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

evbn-20220331x10q

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United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For quarterly period ended March 31, 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, 5,523,536 shares as of April 27, 2022.

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INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES



PART 1. FINANCIAL INFORMATION		PAGE

Item 1.	Financial Statements

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

	Unaudited Consolidated Statements of Income – Three months ended March 31, 2022 and 2021	2

	Unaudited Consolidated Statements of Comprehensive (Loss) Income – Three months ended March 31, 2022 and 2021	3

	Unaudited Consolidated Statements of Changes in Stockholders’ Equity – Three months ended March 31, 2022 and 2021	4

	Unaudited Consolidated Statements of Cash Flows – Three months ended March 31, 2022 and 2021	5

	Notes to Unaudited Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	36

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 3.	Defaults Upon Senior Securities	37

Item 4.	Mine Safety Disclosure	37

Item 5.	Other Information	37

Item 6.	Exhibits	38

	Signatures	39

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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2022 AND DECEMBER 31, 2021
(in thousands, except share and per share amounts)
	March 31,		December 31,
	2022		2021
ASSETS
Cash and due from banks	$	11,398	$	9,856
Interest-bearing deposits at banks		147,277		234,929
Securities:
Available for sale, at fair value (amortized cost: $412,742 at March 31, 2022;		385,936		305,959
$310,228 at December 31, 2021)
Held to maturity, at amortized cost (fair value: $2,976 at March 31, 2022;		3,017		3,165
$3,179 at December 31, 2021)
Federal Home Loan Bank common stock, at cost		2,734		3,045
Federal Reserve Bank common stock, at cost		3,051		3,039
Loans, net of allowance for loan losses of $18,618 at March 31, 2022
and $18,438 at December 31, 2021		1,585,461		1,553,467
Properties and equipment, net of accumulated depreciation of $10,727 at March 31, 2022
and $10,283 at December 31, 2021		17,571		17,789
Goodwill		12,702		12,702
Intangible assets		1,527		1,627
Bank-owned life insurance		34,449		34,295
Operating lease right-of-use asset		4,594		4,826
Other assets		31,017		25,941

TOTAL ASSETS	$	2,240,734	$	2,210,640

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand	$	528,962	$	492,864
NOW		257,475		259,908
Savings		1,051,136		1,019,925
Time		149,243		164,340
Total deposits		1,986,816		1,937,037

Securities sold under agreement to repurchase		6,476		4,112
Other borrowings		26,847		32,879
Operating lease liability		4,965		5,210
Other liabilities		15,428		16,536
Subordinated debt		30,999		30,974
Total liabilities		2,071,531		2,026,748

STOCKHOLDERS' EQUITY:
Common stock, $0.50 par value, 10,000,000 shares authorized; at
March 31, 2022 and December 31, 2021 shares issued and outstanding were
5,519,831 and 5,482,756, respectively		2,762		2,744
Capital surplus		79,396		78,795
Retained earnings		109,366		108,024
Accumulated other comprehensive income (loss), net of tax		(22,321)		(5,671)
Total stockholders' equity		169,203		183,892

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,240,734	$	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 MARCH 31, 2022 AND 2021
(in thousands, except share and per share amounts)
	Three Months Ended March 31,
	2022		2021
INTEREST INCOME
Loans	$	15,724	$	17,066
Interest-bearing deposits at banks		70		16
Securities:
Taxable		1,677		832
Non-taxable		46		56
Total interest income		17,517		17,970
INTEREST EXPENSE
Deposits		568		886
Other borrowings		47		88
Subordinated debt		401		399
Total interest expense		1,016		1,373
NET INTEREST INCOME		16,501		16,597
PROVISION FOR LOAN LOSSES		221		313
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		16,280		16,284
NON-INTEREST INCOME
Deposit service charges		692		572
Insurance service and fees		2,299		2,502
Bank-owned life insurance		154		163
Interchange fee income		492		490
Other		794		839
Total non-interest income		4,431		4,566
NON-INTEREST EXPENSE
Salaries and employee benefits		9,470		9,044
Occupancy		1,180		1,187
Advertising and public relations		179		263
Professional services		872		959
Technology and communications		1,174		1,264
Amortization of intangibles		100		135
FDIC insurance		270		300
Other		1,215		1,213
Total non-interest expense		14,460		14,365
INCOME BEFORE INCOME TAXES		6,251		6,485
INCOME TAX PROVISION		1,503		1,633
NET INCOME	$	4,748	$	4,852
Net income per common share-basic	$	0.86	$	0.89
Net income per common share-diluted	$	0.86	$	0.89
Weighted average number of common shares outstanding		5,494,782		5,421,837
Weighted average number of diluted shares outstanding		5,547,548		5,463,674

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 MARCH 31, 2022 AND 2021
(in thousands)
	Three Months Ended March 31,
		2022		2021

NET INCOME		$	4,748	$	4,852

OTHER COMPREHENSIVE LOSS, NET OF TAX:
Unrealized gain (loss) on available-for-sale securities:
Unrealized loss on available-for-sale securities			(16,705)		(3,889)
Defined benefit pension plans:
Amortization of prior service cost			5		6
Amortization of actuarial loss			50		70
Total			55		76
OTHER COMPREHENSIVE LOSS, NET OF TAX			(16,650)		(3,813)
COMPREHENSIVE (LOSS) INCOME		$	(11,902)	$	1,039

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 MARCH 31, 2022 AND 2021
(in thousands, except share and per share amounts)
							Accumulated
							Other
	Common		Capital		Retained		Comprehensive
	Stock		Surplus		Earnings		Loss		Total
Balance, December 31, 2020	$	2,708	$	76,394	$	90,522	$	(719)	$	168,905
Net Income						4,852				4,852
Other comprehensive income								(3,813)		(3,813)
Cash dividends ($0.60 per common share)						(3,257)				(3,257)
Stock compensation expense				233						233
Issued 8,280 restricted shares, net of forfeitures		4		(4)						-
Issued 9,329 shares in stock option exercises		4		50						54
Balance, March 31, 2021	$	2,716	$	76,673	$	92,117	$	(4,532)	$	166,974

Balance, December 31, 2021	$	2,744	$	78,795	$	108,024	$	(5,671)	$	183,892
Net Income						4,748				4,748
Other comprehensive loss								(16,650)		(16,650)
Cash dividends ($0.62 per common share)						(3,406)				(3,406)
Stock compensation expense				333						333
Issued 18,244 restricted shares, net of forfeitures		9		(9)						-
Issued 18,831 shares in stock option exercises		9		277						286
Balance, March 31, 2022	$	2,762	$	79,396	$	109,366	$	(22,321)	$	169,203

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(in thousands)
	Three Months Ended March 31,
		2022		2021
OPERATING ACTIVITIES:
Interest received	$	17,088	$	17,080
Fees received		5,142		5,183
Interest paid		(1,094)		(1,790)
Cash paid to employees and vendors		(18,781)		(15,000)
Income taxes paid		(1,200)		(187)
Proceeds from sale of loans held for sale		2,957		-
Originations of loans held for sale		(2,815)		-

Net cash provided by operating activities		1,297		5,286

INVESTING ACTIVITIES:
Available for sales securities:
Purchases		(109,990)		(40,301)
Proceeds from sales, maturities, calls, and payments		7,726		6,421
Held to maturity securities:
Purchases		(412)		(515)
Proceeds from maturities, calls, and payments		560		45
Additions to properties and equipment		(226)		(233)
Sale of other real estate		-		129
Net increase in loans		(31,622)		(51,764)

Net cash used in investing activities		(133,964)		(86,218)

FINANCING ACTIVITIES:
(Repayments) proceeds from long-term borrowings, net		(5,888)		897
Proceeds (repayments) from short-term borrowings, net		2,364		(2,131)
Net increase in deposits		49,795		100,728
Issuance of common stock		286		54

Net cash provided by financing activities		46,557		99,548

Net (decrease) increase in cash and cash equivalents		(86,110)		18,616

CASH AND CASH EQUIVALENTS:
Beginning of period		244,785		97,604
End of period	$	158,675	$	116,220

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(in thousands)
	Three Months Ended March 31,
		2022		2021

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

Net income	$	4,748	$	4,852

Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		497		440
Deferred tax expense (benefit)		262		(1,971)
Provision for loan losses		221		313
Loss on sales of assets		-		22
Gain on loans sold		(43)		-
Stock compensation expense		333		233
Proceeds from sale of loans held for sale		2,957		-
Originations of loans held for sale		(2,815)		-
Changes in assets and liabilities affecting cash flow:
Other assets		303		(1,553)
Other liabilities		(5,166)		2,950

NET CASH PROVIDED BY OPERATING ACTIVITIES	$	1,297	$	5,286

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTH PERIOD ENDED MARCH 31, 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 three month period ended March 31, 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 March 31, 2022 and December 31, 2021 were as follows:



	March 31, 2022
	(in thousands)

	Amortized		Unrealized				Fair
	Cost		Gains		Losses		Value

Available for Sale:
Debt securities:
U.S. treasuries and government agencies	$	154,343	$	6	$	(11,045)	$	143,304
States and political subdivisions		24,850		17		(657)		24,210
Total debt securities		179,193		23		(11,702)		167,514

Mortgage-backed securities:
FNMA		81,656		18		(5,599)		76,075
FHLMC		41,094		6		(3,022)		38,078
GNMA		35,450		4		(2,458)		32,996
SBA		24,710		1		(632)		24,079
CMO		50,639		7		(3,452)		47,194
Total mortgage-backed securities		233,549		36		(15,163)		218,422
Total securities designated as available for sale	$	412,742	$	59	$	(26,865)	$	385,936

Held to Maturity:
Debt securities
States and political subdivisions	$	3,017	$	4	$	(45)	$	2,976
Total securities designated as held to maturity	$	3,017	$	4	$	(45)	$	2,976



	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 $320 million and $207 million were pledged as collateral to secure public deposits and for other purposes required or permitted by law at March 31, 2022 and December 31, 2021, respectively.

The scheduled maturities of debt and mortgage-backed securities at March 31, 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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	March 31, 2022
	Amortized		Estimated
	cost		fair value
	(in thousands)

Debt securities available for sale:

Due in one year or less	$	2,033	$	2,035
Due after one year through five years		70,017		67,757
Due after five years through ten years		69,044		64,900
Due after ten years		38,099		32,822
		179,193		167,514

Mortgage-backed securities
available for sale		233,549		218,422
Total	$	412,742	$	385,936

Debt securities held to maturity:

Due in one year or less	$	2,093	$	2,092
Due after one year through five years		471		458
Due after five years through ten years		384		358
Due after ten years		69		68
Total	$	3,017	$	2,976

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

There were no gross realized gains or losses from sales of investment securities for the three month periods ended March 31, 2022 and 2021.

Management has assessed the securities available for sale in an unrealized loss position at March 31, 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 three months ended March 31, 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 March 31, 2022 and December 31, 2021 is summarized below.



	March 31, 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	$	108,767	$	(5,589)	$	32,533	$	(5,456)	$	141,300	$	(11,045)
States and political subdivisions		20,776		(657)		-		-		20,776		(657)
Total debt securities		129,543		(6,246)		32,533		(5,456)		162,076		(11,702)

Mortgage-backed securities:
FNMA		65,825		(4,779)		7,879		(820)		73,704		(5,599)
FHLMC		34,183		(2,610)		3,320		(412)		37,503		(3,022)
GNMA		29,039		(2,139)		3,709		(319)		32,748		(2,458)
SBA		21,909		(605)		1,164		(27)		23,073		(632)
CMO		40,758		(2,658)		6,122		(794)		46,880		(3,452)
Total mortgage-backed securities		191,714		(12,791)		22,194		(2,372)		213,908		(15,163)
Held to Maturity:
Debt securities:
States and political subdivisions		1,912		(22)		316		(23)		2,228		(45)
Total temporarily impaired
securities	$	323,169	$	(19,059)	$	55,043	$	(7,851)	$	378,212	$	(26,910)


	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:


	March 31, 2022		December 31, 2021
Mortgage loans on real estate:	(in thousands)
Residential mortgages	$	419,053	$	411,060
Commercial and multi-family		764,369		739,761
Construction-Residential		3,839		5,109
Construction-Commercial		94,155		98,012
Home equities		80,579		81,238
Total real estate loans		1,361,995		1,335,180
Commercial and industrial loans		242,271		237,077
Consumer and other loans		662		719
Unaccreted yield adjustments*		(849)		(1,071)
Total gross loans		1,604,079		1,571,905
Allowance for loan losses		(18,618)		(18,438)
Loans, net	$	1,585,461	$	1,553,467

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

On March 27, 2021 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 $10 million and $25 million as of March 31, 2022 and December 31, 2021, respectively, are 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 were $0.5 million and $1.7 million in the three month periods ended March 31, 2022 and 2021, respectively. Unamortized PPP fees were $0.3 million and $0.8 million at March 31, 2022 and December 31, 2021, respectively.

At March 31, 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 March 31, 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 $585 million and $619 million in residential and commercial mortgage loans pledged to FHLBNY to serve as collateral for potential borrowings as of March 31, 2022 and December 31, 2021, respectively.

At March 31, 2022, the Company’s FHLMC loan serving portfolio had $67 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 periods ending March 31, 2022 and 2021.

The Company may also sell certain fixed rate residential mortgages to FNMA while maintaining the servicing rights for those mortgages. At March 31, 2022, the Company’s FNMA loan servicing portfolio was $61 million in principal balances. In the three month period ended March 31, 2022, the Company sold $2.9 million residential mortgages to FNMA. The Company did not sell any mortgages to FNMA in the three month period ended March 31, 2021.

At March 31, 2022 and December 31, 2021, the Company had loan servicing portfolio principal balances of $128 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 March 31, 2022 and December 31, 2021, respectively.

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

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Disclosures related to the basis for accounting for loans, the method for recognizing interest income on loans, the policy for placing loans on nonaccrual status and the subsequent recording of payments and resuming accrual of interest, the policy for determining past due status, a description of the Company’s accounting policies and methodology used to estimate the allowance for loan losses, the policy for charging-off loans, the accounting policies for impaired loans, the accounting policy for loans acquired in a business combination, and more descriptive information on the Company’s credit risk ratings are all contained in the Notes to the Audited Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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:



	March 31, 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	$	63,829	$	510,297	$	574,126	$	158,131
Watch		9,704		185,092		194,796		63,790
Special Mention		14,544		32,393		46,937		11,698
Substandard		6,078		36,587		42,665		8,652
Doubtful/Loss		-		-		-		-
Total	$	94,155	$	764,369	$	858,524	$	242,271


	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

The Company continues to evaluate its loan portfolio in response to the economic impact of the COVID-19 pandemic on its clients. During 2021, the Company identified a well-defined weakness in the hotel industry and classified the loans to clients within that industry as substandard. As of March 31, 2022, the Company’s hotel loan portfolio totaled approximately $75 million, of which $55 million or 5% of total commercial loans was classified as criticized. Total criticized assets were $110 million at March 31, 2022 and $111 million at the end of the 2021.

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Past Due Loans

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



	March 31, 2022
	(in thousands)
		Current							Non-accruing		Total
		Balance	30-59 days		60-89 days		90+ days		Loans		Balance
Commercial and industrial	$	230,668	$	6,909	$	-	$	-	$	4,694	$	242,271
Residential real estate:
Residential		410,466		4,668		481		-		3,438		419,053
Construction		3,839		-		-		-		-		3,839
Commercial real estate:
Commercial		739,677		15,071		96		3,354		6,171		764,369
Construction		88,906		2,112		774		-		2,363		94,155
Home equities		79,577		254		109		-		639		80,579
Consumer and other		658		3		1		-		-		662
Total Loans	$	1,553,791	$	29,017	$	1,461	$	3,354	$	17,305	$	1,604,928

Note: Loan balances do not include $(0.8) million of unaccreted yield adjustments as of March 31, 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 March 31, 2022 and 2021.



	March 31, 2022
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan	(in thousands)
losses:
Beginning balance	$	3,309	$	12,367	$	54	$	2,127		581	$	18,438
Charge-offs		(24)		-		(40)		-		-		(64)
Recoveries		17		-		6		-		-		23
Provision (Credit)		386		(88)		24		(10)		(91)		221
Ending balance	$	3,688	$	12,279	$	44	$	2,117	$	490	$	18,618

*Includes construction loans



	March 31, 2021
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan	(in thousands)
losses:
Beginning balance	$	4,882	$	13,249	$	45	$	1,658	$	581	$	20,415
Charge-offs		-		-		(60)		-		-		(60)
Recoveries		21		-		12		-		-		33
Provision (Credit)		(513)		819		60		51		(104)		313
Ending balance	$	4,390	$	14,068	$	57	$	1,709	$	477	$	20,701

* Includes construction loans

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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 March 31, 2022 and December 31, 2021:



	March 31, 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		91		24		-		74		42		231

Collectively evaluated for impairment		3,597		12,255		44		2,043		448		18,387
Total	$	3,688	$	12,279	$	44	$	2,117	$	490	$	18,618

Loans:
Ending balance:
Loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	786	$	-	$	786

Individually evaluated for impairment		4,803		11,776		-		3,005		1,068		20,652

Collectively evaluated for impairment		237,468		846,748		662		419,101		79,511		1,583,490
Total	$	242,271	$	858,524	$	662	$	422,892	$	80,579	$	1,604,928

Note: Loan balances do not include $(0.8) million of unaccreted yield adjustments as of March 31, 2022.

* Includes construction loans

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	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 March 31, 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	$	4,709	$	5,530	$	-	$	4,874	$	5,712	$	-
Residential real estate:
Residential		3,443		3,826		-		3,297		3,654		-
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		9,241		9,704		-		8,821		9,338		-
Construction		2,218		2,414		-		1,395		1,499		-
Home equities		959		1,156		-		1,127		1,324		-
Consumer and other		-		-		-		-		-		-
Total impaired loans	$	20,570	$	22,630	$	-	$	19,514	$	21,527	$	-


	At March 31, 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	$	94	$	97	$	91	$	154	$	158	$	100
Residential real estate:
Residential		304		304		74		60		60		9
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		172		197		11		171		717		16
Construction		145		150		13		1,538		1,555		329
Home equities		109		109		42		109		109		41
Consumer and other		-		-		-		-		-		-
Total impaired loans	$	824	$	857	$	231	$	2,032	$	2,599	$	495


		At March 31, 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	$	4,803	$	5,627	$	91	$	5,028	$	5,870	$	100
Residential real estate:
Residential		3,747		4,130		74		3,357		3,714		9
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		9,413		9,901		11		8,992		10,055		16
Construction		2,363		2,564		13		2,933		3,054		329
Home equities		1,068		1,265		42		1,236		1,433		41
Consumer and other		-		-		-		-		-		-
Total impaired loans	$	21,394	$	23,487	$	231	$	21,546	$	24,126	$	495

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			Three months ended March 31, 2022				Three months ended March 31, 2021
	(in thousands)		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial		$	5,118	$	2	$	1,344	$	3
Residential real estate:
Residential			3,512		4		4,542		17
Construction			-		-		-		-
Commercial real estate:
Commercial			9,298		70		11,929		12
Construction			2,634		-		1,085		-
Home equities			1,000		5		1,719		2
Consumer and other			-		-		-		-
Total impaired loans		$	21,562	$	81	$	20,619	$	34


			Three months ended March 31, 2022				Three months ended March 31, 2021
	(in thousands)		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With a related allowance recorded:
Commercial and industrial		$	98	$	-	$	4,139	$	-
Residential real estate:
Residential			304		-		627		-
Construction			-		-		-		-
Commercial real estate:
Commercial			178		-		2,943		-
Construction			146		-		2,528		2
Home equities			109		-		109		-
Consumer and other			-		-		-		-
Total impaired loans		$	835	$	-	$	10,346	$	2


			Three months ended March 31, 2022				Three months ended March 31, 2021
	(in thousands)		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Total:
Commercial and industrial		$	5,216	$	2	$	5,483	$	3
Residential real estate:
Residential			3,816		4		5,169		17
Construction			-		-		-		-
Commercial real estate:
Commercial			9,476		70		14,872		12
Construction			2,780		-		3,613		2
Home equities			1,109		5		1,828		2
Consumer and other			-		-		-		-
Total impaired loans		$	22,397	$	81	$	30,965	$	36

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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:



		March 31, 2022
		(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	931	$	822	$	109	$	-
Residential real estate:
Residential		975		622		353		-
Construction		-		-		-		-
Commercial real estate:
Commercial and multi-family		3,242		-		3,242		-
Construction		-		-		-		-
Home equities		442		13		429		-
Consumer and other		-		-		-		-
Total TDR loans	$	5,590	$	1,457	$	4,133	$	-



		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.

In late March 2021, 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 period ended March 31, 2022 and 2021.



		Three months ended March 31, 2022					Three months ended March 31, 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	-		$	-	$	-	-	$	-	$	-
Residential Real Estate & Construction
Commercial Real Estate & Construction	-			-		-	-		-		-
Home Equities:				-		-	-		-		-
Extension of maturity and
interest rate reduction	1			38		38	-		-		-
Consumer and other loans	-			-		-	-		-		-
Other	-			-		-	-		-		-

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 period ended March 31, 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 month period ended March 31, 2022 and 2021, the Company had an average of 52,766 and 41,837 dilutive shares outstanding, respectively.

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and not included in calculating diluted earnings per share. For the three month period ended March 31, 2022 and 2021 there was an average of 21,560 and 81,770 potentially anti-dilutive shares outstanding, respectively, that were not included in calculating diluted earnings per share because their effect was anti-dilutive.

5. OTHER COMPREHENSIVE INCOME

The following tables summarize the changes in the components of accumulated other comprehensive income during the three month period ended March 31, 2022 and 2021:


	Balance at December 30, 2021		Net Change		Balance at March 31, 2022
	(in thousands)
Net unrealized loss on investment securities	$	(3,160)	$	(16,705)	$	(19,865)
Net defined benefit pension plan adjustments		(2,511)		55		(2,456)
Total	$	(5,671)	$	(16,650)	$	(22,321)


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



	Three months ended March 31, 2022						Three months ended March 31, 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	$	(22,537)	$	5,832	$	(16,705)	$	(5,253)	$	1,364	$	(3,889)

Defined benefit pension plan
adjustments:
Amortization of prior service cost		8		(3)		5		8		(2)		6
Amortization of actuarial loss		68		(18)		50		95		(25)		70
Net change		76		(21)		55		103		(27)		76

Other comprehensive loss	$	(22,461)	$	5,811	$	(16,650)	$	(5,150)	$	1,337	$	(3,813)

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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 month period ended March 31, 2022 and 2021:




		Three months ended March 31,

		(in thousands)
					Supplemental Executive
	Pension Benefits				Retirement Plan

	2022		2021		2022		2021

Service cost	$	-	$	-	$	33	$	37
Interest cost		44		41		31		25
Expected return on plan assets		(88)		(89)		-		-
Amortization of prior service cost		-		-		8		8
Amortization of the net loss		24		24		44		71
Net periodic (benefit) cost	$	(20)	$	(24)	$	116	$	141

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. The insurance companies measure the loss ratio for TEA’s customers and pay TEA according to how profitable TEA customers are.

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

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

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

Insurance claims services revenue is recorded at FCS.

FCS has signed agreements with insurance companies to perform claims services including investigative and adjustment services related to residential and commercial lines. The performance obligation is for FCS to investigate the insurance claims and inspecting the damage to determine the extent of the insurance company’s liability. FCS is paid based on time and materials expended to investigate the claim. The rates paid are determined in the agreement between FCS and the respective insurance companies. Upon completion of its claims inspection work, FCS bills the insurance company for services rendered and recognizes the revenue earned. FCS discontinued operations on December 31, 2021.

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A disaggregation of the total insurance service and other fees for the three months ended March 31, 2022 and 2021 is provided in the tables below:



		Three months ended March 31,
		2022		2021
		(in thousands)
Commercial property and casualty insurance commissions	$	788	$	797
Personal property and casualty insurance commissions		723		740
Employee benefits sales commissions		234		244
Profit sharing and contingent revenue		370		402
Wealth management and other financial services		141		180
Insurance claims services revenue		-		81
Other insurance-related revenue		43		58
Total insurance service and other fees	$	2,299	$	2,502

8. FAIR VALUE MEASUREMENT

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

There are three levels of inputs to fair value measurement:


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

Observable market data should be used when available.

FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A RECURRING BASIS

The following table presents, for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021, respectively:


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

March 31, 2022
Securities available-for-sale:
US treasuries and government agencies	$	-	$	143,304	$	-	$	143,304
States and political subdivisions		-		24,210		-		24,210
Mortgage-backed securities		-		218,422		-		218,422

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

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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 March 31, 2022 and December 31, 2021:



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

March 31, 2022
Collateral dependent impaired loans	$	-	$	-	$	3,569	$	3,569

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

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 $3.7 million, with an allowance for loan loss of $0.1 million, at March 31, 2022 compared with $5.0 million and $0.4 million, respectively, at December 31, 2021.

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


	March 31, 2022				December 31, 2021
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
		(in thousands)				(in thousands)
Financial assets:
Level 1:
Cash and cash equivalents	$	158,675	$	158,675	$	244,785	$	244,785
Level 2:
Available for sale securities		385,936		385,936		305,959		305,959
FHLB and FRB stock		5,785		N/A		6,084		N/A
Level 3:
Held to maturity securities		3,017		2,976		3,165		3,179
Loans, net		1,585,461		1,543,612		1,553,467		1,573,420

Financial liabilities:
Level 1:
Demand deposits	$	528,962	$	528,962	$	492,864	$	492,864
NOW deposits		257,475		257,475		259,908		259,908
Savings deposits		1,051,136		1,051,136		1,019,925		1,019,925
Level 2:
Securities sold under agreement to
repurchase		6,476		6,476		4,112		4,112
Other borrowed funds		26,847		26,398		32,879		32,990
Subordinated debt		30,999		31,107		30,974		32,111
Level 3:
Time deposits		149,243		149,386		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 month period ended March 31, 2022 and 2021.




	Three months ended March 31, 2022
		Banking		Insurance Agency
		Activities		Activities		Total
		(in thousands)

Net interest income	$	16,501	$	-	$	16,501
Provision for loan losses		221		-		221
Net interest income after
provision for loan losses		16,280		-		16,280
Insurance service and fees		139		2,160		2,299
Other non-interest income		2,132		-		2,132
Amortization expense		5		95		100
Other non-interest expense		12,502		1,858		14,360
Income before income taxes		6,044		207		6,251
Income tax provision		1,449		54		1,503
Net income	$	4,595	$	153	$	4,748




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

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

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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:



	March 31,		December 31,
	2022		2021
	(in thousands)

Commitments to extend credit	$	372,964	$	394,953
Standby letters of credit		4,353		4,636
Total	$	377,317	$	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 three 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 is developing its approach for determining expected credit losses under the new guidance, including the licensing of new software and the development of processes to track loan performance. The total impact of CECL to the Company’s financial statements is unknown but may be material. On October 16, 2019, the FASB affirmed its decision to amend the effective date for the amendments in CECL for smaller reporting companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is allowed for fiscal years beginning after December 15, 2018. The Company intends to adopt CECL effective January 1, 2023.

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; 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 March 31, 2021 as well as the trailing quarter ended December 31, 2021. Information with respect to the trailing quarter ended December 31, 2021 is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, 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 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.

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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 $11.7 million and an increase of $9.9 million at March 31, 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 March 31, 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 March 31, 2022 and December 31, 2021 compared with $1.7 billion at March 31, 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 $227 million since March 31, 2021. PPP loans totaled $10 million at March 31, 2022, compared with $25 million at December 31, 2021 and $237 million at March 31, 2021. Excluding the decrease of PPP loans, commercial and industrial loans increased $19 million year-over-year. Residential mortgages and commercial real estate loans increased year-over-year by $42 million and $19 million, respectively.

Loans secured by real estate were $1.4 billion at March 31, 2022, compared with $1.3 billion at December 31, 2021 and March 31, 2021. Residential real estate loans were $423 million at March 31, 2022, $7 million or 2% higher than at December 31, 2021, and $42 million or 11% higher than at March 31, 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 $859 million at March 31, 2022, $21 million or 2% higher than the balance at December 31, 2021, and $19 million or 2% higher than the balance at March 31, 2021. Commercial real estate is the largest part of the Company’s loan portfolio and has historically been the highest growth segment of the portfolio.

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In the first quarter of 2022, residential mortgage originations were $22 million compared with the previous quarter’s originations of $25 million and $32 million in the first quarter 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 quarter of 2021. The Company sold $3 million of residential mortgages during the first three months of 2022 compared with $1 million during the fourth quarter of 2021. The Company did not sell any residential mortgages during the first three 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 $242 million at March 31, 2022, representing a $5 million or 2% increase from December 31, 2021, but a $209 million or 46% decrease from March 31, 2021. The decrease from prior year period is primarily the result of SBA forgiveness of PPP loans as the program approaches it conclusion. A total of $298 million of PPP loans were originated during the program, of which $95 million were originated during 2021. As of March 31, 2022, a total of $288 million of the PPP loans have been forgiven by the SBA, including $15 million that was forgiven during the first three 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 $21 million, or 1.29% of total loans outstanding at March 31, 2022, compared with $18 million, or 1.17% of total loans outstanding, as of December 31, 2021 and $29 million, or 1.66% of total loans outstanding, as of March 31, 2021. The decrease in non-performing loans from the first quarter of 2021 was primarily due to three separate commercial real estate loans totaling $8 million that were paid off during 2021.

Commercial credits graded as “special mention” and “substandard,” or the criticized loan portfolio, were $110 million at March 31, 2022, a $1 million decrease from $111 million at December 31, 2021, and a $44 million decrease from $154 million at March 31, 2021. The Company continues to classify loans to clients within the hotel industry as criticized given their level of seasonality and ongoing challenges during the COVID-19 pandemic. As of March 31, 2022, the Company’s hotel loan portfolio was $75 million, or approximately 7% of total commercial loans, of which $55 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 $18.6 million or 1.16% of total loans outstanding at March 31, 2022, compared with $18.4 million or 1.17% of total loans outstanding as of December 31, 2021 and $20.7 million or 1.18% of total loans outstanding at March 31, 2021. The Company recorded a $0.2 million provision for loan losses in the first quarter of 2022, compared with $0.4 million the fourth quarter of 2021, and $0.3 million during in the first quarter of 2021. First quarter of 2022 provision for loan losses reflects loan growth, partially offset by a reduction in specific reserves.

Investing Activities

Total investment securities were $389 million at March 31, 2022, compared with $309 million at December 31, 2021 and $195 million at March 31, 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 $147 million at March 31, 2022 compared to $235 million at December 31, 2021, and $106 million at March 31, 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 26% of average interest-earning assets in the first quarter of 2022, compared with 25% in the fourth quarter of 2021 and 13% in the first 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 56%, 66% and 57% of total investment securities at March 31, 2022, December 31, 2021 and March 31, 2021, respectively. Tax-advantaged debt securities issued by state and political subdivisions was 2%, 3% and 6% of the total securities portfolio at March 31, 2022, December 31, 2021, and March 31, 2021, respectively. The concentration in U.S. government-sponsored agency bonds was 37% of the total securities portfolio as of March 31, 2022 compared with 31% of the total securities portfolio at December 31, 2021 and 37% at March 31, 2021.

The total net unrealized loss position of the available-for-sale investment portfolio was $26.8 million at March 31, 2022, compared with a net unrealized gain position of $4.3 million at December 31, 2021 and $2.0 million at March 31, 2021. The securities in an unrealized

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loss position at the end of the first 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 March 31, 2022 were $2.0 billion, a $50 million or 3% increase from December 31, 2021, and a $115 million or 6% increase from March 31, 2021. The increase from March 31, 2021 largely reflects an increase in commercial deposits related to the second round of PPP loans and an increase in consumer deposits from government stimulus payments and lower consumer spending. Specifically, the increase from prior year reflects increases in commercial savings of $54 million or 28%, total demand deposits of $43 million or 9%, municipal savings deposits of $41 million or 20%, consumer savings deposits of $31 million or 6%, and total NOW deposits of $19 million or 8%. These increases were offset by a decrease in time deposits of $73 million or 33%. Average demand deposits were $512 million in the first quarter of 2022, a 1% decrease from $515 million in the fourth quarter of 2021, but a 10% increase from $465 million in the first quarter of 2021.

The Company had $27 million in other borrowings at March 31, 2022, compared with $33 million at December 31, 2021 and $42 million at March 31, 2021. This represents long-term advances from the Federal Home Loan Bank of New York (“FHLBNY”) that were acquired in the FSB acquisition. The Company’s use of its overnight line of credit with FHLBNY varies depending on its ability to fund investment and loan growth with deposits along with the line usage’s impact on interest rate risk. There were no overnight borrowings at March 31, 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 March 31, 2022						Three months ended March 31, 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⁾	$	1,566,716	$	15,724	4.07	%	$	1,706,325	$	17,066	4.06	%
Taxable securities		347,123		1,677	1.96	%		168,699		832	2.00	%
Tax-exempt securities		10,807		46	1.73	%		11,774		56	1.93	%
Interest bearing deposits at banks		178,729		70	0.16	%		76,651		16	0.08	%

Total interest-earning assets		2,103,375	$	17,517	3.38	%		1,963,449	$	17,970	3.71	%

Non interest-earning assets:
Cash and due from banks		13,302						17,338
Premises and equipment, net		17,698						19,210
Other assets		79,316						78,652
Total Assets	$	2,213,691					$	2,078,649

LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW	$	252,965	$	56	0.09	%	$	230,627	$	76	0.13	%
Savings		1,024,447		344	0.14	%		866,991		421	0.20	%
Time deposits		156,534		168	0.44	%		246,120		389	0.64	%
Other borrowed funds		29,280		45	0.62	%		42,767		86	0.82	%
Subordinated debt		30,984		401	5.25	%		30,883		399	5.24	%
Securities sold U/A to repurchase		4,890		2	0.17	%		4,634		2	0.18	%
Total interest-bearing liabilities		1,499,100	$	1,016	0.27	%		1,422,022	$	1,373	0.39	%
Noninterest-bearing liabilities:
Demand deposits		512,118						464,579
Other		20,897						23,031
Total liabilities	$	2,032,115					$	1,909,632
Stockholders' equity		181,576						169,017
Total Liabilities and Equity	$	2,213,691					$	2,078,649
Net interest income			$	16,501					$	16,597
Net interest margin					3.18	%					3.43	%
Interest rate spread					3.11	%					3.32	%

(1) Included in interest earned on loans were PPP loan fees of $0.5 million and $1.7 million for the three months ended March 31, 2022 and 2021, respectively. Other loan fees included in interest earned were not material during the three months ended March 31, 2022 and 2021.
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Net Income

Net income was $4.7 million, or $0.86 per diluted share, in the first quarter of 2022, compared with $5.9 million, or $1.06 per diluted share, in the fourth quarter of 2021 and $4.9 million, or $0.89 per diluted share, in last year’s first quarter. The change from prior quarter was largely due to lower net interest income impacted by reduced PPP fees earned during the first quarter of 2022. In addition, fourth quarter of 2021 included higher interest income recognized on non-accrual loan payoffs and higher amortization of fair value marks on acquired loans.

Return on average equity was 10.46% for the first quarter of 2022, compared with 12.98% in the fourth quarter of 2021 and 11.48% in the first quarter of 2021.

Other Results of Operations – Quarterly Comparison

Net interest income decreased $3.2 million, or 16%, from the sequential fourth quarter, but was relatively flat when compared with prior-year first quarter. The decrease reflected lower PPP fees of $1.9 million, amortization of fair value marks on acquired loans of $0.8 million, and interest recognized on the payoff of non-accrual loans of $0.7 million in the fourth quarter. The decrease in PPP fees reflects the deceleration in the rate of loan forgiveness as the program approaches its conclusion. PPP fees recognized in interest income were $0.5 million in the first quarter of 2022, $2.4 million in the fourth quarter of 2021 and $1.7 million in the first quarter of 2021. Interest expense remained relatively flat from the prior quarter as the Company continued to effectively manage rates on deposits.

First quarter net interest margin of 3.18% decreased 56 basis points from the fourth quarter of 2021 and 25 basis points from the first quarter of 2021. The yield on loans decreased 79 basis points compared with the fourth quarter of 2021 but remained relatively flat compared with the first quarter of 2021. The cost of interest-bearing liabilities decreased to 0.27% compared with 0.28% in the fourth quarter of 2021 and 0.39% in the first quarter of 2021.

The $0.2 million provision for loan losses in the current quarter was due to loan growth, partially offset by a reduction in specific reserves.

Non-interest income was $4.4 million in the first quarter of 2022, compared with $4.7 million in the fourth quarter of 2021 and $4.6 million in the prior year first quarter. The decrease from the sequential fourth quarter is due to a $0.3 million benefit recognized during the fourth quarter of 2021 relating to the reversal of an earnout in connection with a small 2020 insurance agency acquisition. In addition, the Company recognized a $0.2 million gain on a bank-owned life insurance claim during the fourth quarter of 2021. Offsetting these decreases was $0.2 million of insurance service and fee revenue reflecting higher profit-sharing revenue. The decrease from prior year first quarter was due to the discontinued operations of our insurance claims services business and decreased profit-sharing revenue.

Non-interest expenses of $14.5 million in the first quarter of 2022 decreased $1.8 million or 11% when compared with the fourth quarter of 2021 and were relatively flat from last year’s first quarter. The primary components of the decrease from the sequential fourth quarter were a decrease of $0.8 million or 8% in salaries and employee benefits and a $0.7 million or 37% decrease in other expenses. Fourth quarter of 2021 salaries and employee benefits expense included a $0.7 million increase in incentive expense. Included in other expenses during the fourth quarter of 2021 were $0.4 million in philanthropic contributions, $0.1 million loss on disposal of assets and $0.1 million of impairment charges. There were no comparable expenses during the first quarter of 2022.

The Company’s GAAP efficiency ratio, or noninterest expenses divided by the sum of net interest income and noninterest income, was 69.1% in the first quarter of 2022, 66.8% in the fourth quarter of 2021, and 67.9% in the first quarter of 2021. The Company’s non-GAAP efficiency ratio, excluding amortization expense, gains and losses from investment securities, and merger-related expenses, was 68.6% compared with 66.2% in the fourth quarter of 2021 and 67.2% in last year’s first quarter.

Income tax expense was $1.5 million, for an effective tax rate of 24.0%, in the first quarter of 2022 compared with 23.4% in the fourth quarter of 2021 and 25.2% in last year’s first quarter.

CAPITAL

The Company consistently maintains regulatory capital ratios significantly above the federal “well capitalized” standard, including a Tier 1 leverage ratio of 8.57% at March 31, 2022 and December 31, 2021, compared with 8.19% at March 31, 2021. Book value per share was $30.65 at March 31, 2022, compared with $33.54 at December 31, 2021 and $30.76 at March 31, 2021.

On February 15, 2022, the Company declared a cash dividend of $0.62 per common share, which was paid on April 5, 2022. The semi-annual dividend represented a $0.02, or 3% increase from the previous semi-annual dividend paid in October 2021.

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The Company has also issued subordinated capital notes and junior subordinated debentures associated with trust preferred securities to provide liquidity and enhance regulatory capital ratios. The Company had $11.3 million of junior subordinated debentures associated with trust preferred securities outstanding at March 31, 2022 and December 31, 2021 which are considered Tier 1 capital and are includable in total regulatory capital. On July 9, 2020, the Company executed a private offering of $20 million of its 6.00% Fixed-to-Floating Rate Subordinated Notes due 2030. During 2020, $15 million of the proceeds from the sale of the Notes were moved to the Company’s Evans Bank, N.A. subsidiary as Tier 1 capital.

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

LIQUIDITY

The Bank utilizes cash flows from the investment portfolio and federal funds sold balances to manage the liquidity requirements related to loan demand and deposit fluctuations. The Bank also has many borrowing options. The Company uses the FHLBNY as its primary source of overnight funds and has long-term advance with FHLBNY. The Company’s use of its overnight line of credit with FHLBNY varies depending on its ability to fund investment and loan growth with core deposits along with the line usage’s impact on interest rate risk. The Company’s funding strategy has resulted in significant deposit growth, resulting in less usage of the FHLBNY overnight line of credit. The Company has pledged sufficient collateral in the form of residential and commercial real estate loans at FHLBNY that meets FHLB collateral requirements. As a member of the FHLB, the Bank is able to borrow funds at competitive rates. As of March 31, 2022, advances of up to $406 million could be drawn on the FHLB via an Overnight Line of Credit Agreement between the Bank and the FHLB. As of March 31, 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.

Cash flows from the Bank’s investment portfolio are laddered, so that securities mature at regular intervals, to provide funds from principal and interest payments at various times as liquidity needs may arise. Contractual maturities are also laddered, with consideration as to the volatility of market prices. At March 31, 2022, approximately 1% of the Bank’s securities had contractual maturity dates of one year or less and approximately 19% had maturity dates of five years or less. Additionally, mortgage-backed securities, which comprise 56% of the investment portfolio at March 31, 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 March 31, 2022, the Company had net short-term liquidity of $665 million as compared with $724 million at December 31, 2021. Available assets of $538 million, divided by public and purchased funds of $422 million, resulted in a long-term liquidity ratio of 127% at March 31, 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

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interest rate risk by calculating the variability of net interest income in future periods under various interest rate scenarios using projected balances for interest-earning assets and interest-bearing liabilities. Management’s philosophy toward interest rate risk management is to limit the variability of net interest income to changes in net interest rates. The balances of financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of loans, and expected maturities of investment securities, loans, and deposits. Management supplements the modeling technique described above with analysis of market values of the Bank’s financial instruments and changes to such market values given changes in the interest rates.

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

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

SENSITIVITY OF NET INTEREST INCOME TO CHANGES IN INTEREST RATES



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

		March 31, 2022		December 31, 2021
Changes in interest rates
+200 basis points	$	(318)	$	1,375
+100 basis points		2,824		3,569

-100 basis points		(1,620)		(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 March 31, 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 March 31, 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 March 31, 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 ₍₁₎		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that may yet be Purchased Under the Plans or Programs ₍₂₎
January 2022:
January 1, 2022 - January 31, 2022		-	$	-	-	300,000
February 2022:
February 1, 2022 - February 28, 2022		-	$	-	-	300,000
March 2022:
March 1, 2022 - March 31, 2022		3,099	$	38.95	-	300,000
Total:		3,099	$	38.95	-	300,000

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

(2)On February 25, 2021, the Board of Directors authorized the Company to repurchase up to 300,000 shares of the Company’s common stock (the “2021 Repurchase Program”). The 2021 Repurchase program does not expire and may be suspended or discontinued by the Board of Directors at any time. The maximum number of shares that may be purchased under the 2021 Repurchase Program as of March 31, 2022 was 300,000.

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 March 31, 2022, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets – March 31, 2022 and December 31, 2021; (ii) Unaudited Consolidated Statements of Income – Three months ended March 31, 2022 and 2021; (iii) Unaudited Statements of Consolidated Comprehensive Income – Three months ended March 31, 2022 and 2021; (iv) Unaudited Consolidated Statements of Stockholders' Equity – Three months ended March 31, 2022 and 2021; (v) Unaudited Consolidated Statements of Cash Flows – Three months ended March 31, 2022 and 2021; and (vi) Notes to Unaudited Consolidated Financial Statements.

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

April 29, 2022

/s/ David J. Nasca

David J. Nasca

President and CEO

(Principal Executive Officer)

DATE

April 29, 2022

/s/ John B. Connerton

John B. Connerton

Treasurer

(Principal Financial Officer and Principal Accounting Officer)