended June 30,
		2022		2021

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

Net income	$	10,482	$	11,165
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		890		927
Deferred tax expense (benefit)		329		(155)
Provision (credit) for loan losses		488		(447)
Loss on sales of assets		-		22
Gain on loans sold		(62)		-
Stock compensation expense		624		434
Proceeds from sale of loans held for sale		3,529		-
Originations of loans held for sale		(3,368)		(134)
Changes in assets and liabilities affecting cash flow:
Other assets		(2,267)		(4,340)
Other liabilities		(2,023)		197
NET CASH PROVIDED BY OPERATING ACTIVITIES	$	8,622	$	7,669

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2022 AND 2021

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 six month period ended June 30, 2022 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, 2021 (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.

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2. SECURITIES

The amortized cost of securities and their approximate fair value at June 30, 2022 and December 31, 2021 were as follows:



	June 30, 2022
	(in thousands)

	Amortized		Unrealized				Fair
	Cost		Gains		Losses		Value

Available for Sale:
Debt securities:
U.S. treasuries and government agencies	$	166,484	$	7	$	(16,534)	$	149,957
States and political subdivisions		23,676		10		(998)		22,688
Total debt securities		190,160		17		(17,532)		172,645

Mortgage-backed securities:
FNMA		78,044		4		(9,191)		68,857
FHLMC		48,272		35		(4,801)		43,506
GNMA		41,528		-		(4,352)		37,176
SBA		23,918		-		(1,238)		22,680
CMO		56,747		44		(6,035)		50,756
Total mortgage-backed securities		248,509		83		(25,617)		222,975

Total securities designated as available for sale	$	438,669	$	100	$	(43,149)	$	395,620

Held to Maturity:
Debt securities
States and political subdivisions	$	7,702	$	-	$	(83)	$	7,619

Total securities designated as held to maturity	$	7,702	$	-	$	(83)	$	7,619



	December 31, 2021
	(in thousands)

	Amortized		Unrealized				Fair
	Cost		Gains		Losses		Value

Available for Sale:
Debt securities:
U.S. treasuries and government agencies	$	99,005	$	199	$	(2,386)	$	96,818
States and political subdivisions		6,150		96		-		6,246
Total debt securities		105,155		295		(2,386)		103,064

Mortgage-backed securities:
FNMA		64,056		222		(1,068)		63,210
FHLMC		38,796		62		(424)		38,434
GNMA		31,814		15		(615)		31,214
SBA		17,919		343		(54)		18,208
CMO		52,488		175		(834)		51,829
Total mortgage-backed securities		205,073		817		(2,995)		202,895

Total securities designated as available for sale	$	310,228	$	1,112	$	(5,381)	$	305,959

Held to Maturity:
Debt securities
States and political subdivisions	$	3,165	$	17	$	(3)	$	3,179

Total securities designated as held to maturity	$	3,165	$	17	$	(3)	$	3,179

Available for sale securities with a total fair value of $275 million and $207 million were pledged as collateral to secure public deposits and for other purposes required or permitted by law at June 30, 2022 and December 31, 2021, respectively.

The scheduled maturities of debt and mortgage-backed securities at June 30, 2022 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.

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	June 30, 2022
	Amortized		Estimated
	cost		fair value
	(in thousands)

Debt securities available for sale:

Due in one year or less	$	6,856	$	6,830
Due after one year through five years		78,891		75,395
Due after five years through ten years		70,423		63,453
Due after ten years		33,990		26,967
		190,160		172,645
Mortgage-backed securities
available for sale		248,509		222,975
Total	$	438,669	$	395,620

Debt securities held to maturity:

Due in one year or less	$	6,770	$	6,754
Due after one year through five years		514		492
Due after five years through ten years		349		309
Due after ten years		69		64
Total	$	7,702	$	7,619

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

There were no gross realized gains or losses from sales of investment securities for the three and six month periods ended June 30, 2022 and 2021.

Management has assessed the securities available for sale in an unrealized loss position at June 30, 2022 and December 31, 2021 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 six month period ended June 30, 2022 and did not record any OTTI charges during 2021. 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.

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Information regarding unrealized losses within the Company’s available for sale securities at June 30, 2022 and December 31, 2021 is summarized below.



	June 30, 2022

		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	$	114,660	$	(8,836)	$	30,292	$	(7,698)	$	144,952	$	(16,534)
States and political subdivisions		19,891		(998)		-		-		19,891		(998)
Total debt securities		134,551		(9,834)		30,292		(7,698)		164,843		(17,532)
Mortgage-backed securities:
FNMA		61,186		(7,994)		7,416		(1,197)		68,602		(9,191)
FHLMC		36,433		(4,215)		3,050		(586)		39,483		(4,801)
GNMA		30,915		(3,418)		6,174		(934)		37,089		(4,352)
SBA		21,678		(1,218)		1,002		(20)		22,680		(1,238)
CMO		36,694		(4,811)		5,842		(1,224)		42,536		(6,035)
Total mortgage-backed securities		186,906		(21,656)		23,484		(3,961)		210,390		(25,617)
Held to Maturity:
Debt securities:
States and political subdivisions		4,050		(83)		-		-		4,050		(83)
Total temporarily impaired
securities	$	325,507	$	(31,573)	$	53,776	$	(11,659)	$	379,283	$	(43,232)


	December 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	$	50,381	$	(884)	$	27,488	$	(1,502)	$	77,869	$	(2,386)
States and political subdivisions		-		-		-		-		-		-
Total debt securities		50,381		(884)		27,488		(1,502)		77,869		(2,386)
Mortgage-backed securities:
FNMA		48,008		(903)		2,941		(165)		50,949		(1,068)
FHLMC		35,851		(423)		76		(1)		35,927		(424)
GNMA		30,252		(615)		143		-		30,395		(615)
SBA		2,824		(25)		1,218		(29)		4,042		(54)
CMO		38,313		(833)		25		(1)		38,338		(834)
Total mortgage-backed securities		155,248		(2,799)		4,403		(196)		159,651		(2,995)
Held to Maturity:
Debt securities:
States and political subdivisions		1,782		(3)		-		-		1,782		(3)
Total temporarily impaired
securities	$	207,411	$	(3,686)	$	31,891	$	(1,698)	$	239,302	$	(5,384)

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3. 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:


	June 30, 2022		December 31, 2021
Mortgage loans on real estate:	(in thousands)
Residential mortgages	$	424,950	$	411,060
Commercial and multi-family		764,593		739,761
Construction-Residential		4,459		5,109
Construction-Commercial		100,902		98,012
Home equities		82,614		81,238
Total real estate loans		1,377,518		1,335,180
Commercial and industrial loans		236,022		237,077
Consumer and other loans		930		719
Unaccreted yield adjustments*		(636)		(1,071)
Total gross loans		1,613,834		1,571,905
Allowance for loan losses		(18,819)		(18,438)
Loans, net	$	1,595,015	$	1,553,467

* Includes net premiums and discounts on acquired loans and net deferred fees and costs on loans originated.

During 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. The outstanding balance of PPP loans of $4 million and $25 million as of June 30, 2022 and December 31, 2021, respectively, is included in commercial and industrial loans. PPP loans did not impact the Company’s allowance for loan losses as a result of the SBA guarantees. Fees collected from the SBA for these loans 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. PPP fees recognized into interest income in the three and six month periods ended June 30, 2022 were $0.2 million and $0.7 million, respectively compared with $2.5 million and $4.2 million in the three and six month periods ended June 30, 2021, respectively. Unamortized PPP fees were less than $0.1 million and $0.8 million at June 30, 2022 and December 31, 2021, respectively.

At June 30, 2022, the outstanding principal balance and the carrying amount of acquired credit-impaired loans totaled $0.8 million and $0.7 million, respectively. At December 31, 2021, the outstanding principal balance and carrying amount of acquired credit-impaired loans totaled $0.8 million. There were no valuation allowances for specifically identified impairment attributable to acquired credit-impaired loans at June 30, 2022 or December 31, 2021. 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 were $545 million and $619 million in residential and commercial mortgage loans pledged to FHLBNY to serve as collateral for potential borrowings as of June 30, 2022 and December 31, 2021, respectively.

At June 30, 2022, the Company’s FHLMC loan serving portfolio had $64 million in principal balances of residential real estate loans that 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 month or six month periods ending June 30, 2022 and 2021.

The Company may also sell certain fixed rate residential mortgages to FNMA while maintaining the servicing rights for those mortgages. At June 30, 2022, the Company’s FNMA loan servicing portfolio was $59 million in principal balances. In the three month and six month periods ended June 30, 2022, the Company sold $0.6 million and $3.5 million, respectively, of residential mortgages to FNMA. The Company did not sell any mortgages to FNMA in the three and six month periods ended June 30, 2021.

At June 30, 2022 and December 31, 2021, the Company had loan servicing portfolio principal balances of $123 million and $131 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 June 30, 2022 and December 31, 2021, respectively.

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At June 30, 2022 no residential mortgages were held for sale. At December 31, 2021 there were $0.2 million of residential mortgages held for sale.

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



	June 30, 2022
	(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	$	64,039	$	538,861	$	602,900	$	161,762
Watch		17,332		155,004		172,336		56,550
Special Mention		14,443		30,153		44,596		8,439
Substandard		5,088		40,575		45,663		9,271
Doubtful/Loss		-		-		-		-
Total	$	100,902	$	764,593	$	865,495	$	236,022

	December 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	$	65,211	$	480,159	$	545,370	$	152,675
Watch		19,108		182,502		201,610		64,406
Special Mention		7,045		33,219		40,264		10,200
Substandard		6,648		43,881		50,529		9,796
Doubtful/Loss		-		-		-		-
Total	$	98,012	$	739,761	$	837,773	$	237,077

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The Company continues to evaluate its loan portfolio in response to the economic impact of the COVID-19 pandemic on its clients. During 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 June 30, 2022, the Company’s hotel loan portfolio totaled approximately $74 million, of which $54 million or 5% of total commercial loans was classified as criticized. Total criticized assets were $108 and $111 million at June 30, 2022 and at the end of the 2021, respectively.

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:



	June 30, 2022
	(in thousands)

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

Commercial and industrial	$	231,598	$	90	$	-	$	-	$	4,334	$	236,022
Residential real estate:
Residential		419,469		-		1,322		554		3,605		424,950
Construction		4,459		-		-		-		-		4,459
Commercial real estate:
Commercial		754,063		-		231		-		10,299		764,593
Construction		98,277		-		-		1,253		1,372		100,902
Home equities		81,783		239		-		-		592		82,614
Consumer and other		916		12		2		-		-		930
Total Loans	$	1,590,565	$	341	$	1,555	$	1,807	$	20,202	$	1,614,470

Note: Loan balances do not include $(0.6) million of unaccreted yield adjustments as of June 30, 2022.



	December 31, 2021
	(in thousands)
		Current							Non-accruing		Total
		Balance	30-59 days		60-89 days		90+ days		Loans		Balance
Commercial and industrial	$	229,724	$	1,336	$	568	$	548	$	4,901	$	237,077
Residential real estate:
Residential		402,992		3,466		1,563		-		3,039		411,060
Construction		5,109		-		-		-		-		5,109
Commercial real estate:
Commercial		711,481		16,451		6,073		-		5,756		739,761
Construction		93,842		757		-		480		2,933		98,012
Home equities		79,644		627		209		-		758		81,238
Consumer and other		706		9		4		-		-		719
Total Loans	$	1,523,498	$	22,646	$	8,417	$	1,028	$	17,387	$	1,572,976

Note: Loan balances do not include $(1.1) million of unaccreted yield adjustments as of December 31, 2021.
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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 June 30, 2022 and 2021.



	Three months ended June 30, 2022
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total

Allowance for loan	(in thousands)
losses:
Beginning balance	$	3,688	$	12,279	$	44	$	2,117	$	490	$	18,618
Charge-offs		(7)		-		(27)		(55)		-		(89)
Recoveries		19		-		4		-		-		23
Provision		14		26		49		102		76		267
Ending balance	$	3,714	$	12,305	$	70	$	2,164	$	566	$	18,819

*Includes construction loans



	Three months ended June 30, 2021
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total

Allowance for loan	(in thousands)
losses:
Beginning balance	$	4,390	$	14,068	$	57	$	1,709	$	477	$	20,701
Charge-offs		-		-		(31)		-		-		(31)
Recoveries		22		-		10		-		-		32
Provision (Credit)		(622)		(143)		22		(15)		(2)		(760)
Ending balance	$	3,790	$	13,925	$	58	$	1,694	$	475	$	19,942

* Includes construction loans

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The following tables present the activity in the allowance for loan losses according to portfolio segment for the six month periods ended June 30, 2022 and 2021.




	Six months ended June 30, 2022
	(in thousands)
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	3,309	$	12,367	$	54	$	2,127	$	581	$	18,438
Charge-offs		(31)		-		(67)		(55)		-		(153)
Recoveries		36		-		10		-		-		46
Provision (Credit)		400		(62)		73		92		(15)		488
Ending balance	$	3,714	$	12,305	$	70	$	2,164	$	566	$	18,819

‎*Includes construction loans



	Six months ended June 30, 2021
	(in thousands)
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	4,882	$	13,249	$	45	$	1,658	$	581	$	20,415
Charge-offs		-		-		(91)		-		-		(91)
Recoveries		43		-		22		-		-		65
Provision (Credit)		(1,135)		676		82		36		(106)		(447)
Ending balance	$	3,790	$	13,925	$	58	$	1,694	$	475	$	19,942

*Includes construction loans

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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 June 30, 2022 and December 31, 2021:


	June 30, 2022
	(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		89		7		-		65		66		227

Collectively evaluated for impairment		3,625		12,298		70		2,099		500		18,592
Total	$	3,714	$	12,305	$	70	$	2,164	$	566	$	18,819

Loans:
Ending balance:
Loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	718	$	-	$	718

Individually evaluated for impairment		4,433		14,453		-		3,237		981		23,104

Collectively evaluated for impairment		231,589		851,042		930		425,454		81,633		1,590,648
Total	$	236,022	$	865,495	$	930	$	429,409	$	82,614	$	1,614,470

Note: Loan balances do not include $(0.6) million of unaccreted yield adjustments as of June 30, 2022.

* Includes construction loans


	December 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	$	-	$	-	$	-	$	-	$	-	$	-

Individually evaluated for impairment		100		345		-		9		41		495

Collectively evaluated for impairment		3,209		12,022		54		2,118		540		17,943
Total	$	3,309	$	12,367	$	54	$	2,127	$	581	$	18,438

Loans:
Ending balance:
Loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	803	$	-	$	803

Individually evaluated for impairment		5,028		11,925		-		2,598		1,236		20,787

Collectively evaluated for impairment		232,049		825,848		719		412,768		80,002		1,551,386
Total	$	237,077	$	837,773	$	719	$	416,169	$	81,238	$	1,572,976

Note: Loan balances do not include $(1.1) million of unaccreted yield adjustments as of December 31, 2021.

* Includes construction loans
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Impaired Loans

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


	At June 30, 2022						At December 31, 2021
(in thousands)		Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial and industrial	$	2,744	$	3,557	$	-	$	4,874	$	5,712	$	-
Residential real estate:
Residential		3,669		4,066		-		3,297		3,654		-
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		12,909		13,354		-		8,821		9,338		-
Construction		1,373		1,499		-		1,395		1,499		-
Home equities		840		998		-		1,127		1,324		-
Consumer and other		-		-		-		-		-		-
Total impaired loans	$	21,535	$	23,474	$	-	$	19,514	$	21,527	$	-


	At June 30, 2022							At December 31, 2021
(in thousands)		Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With a related allowance recorded:
Commercial and industrial	$	1,689	$	1,727	$	89	$	154	$	158	$	100
Residential real estate:
Residential		245		245		65		60		60		9
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		171		197		7		171		717		16
Construction		-		-		-		1,538		1,555		329
Home equities		141		158		66		109		109		41
Consumer and other		-		-		-		-		-		-
Total impaired loans	$	2,246	$	2,327	$	227	$	2,032	$	2,599	$	495


		At June 30, 2022					At December 31, 2021
(in thousands)		Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Total:
Commercial and industrial	$	4,433	$	5,284	$	89	$	5,028	$	5,870	$	100
Residential real estate:
Residential		3,914		4,311		65		3,357		3,714		9
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		13,080		13,551		7		8,992		10,055		16
Construction		1,373		1,499		-		2,933		3,054		329
Home equities		981		1,156		66		1,236		1,433		41
Consumer and other		-		-		-		-		-		-
Total impaired loans	$	23,781	$	25,801	$	227	$	21,546	$	24,126	$	495

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			Three months ended June 30, 2022				Three months ended June 30, 2021
	(in thousands)		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial		$	2,834	$	2	$	1,071	$	-
Residential real estate:
Residential			3,534		8		3,593		9
Construction			-		-		-		-
Commercial real estate:
Commercial			10,185		107		13,671		51
Construction			1,377		-		1,278		-
Home equities			787		5		1,444		2
Consumer and other			-		-		-		-
Total impaired loans		$	18,717	$	122	$	21,057	$	62


			Three months ended June 30, 2022				Three months ended June 30, 2021
	(in thousands)		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With a related allowance recorded:
Commercial and industrial		$	1,774	$	-	$	5,082	$	-
Residential real estate:
Residential			245		-		814		-
Construction			-		-		-		-
Commercial real estate:
Commercial			171		-		-		-
Construction			-		-		2,211		-
Home equities			142		-		109		-
Consumer and other			-		-		-		-
Total impaired loans		$	2,332	$	-	$	8,216	$	-


			Three months ended June 30, 2022				Three months ended June 30, 2021
	(in thousands)		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Total:
Commercial and industrial		$	4,608	$	2	$	6,153	$	-
Residential real estate:
Residential			3,779		8		4,407		9
Construction			-		-		-		-
Commercial real estate:
Commercial			10,356		107		13,671		51
Construction			1,377		-		3,489		-
Home equities			929		5		1,553		2
Consumer and other			-		-		-		-
Total impaired loans		$	21,049	$	122	$	29,273	$	62

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			Six months ended June 30, 2022				Six months ended June 30, 2021
	(in thousands)		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial		$	2,896	$	4	$	1,123	$	3
Residential real estate:
Residential			3,440		12		4,508		26
Construction			-		-		-		-
Commercial real estate:
Commercial			9,076		177		13,238		63
Construction			1,383		-		1,076		-
Home equities			775		10		1,657		4
Consumer and other			-		-		-		-
Total impaired loans		$	17,570	$	203	$	21,602	$	96

			Six months ended June 30, 2022				Six months ended June 30, 2021
	(in thousands)		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With a related allowance recorded:
Commercial and industrial		$	1,775	$	-	$	4,830	$	26
Residential real estate:
Residential			163		-		710		1
Construction			-		-		-		-
Commercial real estate:
Commercial			172		-		-		-
Construction			-		-		2,372		2
Home equities			142		-		109		-
Consumer and other			-		-		-		-
Total impaired loans		$	2,252	$	-	$	8,021	$	29

			Six months ended June 30, 2022				Six months ended June 30, 2021
	(in thousands)		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Total:
Commercial and industrial		$	4,671	$	4	$	5,953	$	29
Residential real estate:
Residential			3,603		12		5,218		27
Construction			-		-		-		-
Commercial real estate:
Commercial			9,248		177		13,238		63
Construction			1,383		-		3,448		2
Home equities			917		10		1,766		4
Consumer and other			-		-		-		-
Total impaired loans		$	19,822	$	203	$	29,623	$	125

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Troubled debt restructurings

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



		June 30, 2022
		(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	1,327	$	1,228	$	99	$	-
Residential real estate:
Residential		917		567		350		-
Construction		-		-		-		-
Commercial real estate:
Commercial and multi-family		2,782		-		2,782		-
Construction		-		-		-		-
Home equities		402		13		389		-
Consumer and other		-		-		-		-
Total TDR loans	$	5,428	$	1,808	$	3,620	$	-



		December 31, 2021
		(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	1,003	$	876	$	127	$	-
Residential real estate:
Residential		989		627		362		-
Construction		-		-		-		-
Commercial real estate:
Commercial and multi-family		3,236		-		3,236		-
Construction		-		-		-		-
Home equities		490		12		478		-
Consumer and other		-		-		-		-
Total TDR loans	$	5,718	$	1,515	$	4,203	$	-

Any TDR that is placed on non-accrual status 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.

During 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.

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The following tables present TDR activity by the type of concession granted to the borrower for the three month and six month periods ended June 30, 2022 and 2021.



	Three months ended June 30, 2022					Three months ended June 30, 2021
	(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:	-	$	-	$	-	-	$	-	$	-
Extension of maturity	1		461		461	-		-		-
Residential Real Estate & Construction
Commercial Real Estate & Construction	-		-		-	-		-		-
Home Equities			-		-	-		-		-
Consumer and other loans	-		-		-	-		-		-
Other	-		-		-	-		-		-



	Six months ended June 30, 2022					Six months ended June 30, 2021
	(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:	-	$	-	$	-	-	$	-	$	-
Extension of maturity	1		461		461	-		-		-
Residential Real Estate & Construction:
Commercial Real Estate & Construction	-		-		-	-		-		-
Home Equities:
Extension of maturity and
interest rate reduction	1		38		38	-		-		-
Consumer and other loans	-		-		-	-		-		-

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 and six month periods ended June 30, 2022 and 2021 were not material.

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4. COMMON EQUITY AND EARNINGS PER SHARE DATA

The common stock per share information is based upon the weighted average number of shares outstanding during each period. For the three and six month periods ended June 30, 2022 the Company had an average of 37,695 and 44,722 dilutive shares outstanding, respectively. For the three and six month periods ended June 30, 2021 the Company had an average of 54,617 and 49,211 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. There was an average of 56,430 potentially anti-dilutive shares outstanding for the three and six month periods ended June 30, 2022 that were not included in calculating diluted earnings per share because their effect was anti-dilutive.

5. OTHER COMPREHENSIVE INCOME (LOSS)

The following tables summarize the changes in the components of accumulated other comprehensive income (loss) during the three and six month periods ended June 30, 2022 and 2021:


	Balance at March 31, 2022		Net Change		Balance at June 30, 2022
	(in thousands)
Net unrealized loss on investment securities	$	(19,865)	$	(12,033)	$	(31,898)
Net defined benefit pension plan adjustments		(2,456)		55		(2,401)
Total	$	(22,321)	$	(11,978)	$	(34,299)


	Balance at March 31, 2021		Net Change		Balance at June 30, 2021
	(in thousands)
Net unrealized gain (loss) on investment securities	$	(1,492)	$	1,722	$	230
Net defined benefit pension plan adjustments		(3,040)		75		(2,965)
Total	$	(4,532)	$	1,797	$	(2,735)


	Balance at December 31, 2021		Net Change		Balance at June 30, 2022
	(in thousands)
Net unrealized loss on investment securities	$	(3,160)	$	(28,738)	$	(31,898)
Net defined benefit pension plan adjustments		(2,511)		110		(2,401)
Total	$	(5,671)	$	(28,628)	$	(34,299)


	Balance at December 31, 2020		Net Change		Balance at June 30, 2021
	(in thousands)
Net unrealized gain (loss) on investment securities	$	2,397	$	(2,167)	$	230
Net defined benefit pension plan adjustments		(3,116)		151		(2,965)
Total	$	(719)	$	(2,016)	$	(2,735)

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	Three months ended June 30, 2022						Three months ended June 30, 2021
	(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 gain (loss) on investment
securities:
Unrealized gain (loss) on investment
securities	$	(16,243)	$	4,210	$	(12,033)	$	2,324	$	(602)	$	1,722

Defined benefit pension plan
adjustments:
Amortization of prior service cost		8		(3)		5		8		(3)		5
Amortization of actuarial loss		67		(17)		50		95		(25)		70
Net change		75		(20)		55		103		(28)		75

Other comprehensive (loss) income	$	(16,168)	$	4,190	$	(11,978)	$	2,427	$	(630)	$	1,797



	Six months ended June 30, 2022						Six months ended June 30, 2021
	(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 on investment
securities:
Unrealized loss on investment
securities	$	(38,780)	$	10,042	$	(28,738)	$	(2,929)	$	762	$	(2,167)

Defined benefit pension plan
adjustments:
Amortization of prior service cost		16		(6)		10		16		(5)		11
Amortization of actuarial loss		135		(35)		100		190		(50)		140
Net change		151		(41)		110		206		(55)		151

Other comprehensive loss	$	(38,629)	$	10,001	$	(28,628)	$	(2,723)	$	707	$	(2,016)

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6. NET PERIODIC BENEFIT COSTS

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

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

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

The following table presents the net periodic cost for the Bank’s defined benefit pension plan and supplemental executive retirement plan for the three and six month periods ended June 30, 2022 and 2021:




		Three months ended June 30,

		(in thousands)
					Supplemental Executive
	Pension Benefits				Retirement Plan

	2022		2021		2022		2021

Service cost	$	-	$	-	$	33	$	38
Interest cost		45		40		31		25
Expected return on plan assets		(88)		(88)		-		-
Amortization of prior service cost		-		-		8		8
Amortization of the net loss		23		24		44		71
Net periodic (benefit) cost	$	(20)	$	(24)	$	116	$	142



		Six months ended June 30,

		(in thousands)
					Supplemental Executive
	Pension Benefits				Retirement Plan

	2022		2021		2022		2021

Service cost	$	-	$	-	$	66	$	75
Interest cost		89		81		62		50
Expected return on plan assets		(176)		(177)		-		-
Amortization of prior service cost		-		-		16		16
Amortization of the net loss		47		48		88		142
Net periodic (benefit) cost	$	(40)	$	(48)	$	232	$	283

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.

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7. 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. 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. FCS discontinued operations on December 31, 2021.

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A disaggregation of the total insurance service and other fees for the three and six months ended June 30, 2022 and 2021 is provided in the tables below:



		Three months ended June 30,
		2022		2021
		(in thousands)
Commercial property and casualty insurance commissions	$	1,031	$	1,025
Personal property and casualty insurance commissions		930		921
Employee benefits sales commissions		209		217
Profit sharing and contingent revenue		191		217
Wealth management and other financial services		179		167
Insurance claims services revenue		-		78
Other insurance-related revenue		27		32
Total insurance service and other fees	$	2,567	$	2,657



		Six months ended June 30,
		2022		2021
	(in thousands)
Commercial property and casualty insurance commissions	$	1,819	$	1,822
Personal property and casualty insurance commissions		1,653		1,661
Employee benefits sales commissions		443		461
Profit sharing and contingent revenue		561		619
Wealth management and other financial services		320		347
Insurance claims services revenue		-		159
Other insurance-related revenue		70		90
Total insurance service and other fees	$	4,866	$	5,159

8. FAIR VALUE MEASUREMENT

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

There are three levels of inputs to fair value measurement:


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

Observable market data should be used when available.

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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 June 30, 2022 and December 31, 2021, respectively:


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

June 30, 2022
Securities available-for-sale:
US treasuries and government agencies	$	-	$	149,957	$	-	$	149,957
States and political subdivisions		-		22,688		-		22,688
Mortgage-backed securities		-		222,975		-		222,975

December 31, 2021
Securities available-for-sale:
US treasuries and government agencies	$	-	$	96,818	$	-	$	96,818
States and political subdivisions		-		6,246		-		6,246
Mortgage-backed securities		-		202,895		-		202,895

Securities available for sale

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

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

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

ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

The Company is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets using fair value measurements. The following table presents 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 June 30, 2022 and December 31, 2021:



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

June 30, 2022
Collateral dependent impaired loans	$	-	$	-	$	4,743	$	4,743

December 31, 2021
Collateral dependent impaired loans	$	-	$	-	$	4,608	$	4,608

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Impaired loans

Collateral dependent loans carried at fair value have been partially charged-off or receive specific allocations of the allowance for credit losses. The Company evaluates and values collateral dependent 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 value 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, which ranges from 10%-50%. Fair value is estimated based on the value of the collateral securing these loans. 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 gross value of $4.9 million, with an allowance for loan loss of $0.2 million, at June 30, 2022 compared with $5.0 million and $0.4 million, respectively, at December 31, 2021.

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.


	June 30, 2022				December 31, 2021
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
		(in thousands)				(in thousands)
Financial assets:
Level 1:
Cash and cash equivalents	$	98,760	$	98,760	$	244,785	$	244,785
Level 2:
Available for sale securities		395,620		395,620		305,959		305,959
FHLB and FRB stock		5,833		N/A		6,084		N/A
Level 3:
Held to maturity securities		7,702		7,619		3,165		3,179
Loans, net		1,595,015		1,545,095		1,553,467		1,573,420

Financial liabilities:
Level 1:
Demand deposits	$	550,079	$	550,079	$	492,864	$	492,864
NOW deposits		265,181		265,181		259,908		259,908
Savings deposits		1,015,511		1,015,511		1,019,925		1,019,925
Level 2:
Securities sold under agreement to
repurchase		5,070		5,070		4,112		4,112
Other borrowed funds		22,934		22,399		32,879		32,990
Subordinated debt		31,024		31,308		30,974		32,111
Level 3:
Time deposits		137,561		137,259		164,340		164,574

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9. 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 and six month periods ended June 30, 2022 and 2021.




	Three months ended June 30, 2022
		Banking		Insurance Agency
		Activities		Activities		Total
		(in thousands)

Net interest income	$	18,052	$	-	$	18,052
Provision for loan losses		267		-		267
Net interest income after
provision for loan losses		17,785		-		17,785
Insurance service and fees		169		2,398		2,567
Other non-interest income		2,045		-		2,045
Amortization expense		5		95		100
Other non-interest expense		12,885		1,799		14,684
Income before income taxes		7,109		504		7,613
Income tax provision		1,748		131		1,879
Net income	$	5,361	$	373	$	5,734




	Three months ended June 30, 2021
		Banking		Insurance Agency
		Activities		Activities		Total
		(in thousands)

Net interest income (expense)	$	18,353	$	(3)	$	18,350
Provision (credit) for loan losses		(760)		-		(760)
Net interest income (expense) after
provision for loan losses		19,113		(3)		19,110
Insurance service and fees		151		2,506		2,657
Other non-interest income		1,757		4		1,761
Amortization expense		5		130		135
Other non-interest expense		13,008		2,033		15,041
Income before income taxes		8,008		344		8,352
Income tax provision		1,950		89		2,039
Net income	$	6,058	$	255	$	6,313

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	Six months ended June 30, 2022
		Banking		Insurance Agency
		Activities		Activities		Total
		(in thousands)

Net interest income (expense)	$	34,553	$	-	$	34,553
Provision for loan losses		488		-		488
Net interest income (expense) after
provision for loan losses		34,065		-		34,065
Insurance service and fees		308		4,558		4,866
Other non-interest income		4,177		-		4,177
Amortization expense		10		190		200
Other non-interest expense		25,387		3,657		29,044
Income before income taxes		13,153		711		13,864
Income tax provision		3,197		185		3,382
Net income	$	9,956	$	526	$	10,482




	Six months ended June 30, 2021
		Banking		Insurance Agency
		Activities		Activities		Total
		(in thousands)

Net interest income (expense)	$	34,953	$	(6)	$	34,947
Provision (credit) for loan losses		(447)		-		(447)
Net interest income (expense) after
provision for loan losses		35,400		(6)		35,394
Insurance service and fees		315		4,844		5,159
Other non-interest income		3,821		4		3,825
Amortization expense		10		260		270
Other non-interest expense		25,221		4,050		29,271
Income before income taxes		14,305		532		14,837
Income tax provision		3,534		138		3,672
Net income	$	10,771	$	394	$	11,165

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10. CONTINGENT LIABILITIES AND COMMITMENTS

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



	June 30,		December 31,
	2022		2021
	(in thousands)

Commitments to extend credit	$	405,219	$	394,953
Standby letters of credit		6,018		4,636
Total	$	411,237	$	399,589

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 six months of 2022 or during 2021.

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

11. RECENT ACCOUNTING PRONOUNCEMENTS

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 has contracted with a third-party software vendor to assist with the development of the Bank’s approach for determining expected credit losses under the new guidance. The Company is actively working on preliminary test calculations, data validation, as well as process and procedural documentation. While the total impact of CECL to the Company’s financial statements is unknown at this time, the Company recognizes it 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.

ASU 2022-02, Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures – This ASU eliminates the accounting guidance for troubled debt restructurings ("TDRs") in ASC 310-40, "Receivables - Troubled Debt Restructurings by Creditors" for entities that have adopted the CECL model introduced by ASU 2016-13. ASU 2022-02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, "Financial Instruments—Credit Losses—Measured at Amortized Cost". The Company intends to adopt ASU 2022-02 effective January 1, 2023.

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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: adverse changes in general economic conditions, either nationally or in the Company’s market areas; increased competition among depository or other financial institutions; inflation and changes in the interest rate environment 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; the effects of the COVID-19 pandemic, including the effects of government responses, changes in consumer behavior, and supply chain interruptions; 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, 2021. 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 June 30, 2021 as well as the trailing quarter ended March 31, 2022 and balances as of December 31, 2021. Information with respect to the trailing quarter ended March 31, 2022 is included in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 as filed with the SEC.

PANDEMIC UPDATE

The COVID-19 pandemic has caused significant economic dislocation that has affected, and may continue to affect, the business, financial condition, and results of operations of the Company and its clients. The pandemic caused changes in the behavior of clients, businesses, and their employees, including illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and overall economic and financial market instability. Given the ongoing and dynamic nature of the pandemic, it is difficult to predict the full impact of the pandemic on the Company’s business. The extent of such impact will depend on future developments, which are highly uncertain, including the extent to which the outbreak can be controlled and abated and when and how the economy may be fully reopened. The pandemic may adversely impact several industries within our geographic footprint and impair the ability of the Company’s clients to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations.

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

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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, 2021. These policies, along with the disclosures presented in the other Notes to the Company's Audited Consolidated Financial Statements contained in its Annual Report on Form 10-K and in this financial review, provide information on how significant assets and liabilities are presented in the Company’s Unaudited Consolidated Financial Statements and how those values are determined.

The more significant areas in which management of the Company applies critical assumptions and estimates includes the allowance for loan losses.

Allowance for Loan Losses

The allowance for loan losses (“ALLL”) represents management’s estimate of probable incurred losses in the Bank’s loan portfolio. Determining the amount of the allowance for loan losses 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, consideration of current economic trends and conditions, and other qualitative and quantitative factors, all of which may be susceptible to significant change. Qualitative loss factors are applied to each portfolio segment with the amounts determined by historical loan charge-offs of a peer group of similar-sized regional banks. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

In estimating the ALLL on loans, management considers the sensitivity of the model and significant judgments and assumptions that could result in an amount that is materially different from management’s estimate. Given the concentration of ALLL allocation to the total commercial portfolio and the significant judgments made by management in deriving the qualitative loss factors, management analyzed the impact that changes in judgments could have. The range of impact on the ALLL allocated to the total commercial loan portfolio was between a reduction of $12.0 million and an increase of $9.8 million at June 30, 2022. The sensitivity and related range of impact is a hypothetical analysis and is not intended to represent management’s judgments or assumptions of qualitative loss factors that were utilized at June 30, 2022 in estimation of the ALLL on loans recognized on the Consolidated Balance Sheet.

If the assumptions underlying the determination of the ALLL prove to be incorrect, the ALLL may not be sufficient to cover actual loan losses and an increase to the ALLL may be necessary to allow for different assumptions or adverse developments. In addition, a problem with one or more loans could require a significant increase to the ALLL.

ANALYSIS OF FINANCIAL CONDITION

Loan Activity

Total gross loans were $1.6 billion at June 30, 2022 and December 31, 2021 compared with $1.7 billion at June 30, 2021. The year-over-year decrease is primarily due to a decrease in PPP loan balances. PPP loan balances, included in commercial and industrial loans, decreased $142 million since June 30, 2021. PPP loans totaled $4 million at June 30, 2022, compared with $25 million at December 31, 2021 and $146 million at June 30, 2021. Excluding the decrease of PPP loans, commercial and industrial loans increased $13 million year-over-year. Residential mortgages and commercial real estate loans increased year-over-year by $34 million and $6 million, respectively.

Loans secured by real estate were $1.4 billion at June 30, 2022, compared with $1.3 billion at December 31, 2021 and June 30, 2021. Residential real estate loans, including construction loans, were $429 million at June 30, 2022, $13 million or 3% higher than at December 31, 2021, and $34 million or 9% higher than at June 30, 2021. The increase in residential real estate loans reflects management’s decision to retain the majority of residential mortgages within our loan portfolio. Commercial real estate loans, including construction loans, were $865 million at June 30, 2022, $28 million or 3% higher than the balance at December 31, 2021, and $6 million or 1% higher than the balance at June 30, 2021.

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In the second quarter of 2022, residential mortgage originations were $18 million compared with the previous quarter’s originations of $22 million and $33 million in the second quarter of 2021. The Company originated $40 million in residential mortgages in the first six months of 2022, compared with $65 million in the first six months of 2021. The decrease in residential mortgage originations as compared to the prior year is primarily due to customers refinancing at lower interest rates during the first six months of 2021. The Company sold $0.6 million of residential mortgages during the second quarter of 2022 compared with $2.9 million during the first quarter of 2022. During the first six months of 2022 the Company sold $3.5 million of residential mortgages. The Company did not sell any residential mortgages during the first six months of 2021. Management decides to keep or sell residential mortgage loans at the time of origination based on interest rate risk management and the risk-adjusted return of alternative investment sources such as mortgage-backed securities.

The 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 $236 million at June 30, 2022, representing a $1 million or less than 1% decrease from December 31, 2021, and a decrease of $129 million or 35% from June 30, 2021. The decrease from prior year period is primarily the result of $142 million in SBA forgiveness of PPP loans as the program approaches conclusion. A total of $298 million of PPP loans were originated during the program, of which $95 million were originated during 2021. As of June 30, 2022, a total of $294 million of the PPP loans have been forgiven by the SBA, including $6 million that was forgiven during the second quarter of 2022. A total of $21 million has been forgiven during the first six months of 2022. 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 $22 million, or 1.36% of total loans outstanding at June 30, 2022, compared with $18 million, or 1.17% of total loans outstanding, as of December 31, 2021 and $24 million, or 1.43% of total loans outstanding, as of June 30, 2021. The increase in non-performing loans since the end of last year was primarily due to one commercial real estate loan of $5.5 million that moved to non-accrual status during the second quarter of 2022.

Commercial credits graded as “special mention” and “substandard,” or the criticized loan portfolio, were $108 million at June 30, 2022, a $3 million decrease from $111 million at December 31, 2021, and a $38 million decrease from $146 million at June 30, 2021. The Company continues to classify loans to clients within the hotel industry as criticized given their level of seasonality and ongoing challenges as a result of the COVID-19 pandemic. As of June 30, 2022, the Company’s hotel loan portfolio was $74 million, or approximately 7% of total commercial loans, of which $54 million of these loans are classified as criticized. 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 $18.8 million or 1.17% of total loans outstanding at June 30, 2022, compared with $18.4 million or 1.17% of total loans outstanding as of December 31, 2021 and $19.9 million or 1.17% of total loans outstanding at June 30, 2021. The Company recorded a $0.3 million provision for loan losses in the second quarter of 2022, compared with $0.2 million the first quarter of 2022, and a credit of $0.8 million during the second quarter of 2021. Second quarter of 2022 provision for loan losses was primarily due to the change in economic trends.

Investing Activities

Total investment securities were $403 million at June 30, 2022, compared with $309 million at December 31, 2021 and $234 million at June 30, 2021. 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 $88 million at June 30, 2022 compared to $235 million at December 31, 2021, and $127 million at June 30, 2021. 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 24% of average interest-earning assets in the second quarter of 2022, compared with 26% in the first quarter of 2022 and 15% in the second quarter of 2021.

The Company’s highest concentration in its securities portfolio was in available for sale U.S. government sponsored mortgage-backed securities which comprised 55%, 66% and 61% of total investment securities at June 30, 2022, December 31, 2021 and June 30, 2021, respectively. Tax-advantaged debt securities issued by state and political subdivisions was 2%, 3% and 4% of the total securities portfolio at June 30, 2022, December 31, 2021 and June 30, 2021, respectively. The concentration in U.S. government-sponsored agency bonds was 37%, 31% and 35% of the total securities portfolio as of June 30, 2022, December 31, 2021 and June 30, 2021, respectively.

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The total net unrealized loss position of the available-for-sale investment portfolio was $43.0 million at June 30, 2022, compared with net unrealized gains of $4.3 million at December 31, 2021 and $0.3 million at June 30, 2021. The securities in an unrealized loss position at the end of the second quarter of 2022 generally reflect an increase in market interest rates. Management believes that the credit quality of the securities portfolio as a whole is strong.

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 June 30, 2022 were $2.0 billion, a $31 million or 2% increase from December 31, 2021, and an $85 million or 4% increase from June 30, 2021. The increase from June 30, 2021 largely reflects the acquisition of new commercial deposit customers. Specifically, the increase from prior year reflects increases in total demand deposits of $63 million or 13%, commercial savings of $42 million or 21%, consumer savings deposits of $21 million or 4%, municipal savings deposits of $12 million or 6%, and total NOW deposits of $4 million or 2%. These increases were offset by a decrease in time deposits of $58 million or 30%. Average demand deposits were $543 million in the second quarter of 2022, a 6% increase from $512 million in the first quarter of 2022, and a 10% increase from $494 million in the second quarter of 2021.

The Company had $23 million in other borrowings at June 30, 2022, compared with $33 million at December 31, 2021 and $41 million at June 30, 2021. This represents long-term advances from the Federal Home Loan Bank of New York (“FHLBNY”) that were acquired in the FSB acquisition. 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 June 30, 2022.

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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. Interest income on loans does not include interest on loans for which the Bank has ceased to accrue interest. Investments are included at book value. Yields are presented on a non-tax-equivalent basis.




	Three months ended June 30, 2022						Three months ended June 30, 2021
	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⁾	$	1,591,971	$	16,828	4.24	%	$	1,718,507	$	18,513	4.32	%
Taxable securities		382,512		1,984	2.08	%		205,798		988	1.93	%
Tax-exempt securities		9,859		59	2.40	%		10,336		56	2.17	%
Interest bearing deposits at banks		111,457		226	0.81	%		97,168		19	0.08	%
Total interest-earning assets		2,095,799	$	19,097	3.65	%		2,031,809	$	19,576	3.86	%

Non interest-earning assets:
Cash and due from banks		14,219						20,017
Premises and equipment, net		17,511						19,012
Other assets		84,472						80,363
Total Assets	$	2,212,001					$	2,151,201

LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW	$	258,197	$	56	0.09	%	$	246,565	$	70	0.11	%
Savings		1,020,004		348	0.14	%		928,375		391	0.17	%
Time deposits		143,677		176	0.49	%		210,287		275	0.52	%
Other borrowed funds		25,321		40	0.63	%		41,291		84	0.82	%
Subordinated debt		31,010		423	5.47	%		30,908		404	5.24	%
Securities sold U/A to repurchase		6,872		2	0.12	%		4,851		2	0.17	%
Total interest-bearing liabilities		1,485,081	$	1,045	0.28	%		1,462,277	$	1,226	0.34	%

Noninterest-bearing liabilities:
Demand deposits		542,827						493,734
Other		17,562						23,682
Total liabilities	$	2,045,470					$	1,979,693
Stockholders' equity		166,531						171,508
Total Liabilities and Equity	$	2,212,001					$	2,151,201
Net interest income			$	18,052					$	18,350
Net interest margin					3.45	%					3.62	%
Interest rate spread					3.37	%					3.52	%

(1) Included in interest earned on loans were PPP loan fees of $0.2 million and $2.5 million for the three months ended June 30, 2022 and 2021, respectively. Other loan fees included in interest earned were not material during the three months ended June 30, 2022 and 2021.
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	Six months ended June 30, 2022						Six months ended June 30, 2021
	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⁾	$	1,579,413	$	32,552	4.16	%	$	1,712,450	$	35,579	4.19	%
Taxable securities		364,915		3,661	2.02	%		187,351		1,820	1.96	%
Tax-exempt securities		10,331		105	2.05	%		11,051		112	2.04	%
Interest bearing deposits at banks		144,907		296	0.41	%		86,967		35	0.08	%
Total interest-earning assets		2,099,566	$	36,614	3.52	%		1,997,819	$	37,546	3.79	%

Non interest-earning assets:
Cash and due from banks		13,763						18,684
Premises and equipment, net		17,604						19,110
Other assets		81,909						79,512
Total Assets	$	2,212,842					$	2,115,125

LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW	$	255,595	$	112	0.09	%	$	238,640	$	147	0.12	%
Regular savings		1,022,214		692	0.14	%		897,853		812	0.18	%
Time deposits		150,070		344	0.46	%		228,105		663	0.59	%
Other borrowed funds		27,289		85	0.63	%		42,025		168	0.81	%
Subordinated debt		30,997		824	5.36	%		30,896		803	5.24	%
Securities sold U/A to repurchase		5,887		4	0.14	%		4,743		6	0.26	%
Total interest-bearing liabilities		1,492,052	$	2,061	0.28	%		1,442,262	$	2,599	0.36	%

Noninterest-bearing liabilities:
Demand deposits		527,558						479,237
Other		19,220						23,357
Total liabilities	$	2,038,830					$	1,944,856
Stockholders' equity		174,012						170,269
Total Liabilities and Equity	$	2,212,842					$	2,115,125
Net interest income			$	34,553					$	34,947
Net interest margin					3.32	%					3.53	%
Interest rate spread					3.24	%					3.43	%

(1) Included in interest earned on loans were PPP loan fees of $0.7 million and $4.2 million for the six months ended June 30, 2022 and 2021, respectively. Other loan fees included in interest earned were not material during the six months ended June 30, 2022 and 2021.

Net Income

Net income was $5.7 million, or $1.03 per diluted share, in the second quarter of 2022, compared with $4.7 million, or $0.86 per diluted share, in the first quarter of 2022 and $6.3 million, or $1.15 per diluted share, in last year’s second quarter. The increase from the sequential first quarter was largely due to higher net interest income. The change from prior year largely reflected lower PPP fees and a sizable credit in provision for loan losses during the prior year period.

Return on average equity was 13.77% for the second quarter of 2022, compared with 10.46% in the first quarter of 2022 and 14.72% in the second quarter of 2021.

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Other Results of Operations – Quarterly Comparison

Net interest income increased $1.6 million, or 9%, from the sequential first quarter, but decreased $0.3 million when compared with prior-year second quarter. The increase from the first quarter of 2022 reflected higher interest income on loans of $1.1 million as a result of higher average balances and the Federal Reserve’s increase of the fed funds rate by 150 basis points since the beginning of 2022. Also contributing was higher interest income on securities of $0.3 million reflecting a $35 million increase in average balances during the second quarter of 2022. The decrease from the prior year period reflected lower interest income on loans of $1.7 million, including a decrease in PPP fees of $2.3 million partially offset by increases in interest income on investment securities of $1.0 million, interest bearing deposits at banks of $0.2 million and lower interest expense of $0.2 million. The decrease in PPP fees reflects the deceleration in the rate of remaining loan forgiveness as the program approaches its conclusion. PPP fees recognized in interest income were $0.2 million in the second quarter of 2022, $0.5 million in the first quarter of 2022 and $2.5 million in the second quarter of 2021.

Second quarter net interest margin of 3.45% increased 27 basis points from the first quarter of 2022 but decreased 17 basis points from the second quarter of 2021. The yield on loans increased 17 basis points compared with the first quarter of 2022 but decreased 8 basis points compared with the second quarter of 2021. The cost of interest-bearing liabilities was 0.28% in the second quarter of 2022 compared with 0.27% in the first quarter of 2022 and 0.34% in the second quarter of 2021.

The $0.3 million provision for loan losses in the current quarter was primarily due to a change in economic trends.

Non-interest income was $4.6 million in the second quarter of 2022, compared with $4.4 million in the first quarter of 2022 and the prior year second quarter. The increase from the sequential first quarter reflects seasonally higher policy renewals for institutional clients. The increase from prior year’s second quarter was largely due to movements in the fair value of mortgage servicing rights.

Non-interest expenses of $14.8 million in the second quarter of 2022 increased $0.3 million or 2% when compared with the first quarter of 2022 but decreased $0.4 million or 3% from last year’s second quarter. The increase from the first quarter of 2022 was due to seasonal marketing campaigns during the second quarter of 2022. The decrease from the second quarter of 2021 is primarily due to lower COVID related technology and communication expense. Salaries and employee benefits expense remained consistent when compared with prior periods. Salaries and employee benefits comprised 64% of total non-interest expense.

The Company’s GAAP efficiency ratio, or noninterest expenses divided by the sum of net interest income and noninterest income, was 65.2% in the second quarter of 2022, 69.1% in the first quarter of 2022, and 66.7% in the second quarter of 2021.

Income tax expense was $1.9 million, for an effective tax rate of 24.7%, in the second quarter of 2022 compared with 24.0% in the first quarter of 2022 and 24.4% in last year’s second quarter.

Other Results of Operations – Year-to-Date Comparison

Net interest income was $34.6 million for the first six months of 2022, a $0.4 million or 1% decrease from the first six months of 2021. The decrease in net interest income is attributable to a $3.5 million reduction in PPP fees earned during the first six months of 2022 compared to prior year period. Partially offsetting the decrease were higher interest income on investment securities of $1.8 million, interest-bearing deposits at banks of $0.3 million and lower total interest expense of $0.5 million. Average investment securities increased $177 million during the first six months of 2022 when compared to the prior year period. At June 30, 2022 total PPP loans that have not yet received SBA forgiveness was $3.5 million. SBA PPP fees are deferred and amortized into interest income over the contractual period of the loan. Upon SBA forgiveness, unamortized fees are then recognized into interest income. The Company recognized $0.7 million of amortized PPP loan fees in interest income during the six months ended June 30, 2022, compared with $4.2 million during the prior year period.

The Company’s net interest margin of 3.32% in the first six months of 2022 was 21 basis points lower than the margin in the first six months of 2021, largely reflecting changes in the composition of the Company’s earning assets. The yield on average interest-earning assets decreased 27 basis points from 3.79% to 3.52%. Average loan yields decreased 3 basis points from 4.19% to 4.16%, reflecting the reduction of PPP fees earned since the prior year, partially offset by the Federal Reserve’s increase of fed funds rate during 2022. The cost of interest-bearing liabilities was 0.28% in the first six months of 2022, 8 basis points lower than during the first six months of 2021. The rate paid on average time deposits decreased from 0.59% in the first half of 2021 to 0.46% during the first six months of 2022.

The Company recorded $0.5 million provision for loan loss in the six month period ended June 30, 2022, compared with $0.4 million release of allowance for loan losses in the six month period ended June 30, 2021 which resulted from improved macroeconomic trends recognized during the first six months of 2021. While the full impact of COVID-19 on future financial results is uncertain, the Company continues to monitor the potential impact on the ability of some clients to meet their borrowing obligations.

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Non-interest income for the first six months of 2022 and 2021 was $9 million at both respective periods. During the first six months of 2022 deposit service charges and changes in the fair value of mortgage servicing rights each increased non-interest income by $0.2 million. Partially offsetting those increases was insurance service and fees revenue, the largest component of non-interest income, which decreased $0.3 million to $4.9 million as of June 30, 2022, primarily due to the discontinued operations of Frontier Claims Services, which ceased operations on December 31, 2021.

Total non-interest expense decreased to $29.2 million in the first six months of 2022, 1% lower than the six-month period ended June 30, 2021. The decrease was mostly attributable to lower technology and communications costs of $0.3 million and professional services costs of $0.2 million during the first six months of 2022 compared to the prior year period. Partially offsetting the decrease were higher salaries and employee benefits costs of $0.5 million or 3% during the first six months of 2022. Salaries and employee benefits costs were $18.9 million for the first six months of 2022 compared to $18.4 million in the prior year period.

The Company’s GAAP efficiency ratio, or noninterest expenses divided by the sum of net interest income and noninterest income, was 67.1% in the first six months of 2022, compared with 67.2% during the prior-year period.

The Company recorded income tax expense of $3.4 million for the six-month period ended June 30, 2022, compared with $3.7 million in the first six months of 2021. The effective tax rate for the first six months of 2022 was 24.4%, compared with 24.8% in the comparable 2021 period.

CAPITAL

The Company consistently maintains regulatory capital ratios significantly above the federal “well capitalized” standard, including a Tier 1 leverage ratio of 8.73% at June 30, 2022, compared with 8.57% at March 31, 2022 and 8.23% at June 30, 2021.

Book value per share was $29.53 at June 30, 2022 compared with $30.65 at March 31, 2022 and $32.28 at June 30, 2021. Reflected in the book value changes are the Federal Reserve’s aggressive interest rate hikes, that have resulted in significant changes in unrealized gains and losses on investment securities, which reduced book value per share at June 30, 2022 by $2.18 when compared with the sequential first quarter and by $5.83 from last year’s second quarter. Such unrealized gains and losses are generally due to changes in interest rates and represent the difference, net of applicable income tax effect, between the estimated fair value and amortized cost of investment securities classified as available-for-sale. The Company had no other-than-temporary impairment charges in its investment portfolio in 2022 or 2021.

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 June 30, 2022 and December 31, 2021 which are considered Tier 1 capital and are includable in total regulatory capital. The Company had $20 million of 6.00% Fixed-to-Floating Rate Subordinated Notes due 2030 outstanding at June 30, 2022 and December 31, 2021. The Company moved $15 million of the proceeds from the sale of these notes 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 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 June 30, 2022, advances of up to $366 million could be drawn on the FHLB via an Overnight Line of Credit Agreement between the Bank and the FHLB. As of June 30, 2022, 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.

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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 June 30, 2022, approximately 3% of the Bank’s securities had contractual maturity dates of one year or less and approximately 22% had maturity dates of five years or less. Additionally, mortgage-backed securities, which comprise 55% of the investment portfolio at June 30, 2022, 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 June 30, 2022, the Company had net short-term liquidity of $548 million as compared with $724 million at December 31, 2021. Available assets of $489 million, divided by public and purchased funds of $379 million, resulted in a long-term liquidity ratio of 129% at June 30, 2022, compared with 153% at December 31, 2021.

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.

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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)

		June 30, 2022		December 31, 2021
Changes in interest rates

+200 basis points	$	(1,130)	$	1,375
+100 basis points		2,412		3,569

-100 basis points		(3,700)		(2,183)
-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 June 30, 2022 (the end of the period covered by this Report). Based on that evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2022.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

No changes in the Company’s internal control over financial reporting were identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the fiscal quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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, 2021.

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

Issuer Purchases of Equity Securities



Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
April 1, 2022 - April 30, 2022
Repurchase program(1)		-	$	-	-	300,000
Employee transactions(2)		-	$	-	N/A	N/A

May 1, 2022 - May 31, 2022
Repurchase program(1)		18,411	$	37.39	18,411	281,589
Employee transactions(2)		2,151	$	37.68	N/A	N/A

June 1, 2022 - June 30, 2022
Repurchase program(1)		10,858	$	37.70	10,858	270,731
Employee transactions(2)		-	$	-	N/A	N/A

Total:
Repurchase program(1)		29,269	$	37.51	29,269	270,731
Employee transactions(2)		2,151	$	37.68	N/A	N/A

(1)On February 25, 2021, the Board of Directors authorized the Company to repurchase up to 300,000 shares of the Company’s common stock (the “2021 Repurchase Program”). The 2021 Repurchase program does not expire and may be suspended or discontinued by the Board of Directors at any time. The remaining number of shares that may be purchased under the 2021 Repurchase Program as of June 30, 2022 was 270,731.

(2)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.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

(Not Applicable.)

ITEM 4 – MINE SAFETY DISCLOSURE

(Not Applicable.)

ITEM 5 – OTHER INFORMATION

(Not Applicable.)

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ITEM 6 – EXHIBITS

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


		EXHIBIT INDEX

Exhibit No.		Name

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 June 30, 2022, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets – June 30, 2022 and December 31, 2021; (ii) Unaudited Consolidated Statements of Income – Three months ended June 30, 2022 and 2021; (iii) Unaudited Consolidated Statements of Income – Six months ended June 30, 2022 and 2021; (iv) Unaudited Statements of Consolidated Comprehensive Income (Loss) – Three months ended June 30, 2022 and 2021; (v) Unaudited Statements of Consolidated Comprehensive Income (Loss) – Six months ended June 30, 2022 and 2021; (vi) Unaudited Consolidated Statements of Stockholders' Equity – Three months ended June 30, 2022 and 2021; (vii) Unaudited Consolidated Statements of Stockholders' Equity – Six months ended June 30, 2022 and 2021; (viii) Unaudited Consolidated Statements of Cash Flows – Six months ended June 30, 2022 and 2021; and (ix) 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 June 30, 2022, formatted in Inline XBRL.

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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

July 29, 2022

/s/ David J Nasca

David J. Nasca

President and CEO

(Principal Executive Officer)

DATE

July 29, 2022

/s/ John B. Connerton

John B. Connerton

Treasurer

(Principal Financial Officer and Principal Accounting Officer)