Table of Contents

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For quarterly period ended March 31, 20222023

¨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, 5,523,5365,462,763 shares as of April 27, 2022.28, 2023.



Table of Contents

INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES

PART 1. FINANCIAL INFORMATION

PAGE

Item 1.

Financial Statements

Unaudited Consolidated Balance Sheets – March 31, 20222023 and December 31, 20212022

1

Unaudited Consolidated Statements of Income – Three months ended March 31, 20222023 and 20212022

2

Unaudited Consolidated Statements of Comprehensive (Loss) Income – Three months ended March 31, 20222023 and 20212022

3

Unaudited Consolidated Statements of Changes in Stockholders’ Equity – Three months ended March 31, 20222023 and 20212022

4

Unaudited Consolidated Statements of Cash Flows – Three months ended March 31, 20222023 and 20212022

5

Notes to Unaudited Consolidated Financial Statements

7

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

2927

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

3534

Item 4.

Controls and Procedures

3635

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

3735

Item 1A.

Risk Factors

3735

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

3736

Item 3.

Defaults Upon Senior Securities

37

Item 4.

Mine Safety Disclosure

37

Item 5.

Other Information

37

Item 6.

Exhibits

3837

Signatures

3938


Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2022 AND DECEMBER 31, 2021

MARCH 31, 2023 AND DECEMBER 31, 2022

(in thousands, except share and per share amounts)

March 31,

December 31,

March 31,

December 31,

2022

2021

2023

2022

ASSETS

Cash and due from banks

$

11,398 

$

9,856 

$

12,272

$

16,796 

Interest-bearing deposits at banks

147,277 

234,929 

3,832

6,258 

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)

Available for sale, at fair value and net of valuation allowance

365,929

364,326 

(amortized cost: $424,935 at March 31, 2023; $428,216 at December 31, 2022)

Held to maturity, at amortized cost and net of valuation allowance

3,707

6,949 

(fair value: $3,613 at March 31, 2023; $6,809 at December 31, 2022)

Federal Home Loan Bank common stock, at cost

2,734 

3,045 

5,364

10,437 

Federal Reserve Bank common stock, at cost

3,051 

3,039 

3,080

3,074 

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 

Loans, net of allowance for credit losses of $21,523 at March 31, 2023

and $19,438 at December 31, 2022

1,637,053

1,652,931 

Properties and equipment, net of accumulated depreciation of $11,482 at March 31, 2023

and $11,596 at December 31, 2022

16,520

16,999 

Goodwill

12,702 

12,702 

12,702 

12,702 

Intangible assets

1,527 

1,627 

1,127

1,227 

Bank-owned life insurance

34,449 

34,295 

42,050

41,826 

Operating lease right-of-use asset

4,594 

4,826 

4,537

4,392 

Other assets

31,017 

25,941 

40,097

40,593 

TOTAL ASSETS

$

2,240,734 

$

2,210,640 

$

2,148,270

$

2,178,510 

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Deposits:

Demand

$

528,962 

$

492,864 

$

483,958

$

493,710 

NOW

257,475 

259,908 

268,283

273,359 

Savings

1,051,136 

1,019,925 

807,532

801,943 

Time

149,243 

164,340 

290,141

202,667 

Total deposits

1,986,816 

1,937,037 

1,849,914

1,771,679 

Securities sold under agreement to repurchase

6,476 

4,112 

9,264

7,147 

Other borrowings

26,847 

32,879 

79,637

193,001 

Operating lease liability

4,965 

5,210 

4,856

4,723 

Other liabilities

15,428 

16,536 

15,247

16,892 

Subordinated debt

30,999 

30,974 

31,101

31,075 

Total liabilities

2,071,531 

2,026,748 

1,990,019

2,024,517 

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 

Common stock, $0.50 par value, 10,000,000 shares authorized; 5,564,449 and 5,544,339 shares issued at

March 31, 2023 and December 31, 2022, respectively, and 5,462,763 and 5,437,048 shares outstanding at

March 31, 2023 and December 31, 2022, respectively.

2,787

2,775 

Capital surplus

79,396 

78,795 

81,210

81,031 

Treasury stock, at cost, 101,686 and 107,291 shares at March 31, 2023 and

December 31, 2022, respectively

(3,656)

(3,891)

Retained earnings

109,366 

108,024 

123,533

123,356 

Accumulated other comprehensive income (loss), net of tax

(22,321)

(5,671)

(45,623)

(49,278)

Total stockholders' equity

169,203 

183,892 

158,251

153,993 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

2,240,734 

$

2,210,640 

$

2,148,270

$

2,178,510 

See Notes to Unaudited Consolidated Financial Statements


1


Table of Contents

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED MARCH 31, 2022 AND 2021

THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(in thousands, except share and per share amounts)

Three Months Ended March 31,

Three Months Ended March 31,

2022

2021

2023

2022

INTEREST INCOME

Loans

$

15,724 

$

17,066 

$

20,886

$

15,724

Interest-bearing deposits at banks

70 

16 

96

70

Securities:

Taxable

1,677 

832 

2,294

1,677

Non-taxable

46 

56 

89

46

Total interest income

17,517 

17,970 

23,365

17,517

INTEREST EXPENSE

Deposits

568 

886 

4,015

568

Other borrowings

47 

88 

1,499

47

Subordinated debt

401 

399 

526

401

Total interest expense

1,016 

1,373 

6,040

1,016

NET INTEREST INCOME

16,501 

16,597 

17,325

16,501

PROVISION FOR LOAN LOSSES

221 

313 

PROVISION FOR CREDIT LOSSES

(654)

221

NET INTEREST INCOME AFTER

PROVISION FOR LOAN LOSSES

16,280 

16,284 

PROVISION FOR CREDIT LOSSES

17,979

16,280

NON-INTEREST INCOME

Deposit service charges

692 

572 

613

692

Insurance service and fees

2,299 

2,502 

2,429

2,299

Bank-owned life insurance

154 

163 

224

154

Interchange fee income

492 

490 

493

492

Other

794 

839 

354

794

Total non-interest income

4,431 

4,566 

4,113

4,431

NON-INTEREST EXPENSE

Salaries and employee benefits

9,470 

9,044 

9,413

9,470

Occupancy

1,180 

1,187 

1,173

1,180

Advertising and public relations

179 

263 

156

179

Professional services

872 

959 

883

872

Technology and communications

1,174 

1,264 

1,356

1,174

Amortization of intangibles

100 

135 

100 

100

FDIC insurance

270 

300 

350

270

Other

1,215 

1,213 

1,071

1,215

Total non-interest expense

14,460 

14,365 

14,502

14,460

INCOME BEFORE INCOME TAXES

6,251 

6,485 

7,590

6,251

INCOME TAX PROVISION

1,503 

1,633 

1,790

1,503

NET INCOME

$

4,748 

$

4,852 

$

5,800

$

4,748

Net income per common share-basic

$

0.86 

$

0.89 

$

1.07

$

0.86

Net income per common share-diluted

$

0.86 

$

0.89 

$

1.06

$

0.86

Weighted average number of common shares outstanding

5,494,782 

5,421,837 

5,444,352

5,494,782

Weighted average number of diluted shares outstanding

5,547,548 

5,463,674 

5,475,790

5,547,548

See Notes to Unaudited Consolidated Financial Statements


2


Table of Contents

EVANS BANCORP, INC. AND SUBSIDIARIES

EVANS BANCORP, INC. AND SUBSIDIARIES

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

THREE MONTHS ENDED MARCH 31, 2022 AND 2021

THREE MONTHS ENDED MARCH 31, 2023 AND 2022

THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(in thousands)

Three Months Ended March 31,

Three Months Ended March 31,

2022

2021

2023

2022

NET INCOME

$

4,748 

$

4,852 

$

5,800 

$

4,748 

OTHER COMPREHENSIVE LOSS, NET OF TAX:

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

Unrealized gain (loss) on available-for-sale securities:

3,635 

(16,705)

Unrealized loss on available-for-sale securities

(16,705)

(3,889)

Defined benefit pension plans:

Amortization of prior service cost

-

Amortization of actuarial loss

50 

70 

20 

50 

Total

55 

76 

20 

55 

OTHER COMPREHENSIVE LOSS, NET OF TAX

(16,650)

(3,813)

COMPREHENSIVE (LOSS) INCOME

$

(11,902)

$

1,039 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

3,655 

(16,650)

COMPREHENSIVE INCOME (LOSS)

$

9,455 

$

(11,902)

See Notes to Unaudited Consolidated Financial Statements


3


Table of Contents

 

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2022 AND 2021

THREE MONTHS ENDED MARCH 31, 2023 AND 2022

THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(in thousands, except share and per share amounts)

Accumulated

Accumulated

Other

Other

Common

Capital

Retained

Comprehensive

Common

Capital

Retained

Comprehensive

Treasury

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)

-

Issued 9,329 shares in stock option exercises

50 

54 

Balance, March 31, 2021

$

2,716 

$

76,673 

$

92,117 

$

(4,532)

$

166,974 

Stock

Surplus

Earnings

Loss

Stock

Total

Balance, December 31, 2021

$

2,744 

$

78,795 

$

108,024 

$

(5,671)

$

183,892 

$

2,744 

$

78,795 

$

108,024 

$

(5,671)

$

-

$

183,892 

Net Income

4,748 

4,748 

4,748 

4,748 

Other comprehensive loss

(16,650)

(16,650)

(16,650)

(16,650)

Cash dividends ($0.62 per common share)

(3,406)

(3,406)

(3,406)

(3,406)

Stock compensation expense

333 

333 

333 

333 

Issued 18,244 restricted shares, net of forfeitures

9

(9)

-

(9)

-

Issued 18,831 shares in stock option exercises

9

277 

286

277 

286 

Balance, March 31, 2022

$

2,762

$

79,396 

$

109,366 

$

(22,321)

$

169,203

$

2,762 

$

79,396 

$

109,366 

$

(22,321)

$

-

$

169,203 

Balance, December 31, 2022

$

2,775 

$

81,031 

$

123,356 

$

(49,278)

$

(3,891)

$

153,993 

Cumulative effect of change in accounting principle— credit losses

-

-

(2,026)

-

-

(2,026)

Beginning balance after cumulative effect adjustment

$

2,775 

$

81,031 

$

121,330 

$

(49,278)

$

(3,891)

$

151,967 

Net Income

5,800 

5,800 

Other comprehensive income

3,655 

3,655 

Cash dividends ($0.66 per common share)

(3,597)

(3,597)

Stock compensation expense

306 

306 

Reissued 6,228 restricted shares

-

(235)

235 

-

Issued 12,421 shares in stock option exercises

114 

120 

Issued 12,671 restricted shares, net of forfeitures

(6)

-

Balance, March 31, 2023

$

2,787 

$

81,210 

$

123,533 

$

(45,623)

$

(3,656)

$

158,251 

See Notes to Unaudited Consolidated Financial Statements

 


4


Table of Contents

EVANS BANCORP, INC. AND SUBSIDIARIES

EVANS BANCORP, INC. AND SUBSIDIARIES

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2022 AND 2021

THREE MONTHS ENDED MARCH 31, 2023 AND 2022

THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(in thousands)

(in thousands)

(in thousands)

Three Months Ended March 31,

Three Months Ended March 31,

2022

2021

2023

2022

OPERATING ACTIVITIES:

Interest received

$

17,088 

$

17,080 

$

23,428 

$

17,088 

Fees received

5,142 

5,183 

5,640 

5,142 

Interest paid

(1,094)

(1,790)

(5,409)

(1,094)

Cash paid to employees and vendors

(18,781)

(15,000)

(18,409)

(18,781)

Income taxes paid

(1,200)

(187)

(4,967)

(1,200)

Proceeds from sale of loans held for sale

2,957 

-

4,828 

2,957 

Originations of loans held for sale

(2,815)

-

(4,800)

(2,815)

Net cash provided by operating activities

1,297 

5,286 

311 

1,297 

INVESTING ACTIVITIES:

Available for sales securities:

Purchases

(109,990)

(40,301)

-

(109,990)

Proceeds from sales, maturities, calls, and payments

7,726 

6,421 

8,400 

7,726 

Held to maturity securities:

Purchases

(412)

(515)

(309)

(412)

Proceeds from maturities, calls, and payments

560 

45 

3,551 

560 

Additions to properties and equipment

(226)

(233)

(364)

(226)

Sale of other real estate

-

129 

Net increase in loans

(31,622)

(51,764)

Proceeds from sales of assets

370 

-

Net decrease (increase) in loans

13,898 

(31,622)

Net cash used in investing activities

(133,964)

(86,218)

25,546 

(133,964)

FINANCING ACTIVITIES:

(Repayments) proceeds from long-term borrowings, net

(5,888)

897 

Proceeds (repayments) from short-term borrowings, net

2,364 

(2,131)

Repayments from long-term borrowings, net

(8,685)

(5,888)

(Repayments) proceeds from short-term borrowings, net

(102,484)

2,364 

Net increase in deposits

49,795

100,728 

78,242 

49,795 

Issuance of common stock

286

54 

120 

286 

Net cash provided by financing activities

46,557

99,548 

Net cash (used in) provided by financing activities

(32,807)

46,557 

Net (decrease) increase in cash and cash equivalents

(86,110)

18,616 

(6,950)

(86,110)

CASH AND CASH EQUIVALENTS:

Beginning of period

244,785

97,604 

23,054 

244,785 

End of period

$

158,675 

$

116,220 

$

16,104 

$

158,675 

See Notes to Unaudited Consolidated Financial Statements


5


Table of Contents

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2022 AND 2021

THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(in thousands)

Three Months Ended March 31,

Three Months Ended March 31,

2022

2021

2023

2022

RECONCILIATION OF NET INCOME TO NET CASH

PROVIDED BY OPERATING ACTIVITIES:

Net income

$

4,748 

$

4,852 

$

5,800

$

4,748

Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation and amortization

497 

440 

387

497

Deferred tax expense (benefit)

262 

(1,971)

Provision for loan losses

221 

313 

Deferred tax expense

252

262

Provision for credit losses

(654)

221

Loss on sales of assets

-

22 

31

-

Gain on loans sold

(43)

-

(26)

(43)

Stock compensation expense

333 

233 

306

333

Proceeds from sale of loans held for sale

2,957 

-

4,828

2,957

Originations of loans held for sale

(2,815)

-

(4,800)

(2,815)

Changes in assets and liabilities affecting cash flow:

Other assets

303 

(1,553)

(7,199)

303

Other liabilities

(5,166)

2,950 

1,386

(5,166)

NET CASH PROVIDED BY OPERATING ACTIVITIES

$

1,297 

$

5,286 

$

311

$

1,297

See Notes to Unaudited Consolidated Financial Statements


6


Table of Contents

EVANS BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTH PERIOD ENDED MARCH 31, 20222023 AND 20212022

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 2two 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”) andsubsidiary 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.

Effective January 1, 2023 the Company adopted ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments which requires an allowance for credit losses be deducted from the amortized cost basis of financial assets to present the net carrying value at the amount that is expected to be collected over the contractual term of the asset considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. In estimating expected losses in the loan portfolio, borrower-specific financial data and macro-economic assumptions are utilized to project losses over a reasonable and supportable forecast period. Assumptions and judgment are applied to measure amounts and timing of expected future cash flows, collateral values and other factors used to determine the borrowers’ abilities to repay obligations. Subsequent to the forecast period, the Company utilizes longer-term historical loss experience to estimate losses over the remaining contractual life of the loans. See Note 3 – “Loans and the Allowance for Credit Losses” to this Quarterly Report on Form 10-Q for the accounting policy for determining the Allowance for Credit Losses.

Prior to January 1, 2023, the allowance for credit losses represented the amount that in management’s judgment reflected incurred credit losses inherent in the loan and lease portfolio as of the balance sheet date. Based on portfolio composition, then current economic conditions, and reasonable and supportable forecasts of future conditions, the Company recognized an increase to the allowance for credit losses of $2.7 million upon adoption of the standard as of January 1, 2023 as compared with the allowance for credit losses recognized on its consolidated balance sheet at December 31, 2022. The $2.7 million increase was recognized as a net of tax cumulative effect adjustment to retained earnings of $2.0 million.

All other 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, 20222023 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, 20212022 (the “10-K”). ThereExcept for the changes to the measurement of credit losses to financial instruments disclosed above, there have been no significant changes to the Company’s significant accounting policies as disclosed in Note 1 to the 10-K.


7


Table of Contents

2. SECURITIES

The amortized cost of securities and their approximate fair value at March 31, 20222023 and December 31, 20212022 were as follows:

March 31, 2022

March 31, 2023

(in thousands)

(in thousands)

Amortized

Unrealized

Fair

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

Cost

Gains

Losses

Value

Available for Sale:

Debt securities:

U.S. treasuries and government agencies

$

154,343

$

6

$

(11,045)

$

143,304

$

165,479 

$

-

$

(22,417)

$

143,062 

States and political subdivisions

24,850

17

(657)

24,210

23,452 

2

(1,286)

22,168

Total debt securities

179,193

23

(11,702)

167,514

188,931 

2

(23,703)

165,230

Mortgage-backed securities:

FNMA

81,656

18

(5,599)

76,075

$

75,087 

$

$

(11,677)

$

63,411 

FHLMC

41,094

6

(3,022)

38,078

46,435

-

(6,042)

40,393 

GNMA

35,450

4

(2,458)

32,996

39,740 

-

(6,698)

33,042 

SBA

24,710

1

(632)

24,079

21,905 

-

(2,099)

19,806 

CMO

50,639

7

(3,452)

47,194

52,837 

-

(8,790)

44,047 

Total mortgage-backed securities

233,549

36

(15,163)

218,422

$

236,004

$

$

(35,306)

$

200,699 

Total securities designated as available for sale

$

412,742

$

59

$

(26,865)

$

385,936

$

424,935

$

3

$

(59,009)

$

365,929

Held to Maturity:

Debt securities

States and political subdivisions

$

3,017

$

4

$

(45)

$

2,976

$

3,707 

$

-

$

(94)

$

3,613

Total securities designated as held to maturity

$

3,017

$

4

$

(45)

$

2,976

$

3,707 

$

-

$

(94)

$

3,613

December 31, 2021

December 31, 2022

(in thousands)

(in thousands)

Amortized

Unrealized

Fair

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

Cost

Gains

Losses

Value

Available for Sale:

Debt securities:

U.S. treasuries and government agencies

$

99,005

$

199

$

(2,386)

$

96,818

$

165,495 

$

$

(24,814)

$

140,682 

States and political subdivisions

6,150

96

-

6,246

23,480 

(1,662)

21,822 

Total debt securities

105,155

295

(2,386)

103,064

188,975 

(26,476)

162,504 

Mortgage-backed securities:

FNMA

64,056

222

(1,068)

63,210

$

75,921 

$

-

$

(12,819)

$

63,102 

FHLMC

38,796

62

(424)

38,434

46,922 

-

(6,695)

40,227 

GNMA

31,814

15

(615)

31,214

40,039 

-

(6,580)

33,459 

SBA

17,919

343

(54)

18,208

22,556 

-

(2,419)

20,137 

CMO

52,488

175

(834)

51,829

53,803 

-

(8,906)

44,897 

Total mortgage-backed securities

205,073

817

(2,995)

202,895

$

239,241 

$

-

$

(37,419)

$

201,822 

Total securities designated as available for sale

$

310,228

$

1,112

$

(5,381)

$

305,959

$

428,216 

$

$

(63,895)

$

364,326 

Held to Maturity:

Debt securities

States and political subdivisions

$

3,165

$

17

$

(3)

$

3,179

$

6,949 

$

-

$

(140)

$

6,809 

Total securities designated as held to maturity

$

3,165

$

17

$

(3)

$

3,179

$

6,949

$

-

$

(140)

$

6,809

Available for sale securities with a total fair value of $320$290 million and $207$226 million were pledged as collateral to secure public deposits and for other purposes required or permitted by law at March 31, 20222023 and December 31, 2021,2022, respectively.

8


Table of Contents

The scheduled maturities of debt and mortgage-backed securities at March 31, 20222023 are summarized below. All maturity amounts are contractual maturities. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call premiums.

March 31, 2023

Amortized

Estimated

cost

fair value

(in thousands)

Debt securities available for sale:

Due in one year or less

$

6,846

$

6,806

Due after one year through five years

91,456

85,576

Due after five years through ten years

61,639

52,446

Due after ten years

28,990

20,402

$

188,931

$

165,230

Mortgage-backed securities

available for sale

$

236,004

$

200,699

Total

$

424,935

$

365,929

Debt securities held to maturity:

Due in one year or less

$

2,900

$

2,887

Due after one year through five years

395

370

Due after five years through ten years

412

356

Due after ten years

-

-

Total

$

3,707

$

3,613

8


Table of Contents

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 0no gross realized gains or losses from sales of investment securities for the three month periods ended March 31, 20222023 or 2022.

As described in note 1, on January 1, 2023 the Company adopted amended accounting guidance that requires an allowance for credit losses be deducted from the amortized cost basis of financial assets, including investment securities held to maturity, to present the net carrying value at the amount that is expected to be collected over the contractual term of the asset. The Company estimated no allowance for credit losses for its investment securities classified as held-to-maturity at January 1, 2023 or March 31, 2023, as the portfolio of held-to-maturity securities consists entirely of states and 2021.political subdivisions investments.

Management has assessed the securities available for sale in an unrealized loss position at March 31, 20222023 and December 31, 20212022 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 holds no securities backed by sub-prime or Alt-A residential mortgages or commercial mortgages and also does not hold any trust-preferred securities.

The Company has 0t recordeddid not record any other-than-temporary impairment (“OTTI”) charges during the three monthsmonth periods ended March 31, 20222023 and did 0t record any OTTI charges during 2021.2022. The credit worthinesscreditworthiness of the Company’s securities portfolio is largely reliant on the ability of U.S. government sponsored agencies such as the Federal Home Loan Bank (“FHLB”), Federal National Mortgage Association (“FNMA”), Government National Mortgage Association (“GNMA”), and the 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.going forward.


9


Table of Contents

Information regarding unrealized losses within the Company’s available for sale securities at March 31, 20222023 and December 31, 20212022 is summarized below.

March 31, 2022

March 31, 2023

Less than 12 months

12 months or longer

Total

Less than 12 months

12 months or longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

Value

Losses

Value

Losses

Value

Losses

(in thousands)

(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)

$

11,835 

$

(165)

$

130,227

$

(22,252)

$

142,062

$

(22,417)

States and political subdivisions

20,776

(657)

-

-

20,776

(657)

1,589 

(60)

18,717 

(1,226)

20,306 

(1,286)

Total debt securities

129,543

(6,246)

32,533

(5,456)

162,076

(11,702)

13,424 

(225)

148,944

(23,478)

162,368

(23,703)

Mortgage-backed securities:

FNMA

65,825

(4,779)

7,879

(820)

73,704

(5,599)

$

630 

$

(22)

$

62,722 

$

(11,655)

$

63,352 

$

(11,677)

FHLMC

34,183

(2,610)

3,320

(412)

37,503

(3,022)

7,838 

(251)

32,511 

(5,791)

40,349 

(6,042)

GNMA

29,039

(2,139)

3,709

(319)

32,748

(2,458)

6,005 

(290)

27,037

(6,408)

33,042

(6,698)

SBA

21,909

(605)

1,164

(27)

23,073

(632)

-

-

19,806 

(2,099)

19,806 

(2,099)

CMO

40,758

(2,658)

6,122

(794)

46,880

(3,452)

6,954 

(149)

37,093 

(8,641)

44,047 

(8,790)

Total mortgage-backed securities

191,714

(12,791)

22,194

(2,372)

213,908

(15,163)

$

21,427 

$

(712)

$

179,169

$

(34,594)

$

200,596

$

(35,306)

Held to Maturity:

Debt securities:

States and political subdivisions

1,912

(22)

316

(23)

2,228

(45)

$

2,887

$

(13)

$

726

$

(81)

$

3,613

$

(94)

Total temporarily impaired

securities

$

323,169

$

(19,059)

$

55,043

$

(7,851)

$

378,212

$

(26,910)

$

37,738

$

(950)

$

328,839

$

(58,153)

$

366,577

$

(59,103)

December 31, 2021

December 31, 2022

Less than 12 months

12 months or longer

Total

Less than 12 months

12 months or longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

Value

Losses

Value

Losses

Value

Losses

(in thousands)

(in thousands)

Available for Sale:

Debt securities:

U.S. treasuries and government agencies

$

50,381

$

(884)

$

27,488

$

(1,502)

$

77,869

$

(2,386)

$

68,292 

$

(5,929)

$

71,389 

$

(18,885)

$

139,681 

$

(24,814)

States and political subdivisions

-

-

-

-

-

-

19,540 

(1,645)

418 

(17)

19,958 

(1,662)

Total debt securities

50,381

(884)

27,488

(1,502)

77,869

(2,386)

87,832 

(7,574)

71,807 

(18,902)

159,639 

(26,476)

Mortgage-backed securities:

FNMA

48,008

(903)

2,941

(165)

50,949

(1,068)

$

23,242 

$

(3,081)

$

39,860 

$

(9,738)

$

63,102 

$

(12,819)

FHLMC

35,851

(423)

76

(1)

35,927

(424)

11,927 

(790)

28,300 

(5,905)

40,227 

(6,695)

GNMA

30,252

(615)

143

-

30,395

(615)

10,763 

(1,298)

22,696 

(5,282)

33,459 

(6,580)

SBA

2,824

(25)

1,218

(29)

4,042

(54)

16,996 

(1,971)

3,141 

(448)

20,137 

(2,419)

CMO

38,313

(833)

25

(1)

38,338

(834)

11,288 

(673)

33,609 

(8,233)

44,897 

(8,906)

Total mortgage-backed securities

155,248

(2,799)

4,403

(196)

159,651

(2,995)

$

74,216 

$

(7,813)

$

127,606 

$

(29,606)

$

201,822 

$

(37,419)

Held to Maturity:

Debt securities:

States and political subdivisions

1,782

(3)

-

-

1,782

(3)

$

6,627 

$

(118)

$

182 

$

(22)

$

6,809 

$

(140)

Total temporarily impaired

securities

$

207,411

$

(3,686)

$

31,891

$

(1,698)

$

239,302

$

(5,384)

$

168,675 

$

(15,505)

$

199,595 

$

(48,530)

$

368,270 

$

(64,035)


10


Table of Contents

3. LOANS AND THE ALLOWANCE FOR LOANCREDIT 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

March 31, 2023

December 31, 2022

Mortgage loans on real estate:

(in thousands)

(in thousands)

Residential mortgages

$

419,053

$

411,060

$

437,416

$

440,123 

Commercial and multi-family

764,369

739,761

772,061

778,714 

Construction-Residential

3,839

5,109

3,472

3,626 

Construction-Commercial

94,155

98,012

123,878

117,403 

Home equities

80,579

81,238

80,673

82,414 

Total real estate loans

1,361,995

1,335,180

1,417,500

1,422,280 

Commercial and industrial loans

242,271

237,077

241,041

250,069 

Consumer and other loans

662

719

604

572 

Unaccreted yield adjustments*

(849)

(1,071)

(569)

(552)

Total gross loans

1,604,079

1,571,905

1,658,576

1,672,369 

Allowance for loan losses

(18,618)

(18,438)

Allowance for credit losses

(21,523)

(19,438)

Loans, net

$

1,585,461

$

1,553,467

$

1,637,053

$

1,652,931 

* 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. Atat March 31, 2023 and December 31, 2021, the outstanding principal balance and carrying amount of acquired credit-impaired loans totaled $0.8 million.2022. There were 0no valuation allowances for specifically identified impairment attributable to acquired credit-impaired loans at March 31, 20222023 or December 31, 2021.2022. 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$607 million and $619$495 million in residential and commercial mortgage loans pledged to FHLBNY to serve as collateral for potential borrowings as of March 31, 20222023 and December 31, 2021,2022, respectively.

At March 31, 2022,2023, the Company’s FHLMC loan servingservicing portfolio had $67$58 million in principal balances of residential real estate loans that were sold to FHLMC and the servicing rights are retained by the Company. NaNNo loans were sold to FHLMC by the Company during the three month periods ending March 31, 20222023 and 2021.2022.

The Company may also sell certain fixed rate residential mortgages to FNMA while maintaining the servicing rights for those mortgages. At March 31, 2022,2023, the Company’s FNMA loan servicing portfolio was $61$57 million in principal balances. In the three month period ended March 31, 2022,2023, the Company sold $2.9$1.3 million residential mortgages to FNMA. The Company did 0tnot sell any mortgages to FNMA in the three month period ended March 31, 2021.2022.

At March 31, 20222023 and December 31, 2021,2022, the Company had loan servicing portfolio principal balances of $128$115 million and $131$116 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, 20222023 and December 31, 2021, respectively.2022.

At March 31, 2022 0 residential mortgagesThere were held for sale. At December 31, 2021 there were $0.2 million ofno residential mortgages held for sale.sale at March 31, 2023 and December 31, 2022.


11


Table of Contents

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.


12


Table of Contents

Past Due Loans

The following tables provide an analysissummarize amortized cost of the ageloans by year of the recorded investment in loans that are past due as of the dates indicated:origination and internally assigned credit grades:

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

-

-

662

Total Loans

$

1,553,791

$

29,017

$

1,461

$

3,354

$

17,305

$

1,604,928

(in thousands)

Term Loans Amortized Cost Basis by Origination Year

As of March 31, 2023

Three months ended March 31, 2023

2022

2021

2020

2019

Prior

Revolving Loans Amortized Cost Basis

Total

Commercial and industrial loans

Risk rating

Pass

$

2,555 

$

43,132 

$

24,725 

$

12,475 

$

10,580 

$

10,162 

$

103,071 

$

206,700 

Special Mention

-

9,062 

447 

4,503 

1,329 

1,417 

6,903 

23,661 

Substandard

-

71 

4,036 

152 

1,715 

1,380 

3,338 

10,692 

Doubtful/Loss

-

-

-

-

-

-

-

-

Total

$

2,555 

$

52,265 

$

29,208 

$

17,130 

$

13,624 

$

12,959 

$

113,312 

$

241,053 

Current period gross writeoffs

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

Commercial real estate mortgages

Risk rating

Pass

$

10,003 

$

201,796 

$

184,437 

$

92,391 

$

70,404 

$

275,966 

$

6,163 

$

841,160 

Special Mention

-

1,262 

410 

6,178 

10,250 

6,987 

-

25,087 

Substandard

-

-

5,499 

336 

7,741 

17,241 

-

30,817 

Doubtful/Loss

-

-

-

-

-

-

-

-

Total

$

10,003 

$

203,058 

$

190,346 

$

98,905 

$

88,395 

$

300,194 

$

6,163 

$

897,064 

Current period gross writeoffs

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

Consumer and other

Payment performance

Performing

$

86 

$

249 

$

37 

$

26 

$

23 

$

40 

$

135 

$

596 

Nonperforming

-

-

-

-

-

-

-

-

Total

$

86 

$

249 

$

37 

$

26 

$

23 

$

40 

$

135 

$

596 

Current period gross writeoffs

$

15 

$

15 

$

-

$

-

$

-

$

-

$

-

$

30 

Residential mortgages

Payment performance

Performing

$

6,251 

$

74,388 

$

105,951 

$

73,201 

$

18,829 

$

158,100 

$

-

$

436,720 

Nonperforming

-

147 

169 

57 

167 

3,331 

-

3,871 

Total

$

6,251 

$

74,535 

$

106,120 

$

73,258 

$

18,996 

$

161,431 

$

-

$

440,591 

Current period gross writeoffs

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

Home equities

Payment performance

Performing

$

2,947 

$

3,342 

$

699 

$

690 

$

709 

$

2,399 

$

68,039 

$

78,825 

Nonperforming

-

-

-

-

-

443 

447 

Total

$

2,947 

$

3,342 

$

699 

$

690 

$

709 

$

2,403 

$

68,482 

$

79,272 

Current period gross writeoffs

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

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

The amortized cost of criticized assets of $93 million included $29 million of loans in the Company’s hotel loan portfolio at March 31, 2023 and December 31, 2022.

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

13


Table of Contents

Past Due Loans

The following tables provide an analysis of the age of the amortized cost of loans that are past due as of the dates indicated:

March 31, 2023

(in thousands)

Current

Non-accruing

Total

Balance

30-59 days

60-89 days

90+ days

Loans

Balance

Commercial and industrial

$

236,523

$

2,010

$

-

$

-

$

2,520

$

241,053

Residential real estate:

Residential

428,354

4,663

233

-

3,871

437,121

Construction

3,305

165

-

-

-

3,470

Commercial real estate:

Commercial

758,478

599

6,628

565

6,561

772,831

Construction

108,061

5,958 

-

1,648

8,566

124,233

Home equities

78,189

595

41

-

447

79,272

Consumer and other

592

4

-

-

-

596

Total Loans

$

1,613,502

$

13,994

$

6,902

$

2,213

$

21,965

$

1,658,576

December 31, 2022

(in thousands)

Current

Non-accruing

Total

Balance

30-59 days

60-89 days

90+ days

Loans

Balance

Commercial and industrial

$

246,412

$

235 

$

684 

$

139 

$

2,625

$

250,095

Residential real estate:

Residential

434,393

1,105

-

472 

3,738

439,708

Construction

3,502

-

-

-

-

3,502

Commercial real estate:

Commercial

771,871

1,083

-

75 

6,648

779,677

Construction

107,369

-

-

1,648 

8,765

117,782

Home equities

79,320

759

206

100 

563

80,948

Consumer and other

652

-

657

Total Loans

$

1,643,519

$

3,185

$

891

$

2,435 

$

22,339

$

1,672,369

Allowance for loancredit losses

The following tablesEffective January 1, 2023 the Company adopted ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments which requires an allowance for credit losses be deducted from the amortized cost basis of financial assets to present the activity innet carrying value at the amount that is expected to be collected over the contractual term of the asset. In determining the allowance for credit losses, accruing loans with similar risk characteristics are generally evaluated collectively. The Company utilizes discounted cash flow models considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount to project principal balances over the remaining contractual lives of the loan portfolios and to determine estimated credit losses accordingthrough a reasonable and supportable forecast period. The models have been statistically developed based on historical correlations of credit losses with prevailing economic metrics, including unemployment and gross domestic product. The Company utilizes a reasonable and supportable forecast period of one year. Subsequent to portfolio segmentthis forecast period the Company reverts, on a straight-line basis over a one-year period, to historical loss experience to inform its estimate of losses for the three month periods ended March 31, 2022remaining contractual life of each portfolio. Model forecasts may be adjusted for inherent limitations or biases that have been identified through independent validation and 2021.back-testing of model performance to actual realized results. The Company also considered the impact of qualitative factors, including portfolio concentrations, changes in underwriting practices, imprecision in its economic forecasts, geopolitical conditions and other risk factors that might influence its loss estimation process.

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 constructionThe Company also estimates losses attributable to specific troubled credits identified through both normal and targeted credit review processes and includes all 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 on nonaccrual status. The amounts of specific losses are determined through a loan-by-loan analysis. Such loss estimates are typically based on expected future cash flows, collateral values and other factors that may impact the borrower’s ability to pay. To the extent that those loans


are collateral-dependent, they are evaluated based on recent estimations of the fair value of the loan’s collateral. In those cases where current appraisals may not yet be available, prior appraisals are utilized with adjustments, as deemed necessary, for estimates of subsequent declines in values as determined by line of business and/or loan workout personnel. Those adjustments are reviewed and assessed for reasonableness by the Company’s credit risk personnel. Accordingly, for real estate collateral securing larger nonaccrual commercial loans and commercial real estate loans, estimated collateral values are based on current

14


Table of Contents

appraisals and estimates of value. For non-real estate loans, collateral is assigned a discounted estimated liquidation value and, depending on the nature of the collateral, is verified through field exams or other procedures. In assessing collateral, real estate and non-real estate values are reduced by an estimate of selling costs. Charge-offs are based on recent indications of value from external parties that are generally obtained shortly after a loan becomes nonaccrual. Loans to consumers that file for bankruptcy are generally charged-off to estimated net collateral value shortly after the Company is notified of such filings. When evaluating individual home equity loans and lines of credit for charge off and for purposes of estimating losses in determining the allowance for credit losses, the Company gives consideration to the required repayment of any first lien positions related to collateral property.

Prior to 2023, the allowance for credit losses represented the amount that in management’s judgment reflected incurred credit losses inherent in the loan and lease portfolio as of the balance sheet date. A description of the methodologies used by the Company to estimate its allowance for credit losses prior to January 1, 2023 is included in note 4 of Notes to Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

The following table presents the allocationactivity in the allowance for credit losses according to portfolio segment for the three month period ended March 31, 2023.

Three months ended March 31, 2023

(in thousands)

Commercial and Industrial

Commercial Real Estate Mortgages*

Consumer and Other

Residential Mortgages*

Home Equities

Total

Allowance for credit losses:

Beginning balance

$

4,980 

$

11,595 

$

153 

$

2,102 

$

608 

$

19,438 

Adoption of new accounting

standard

324 

1,145 

(147)

1,618 

(205)

2,735 

Beginning balance after

cumulative effect adjustment

$

5,304 

$

12,740 

$

$

3,720 

$

403 

$

22,173 

Charge-offs

-

-

(30)

-

-

(30)

Recoveries

30 

-

-

-

34 

Provision

(67)

(186)

24 

(342)

(83)

(654)

Ending balance

$

5,267 

$

12,554 

$

$

3,378 

$

320 

$

21,523 

*Includes construction loans

Prior to the adoption of ASU 2016-13 on January 1, 2023, the Company calculated the allowance for loan losses according to portfoliousing the incurred loss methodology. The following table presents the activity in the allowance for loan losses by segment summarized onfor the basis of the Company’s impairment methodology as ofthree month period ended March 31, 2022 and December 31, 2021:

2022.

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

Three months ended March 31, 2022

(in thousands)

Commercial and Industrial

Commercial Real Estate Mortgages*

Consumer and Other

Residential Mortgages*

Home Equities

Total

Allowance for credit losses:

Beginning balance

$

3,309 

$

12,367 

$

54 

$

2,127 

$

581 

$

18,438 

Charge-offs

(24)

-

(40)

-

-

(64)

Recoveries

17 

-

-

-

23 

Provision

386 

(88)

24 

(10)

(91)

221 

Ending balance

$

3,688 

$

12,279 

$

44 

$

2,117 

$

490 

$

18,618 

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

* Includes construction loans


15


Table of Contents

The following tables present the allowance for credit losses and recorded investment on loans by segment as of March 31, 2023 and December 31, 2022.

December 31, 2021

Three months ended March 31, 2023

(in thousands)

(in thousands)

Commercial and Industrial

Commercial Real Estate Mortgages*

Consumer and Other

Residential Mortgages*

Home Equities

Total

Commercial and Industrial

Commercial Real Estate Mortgages*

Consumer and Other

Residential Mortgages*

Home Equities

Total

Allowance for loan

Allowance for credit

losses:

Ending balance:

Loans acquired with deteriorated credit quality

$

-

$

-

$

-

$

-

$

-

$

-

Individually evaluated for impairment

100

345

-

9

41

495

-

212 

-

35 

29 

276 

Collectively evaluated for impairment

3,209

12,022

54

2,118

540

17,943

5,267 

12,342 

3,343 

291 

21,247 

Total

$

3,309

$

12,367

$

54

$

2,127

$

581 

$

18,438

$

5,267 

$

12,554 

$

$

3,378 

$

320 

$

21,523 

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

2,582 

17,869 

-

4,244 

826 

25,521 

Collectively evaluated for impairment

232,049

825,848

719

412,768

80,002

1,551,386

238,459 

878,070 

604 

436,644 

79,847 

1,633,624 

Total

$

237,077

$

837,773

$

719

$

416,169

$

81,238

$

1,572,976

$

241,041 

$

895,939 

$

604 

$

440,888 

$

80,673 

$

1,659,145 

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

* Includes construction loans

December 31, 2022

(in thousands)

Commercial and Industrial

Commercial Real Estate Mortgages*

Consumer and Other

Residential Mortgages*

Home Equities

Total

Allowance for credit

losses:

Ending balance:

Loans acquired with deteriorated credit quality

$

-

$

-

$

-

$

-

$

-

$

-

Individually evaluated for impairment

-

251 

-

28 

77 

356 

Collectively evaluated for impairment

4,980 

11,344 

153 

2,074 

531 

19,082 

Total

$

4,980 

$

11,595 

$

153 

$

2,102 

$

608 

$

19,438 

Loans:

Ending balance:

Loans acquired with deteriorated credit quality

$

-

$

-

$

-

$

687 

$

-

$

687 

Individually evaluated for impairment

2,697 

18,144 

-

4,020 

949 

25,810 

Collectively evaluated for impairment

247,372 

877,973 

572 

439,042 

81,465 

1,646,424 

Total

$

250,069 

$

896,117 

$

572 

$

443,749 

$

82,414 

$

1,672,921 


16


Table of Contents

ImpairedThe Company’s reserve for off-balance sheet credit exposures was not material at March 31, 2023 and upon adoption of ASU 2016-13,

Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.

Nonaccrual Loans

The following tables provide data,amortized costs, at the class level, for impairednonaccrual 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:

Three Months Ended

March 31, 2023

January 1, 2023

March 31, 2023

Amortized Cost with Allowance

Amortized Cost without Allowance

Total

Amortized Cost

Interest Income Recognized

(in thousands)

Commercial and industrial

$

94 

$

97 

$

91 

$

154 

$

158 

$

100 

$

-

$

2,520 

$

2,520 

$

2,625 

$

-

Residential real estate:

Residential

304 

304 

74 

60 

60 

151 

3,720 

3,871 

3,738 

Construction

-

-

-

-

-

-

-

-

-

-

-

Commercial real estate:

Commercial

172 

197 

11 

171 

717 

16 

-

6,561 

6,561 

6,648 

-

Construction

145 

150 

13 

1,538 

1,555 

329 

1,301 

7,265 

8,566 

8,765 

-

Home equities

109 

109 

42 

109 

109 

41 

29 

418 

447 

563 

-

Consumer and other

-

-

-

-

-

-

-

-

-

-

-

Total impaired loans

$

824 

$

857 

$

231 

$

2,032 

$

2,599 

$

495 

Total nonaccrual loans

$

1,481 

$

20,484 

$

21,965 

$

22,339 

$

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:

Three Months Ended

March 31, 2022

January 1, 2022

March 31, 2022

Amortized Cost with Allowance

Amortized Cost without Allowance

Total

Amortized Cost

Interest Income Recognized

(in thousands)

Commercial and industrial

$

4,803 

$

5,627 

$

91 

$

5,028 

$

5,870 

$

100 

$

93 

$

4,619 

$

4,712 

$

4,919 

$

Residential real estate:

Residential

3,747 

4,130 

74 

3,357 

3,714 

303 

3,114 

3,417 

3,020 

Construction

-

-

-

-

-

-

-

-

-

-

-

Commercial real estate:

Commercial

9,413 

9,901 

11 

8,992 

10,055 

16 

171 

6,010 

6,181 

5,758 

70 

Construction

2,363 

2,564 

13 

2,933 

3,054 

329 

1,536 

836 

2,372 

2,942 

-

Home equities

1,068 

1,265 

42 

1,236 

1,433 

41 

108 

529 

637 

755 

Consumer and other

-

-

-

-

-

-

-

-

-

-

-

Total impaired loans

$

21,394 

$

23,487 

$

231 

$

21,546 

$

24,126 

$

495 

Total nonaccrual loans

$

2,211 

$

15,108 

$

17,319 

$

17,394 

$

81 


17


Table of Contents

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 

$

$

1,344 

$

Residential real estate:

Residential

3,512 

4,542 

17 

Construction

-

-

-

-

Commercial real estate:

Commercial

9,298 

70 

11,929 

12 

Construction

2,634 

-

1,085 

-

Home equities

1,000 

1,719 

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 

Home equities

109 

-

109 

-

Consumer and other

-

-

-

-

Total impaired loans

$

835 

$

-

$

10,346 

$

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 

$

$

5,483 

$

Residential real estate:

Residential

3,816 

5,169 

17 

Construction

-

-

-

-

Commercial real estate:

Commercial

9,476 

70 

14,872 

12 

Construction

2,780 

-

3,613 

Home equities

1,109 

1,828 

Consumer and other

-

-

-

-

Total impaired loans

$

22,397 

$

81 

$

30,965 

$

36 


1817


Table of Contents

Modifications to Borrowers Experiencing Financial Difficulty

The Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.

The table below details the amortized cost of gross loans held for investment made to borrowers experiencing financial difficulty that were modified during the three months ended March 31, 2023:

(in thousands)

Term Extension

Total Class of Receivable

Commercial and industrial

$

-

-

%

Residential real estate:

Residential

104 

Construction

-

-

Commercial real estate:

Commercial

-

-

Construction

-

-

Home equities

-

-

Consumer and other

-

-

-

Total nonaccrual loans

$

104 

%

The financial impacts of residential mortgage loan modifications made to borrowers experiencing financial difficulty during the three months ended March 31, 2023 were maturity extensions ranging from 159 months to 164 months.

The Company has not committed to lend any additional amounts to the borrowers included in the previous table.

As of March 31, 2023, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the first quarter of 2023 that subsequently defaulted. Payment default is defined as movement to nonperforming status, foreclosure or charge-off, whichever occurs first.

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The payment status of all loans modified to borrowers experiencing financial difficulties during the first quarter of 2023 was current as of March 31, 2023.

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 placedInformation 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 leadingmodifications prior to the designationadoption of a TDR are lines of creditASU 2022-02 on January 1, 2023 is presented in accordance with the applicable accounting standards in effect at 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.

19


Table of Contents

The following tables present TDR activity by the type of concession granted to the borrower fortime. During the three month periodmonths 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

38 

38 

-

-

-

Consumer and other loans

-

-

-

-

-

-

Other

-

-

-

-

-

-

The general practice of the Bank is to work with borrowers soCompany modified only one loan 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 iswas determined to be uncollectible, thea troubled debt restructuring, a Home Equity 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, 2022with an outstanding balance of $38 thousand that included extension of maturity and 2021 were not material.


20


Table of Contents

interest rate reduction concessions.

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, 20222023 and 2021,2022, the Company had an average of 52,76631,438 and 41,83752,766 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, 20222023 and 20212022 there was an average of 21,56053,910 and 81,77021,560 potentially anti-dilutive shares outstanding, respectively, that were not included in calculating diluted earnings per share because their effect was anti-dilutive.


18


Table of Contents

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, 20222023 and 2021:2022:

Balance at December 30, 2021

Net Change

Balance at March 31, 2022

Balance at December 31, 2022

Net Change

Balance at March 31, 2023

(in thousands)

(in thousands)

Net unrealized loss on investment securities

$

(3,160)

$

(16,705)

$

(19,865)

Net unrealized (loss) gain on investment securities

$

(47,348)

$

3,635

$

(43,713)

Net defined benefit pension plan adjustments

(2,511)

55

(2,456)

(1,930)

20

(1,910)

Total

$

(5,671)

$

(16,650)

$

(22,321)

$

(49,278)

$

3,655

$

(45,623)

Balance at December 31, 2020

Net Change

Balance at March 31, 2021

Balance at December 31, 2021

Net Change

Balance at March 31, 2022

(in thousands)

(in thousands)

Net unrealized gain (loss) on investment securities

$

2,397

$

(3,889)

$

(1,492)

$

(3,160)

$

(16,705)

$

(19,865)

Net defined benefit pension plan adjustments

(3,116)

76

(3,040)

(2,511)

55

(2,456)

Total

$

(719)

$

(3,813)

$

(4,532)

$

(5,671)

$

(16,650)

$

(22,321)

Three months ended March 31, 2022

Three months ended March 31, 2021

Three months ended March 31, 2023

Three months ended March 31, 2022

(in thousands)

(in thousands)

(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

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

Unrealized gain (loss) on investment

securities:

Unrealized loss on investment

Unrealized gain (loss) on investment

securities

$

(22,537)

$

5,832 

$

(16,705)

$

(5,253)

$

1,364 

$

(3,889)

$

4,884 

$

(1,249)

$

3,635 

$

(22,537)

$

5,832 

$

(16,705)

Defined benefit pension plan

adjustments:

Amortization of prior service cost

(3)

(2)

-

-

-

(3)

Amortization of actuarial loss

68 

(18)

50 

95 

(25)

70 

27 

(7)

20 

68 

(18)

50 

Net change

76 

(21)

55 

103 

(27)

76 

27 

(7)

20 

76 

(21)

55 

Other comprehensive loss

$

(22,461)

$

5,811 

$

(16,650)

$

(5,150)

$

1,337 

$

(3,813)

Other comprehensive income (loss)

$

4,911 

$

(1,256)

$

3,655 

$

(22,461)

$

5,811 

$

(16,650)


2119


Table of Contents

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, 20222023 and 2021:2022:

Three months ended March 31,

Three months ended March 31,

(in thousands)

(in thousands)

Supplemental Executive

Supplemental Executive

Pension Benefits

Retirement Plan

Pension Benefits

Retirement Plan

2022

2021

2022

2021

2023

2022

2023

2022

Service cost

$

-

$

-

$

33

$

37

$

-

$

-

$

36

$

33

Interest cost

44

41

31

25

62

44

62

31

Expected return on plan assets

(88)

(89)

-

-

(67)

(88)

-

-

Amortization of prior service cost

-

-

8

8

-

-

-

8

Amortization of the net loss

24

24

44

71

27

24

-

44

Net periodic (benefit) cost

$

(20)

$

(24)

$

116

$

141

$

22

$

(20)

$

98

$

116

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.


2220


Table of Contents

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.




2321


Table of Contents

A disaggregation of the total insurance service and other fees for the three months ended March 31, 20222023 and 20212022 is provided in the tables below:

Three months ended March 31,

Three months ended March 31,

2022

2021

2023

2022

(in thousands)

(in thousands)

Commercial property and casualty insurance commissions

$

788

$

797

$

889

$

788

Personal property and casualty insurance commissions

723

740

739

723

Employee benefits sales commissions

234

244

194

234

Profit sharing and contingent revenue

370

402

427

370

Wealth management and other financial services

141

180

127

141

Insurance claims services revenue

-

81

Other insurance-related revenue

43

58

53

43

Total insurance service and other fees

$

2,299

$

2,502

$

2,429

$

2,299

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, 20222023 and December 31, 2021,2022, respectively:

(in thousands)

Level 1

Level 2

Level 3

Fair Value

Level 1

Level 2

Level 3

Fair Value

March 31, 2022

March 31, 2023

Securities available-for-sale:

US treasuries and government agencies

$

-

$

143,304

$

-

$

143,304

$

-

$

143,062

$

-

$

143,062

States and political subdivisions

-

24,210

-

24,210

-

22,168

-

22,168

Mortgage-backed securities

-

218,422

-

218,422

-

200,699

-

200,699

December 31, 2021

December 31, 2022

Securities available-for-sale:

US treasuries and government agencies

$

-

$

96,818

$

-

$

96,818

$

-

$

140,682

$

-

$

140,682

States and political subdivisions

-

6,246

-

6,246

-

21,822

-

21,822

Mortgage-backed securities

-

202,895

-

202,895

-

201,822

-

201,822

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

22


Table of Contents

market movements and sector news into the evaluated pricing applications and models. The third-party, at times, may determine that it

24


Table of Contents

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, 20222023 and December 31, 2021:2022:

(in thousands)

Level 1

Level 2

Level 3

Fair Value

Level 1

Level 2

Level 3

Fair Value

March 31, 2022

March 31, 2023

Collateral dependent impaired loans

$

-

$

-

$

3,569

$

3,569

$

-

$

-

$

1,200

$

1,200

December 31, 2021

December 31, 2022

Collateral dependent impaired loans

$

-

$

-

$

4,608

$

4,608

$

-

$

-

$

1,170

$

1,170

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$1.5 million, with an allowance for loancredit loss of $0.1$0.3 million, at March 31, 20222023 compared with $5.0$1.5 million and $0.4 million, respectively, at December 31, 2021.2022.


2523


Table of Contents

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

March 31, 2023

December 31, 2022

Carrying

Fair

Carrying

Fair

Carrying

Fair

Carrying

Fair

Amount

Value

Amount

Value

Amount

Value

Amount

Value

(in thousands)

(in thousands)

(in thousands)

(in thousands)

Financial assets:

Level 1:

Cash and cash equivalents

$

158,675 

$

158,675 

$

244,785 

$

244,785 

$

16,104

$

16,104

$

23,054

$

23,054

Level 2:

Available for sale securities

385,936 

385,936 

305,959 

305,959 

365,929

365,929

364,326

364,326

FHLB and FRB stock

5,785 

N/A

6,084 

N/A

8,444

N/A

13,511

N/A

Level 3:

Held to maturity securities

3,017 

2,976

3,165 

3,179 

3,707

3,613

6,949

6,809

Loans, net

1,585,461 

1,543,612

1,553,467 

1,573,420 

1,637,053

1,565,824

1,652,931

1,564,641

Financial liabilities:

Level 1:

Demand deposits

$

528,962 

$

528,962 

$

492,864 

$

492,864 

$

483,958

$

483,958

$

493,710

$

493,710

NOW deposits

257,475 

257,475 

259,908 

259,908 

268,283

268,283

273,359

273,359

Savings deposits

1,051,136 

1,051,136 

1,019,925 

1,019,925 

807,532

807,532

801,943

801,943

Level 2:

Securities sold under agreement to

repurchase

6,476 

6,476 

4,112 

4,112 

9,264

9,264

7,147

7,147

Other borrowed funds

26,847 

26,398 

32,879 

32,990 

79,637

79,293

193,001

192,443

Subordinated debt

30,999 

31,107 

30,974 

32,111 

31,101

30,035

31,075

30,263

Level 3:

Time deposits

149,243 

149,386

164,340 

164,574 

290,141

286,883

202,667

199,910


2624


Table of Contents

9. SEGMENT INFORMATION

The Company comprises 2two 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, 20222023 and 2021.2022.

Three months ended March 31, 2022

Three months ended March 31, 2023

Banking

Insurance Agency

Banking

Insurance Agency

Activities

Activities

Total

Activities

Activities

Total

(in thousands)

(in thousands)

Net interest income

$

16,501

$

-

$

16,501

$

17,325

$

-

$

17,325

Provision for loan losses

221

-

221

Provision for credit losses

(654)

-

(654)

Net interest income after

provision for loan losses

16,280

-

16,280

provision for credit losses

17,979

-

17,979

Insurance service and fees

139

2,160

2,299

123

2,306

2,429

Other non-interest income

2,132

-

2,132

1,684

-

1,684

Amortization expense

5

95

100

5

95

100

Other non-interest expense

12,502

1,858

14,360

12,557

1,845

14,402

Income before income taxes

6,044

207

6,251

7,224

366

7,590

Income tax provision

1,449

54

1,503

1,707

83

1,790

Net income

$

4,595

$

153

$

4,748

$

5,517

$

283

$

5,800

Three months ended March 31, 2021

Three months ended March 31, 2022

Banking

Insurance Agency

Banking

Insurance Agency

Activities

Activities

Total

Activities

Activities

Total

(in thousands)

(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

Net interest income

$

16,501

$

-

$

16,501

Provision for credit losses

221

-

221

Net interest income after

provision for credit losses

16,280

-

16,280

Insurance service and fees

164

2,338

2,502

139

2,160

2,299

Other non-interest income

2,064

-

2,064

2,132

-

2,132

Amortization expense

5

130 

135

5

95

100

Other non-interest expense

12,213

2,017

14,230

12,502

1,858

14,360

Income before income taxes

6,297

188

6,485

6,044

207

6,251

Income tax provision

1,584

49

1,633

1,449

54

1,503

Net income

$

4,713

$

139

$

4,852

$

4,595

$

153

$

4,748


2725


Table of Contents

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,

March 31,

December 31,

2022

2021

2023

2022

(in thousands)

(in thousands)

Commitments to extend credit

$

372,964

$

394,953

$

422,843

$

376,167

Standby letters of credit

4,353

4,636

3,027

3,673

Total

$

377,317

$

399,589

$

425,870

$

379,840

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 0tnot incur any losses on its commitments and did 0tnot record a reserve for its commitments during the first three months of 20222023 or during 2021.2022.

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

The FASB establishes changes to U.S. 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 adoptedwhen they are issued by FASB. Effective January 1, 2023 the Company adopted both ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses of Financial Instruments and ASU 2022-02, Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. Excluding those ASUs, the Company did not adopt any accounting pronouncements during theits current fiscal year are not expected to havethat had a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures. The following standard willThere have been no accounting standards that have been recently issued but not yet required to be adopted in a future period. ASUs not listed below are not expected toas of March 31, 2023 that management expects will have a material impact on the Company’s consolidated financial position,condition, results of operations, cash flows or disclosures.

ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial InstrumentsCurrent 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 ofCompany adopted this ASU (commonly known as the Current Expected Credit Loss Impairment Model, or CECL, in the industry)CECL) effective January 1, 2023. The main objective of this ASU 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 approachSee Note 3 – “Loans and the Allowance for Credit Losses” to this Quarterly Report on Form 10-Q for further details regarding the Company’s accounting policy for determining expectedthe Allowance for Credit Losses under this new accounting standard.

Upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments, the Company recognized a $2.7 million increase in the allowance for credit losses under the new guidance, including the licensingas 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, 2023.2023 with a net of tax cumulative effect adjustment to retained earnings of $2.0 million.

ASU 2022-02, Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures –The Company adopted this ASU effective January 1, 2023. 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 adoptadoption of ASU 2022-02 effective January 1, 2023.


did not have a material impact on the Company’s financial condition, results of operations or cash flows, but did affect the financial statement disclosures.

2826


Table of Contents

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

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

These forward-looking statements are based largely on the expectations of the Company’s management and are subject to a number of risks and uncertainties, including but not limited to: 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; loancredit losses in excess of the Company’s allowance for loancredit 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, 2021.2022 and this Quarterly Report on Form 10-Q. Many of these factors are beyond the Company’s control and are difficult to predict.

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

The Discussion and Analysis of Financial Condition and Results of Operations that follows includes comparisons to the quarter ended March 31, 20212022 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.2022.

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.

29


Table of Contents

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, 2021.2022. 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.

Effective January 1, 2023 the Company adopted ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. See Note 3 – “Loans and the Allowance for Credit Losses” to this Quarterly Report on Form 10-Q for the accounting policy for determining the Allowance for Credit Losses (“ACL”).

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

27


Table of Contents

Allowance for LoanCredit Losses

The allowance for loan losses (“ALLL”) representsACL on loans is management’s estimate of probable incurredexpected lifetime credit losses on loans carried at amortized cost. The ACL on loans is established through a provision for credit losses recognized in the Bank’sConsolidated Statements of Income. Additionally, the ACL on loans is reduced by charge-offs on loans and increased by recoveries of amounts previously charged-off. At March 31, 2023 the ACL on loans totaled $21.5 million, compared to $22.2 million recorded upon adoption of ASU 2016-13 at January 1, 2023. A significant portion of our ACL is allocated to the commercial portfolio (both commercial real estate and commercial and industrial (“C&I”) loans). As of March 31, 2023 and January 1, 2023, the ACL allocated to the total commercial portfolio was $17.8 million and $18.0 million, respectively.

Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors consists of two basic components; pooling loans into portfolio segments for loans that share similar risk characteristics and identifying individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments.

For pooled loan portfolio. Determiningportfolio segments, the amountCompany utilizes a discounted cash flow (“DCF”) methodology to estimate credit losses over the expected life of the allowance for loan losses requires significant judgment on the partloan. The methodology incorporates a probability of managementdefault and the use of estimates related to the amount and timing of expected future cash flows on impaired loans,loss given default framework. Loss given default is estimated losses on pools of homogeneous loans based on historical credit loss experience, considerationexperience. Probability of current economic trendsdefault is estimated utilizing a regression model that incorporates econometric factors. The model utilizes forecasted econometric factors with a one-year reasonable and conditions,supportable forecast period and otherone-year straight-line reversion period in order to estimate the probability of default for each loan portfolio segment. The DCF methodology combines the probability of default, the loss given default, prepayment speeds and the remaining life of the loan to estimate a reserve for each loan.

The ACL for individually analyzed loans is measured using a DCF method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan was collateral dependent, at the fair value of the collateral.

Quantitative loss factors are also supplemented by certain qualitative andrisk factors reflecting management’s view of how losses may vary from those represented by quantitative factors, all of which may be susceptible to significant change.loss rates. 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

Because the methodology is difficultbased upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations. Deteriorating conditions or assumptions could lead to estimate how potential changesfurther increases in any one economic factorthe ACL on loans; conversely, improving conditions or input might affectassumptions could lead to further reductions in 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.ACL on loans.

In estimating the ALLLACL 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 ALLLACL 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 ALLLresult was an ACL allocated to the total commercial loan portfolio wasthat ranged between a reduction of $11.7$13.4 million and an increase of $9.9$28.2 million at March 31, 2022.2023. 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, 20222023 in estimation of the ALLLACL on loans recognized on the Consolidated Balance Sheet.

If the assumptions underlying the determination of the ALLLACL prove to be incorrect, the ALLLACL may not be sufficient to cover actual loan losses and an increase to the ALLLACL 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.ACL.

ANALYSIS OF FINANCIAL CONDITION

Loan Activity

Total gross loans were $1.7 billion at March 31, 2023 and December 31, 2022 compared with $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.

2022. Loans secured by real estate were $1.4 billion at March 31, 2022, compared with $1.3 billion at2023, December 31, 20212022 and March 31, 2021.2022. Residential real estate loans, including construction loans, were $423$441 million at March 31, 2022, $72023, $3 million or 2% higherless than 1% lower than at December 31, 2021, and $422022, but $18 million or 11%4% higher than at March 31, 2021.2022. The increase in residential real estate loans from March 31, 2022 reflects management’s decision to retain the majority of residential mortgages within our loan portfolio. Commercial real estate loans, including construction loans, were $859$895 million at March 31, 2022, $212023, $1 million or 2% higherless than the balance1% lower than at December 31, 2021, and $192022, but $36 million or 2%4% higher than the balance at March 31, 2021.2022. Commercial real estate is the largest part of the Company’s loan portfolio and has historically been the highest growth segment of the portfolio.


3028


Table of Contents

In the first quarter of 2022,2023, residential mortgage originations were $22$8 million compared with the previous quarter’s originations of $25$15 million and $32$22 million in the first quarter of 2021.2022. The decrease in residential mortgage originations as compared to the prior year iswas primarily due to customers refinancing at lowerthe impact of the rising interest rates during the first quarter of 2021.rate environment. The Company sold $3$1 million of residential mortgages during the first three months of 20222023 compared with $1$3 million during the fourth quarter of 2021.year earlier period. The Company did not sell any residential mortgages during the first three monthsfourth quarter of 2021.2022. Management decides to keep or sell residential mortgage loans at the time of origination based on interest rate risk management practices 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”)&I lending as a way to diversify its overall loan portfolio. The C&I portfolio was $242$241 million at March 31, 2022,2023, representing a $5$9 million or 2% increase4% decrease from December 31, 2021, but a $2092022. When compared with last year’s first quarter, commercial and industrial loans increased $8 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.4%, excluding Paycheck Protection Program loan balances.

Credit Quality of Loan Portfolio

Non-performing loans, defined as accruing loans greater than 90 days past due and nonaccrual loans, totaled $24 million, or 1.45% of total loans outstanding at March 31, 2023, compared with $25 million, or 1.48% of total loans outstanding, as of December 31, 2022 and $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 2021.2022.

Commercial credits graded as “special mention” and “substandard,” or the criticized loan portfolio, were $90 million at March 31, 2023, a $3 million decrease from $93 million at December 31, 2022, and a $20 million decrease from $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.2022. 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 formonitor credit risk in its commercial loan losses for commercial credits.portfolio. “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 anPrior to January 1, 2023, the allowance for loancredit losses represented the amount that in management’s judgment appropriately reflectsreflected incurred credit losses inherent in the loan portfolio. Loansand lease portfolio as of the balance sheet date. Based on portfolio composition, then current economic conditions, and reasonable and supportable forecasts of future conditions, the Company recognized an increase to the allowance for credit losses of $2.7 million upon adoption of the new credit loss accounting standard, ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, as of January 1, 2023 as compared with the allowance for credit losses recognized on its consolidated balance sheet at December 31, 2022. The $2.7 million increase was recognized as a net of tax cumulative effect adjustment to retained earnings of $2.0 million.

The Company recorded a $0.7 million release of allowance during the three months ended March 31, 2023, primarily due to lower loan balances, a benefit from the reduction in rate of increases in home prices in the Company’s market and lower specific reserves on individually analyzed loans.

Prior to the adoption of ASU 2016-13, loans acquired in a business combination arewere recorded at fair value with no carry-over of an acquired entity’s previously established allowance for credit losses. Acquired loans that previously did not have an allowance valuation totaled $129 million at January 1, 2023. Upon adoption of the new ACL accounting standard these loans contributed $1 million to the allowance for credit losses. The allowance for loancredit losses totaled $21.5 million or 1.30% of total loans outstanding at March 31, 2023, compared with $19.4 million, or 1.16% of total loans outstanding as of December 31, 2022 and $18.6 million, or 1.16% of total loans outstanding at March 31, 2022, compared with $18.4 million or 1.17%2022. The increase in the percentage of allowance for credit losses to total loans outstanding asfrom both comparative periods was the result of December 31, 2021 and $20.7 million or 1.18%the adoption 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.new accounting standard.

Investing Activities

Total investment securities were $370 million at March 31, 2023, compared with $371 million at December 31, 2022 and $389 million at March 31, 2022, compared with $309 million at December 31, 20212022. The decreases reflect changes in unrealized gains and $195 million at March 31, 2021. The increases reflect the use of excess cash balances.losses on investment securities. Interest-bearing deposits at other banks, which consist of overnight funds kept at correspondent banks and the Federal Reserve, were $4 million at March 31, 2023 compared to $6 million at December 31, 2022, and $147 million at March 31, 2022 compared to $235 million at December 31, 2021, and $106 million at March 31, 2021.2022. 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 2619% of average interest-earning assets in both the first quarter of 2022, compared with 25% in the2023 and fourth quarter of 20212022 and 13%26% in the first quarter of 2021.2022.

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%were 54% of total investment securities at March 31, 2022,2023 and December 31, 20212022, and 56% of total investment securities at March 31, 2021, respectively.2022. Tax-advantaged debt securities issued by state and political subdivisions waswere 2%, 3% and 6%2% of the total securities portfolio at March 31, 2022,2023, December 31, 2021,2022, and March 31, 2021,2022, respectively. The concentration in U.S. government-sponsored agency bonds was 37%

29


Table 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.Contents

The total net unrealized loss position of the available-for-sale investment portfolio was $26.8$59 million at March 31, 2022,2023, compared with a net unrealized gain position of $4.3$64 million at December 31, 20212022 and $2.0$27 million at March 31, 2021.2022. The securities in an unrealized

31


Table of Contents

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, 20222023 were $2.0$1.8 billion, a $50$78 million or 3%4% increase from December 31, 2021, and2022, but a $115$137 million or 6% increase7% decrease from March 31, 20212022. The increase from March 31, 2021 largelythe fourth quarter of 2022 reflects an increase in commercialtime deposits related to the second round of PPP loans$87 million or 43%, municipal savings deposits of $52 million or 31%, 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$15 million or 28%8%, totalpartially offset by a decrease in consumer savings of $62 million or 14%, demand deposits of $43$9 million or 2%, and NOW deposits of $5 million or 2%. The decrease from March 31, 2022 largely reflects deposit decreases in consumer savings of $163 million or 42%, commercial savings of $51 million or 26%, demand deposits of $45 million or 9%, municipal savings of $30 million or 13%, and brokered deposits of $41$2 million or 20%,29%. Offsetting those decreases were higher consumer savingstime deposits of $31$143 million or 6%,51% and total NOW deposits of $19$11 million or 8%. These increases were offset by a decrease in time deposits of $73 million or 33%4%. Average demand deposits were $504 million in the first quarter of 2023, a 3% decrease from $519 million in the fourth quarter of 2022, and a 2% decrease from $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 2021.2022.

The Company had $27$11 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”) advances at March 31, 2023, compared with $20 million at December 31, 2022 and $27 million at March 31, 2022. This represents long-term advances from the 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$69 million in overnight borrowings with the FHLBNY at March 31, 2022.2023.


3230


Table of Contents

ANALYSIS OF RESULTS OF OPERATIONS

Average Balance Sheet

The following tables present the significant categories of the assets and liabilities of the Company, interest income and interest expense, and the corresponding yields earned and rates paid for the periods indicated. The assets and liabilities are presented as daily averages. The average loan balances include both performing and non-performing loans. 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

Three months ended March 31, 2023

Three months ended March 31, 2022

Average

Interest

Average

Interest

Average

Interest

Average

Interest

Outstanding

Earned/

Yield/

Outstanding

Earned/

Yield/

Outstanding

Earned/

Yield/

Outstanding

Earned/

Yield/

Balance

Paid

Rate

Balance

Paid

Rate

Balance

Paid

Rate

Balance

Paid

Rate

(dollars in thousands)

(dollars in thousands)

(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 

%

$

1,641,162 

$

20,886 

5.16 

%

$

1,566,716 

$

15,724 

4.07 

%

Taxable securities

347,123 

1,677 

1.96 

%

168,699 

832 

2.00 

%

370,798 

2,294 

2.51 

%

347,123 

1,677 

1.96 

%

Tax-exempt securities

10,807 

46 

1.73 

%

11,774 

56 

1.93 

%

11,531

89 

3.13 

%

10,807 

46 

1.73 

%

Interest bearing deposits at banks

178,729 

70 

0.16 

%

76,651 

16 

0.08 

%

9,824

96 

3.97

%

178,729 

70 

0.16 

%

Total interest-earning assets

2,103,375 

$

17,517 

3.38 

%

1,963,449 

$

17,970 

3.71 

%

2,033,315 

$

23,365 

4.66 

%

2,103,375 

$

17,517 

3.38 

%

Non interest-earning assets:

Cash and due from banks

13,302 

17,338 

16,796 

13,302 

Premises and equipment, net

17,698 

19,210 

16,900 

17,698 

Other assets

79,316 

78,652 

100,240 

79,316 

Total Assets

$

2,213,691 

$

2,078,649 

$

2,167,251 

$

2,213,691 

LIABILITIES & STOCKHOLDERS' EQUITY

LIABILITIES & STOCKHOLDERS' EQUITY

LIABILITIES & STOCKHOLDERS' EQUITY

Interest-bearing liabilities:

NOW

$

252,965 

$

56 

0.09 

%

$

230,627 

$

76 

0.13 

%

$

260,242 

$

482 

0.75 

%

$

252,965 

$

56 

0.09 

%

Savings

1,024,447 

344 

0.14 

%

866,991 

421 

0.20 

%

796,793 

1,860 

0.95 

%

1,024,447 

344 

0.14 

%

Time deposits

156,534 

168 

0.44 

%

246,120 

389 

0.64 

%

257,733 

1,673 

2.63 

%

156,534 

168 

0.44 

%

Other borrowed funds

29,280 

45 

0.62 

%

42,767 

86 

0.82 

%

134,719 

1,496 

4.50 

%

29,280 

45 

0.62 

%

Subordinated debt

30,984 

401 

5.25 

%

30,883 

399 

5.24 

%

31,086 

526 

6.86 

%

30,984 

401 

5.25 

%

Securities sold U/A to repurchase

4,890 

0.17 

%

4,634 

0.18 

%

7,248 

0.17 

%

4,890 

0.17 

%

Total interest-bearing liabilities

1,499,100 

$

1,016 

0.27 

%

1,422,022 

$

1,373 

0.39 

%

1,487,821 

$

6,040 

1.65 

%

1,499,100 

$

1,016 

0.27 

%

Noninterest-bearing liabilities:

Demand deposits

512,118 

464,579 

503,945 

512,118 

Other

20,897 

23,031 

20,487 

20,897 

Total liabilities

$

2,032,115 

$

1,909,632 

$

2,012,253 

$

2,032,115 

Stockholders' equity

181,576 

169,017 

154,998 

181,576 

Total Liabilities and Equity

$

2,213,691 

$

2,078,649 

$

2,167,251 

$

2,213,691 

Net interest income

$

16,501 

$

16,597 

$

17,325 

$

16,501

Net interest margin

3.18 

%

3.43 

%

3.46 

%

3.18

%

Interest rate spread

3.11 

%

3.32 

%

3.01 

%

3.11 

%

(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.

3331


Table of Contents

Net Income

Net income was $4.7$5.8 million, or $0.86$1.06 per diluted share, in the first quarter of 2022,2023, compared with $5.9$6.0 million, or $1.06$1.10 per diluted share, in the fourth quarter of 20212022 and $4.9$4.7 million, or $0.89$0.86 per diluted share, in last year’s first quarter. The change from the prior quarter was largely due to lowera reduction in net interest income impactedin the current period, partially offset by reduced PPP fees earned during the first quartera release of 2022. In addition, fourth quarter of 2021 includedallowance for credit losses. The change from prior year period reflected higher net interest income recognized on non-accrual loan payoffs and higher amortization of fair value marks on acquired loans.a reduction in provision for credit losses in the current period, partially offset by lower non-interest income.

Return on average equity was 10.46%14.97% for the first quarter of 2022,2023, compared with 12.98%16.07% in the fourth quarter of 20212022 and 11.48%10.46% in the first quarter of 2021.2022.

Other Results of Operations – Quarterly Comparison

Net interest income decreased $3.2$1.9 million, or 16%10%, from the sequential fourth quarter but was relatively flat whendue to higher interest expense, given the cost increase of interest-bearing liabilities as a result of competitive pricing on deposits. 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 into the first quarter of 2022 $2.4net interest income increased $0.8 million, or 5%, resulting from a 128 basis point increase in yields on interest-earning assets and higher average loan and investment balances. The increase in rates paid on interest-bearing liabilities and yields on interest-earning assets resulted from the 450 basis point increase 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.federal funds rate.

First quarter net interest margin of 3.18%3.46% decreased 5631 basis points from the fourth quarter of 2021 and 252022 but increased 28 basis points from the first quarter of 2021.2022. The yield on loans decreased 79increased 28 basis points compared with the fourth quarter of 2021 but remained relatively flat2022 and 109 basis points when compared withto the first quarter of 2021.2022. The cost of interest-bearing liabilities decreasedincreased to 0.27%1.65% compared with 0.28%0.86% in the fourth quarter of 20212022 and 0.39%0.27% in the first quarter of 2021.2022.

The $0.2$0.7 million provision for loan lossesrelease of allowance in the current quarter was largely due to lower loan growth, partially offset bybalances, a reduction in the rate of increases in home prices in the Company’s market and lower specific reserves.reserves on individually analyzed loans.

Non-interest income was $4.4$4.1 million in the first quarter of 2022,2023, compared with $4.7$4.5 million in the fourth quarter of 20212022 and $4.6$4.4 million in the prior year first quarter. The decrease from the sequential fourth quarter is due to a $0.3 million benefit recognized duringIncluded in 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 recognized2022 was a $0.2 million gain on a bank-owned life insurance claim during the fourth quartersale of 2021. Offsetting these decreasesan asset that was acquired in foreclosure as well as $0.2 million of insurancerevenue recognized relating to rent payments received on the acquired asset. The decrease from last year’s first quarter was primarily due to decreases in mortgage servicing rights and loan fees. Insurance service and fee revenue, reflecting higher profit-sharing revenue. The decreaseincreased 10% over the fourth quarter and was up 6% from prior yearlast year’s first quarter, was due to the discontinued operations of ourhigher profit sharing revenue and commissions from higher premiums and new commercial lines insurance claims services business and decreased profit-sharing revenue.business.

Non-interest expenses of $14.5 million in the first quarter of 20222023 decreased $1.8$0.4 million or 11%3% when compared with the fourth quarter of 20212022 and were relatively flat from last year’s first quarter. The primary componentsSalaries and employee benefits were down slightly as merit increases and strategic hires were offset by lower incentive accruals of $0.6 million. FDIC insurance expense increased $0.1 million from both comparative periods, reflecting changes to the FDIC’s assessment rate schedule intended to raise the reserve ratio of the decreaseDeposit Insurance Fund. Other expenses decreased from the sequential fourth quarter wereprimarily due to lower loan fees of $0.3 million and expenses relating to a decreaseforeclosed property of $0.8$0.1 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.quarter.

The Company’s GAAP efficiency ratio, or noninterest expenses divided by the sum of net interest income and noninterest income, was 67.6% in the first quarter of 2023, 62.9% in the fourth quarter of 2022, and 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.2022.

Income tax expense was $1.5$1.8 million, for an effective tax rate of 24.0%23.6%, in the first quarter of 20222023 compared with 23.4%23.0% in the fourth quarter of 20212022 and 25.2%24.0% 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 9.13% at March 31, 2023 and December 31, 2022, compared with 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, 2021.2022.

On February 15, 2022,22, 2023, the Company declared a cash dividend of $0.62$0.66 per common share, which was paid on April 5, 2022.4, 2023. The semi-annual dividend represented a $0.02, or 3%, increase from the previous semi-annual dividend paid in October 2021.2022.

Book value per share was $28.97 at March 31, 2023, compared with $28.32 at December 31, 2022 and $30.65 at March 31, 2022. Reflected in the book value changes are the Federal Reserve’s aggressive interest rate hikes that have resulted in significant unrealized losses on investment securities, which reduced book value per share at March 31, 2023 by $4.37 when compared with the last year’s

3432


Table of Contents

first quarter.  Such unrealized gains and losses are generally due to changes in interest rates and represent the difference, net of applicable income tax effect, between the estimated fair value and amortized cost of investment securities classified as available-for-sale. 

The Company 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, 20222023 and December 31, 20212022 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.ratios. 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, 2022,2023, advances of up to $406$404 million could be drawn on the FHLB via an Overnight Line of Credit Agreement between the Bank and the FHLB. As of March 31, 2022,2023, 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. Furthermore, the Federal Reserve Board has announced a Bank Term Funding Program available to eligible depository institutions secured by U.S. treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral at par, to mitigate the risk of potential losses on the sale of such instruments. 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, 2022,2023, approximately 1%3% of the Bank’s securities had contractual maturity dates of one year or less and approximately 19%26% had maturity dates of five years or less. Additionally, mortgage-backed securities, which comprise 56%54% of the investment portfolio at March 31, 2022,2023, 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 Company’s 90-day liquidity ratio 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, 2022,2023, the Company had net short-term liquidity of $665$433 million as compared with $724$209 million at December 31, 2021.2022. Available assets of $538$375 million, divided by public and purchased funds of $422$505 million, resulted in a long-term liquidity ratio of 127%74% at March 31, 2022,2023, compared with 153%75% at December 31, 2021.2022.

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.


33


Table of Contents

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

35


Table of Contents

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)

Calculated increase (decrease)

in projected annual net interest income

in projected annual net interest income

(in thousands)

(in thousands)

March 31, 2022

December 31, 2021

March 31, 2023

December 31, 2022

Changes in interest rates

+200 basis points

$

(318)

$

1,375

$

(2,734)

$

(2,867)

+100 basis points

2,824

3,569

528

770

-100 basis points

(1,620)

(2,183)

(679)

(962)

-200 basis points

NM

NM

(1,588)

(2,661)

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.


34


Table of Contents

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, 20222023 (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, 2022.2023.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Effective January 1, 2023, Evans Bancorp, Inc. adopted the CECL accounting standard. The Company designed new controls and modified existing controls as part of its adoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data.

No

Except for the change in controls relating to the adoption of the CECL accounting standard, there were no other 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, 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


36


Table of Contents

PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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

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

ITEM 1A – RISK FACTORS

ThereOther than the risk factors set forth below, 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, 2021.2022.

Recent Negative Developments Affecting the Banking Industry, and Resulting Media Coverage, May Erode Customer Confidence in the Banking System

The March 2023 high-profile bank failures involving Silicon Valley Bank and Signature Bank have generated significant market volatility among publicly traded bank holding companies and, in particular, community banks like the Company. These market developments have negatively impacted customer confidence in the safety and soundness of community banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of these recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in community banks and the banking system more broadly.

A Lack of Liquidity Could Adversely Affect the Company’s Financial Condition and Results of Operations and Result in Regulatory Restrictions

The Company must maintain sufficient funds to respond to the needs of depositors and borrowers. Deposits have traditionally been the Company’s primary source of funds for use in lending and investment activities and are emphasized due to the relatively lower cost of these funds. The Company also receives funds from loan repayments, investment maturities and income on other interest-earning assets, as well as borrowings. If the Company is required to rely more heavily on more expensive funding sources to support liquidity and future growth, its revenues may not increase proportionately to cover its increased costs, which would adversely affect its operating margins, profitability and growth prospects. Alternatively, the Company may need to sell a portion of its investment securities portfolio to raise funds, which, as discussed below, could result in a loss.

35


Table of Contents

Any decline in funding could adversely impact the Company’s ability to originate loans, invest in securities, pay expenses, or fulfill obligations such as repaying its borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on its liquidity, business, financial condition and results of operations. A lack of liquidity could also attract increased regulatory scrutiny and potential restraints imposed by regulators. Depending on the capitalization status and regulatory treatment of depository institutions, including whether an institution is subject to a supervisory prompt corrective action directive, regulatory restrictions and prohibitions may include restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits.

Rising Interest Rates Have Decreased the Value of the Company’s Securities Portfolio, and the Company Would Realize Losses if it Were Required to Sell Such Securities to Meet Liquidity Needs

As a result of inflationary pressures and the resulting rapid increases in interest rates over the last year, the trading value of previously issued government and other fixed income securities has declined significantly. These securities make up a majority of the securities portfolio of most banks in the U.S., including the Company’s, resulting in unrealized losses embedded in the securities portfolios. While the Company does not currently intend to sell these securities, if the Company were required to sell such securities to meet liquidity needs, it may incur losses, which could impair the Company’s capital, financial condition, and results of operations and require the Company to raise additional capital on unfavorable terms, thereby negatively impacting its profitability. While the Company has taken actions to maximize its funding sources, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs. Furthermore, while the Federal Reserve Board has announced a Bank Term Funding Program available to eligible depository institutions secured by U.S. treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral at par, to mitigate the risk of potential losses on the sale of such instruments, there is no guarantee that such programs will be effective in addressing liquidity needs as they arise.

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 

Period

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number of Shares that may yet be Purchased Under the Plans or Programs

January 1, 2023 - January 31, 2023

Repurchase program(1)

-

$

-

-

187,932 

Employee transactions(2)

215 

$

37.68 

N/A

N/A

February 1, 2023 - February 28, 2023

Repurchase program(1)

-

$

-

-

187,932 

Employee transactions(2)

7,130 

$

39.99 

N/A

N/A

March 1, 2023 - March 31, 2023

Repurchase program(1)

-

$

-

-

187,932 

Employee transactions(2)

-

$

-

N/A

N/A

Total:

Repurchase program(1)

-

$

-

-

187,932 

Employee transactions(2)

7,345 

$

39.92 

N/A

N/A

(1)On February 25, 2021, the Board of Directors authorized the Company to repurchase up to 300,000 shares of the Company’s common stock (the “2021 Repurchase Program”). The 2021 Repurchase program does not expire and may be suspended or discontinued by the Board of Directors at any time. The maximum number of shares that may be purchased under the 2021 Repurchase Program as of March 31, 2023 was 187,932.

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

(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.

36


Table of Contents

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

(Not Applicable.)

ITEM 4 – MINE SAFETY DISCLOSURE

(Not Applicable.)

ITEM 5 – OTHER INFORMATION

(Not Applicable.)


37


Table of Contents

ITEM 6 – EXHIBITS

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

EXHIBIT INDEX

Exhibit No.

Name

3.1

Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3a to the Company’s Registration Statement on Form S-4 (Registration No. 33-25321), as filed on November 7, 1988). (Filed on paper – hyperlink is not required pursuant to Rule 105 of Regulation S-T)

3.1.1

Certificate of Amendment to the Company’s Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997, as filed on May 14, 1997). (Filed on paper – hyperlink is not required pursuant to Rule 105 of Regulation S-T)

3.2

Amended and Restated Bylaws of the Company, effective as of January 24, 2023 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on January 30, 2023)

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, 2022,2023, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets – March 31, 20222023 and December 31, 2021;2022; (ii) Unaudited Consolidated Statements of Income – Three months ended March 31, 20222023 and 2021;2022; (iii) Unaudited Statements of Consolidated Comprehensive Income – Three months ended March 31, 20222023 and 2021;2022; (iv) Unaudited Consolidated Statements of Stockholders' Equity – Three months ended March 31, 20222023 and 2021;2022; (v) Unaudited Consolidated Statements of Cash Flows – Three months ended March 31, 20222023 and 2021;2022; 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, 2022,2023, formatted in Inline XBRL.


3837


Table of Contents

SIGNATURES

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

Evans Bancorp, Inc.

DATE

April 29, 2022May 02, 2023

/s/ David J. Nasca

David J. Nasca

President and CEO

(Principal Executive Officer)

DATE

April 29, 2022May 02, 2023

/s/ John B. Connerton

John B. Connerton

Treasurer

(Principal Financial Officer and Principal Accounting Officer)

3938