evbn-20240331x10q

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United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For quarterly period ended March 31, 2024

¨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 x
Non-accelerated filer ¨		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, 5,521,009 shares as of April 30, 2024.

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INDEX

EVANS BANCORP, INC. AND SUBSIDIARIES



PART 1. FINANCIAL INFORMATION		PAGE

Item 1.	Financial Statements

	Unaudited Consolidated Balance Sheets – March 31, 2024 and December 31, 2023	1

	Unaudited Consolidated Statements of Income – Three months ended March 31, 2024 and 2023	2

	Unaudited Consolidated Statements of Comprehensive (Loss) Income – Three months ended March 31, 2024 and 2023	3

	Unaudited Consolidated Statements of Changes in Stockholders’ Equity – Three months ended March 31, 2024 and 2023	4

	Unaudited Consolidated Statements of Cash Flows – Three months ended March 31, 2024 and 2023	5

	Notes to Unaudited Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	35

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	36

Item 3.	Defaults Upon Senior Securities	36

Item 4.	Mine Safety Disclosure	36

Item 5.	Other Information	36

Item 6.	Exhibits	37

	Signatures	38

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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2024 AND DECEMBER 31, 2023
(in thousands, except share and per share amounts)
	March 31,		December 31,
	2024		2023
ASSETS
Cash and due from banks	$	13,952	$	19,669
Interest-bearing deposits at banks		164,400		3,798
Securities:
Available for sale, at fair value and net of valuation allowance		268,476		275,680
(amortized cost: $326,885 at March 31, 2024; $330,725 at December 31, 2023)
Held to maturity, at amortized cost and net of valuation allowance		3,611		2,059
(fair value: $3,531 at March 31, 2024; $1,988 at December 31, 2023)
Federal Home Loan Bank common stock, at cost		4,384		4,914
Federal Reserve Bank common stock, at cost		3,676		3,097
Loans, net of allowance for credit losses of $22,287 at March 31, 2024
and $22,114 at December 31, 2023		1,699,589		1,698,832
Properties and equipment, net of accumulated depreciation of $12,950 at March 31, 2024
and $12,538 at December 31, 2023		15,173		15,397
Goodwill		1,768		1,768
Intangible assets		90		94
Bank-owned life insurance		43,004		42,758
Operating lease right-of-use asset		3,945		3,781
Other assets		37,876		36,816

TOTAL ASSETS	$	2,259,944	$	2,108,663

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand	$	399,558	$	390,238
NOW		381,798		345,279
Savings		715,495		649,621
Time		394,515		333,623
Total deposits		1,891,366		1,718,761

Securities sold under agreement to repurchase		6,873		9,475
Other borrowings		131,023		145,123
Operating lease liability		4,218		4,063
Other liabilities		20,666		21,845
Subordinated debt		31,203		31,177
Total liabilities		2,085,349		1,930,444

STOCKHOLDERS' EQUITY:
Common stock, $0.50 par value, 10,000,000 shares authorized; 5,603,541 and 5,601,308 shares issued at
March 31, 2024 and December 31, 2023, respectively, and 5,521,009 and 5,499,772 shares outstanding at
March 31, 2024 and December 31, 2023, respectively.		2,804		2,803
Capital surplus		82,268		82,712
Treasury stock, at cost, 82,532 and 101,536 shares at March 31, 2024 and
December 31, 2023, respectively		(2,892)		(3,656)
Retained earnings		137,161		138,631
Accumulated other comprehensive loss, net of tax		(44,746)		(42,271)
Total stockholders' equity		174,595		178,219

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,259,944	$	2,108,663

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2024 AND 2023
(in thousands, except share and per share amounts)
	Three Months Ended March 31,
	2024		2023
INTEREST INCOME
Loans	$	23,529	$	20,886
Interest-bearing deposits at banks		79		96
Securities:
Taxable		1,719		2,294
Non-taxable		47		89
Total interest income		25,374		23,365
INTEREST EXPENSE
Deposits		9,288		4,015
Other borrowings		1,627		1,499
Subordinated debt		552		526
Total interest expense		11,467		6,040
NET INTEREST INCOME		13,907		17,325
PROVISION FOR CREDIT LOSSES		266		(654)
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES		13,641		17,979
NON-INTEREST INCOME
Deposit service charges		681		613
Insurance service and fees		149		2,429
Bank-owned life insurance		246		224
Interchange fee income		466		493
Other		725		354
Total non-interest income		2,267		4,113
NON-INTEREST EXPENSE
Salaries and employee benefits		7,837		9,413
Occupancy		1,157		1,173
Advertising and public relations		171		156
Professional services		895		883
Technology and communications		1,409		1,356
Amortization of intangibles		4		100
FDIC insurance		325		350
Other		1,129		1,071
Total non-interest expense		12,927		14,502
INCOME BEFORE INCOME TAXES		2,981		7,590
INCOME TAX PROVISION		647		1,790
NET INCOME	$	2,334	$	5,800
Net income per common share-basic	$	0.42	$	1.07
Net income per common share-diluted	$	0.42	$	1.06
Weighted average number of common shares outstanding		5,507,760		5,444,352
Weighted average number of diluted shares outstanding		5,519,244		5,475,790

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
THREE MONTHS ENDED MARCH 31, 2024 AND 2023
(in thousands)
	Three Months Ended March 31,
		2024		2023

NET INCOME		$	2,334	$	5,800
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
Unrealized (loss) gain on available-for-sale securities:			(2,493)		3,635
Defined benefit pension plans:
Amortization of prior service cost			-		-
Amortization of actuarial loss			18		20
Total			18		20
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:			(2,475)		3,655
COMPREHENSIVE (LOSS) INCOME		$	(141)	$	9,455

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2024 AND 2023
(in thousands, except share and per share amounts)
							Accumulated
							Other
	Common		Capital		Retained		Comprehensive		Treasury
	Stock		Surplus		Earnings		Loss		Stock		Total
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 loss								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		6		114								120
Issued 12,671 restricted shares, net of forfeitures		6		(6)								-
Balance, March 31, 2023	$	2,787	$	81,210	$	123,533	$	(45,623)	$	(3,656)	$	158,251

Balance, December 31, 2023	$	2,803	$	82,712	$	138,631	$	(42,271)	$	(3,656)	$	178,219
Net Income						2,334						2,334
Other comprehensive loss								(2,475)				(2,475)
Cash dividends ($0.66 per common share)						(3,634)						(3,634)
Stock compensation expense				330								330
Repurchased 7,000 shares of Common Stock										(204)		(204)
Issued 2,233 shares in stock option exercises		1		24								25
Reissued 26,004 restricted shares, net of forfeitures		-		(798)		(170)				968		-
Balance, March 31, 2024	$	2,804	$	82,268	$	137,161	$	(44,746)	$	(2,892)	$	174,595

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2024 AND 2023
(in thousands)
	Three Months Ended March 31,
		2024		2023
OPERATING ACTIVITIES:
Interest received	$	25,129	$	23,428
Fees received		2,101		5,640
Interest paid		(11,355)		(5,409)
Cash paid to employees and vendors		(16,187)		(18,409)
Income taxes paid		(1,879)		(4,967)
Proceeds from sale of loans held for sale		3,492		4,828
Originations of loans held for sale		(3,404)		(4,800)

Net cash (used) provided by operating activities	$	(2,103)	$	311

INVESTING ACTIVITIES:
Available for sales securities:
Proceeds from sales, maturities, calls, and payments		3,854		3,333
Held to maturity securities:
Purchases		(1,906)		(309)
Proceeds from maturities, calls, and payments		353		3,551
Purchases of Federal Reserve Bank Stock		(579)		(6)
Redemption of FHLB Stock		530		5,073
Additions to properties and equipment		(188)		(364)
Proceeds from sales of assets		-		370
Net (increase) decrease in loans		(838)		13,898
Net cash provided by investing activities	$	1,226	$	25,546

FINANCING ACTIVITIES:
Proceeds from long-term borrowings	$	40,000	$	-
Repayments from long-term borrowings		(3,077)		(8,685)
Repayments from short-term borrowings, net		(53,602)		(102,484)
Net increase in deposits		172,620		78,242
Repurchase of treasury stock		(204)		-
Issuance of common stock		25		120

Net cash provided (used) in financing activities	$	155,762	$	(32,807)
Net increase (decrease) in cash and cash equivalents		154,885		(6,950)

CASH AND CASH EQUIVALENTS:
Beginning of period		23,467		23,054
End of period	$	178,352	$	16,104

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2024 AND 2023
(in thousands)
	Three Months Ended March 31,
		2024		2023

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

Net income	$	2,334	$	5,800

Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		301		387
Deferred tax expense		56		252
Provision for credit losses		266		(654)
Loss on sales of assets		-		31
Gain on loans sold		(87)		(26)
Stock compensation expense		330		306
Proceeds from sale of loans held for sale		3,492		4,828
Originations of loans held for sale		(3,404)		(4,800)
Changes in assets and liabilities affecting cash flow:
Other assets		(750)		(7,199)
Other liabilities		(4,641)		1,386

NET CASH PROVIDED BY OPERATING ACTIVITIES	$	(2,103)	$	311

See Notes to Unaudited Consolidated Financial Statements

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EVANS BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTH PERIOD ENDED MARCH 31, 2024 AND 2023

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies followed by Evans Bancorp, Inc. (the “Company”), a financial holding company, and its two direct, wholly-owned subsidiaries: (i) Evans Bank, National Association (the “Bank”), and the Bank’s subsidiary, Evans National Holding Corp. (“ENHC”); and (ii) Evans National Financial Services, LLC (“ENFS”), and ENFS’s subsidiary, The Evans Agency, LLC (“TEA”), 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. Unless the context otherwise requires, the term “Company” refers collectively to Evans Bancorp, Inc. and its subsidiaries. The Company conducts its business through its subsidiaries. It does not engage in other substantial business.

On November 30, 2023 the Company sold substantially all of the assets of TEA to Gallagher and ceased its insurance business for the Company. For comparative purposes it should be noted that insurance business activity from TEA is included within prior year balances throughout this Quarterly Report on Form 10-Q. For further information on the sale of TEA see Note 2 to the Company’s Consolidated Financial Statements included under Item 8 of the 2023 Annual Report on Form 10-K.

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

The results of operations for the three month period ended March 31, 2024 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, 2023 (the “10-K”).

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2. SECURITIES

The amortized cost of securities and their approximate fair value at March 31, 2024 and December 31, 2023 were as follows:



	March 31, 2024
	(in thousands)

	Amortized		Unrealized				Fair
	Cost		Gains		Losses		Value

Available for Sale:
Debt securities:
U.S. treasuries and government agencies	$	113,196	$	-	$	(19,153)	$	94,043
States and political subdivisions		6,255		1		(266)		5,990
Total debt securities		119,451		1		(19,419)		100,033

Mortgage-backed securities:
FNMA	$	65,334	$	-	$	(12,240)	$	53,094
FHLMC		36,241		-		(5,947)		30,294
GNMA		38,466		-		(7,937)		30,529
SBA		20,239		-		(2,484)		17,755
CMO		47,154		-		(10,383)		36,771
Total mortgage-backed securities	$	207,434	$	-	$	(38,991)	$	168,443

Total securities designated as available for sale	$	326,885	$	1	$	(58,410)	$	268,476

Held to Maturity:
Debt securities
States and political subdivisions	$	3,611	$	-	$	(80)	$	3,531

Total securities designated as held to maturity	$	3,611	$	-	$	(80)	$	3,531



	December 31, 2023
	(in thousands)

	Amortized		Unrealized				Fair
	Cost		Gains		Losses		Value

Available for Sale:
Debt securities:
U.S. treasuries and government agencies	$	114,152	$	-	$	(17,912)	$	96,240
States and political subdivisions		6,258		2		(231)		6,029
Total debt securities		120,410		2		(18,143)		102,269

Mortgage-backed securities:
FNMA	$	66,262	$	2	$	(11,294)	$	54,970
FHLMC		36,743		-		(5,569)		31,174
GNMA		38,793		-		(7,683)		31,110
SBA		20,776		-		(2,291)		18,485
CMO		47,741		-		(10,069)		37,672
Total mortgage-backed securities	$	210,315	$	2	$	(36,906)	$	173,411

Total securities designated as available for sale	$	330,725	$	4	$	(55,049)	$	275,680

Held to Maturity:
Debt securities
States and political subdivisions	$	2,059	$	1	$	(72)	$	1,988

Total securities designated as held to maturity	$	2,059	$	1	$	(72)	$	1,988

Available for sale securities with a total fair value of $114 million and $172 million were pledged as collateral to secure public deposits and for other purposes required or permitted by law at March 31, 2024 and December 31, 2023, respectively.

The scheduled maturities of debt and mortgage-backed securities at March 31, 2024 are summarized below. All maturity amounts are contractual maturities. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call premiums.

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	March 31, 2024
	Amortized		Estimated
	cost		fair value
	(in thousands)

Debt securities available for sale:

Due in one year or less	$	4,750	$	4,729
Due after one year through five years		42,025		38,344
Due after five years through ten years		48,680		40,278
Due after ten years		23,996		16,682
	$	119,451	$	100,033

Mortgage-backed securities
available for sale	$	207,434	$	168,443
Total	$	326,885	$	268,476

Debt securities held to maturity:

Due in one year or less	$	2,946	$	2,944
Due after one year through five years		295		276
Due after five years through ten years		370		311
Due after ten years		-		-
Total	$	3,611	$	3,531

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

There were no gross realized gains or losses from sales of investment securities for the three month periods ended March 31, 2024 and 2023.

Management has assessed the securities available for sale in an unrealized loss position at March 31, 2024 and determined that it expected to recover the amortized cost basis of its securities. As of March 31, 2024, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its impaired 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. As a result, the Company does not hold an allowance for credit losses relating to securities. 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 creditworthiness of the Company’s portfolio is largely reliant on the ability of U.S. government agencies such as Federal Home Loan Bank (“FHLB”), Federal National Mortgage Association (“FNMA”), 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 going forward.

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Information regarding unrealized losses within the Company’s available for sale and held to maturity securities at March 31, 2024 and December 31, 2023 is summarized below. The securities are primarily U.S. government sponsored entities securities or municipal securities. All unrealized losses are related to market interest rate fluctuations and not indicative of credit loss.



	March 31, 2024

		Less than 12 months				12 months or longer				Total
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses
		(in thousands)
Available for Sale:
Debt securities:
U.S. treasuries and government agencies	$	-	$	-	$	94,043	$	(19,153)	$	94,043	$	(19,153)
States and political subdivisions		196		(4)		4,838		(262)		5,034		(266)
Total debt securities		196		(4)		98,881		(19,415)		99,077		(19,419)

Mortgage-backed securities:
FNMA	$	74	$	-	$	52,965	$	(12,240)	$	53,039	$	(12,240)
FHLMC		89		-		30,173		(5,947)		30,262		(5,947)
GNMA		-		-		30,529		(7,937)		30,529		(7,937)
SBA		-		-		17,755		(2,484)		17,755		(2,484)
CMO		-		-		36,771		(10,383)		36,771		(10,383)
Total mortgage-backed securities	$	163	$	-	$	168,193	$	(38,991)	$	168,356	$	(38,991)

Held to Maturity:
Debt securities:
States and political subdivisions	$	2,945	$	(2)	$	586	$	(78)	$	3,531	$	(80)

Total temporarily impaired
securities	$	3,304	$	(6)	$	267,660	$	(58,484)	$	270,964	$	(58,490)


	December 31, 2023

		Less than 12 months				12 months or longer				Total
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses
		(in thousands)
Available for Sale:
Debt securities:
U.S. treasuries and government agencies	$	-		-	$	95,240		(17,912)	$	95,240	$	(17,912)
States and political subdivisions		878		(2)		4,194		(229)		5,072		(231)
Total debt securities		878		(2)		99,434		(18,141)		100,312		(18,143)

Mortgage-backed securities:
FNMA	$	-		-	$	54,831		(11,294)	$	54,831	$	(11,294)
FHLMC		-		-		31,174		(5,569)		31,174		(5,569)
GNMA		-		-		31,110		(7,683)		31,110		(7,683)
SBA		-		-		18,485		(2,291)		18,485		(2,291)
CMO		-		-		37,674		(10,069)		37,674		(10,069)
Total mortgage-backed securities	$	-	$	-	$	173,274	$	(36,906)	$	173,274	$	(36,906)

Held to Maturity:
Debt securities:
States and political subdivisions	$	444	$	(1)	$	643	$	(71)	$	1,087	$	(72)

Total temporarily impaired
securities	$	1,322	$	(3)	$	273,351	$	(55,118)	$	274,673	$	(55,121)

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3. LOANS AND THE ALLOWANCE FOR CREDIT 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, 2024		December 31, 2023
Mortgage loans on real estate:	(in thousands)
Residential mortgages	$	440,675	$	443,788
Commercial and multi-family		857,107		854,565
Construction-Residential		3,489		3,255
Construction-Commercial		114,869		114,623
Home equities		80,120		81,412
Total real estate loans		1,496,260		1,497,643

Commercial and industrial loans		225,947		223,100
Consumer and other loans		776		1,066
Unaccreted yield adjustments*		(1,107)		(863)
Total gross loans		1,721,876		1,720,946

Allowance for credit losses		(22,287)		(22,114)

Loans, net	$	1,699,589	$	1,698,832

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

As of March 31, 2024, the outstanding principal balance and the carrying amount of acquired credit-deteriorated loans totaled $0.8 million, and $0.7 million, respectively. There were no valuation allowances for specifically identified impairment attributable to acquired credit-impaired loans at March 31, 2024.

There were $944 million and $566 million in residential and commercial mortgage loans pledged to FHLBNY to serve as collateral for potential borrowings as of March 31, 2024 and December 31, 2023, respectively.

The Company may also sell certain fixed rate residential mortgages to FNMA, FHLMC and FHLB while maintaining the servicing rights for those mortgages. At March 31, 2024 and December 31, 2023, the Company had loan servicing portfolio principal balances of $114 million and $113 million, respectively, upon which it earned servicing fees. In the three month period ended March 31, 2024, the Company sold $3.4 million of residential mortgages compared with $1.3 million in the three months ended March 31, 2023.

The fair value of the mortgage servicing rights for that portfolio was $1.1 million at each of March 31, 2024 and December 31, 2023. There were no residential mortgages held for sale at March 31, 2024 and December 31, 2023.

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 credit 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 summarize amortized cost of loans by year of origination and internally assigned credit grades:

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(in thousands)	Term Loans Amortized Cost Basis by Origination Year
As of March 31, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost Basis		Total
Commercial and industrial loans
Risk rating
Pass	$	14,680	$	22,780	$	37,089	$	19,383	$	11,442	$	11,929	$	82,532	$	199,835
Special Mention		-		947		2,516		2,666		820		1,337		13,567		21,853
Substandard		-		-		450		2		427		342		3,027		4,248
Doubtful/Loss		-		-		-		-		-		-		-		-
Total	$	14,680	$	23,727	$	40,055	$	22,051	$	12,689	$	13,608	$	99,126	$	225,936

Current period gross writeoffs	$	-	$	59	$	-	$	-	$	-	$	8	$	-	$	67

Commercial real estate mortgages*
Risk rating
Pass	$	14,168	$	144,191	$	194,358	$	157,281	$	95,303	$	322,479	$	-	$	927,780
Special Mention		-		-		4,008		393		-		14,727		-		19,128
Substandard		-		-		4,756		11,672		-		8,590		-		25,018
Doubtful/Loss		-		-		-		-		-		-		-		-
Total	$	14,168	$	144,191	$	203,122	$	169,346	$	95,303	$	345,796	$	-	$	971,926

Current period gross writeoffs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Consumer and other
Payment performance
Performing	$	146	$	527	$	156	$	24	$	10	$	23	$	124	$	1,010
Nonperforming		-		-		-		-		-		-		-		-
Total	$	146	$	527	$	156	$	24	$	10	$	23	$	124	$	1,010

Current period gross writeoffs	$	31	$	3	$	-	$	-	$	-	$	-	$	-	$	34

Residential mortgages*
Payment performance
Performing	$	6,679	$	36,281	$	71,441	$	98,508	$	68,276	$	158,033	$	-	$	439,218
Nonperforming		-		365		263		571		129		3,523		-		4,851
Total	$	6,679	$	36,646	$	71,704	$	99,079	$	68,405	$	161,556	$	-	$	444,069

Current period gross writeoffs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Home equities
Payment performance
Performing	$	926	$	7,343	$	2,668	$	559	$	556	$	2,541	$	63,723	$	78,316
Nonperforming		-		-		-		-		-		1		618		619
Total	$	926	$	7,343	$	2,668	$	559	$	556	$	2,542	$	64,341	$	78,935

Current period gross writeoffs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

*Includes construction loans
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(in thousands)	Term Loans Amortized Cost Basis by Origination Year
As of December 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Commercial and industrial loans
Risk rating
Pass	$	24,338	$	42,967	$	21,614	$	12,174	$	5,686	$	6,539	$	86,459	$	199,777
Special Mention		10		1,955		2,739		510		268		1,867		11,705		19,054
Substandard		-		2		3		460		-		838		2,955		4,258
Doubtful/Loss		-		-		-		-		-		-		-		-
Total	$	24,348	$	44,924	$	24,356	$	13,144	$	5,954	$	9,244	$	101,119	$	223,089

Current period gross writeoffs	$	-	$	-	$	-	$	-	$	4	$	3	$	-	$	7

Commercial real estate mortgages*
Risk rating
Pass	$	132,525	$	194,197	$	169,943	$	95,264	$	66,243	$	263,628	$	-	$	921,800
Special Mention		-		6,634		397		861		9,988		8,094		-		25,974
Substandard		-		-		11,737		-		6,733		3,617		-		22,087
Doubtful/Loss		-		-		-		-		-		-		-		-
Total	$	132,525	$	200,831	$	182,077	$	96,125	$	82,964	$	275,339	$	-	$	969,861

Current period gross writeoffs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Consumer and other
Payment performance
Performing	$	597	$	176	$	27	$	12	$	13	$	20	$	144	$	989
Nonperforming		-		-		-		-		-		-		-		-
Total	$	597	$	176	$	27	$	12	$	13	$	20	$	144	$	989

Current period gross writeoffs	$	145	$	18	$	1	$	-	$	-	$	1	$	-	$	165

Residential mortgages*
Payment performance
Performing	$	37,536	$	72,624	$	100,308	$	69,454	$	17,829	$	144,499	$	-	$	442,250
Nonperforming		156		270		576		351		204		3,044		-		4,601
Total	$	37,692	$	72,894	$	100,884	$	69,805	$	18,033	$	147,543	$	-	$	446,851

Current period gross writeoffs	$	-	$	-	$	-	$	1	$	-	$	-	$	-	$	1

Home equities
Payment performance
Performing	$	7,833	$	2,768	$	590	$	588	$	571	$	2,126	$	65,165	$	79,641
Nonperforming		-		-		-		-		-		1		514		515
Total	$	7,833	$	2,768	$	590	$	588	$	571	$	2,127	$	65,679	$	80,156

Current period gross writeoffs	$	-	$	-	$	-	$	-	$	-	$	25	$	-	$	25

*Includes construction loans

The amortized cost of criticized assets of $70 million included $13 million of loans in the Company’s hotel loan portfolio at March 31, 2024. At December 31, 2023 the amortized cost of criticized assets was $72 million including $19 million of loans in the Company’s hotel loan portfolio.

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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, 2024
	(in thousands)

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

Commercial and industrial	$	220,075	$	4,138	$	23	$	-	$	1,700	$	225,936
Residential real estate:
Residential		434,341		1,388		-		-		4,851		440,580
Construction		3,489		-		-		-		-		3,489
Commercial real estate:
Commercial		818,818		18,374		-		828		18,755		856,775
Construction		113,883		-		-		-		1,268		115,151
Home equities		77,239		920		157		-		619		78,935
Consumer and other		987		7		16		-		-		1,010
Total Loans	$	1,668,832	$	24,827	$	196	$	828	$	27,193	$	1,721,876



	December 31, 2023
	(in thousands)

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

Commercial and industrial	$	220,602	$	518	$	130	$	-	$	1,839	$	223,089
Residential real estate:
Residential		437,471		1,173		341		-		4,602		443,587
Construction		3,264		-		-		-		-		3,264
Commercial real estate:
Commercial		831,375		4,360		-		134		19,000		854,869
Construction		110,727		2,326		671		-		1,268		114,992
Home equities		77,080		1,906		655		-		515		80,156
Consumer and other		959		27		3		-		-		989
Total Loans	$	1,681,478	$	10,310	$	1,800	$	134	$	27,224	$	1,720,946

Allowance for Credit losses

ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments requires an allowance for credit losses to 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. 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 through 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 this 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 remaining contractual life of each portfolio. Model forecasts may be adjusted for inherent limitations of biases that have been identified through independent validation and 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.

The Company also estimates losses attributable to specific troubled credits identified through both normal and targeted credit review processes and includes all loans on nonaccrual status. The amounts of individually analyzed 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

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on current 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 considers the required repayment of any first lien positions related to collateral property.

The following tables present the activity in the allowance for credit losses according to portfolio segment for the three month periods ended March 31, 2024 and 2023.



	Three months ended March 31, 2024
	(in thousands)
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total

Allowance for credit losses:
Beginning balance	$	5,241	$	12,548	$	8	$	3,883	$	434	$	22,114
Charge-offs		(67)		-		(34)		-		-		(101)
Recoveries		2		-		3		3		-		8
Provision		139		(1)		32		177		(81)		266
Ending balance	$	5,315	$	12,547	$	9	$	4,063	$	353	$	22,287

*Includes construction loans



	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	$	6	$	3,720	$	403	$	22,173
Charge-offs		-		-		(30)		-		-		(30)
Recoveries		30		-		4		-		-		34
Provision		(67)		(186)		24		(342)		(83)		(654)
Ending balance	$	5,267	$	12,554	$	4	$	3,378	$	320	$	21,523

* Includes construction loans

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The following tables present the allowance for credit losses and recorded investment on loans by segment as of March 31, 2024 and December 31, 2023:



	March 31, 2024
	(in thousands)
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for credit
losses:
Ending balance:

Individually evaluated for impairment		53		719		-		13		-		785

Collectively evaluated for impairment		5,262		11,828		9		4,050		353		21,502
Total	$	5,315	$	12,547	$	9	$	4,063	$	353	$	22,287

Loans:
Ending balance:

Individually evaluated for impairment		2,107		22,810		-		5,356		906		31,179

Collectively evaluated for impairment		223,840		949,166		776		438,808		79,214		1,691,804
Total	$	225,947	$	971,976	$	776	$	444,164	$	80,120	$	1,722,983

* Includes construction loans



	December 31, 2023
	(in thousands)
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for credit
losses:
Ending balance:

Individually evaluated for impairment		36		719		-		-		-		755

Collectively evaluated for impairment		5,205		11,829		8		3,883		434		21,359
Total	$	5,241	$	12,548	$	8	$	3,883	$	434	$	22,114

Loans:
Ending balance:

Individually evaluated for impairment		1,869		23,044		-		5,146		761		30,820

Collectively evaluated for impairment		221,231		946,144		1,066		441,897		80,651		1,690,989
Total	$	223,100	$	969,188	$	1,066	$	447,043	$	81,412	$	1,721,809

* Includes construction loans

The Company’s reserve for off-balance sheet credit exposures was not material at March 31, 2024 and December 31, 2023.

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Nonaccrual Loans

The following tables provide amortized costs, at the class level, for nonaccrual loans as of the dates indicated:


							Three Months Ended
	March 31, 2024						March 31, 2024
	Amortized Cost with Allowance		Amortized Cost without Allowance		Total		Interest Income Recognized
	(in thousands)
Commercial and industrial	$	66	$	1,634	$	1,700	$	-
Residential real estate:
Residential		160		4,691		4,851		3
Construction		-		-		-		-
Commercial real estate:
Commercial		6,569		12,186		18,755		-
Construction		1,268		-		1,268		-
Home equities		-		619		619		2
Consumer and other		-		-		-		-
Total nonaccrual loans	$	8,063	$	19,130	$	27,193	$	5


							Three Months Ended
	March 31, 2023						March 31, 2023
	Amortized Cost with Allowance		Amortized Cost without Allowance		Total		Interest Income Recognized
	(in thousands)
Commercial and industrial	$	-	$	2,520	$	2,520	$	-
Residential real estate:
Residential		151		3,720		3,871		8
Construction		-		-		-		-
Commercial real estate:
Commercial		-		6,561		6,561		-
Construction		1,301		7,265		8,566		-
Home equities		29		418		447		-
Consumer and other		-		-		-		-
Total nonaccrual loans	$	1,481	$	20,484	$	21,965	$	8

Collateral-dependent loans are loans that we expect the repayment to be provided substantially through the operation or sale of the collateral of the loan and we have determined that the borrower is experiencing financial difficulty. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for selling costs. As of March 31, 2024 and December 31, 2023, there were $27 million of collateral-dependent loans, secured mainly by real estate and equipment. There have been no significant changes to the collateral that secures the collateral-dependent assets.

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Modifications to Borrowers Experiencing Financial Difficulty

The amendments in ASU 2022-02 eliminated the recognition and measurement 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, 2024 and March 31,2023:


		March 31, 2024			March 31, 2023
(in thousands)	Term Extension		Total Class of Receivable		Term Extension		Total Class of Receivable
Commercial and industrial	$	-	-	%	$	-	-	%
Residential real estate:
Residential		319	0.07			104	0.00
Construction		-	-			-	-
Commercial real estate:
Commercial		-	-			-	-
Construction		-	-			-	-
Home equities		-	-			-	-
Consumer and other		-	-	-		-	-	-
Total nonaccrual loans	$	319	0.02	%	$	104	0.00	%

The financial impacts of the residential mortgage modifications made to borrowers experiencing financial difficulty during the three months ended March 31, 2024 was a maturity extension of six months. 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, 2024 and March 31, 2023, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the first three months of 2024 and 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 were current during the first three months of 2024 and 2023.

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4. COMMON EQUITY AND EARNINGS PER SHARE DATA

The common stock per share information is based upon the weighted average number of shares outstanding during each period. For the three month periods ended March 31, 2024 and 2023 the Company had an average of 11,484 and 31,438 dilutive shares outstanding, respectively.

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and not included in calculating diluted earnings per share. For the three month periods ended March 31, 2024 and 2023, there was an average of 78,080 and 53,910 potentially anti-dilutive shares outstanding, respectively. Potentially anti-dilutive shares outstanding were not included in calculating diluted earnings per share because their effect was anti-dilutive.

5. OTHER COMPREHENSIVE INCOME (LOSS)

The following tables summarize the changes in the components of accumulated other comprehensive income (loss) during the three month periods ended March 31, 2024 and 2023:


	Balance at December 31, 2023		Net Change		Balance at March 31, 2024
	(in thousands)
Net unrealized loss on investment securities	$	(40,741)	$	(2,493)	$	(43,234)
Net defined benefit pension plan adjustments		(1,530)		18		(1,512)
Total	$	(42,271)	$	(2,475)	$	(44,746)


	Balance at December 31, 2022		Net Change		Balance at March 31, 2023
	(in thousands)
Net unrealized loss on investment securities	$	(47,348)	$	3,635	$	(43,713)
Net defined benefit pension plan adjustments		(1,930)		20		(1,910)
Total	$	(49,278)	$	3,655	$	(45,623)



	Three months ended March 31, 2024						Three months ended March 31, 2023
	(in thousands)						(in thousands)
	Before-Tax Amount		Income Tax (Provision) Benefit		Net-of-Tax Amount		Before-Tax Amount		Income Tax (Provision) Benefit		Net-of-Tax Amount
Unrealized (loss) gain on investment
securities:
Unrealized (loss) gain on investment
securities	$	(3,364)	$	871	$	(2,493)	$	4,884	$	(1,249)	$	3,635

Defined benefit pension plan
adjustments:
Amortization of prior service cost		-		-		-		-		-		-
Amortization of actuarial loss		25		(7)		18		27		(7)		20
Net change		25		(7)		18		27		(7)		20

Other comprehensive (loss) income	$	(3,339)	$	864	$	(2,475)	$	4,911	$	(1,256)	$	3,655

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6. NET PERIODIC BENEFIT COSTS

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

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

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

The following table presents the net periodic cost for the Bank’s defined benefit pension plan and supplemental executive retirement plan for the three month period ended March 31, 2024 and 2023:




		Three months ended March 31,

		(in thousands)
					Supplemental Executive
	Pension Benefits				Retirement Plan

	2024		2023		2024		2023

Service cost	$	-	$	-	$	31	$	36
Interest cost		57		62		63		62
Expected return on plan assets		(64)		(67)		-		-
Amortization of prior service cost		-		-		-		-
Amortization of the net loss		25		27		-		-
Net periodic cost (benefit)	$	18	$	22	$	94	$	98

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

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7. REVENUE RECOGNITION OF NON-INTEREST INCOME

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

As a result of the sale of TEA, insurance services revenue recognized during 2024 is a result of services provided by the Banks’ wealth management department. TEA and the Bank’s wealth management activity are both included in the comparative 2023 balances. See Note 2 to the Company’s Consolidated Financial Statements included under Item 8 of the 2023 Annual Report on Form 10-K for more information on the sale of TEA.

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

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

TEA had 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.

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A disaggregation of the total insurance service and other fees for the three months ended March 31, 2024 and 2023 is provided in the tables below:



		Three months ended March 31,
		2024		2023
		(in thousands)
Commercial property and casualty insurance commissions	$	-	$	889
Personal property and casualty insurance commissions		-		739
Employee benefits sales commissions		-		194
Profit sharing and contingent revenue		-		427
Wealth management and other financial services		149		127
Other insurance-related revenue		-		53
Total insurance service and other fees	$	149	$	2,429

8. FAIR VALUE MEASUREMENT

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

There are three levels of inputs to fair value measurement:

Level 1 inputs are quoted prices for identical instruments in active markets;

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

Level 3 inputs are unobservable inputs.

Observable market data should be used when available.

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FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A RECURRING BASIS

The following table presents, for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023, respectively:


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

March 31, 2024
Securities available-for-sale:
US treasuries and government agencies	$	-	$	94,043	$	-	$	94,043
States and political subdivisions		-		5,990		-		5,990
Mortgage-backed securities		-		168,443		-		168,443

December 31, 2023
Securities available-for-sale:
US treasuries and government agencies	$	-	$	96,240	$	-	$	96,240
States and political subdivisions		-		6,029		-		6,029
Mortgage-backed securities		-		173,411		-		173,411

Securities available for sale

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

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

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

ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

The Company is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets using fair value measurements. The following table presents for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a nonrecurring basis March 31, 2024 and December 31, 2023:



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

March 31, 2024
Collateral dependent individually analyzed loans	$	-	$	-	$	7,273	$	7,273

December 31, 2023
Collateral dependent individually analyzed loans	$	-	$	-	$	7,147	$	7,147

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Individually analyzed loans

Collateral dependent loans carried at fair value have been partially charged-off or receive individually analyzed allocations of the allowance for credit losses. The Company evaluates and values collateral dependent individually analyzed loans at the time the loan is identified to be individually analyzed, 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 individually analyzed 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 individually analyzed 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 individually analyzed, whichever occurs first. Subsequent to the downgrade or reaching 90 days past due, if the loan remains outstanding and individually analyzed for at least one year or 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 individually analyzed loans had a gross value of $8.1 million, with an allowance for credit loss of $0.8 million, at March 31, 2024 compared with $7.9 million and $0.8 million, respectively, at December 31, 2023.

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, 2024				December 31, 2023
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
		(in thousands)				(in thousands)
Financial assets:
Level 1:
Cash and cash equivalents	$	178,352	$	178,352	$	23,467	$	23,467
Level 2:
Available for sale securities		268,476		268,476		275,680		275,680
FHLB and FRB stock		8,060		N/A		8,011		N/A
Level 3:
Held to maturity securities		3,611		3,531		2,059		1,988
Loans, net		1,699,589		1,608,565		1,698,832		1,606,666

Financial liabilities:
Level 1:
Demand deposits	$	399,558	$	399,558	$	390,238	$	390,238
NOW deposits		381,798		381,798		345,279		345,279
Savings deposits		715,495		715,495		649,621		649,621
Level 2:
Securities sold under agreement to
repurchase		6,873		6,873		9,475		9,475
Other borrowed funds		131,023		130,699		145,123		145,055
Subordinated debt		31,203		29,847		31,177		29,563
Level 3:
Time deposits		394,515		392,997		333,623		331,675

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9. SEGMENT INFORMATION

Prior to the sale of TEA, the Company was comprised of two primary business segments, banking and insurance agency activities. For comparative purposes the following tables set forth information regarding these segments for the three month periods ended March 31, 2024 and 2023. For further information on the sale of TEA see Note 2 to the Company’s Consolidated Financial Statements included under Item 8 of the 2023 Annual Report on Form 10-K.




	Three months ended March 31, 2024
		Banking		Insurance Agency
		Activities		Activities		Total
		(in thousands)

Net interest income	$	13,907	$	-	$	13,907
Provision for credit losses		266		-		266
Net interest income after
provision for credit losses		13,641		-		13,641
Insurance service and fees		149		-		149
Other non-interest income		2,118		-		2,118
Amortization expense		4		-		4
Other non-interest expense		12,923		-		12,923
Income before income taxes		2,981		-		2,981
Income tax provision		647		-		647
Net income	$	2,334	$	-	$	2,334




	Three months ended March 31, 2023
		Banking		Insurance Agency
		Activities		Activities		Total
		(in thousands)

Net interest income	$	17,325	$	-	$	17,325
Provision for credit losses		(654)		-		(654)
Net interest income after
provision for credit losses		17,979		-		17,979
Insurance service and fees		123		2,306		2,429
Other non-interest income		1,684		-		1,684
Amortization expense		5		95		100
Other non-interest expense		12,557		1,845		14,402
Income before income taxes		7,224		366		7,590
Income tax provision		1,707		83		1,790
Net income	$	5,517	$	283	$	5,800

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10. CONTINGENT LIABILITIES AND COMMITMENTS

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



	March 31,		December 31,
	2024		2023
	(in thousands)

Commitments to extend credit	$	468,873	$	431,085
Standby letters of credit		4,173		3,883
Total	$	473,046	$	434,968

Commitments to extend credit and standby letters of credit include some exposure to credit loss in the event of nonperformance by the customer. The Bank’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded on the Company’s unaudited consolidated balance sheets. Because these instruments have fixed maturity dates, and because they may expire without being drawn upon, they do not necessarily represent cash requirements of the Bank. The Bank did not incur any losses on its commitments and did not record a reserve for its commitments during the first three months of 2024 or during 2023.

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 when they are issued by FASB. The Company did not adopt any accounting pronouncements during its current fiscal year that had a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures. The following accounting standards have been recently issued but are not yet required to be adopted as of March 31, 2024. Management is currently evaluating the effect of the updated guidance these accounting standards will have on the Company’s financial statement disclosures.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The updated accounting guidance requires expanded reportable segment disclosures, primarily related to significant segment expenses which are regularly provided to the company’s Chief Operating Decision Maker. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within annual periods beginning after December 15, 2024. Retrospective application is required.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The updated accounting guidance requires expanded income tax disclosures, including the disaggregation of existing disclosures related to the tax rate reconciliation and income taxes paid. The guidance is effective for annual periods beginning after December 15, 2024. Prospective application is required, with retrospective application permitted.

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,

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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; the cost and availability of funds; 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; credit losses in excess of the Company’s allowance for credit 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 Securities and Exchange Commission (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, 2023 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 of the quarter ended March 31, 2024 to the quarter ended March 31, 2023 as well as the trailing quarter ended December 31, 2023. Financial information for the quarter ended March 31, 2023 can be found in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, as filed with the SEC on May 2, 2023.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

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

Significant accounting policies followed by the Company are presented in Note 1 – “Organization and Summary of Significant Accounting Policies” to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K for the year ended December 31, 2023. These policies, along with the disclosures presented in the other Notes to the Company's Audited Consolidated Financial Statements contained in its Annual Report on Form 10-K and in this financial review, provide information on how significant assets and liabilities are presented in the Company’s Unaudited Consolidated Financial Statements and how those values are determined.

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

Allowance for Credit Losses

The ACL on loans is management’s estimate of expected lifetime credit losses on loans carried at amortized cost. The ACL on loans is established through a provision for credit losses recognized in the Consolidated 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, 2024 the ACL on loans totaled $22.3 million, compared to $21.5 million at March 31, 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, 2024, December 31, 2023 and March 31, 2023, the ACL allocated to the total commercial portfolio was $17.1 million, $17.8 million and $17.8 million, respectively.

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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 segments, the Company utilizes a discounted cash flow (“DCF”) methodology to estimate credit losses over the expected life of the loan. The methodology incorporates a probability of default and loss given default framework. Loss given default is estimated based on historical credit loss experience. Probability of default is estimated utilizing a regression model that incorporates econometric factors. The model utilizes forecasted econometric factors with a one-year reasonable and supportable forecast period and one-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 risk factors reflecting management’s view of how losses may vary from those represented by quantitative 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.

Because the methodology is based 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 further increases in the ACL on loans; conversely, improving conditions or assumptions could lead to further reductions in the ACL on loans.

In estimating the ACL 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 ACL 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 result was an ACL allocated to the total commercial loan portfolio that ranged between $13.0 million and $28.8 million at March 31, 2024. 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, 2024 in estimation of the ACL on loans recognized on the Consolidated Balance Sheet.

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

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ANALYSIS OF FINANCIAL CONDITION

Loan Activity

Total gross loans were $1.7 billion at March 31, 2024, December 31, 2023 and March 31, 2023. Loans secured by real estate were $1.5 billion at March 31, 2024 and December 31, 2023 compared with $1.4 billion at March 31, 2023. Residential real estate loans, including construction loans, were $444 million at March 31, 2024 compared with $447 million, a $3 million, or less than 1%, decrease from December 31, 2023, but a $3 million, or 1%, increase from March 31, 2023. Commercial real estate loans, including construction loans, were $972 million at March 31, 2024, $3 million or less than 1% higher than at December 31, 2023, and $76 million, or 8% higher than at March 31, 2023.

In the first quarter of 2024, residential mortgage originations were $10 million compared with the previous quarter’s originations of $12 million and $8 million in the first quarter of 2023. The Company sold $3 million of residential mortgages in the first quarter of 2024 and $1 million in the year earlier period. Management decides whether to keep or sell residential mortgage loans at the time of origination based on interest rate risk management and the risk-adjusted return of alternative investment sources such as mortgage-backed securities.

The C&I portfolio was $226 million at March 31, 2024, representing a $3 million, or 1%, increase from December 31, 2023. When compared with March 31, 2023, C&I loans decreased $15 million or 6%. Funding levels of C&I lines of credit are at low levels compared to what we have experienced historically, which impacted the growth in that portfolio.

Credit Quality of Loan Portfolio

Non-performing loans, defined as accruing loans greater than 90 days past due and nonaccrual loans, totaled $28 million, or 1.62% of total loans outstanding at March 31, 2024, compared with $27 million, or 1.59% of total loans outstanding, as of December 31, 2023 and $24 million, or 1.45% of total loans outstanding, as of March 31, 2023.

Commercial credits graded as “special mention” and “substandard,” or the criticized loan portfolio, were $70 million at March 31, 2024, a $1 million decrease from $71 million at December 31, 2023, and a $20 million decrease from $90 million at March 31, 2023. 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 rating are the credit quality indicators used by management to monitor credit risk in its commercial loan 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 recorded a $0.3 million provision for credit losses during the three months ended March 31, 2024, primarily due to slower prepayment rates and higher net loan charge-offs, partially offset by improving economic factors.

The allowance for credit losses totaled $22.3 million or 1.28% of total loans outstanding at March 31, 2024, compared with $22.1 million, or 1.29% of total loans outstanding as of December 31, 2023, and $21.5 million, or 1.30% of total loans outstanding at March 31, 2023.

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Investing Activities

Total investment securities were $272 million at March 31, 2024, compared with $278 million at December 31, 2023 and $370 million at March 31, 2023. The decrease from the first quarter of 2023 was mainly due to the sale of $73 million of securities during the fourth quarter of 2023 as the company strategically repositioned the balance sheet. Interest-bearing deposits at other banks, which consist of overnight funds kept at correspondent banks and the Federal Reserve, were $164 million at March 31, 2024 compared to $4 million at each of December 31, 2023, and March 31, 2023. 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 15% of average interest-earning assets in first quarter of 2024, 17% in the fourth quarter of 2023, and 19% in the first quarter of 2023.

The Company’s highest concentration in its securities portfolio was in available for sale U.S. government sponsored mortgage-backed securities which comprised 62% of total investment securities at March 31, 2024 and December 31, 2023 and 54% March 31, 2023. Tax-advantaged debt securities issued by state and political subdivisions as a percent of the total investment securities portfolio were 4% in the first quarter of 2024, 3% in the fourth quarter of 2023 and 2% in the first quarter of 2023.

The total net unrealized loss position of the available for sale investment portfolio was $58 million at March 31, 2024, compared with $55 million at December 31, 2023 and $59 million March 31, 2023. The securities in an unrealized loss position at the end of the first quarter of 2024 generally reflect an increase in market interest rates. Management believes that the credit quality of the securities portfolio as a whole is strong. In addition, the Company has the ability and intent to hold these securities until their fair value recovers to their amortized cost.

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, 2024 were $1.9 billion, a $173 million, or 10%, increase from December 31, 2023, and an increase of $41 million, or 2%, from March 31, 2023. The change from December 31, 2023 largely reflected an increase in brokered time deposits and deposits from municipal relationships. From a product perspective, deposit increases were in municipal saving deposits of $69 million, brokered time deposits of $55 million, NOW deposits of $37 million, demand deposits of $9 million, and consumer time deposits of $6 million. Offsetting those increases was a decrease in commercial savings deposits of $3 million. When compared to last year’s first quarter, there were increases in NOW deposits of $114 million, consumer time deposits of $56 million, brokered time deposits of $48 million and municipal savings deposits of $14 million. Offsetting those increases were decreases in demand deposits of $84 million, commercial savings of $58 million and consumer savings of $49 million.

Total borrowings decreased from $145 million at December 31, 2023 to $131 million at March 31, 2024. At March 31, 2024 the Bank had $43 million in long-term Federal Home Loan Bank of New York (“FHLBNY”) advances compared with $6 million at December 31, 2023 and $11 million at March 31, 2023. As of March 31, 2024 the Bank did not have overnight borrowings at the FHLB compared with $53 million at December 31, 2023 and $69 million at March 31, 2023. During the first quarter of 2024 the Bank lengthened the maturities of overnight borrowings with the FHLB. Additionally, the Bank has the ability to borrow from the Federal Reserve. The Bank had $88 million and $86 million in short-term borrowings with the Federal Reserve at March 31, 2024 and December 31, 2023, respectively. There were no short-term borrowings at the Federal Reserve at March 31, 2023.

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ANALYSIS OF RESULTS OF OPERATIONS

Average Balance Sheets

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, 2024						Three months ended March 31, 2023
	Average		Interest				Average		Interest
	Outstanding		Earned/		Yield/		Outstanding		Earned/		Yield/
	Balance		Paid		Rate		Balance		Paid		Rate
	(dollars in thousands)						(dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net	$	1,703,320	$	23,529	5.56	%	$	1,641,162	$	20,886	5.16	%
Taxable securities		275,317		1,719	2.51	%		370,798		2,294	2.51	%
Tax-exempt securities		5,658		47	3.37	%		11,531		89	3.13	%
Interest bearing deposits at banks		18,889		79	1.68	%		9,824		96	3.97	%

Total interest-earning assets		2,003,184	$	25,374	5.09	%		2,033,315	$	23,365	4.66	%

Non interest-earning assets:

Cash and due from banks		18,189						16,796
Premises and equipment, net		15,329						16,900
Other assets		84,128						100,240

Total Assets	$	2,120,830					$	2,167,251

LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW	$	347,908	$	1,989	2.30	%	$	260,242	$	482	0.75	%
Savings		658,656		3,692	2.25	%		796,793		1,860	0.95	%
Time deposits		342,358		3,607	4.24	%		257,733		1,673	2.63	%
Other borrowed funds		127,130		1,587	5.02	%		134,719		1,496	4.50	%
Subordinated debt		31,187		552	7.12	%		31,086		526	6.86	%
Securities sold U/A to repurchase		8,631		40	1.86	%		7,248		3	0.17	%

Total interest-bearing liabilities		1,515,870	$	11,467	3.04	%		1,487,821	$	6,040	1.65	%

Noninterest-bearing liabilities:
Demand deposits		404,053						503,945
Other		23,943						20,487
Total liabilities	$	1,943,866					$	2,012,253

Stockholders' equity		176,964						154,998

Total Liabilities and Equity	$	2,120,830					$	2,167,251

Net interest income			$	13,907					$	17,325

Net interest margin					2.79	%					3.46	%

Interest rate spread					2.05	%					3.01	%

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Net Income

Net income was $2.3 million, or $0.42 per diluted share, in the first quarter of 2024, compared with $10.2 million, or $1.85 per diluted share in the fourth quarter of 2023 and $5.8 million, or $1.06 per diluted share, in last year’s first quarter. The sequential quarter’s net income included a gain of $14 million, net of taxes, from the sale of TEA, $1.5 million of insurance revenue recognized prior to the sale, and a pretax loss on the sale of investment securities of $5 million. The change in net income from the prior-year period was due to lower net interest income of $3.4 million, an increase in loan provision of $0.9 million, and a decrease in non-interest income of $1.8 million, partially offset by a decrease in non-interest expense of $1.6 million.

Return on average equity was 5.28% for the first quarter of 2024, compared with 25.73% in the fourth quarter of 2023 and 14.97% in the first quarter of 2023.

Other Results of Operations – Quarterly Comparison

Net interest income of $13.9 million was flat compared with the fourth quarter of 2023, but decreased $3.4 million, or 20%, when compared with the prior year’s first quarter. The lower net interest income from the prior year’s first quarter was due to higher interest expense related to the increased cost of interest-bearing liabilities produced by competitive pricing on deposits.

First quarter net interest margin of 2.79% increased 4 basis points from the fourth quarter of 2023 but decreased 67 basis points from the first quarter of 2023. The yield on loans increased 13 basis points compared with the fourth quarter and 40 basis points year-over-year. The cost of interest-bearing liabilities was 3.04% compared with 2.87% in the fourth quarter of 2023 and 1.65% in the first quarter of 2023.

The $0.3 million provision for credit losses in the current quarter was largely due to slower prepayment speeds and higher net loan charge-offs, partially offset by improving economic factors.

Non-interest income was $2.3 million in the first quarter of 2024 compared with $18.6 million in the fourth quarter of 2023, and $4.1 million in the prior year’s first quarter. The reduction from the fourth quarter of 2023 was due to the gain on sale of TEA of $20.2 million, $1.5 million in TEA insurance revenue, offset by the $5.0 million investment loss which were all recognized in the sequential quarter. The remaining increase in non-interest income from the fourth quarter was primarily due to an increase in the value of mortgage servicing rights.

Total non-interest income was down $1.8 million when compared with the first quarter of 2023. The majority of the reduction was related to $2.3 million in TEA insurance revenue recognized in the first quarter of 2023. This was offset by an increase in the value of mortgage servicing rights during the first quarter of 2024.

Non-interest expense was $12.9 million in the first quarter of 2024 compared with $16.3 million in the fourth quarter and $14.5 million in the first quarter of 2023. The $3.4 million decrease in non-interest expenses from the fourth quarter of 2023 was due to lower incentive accruals of $2.1 million, $1.0 million of non-interest expenses related to TEA, primarily salaries and employee benefits, that were recognized during the fourth quarter of 2023 prior to the sale. In addition, $0.3 million of charitable contributions, and $0.1 million of pension settlement expenses of which both were included in other expenses during the sequential quarter.

The $1.6 million decrease in non-interest expenses from the first quarter of 2023 was due to $1.8 million of non-interest expenses relating to TEA, of which salaries and employee benefits was $1.5 million. During the first quarter of 2023 salaries and employee benefits, excluding the $1.5 million related to TEA, was $7.9 million, flat with the first quarter of 2024. The remaining increase in total non-interest expense of $0.2 million is due to higher technology and communications expenses recognized by the Bank during the first quarter of 2024.

The Company’s GAAP efficiency ratio, or noninterest expenses divided by the sum of net interest income and noninterest income, was 79.9% in the first quarter of 2024, 50.16% in the fourth quarter of 2023, and 67.65% in the first quarter of 2023.

Income tax expense was $0.6 million, for an effective tax rate of 21.7 % in the first quarter of 2024 compared with 36.1% in the fourth quarter of 2023 and 23.6% in last year’s first quarter. The elevated tax rate in the fourth quarter of 2023 reflected the sale of TEA which included significant non-deductible goodwill expense.

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CAPITAL

The Company consistently maintains regulatory capital ratios significantly above the federal “well capitalized” standard, including a Tier 1 leverage ratio of 10.52% at March 31, 2024, compared with 10.37% at December 31, 2023 and 9.13% at March 31, 2023.

Book value per share was $31.62 at March 31, 2024 compared with $32.40 at December 31, 2023 and $28.97 at March 31, 2023. Reflected in the book value changes are the Federal Reserve’s aggressive interest rate hikes, that have resulted in significant changes in unrealized gains and losses on investment securities. As of March 31, 2024, this amounted to $7.83 per share impact to book value. 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, 2024 and December 31, 2023 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 contributed to Evans Bank as Tier 1 capital.

While we are currently classified as well capitalized, an extended economic recession could adversely impact our reported and regulatory capital ratios. 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 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, 2024, advances of up to $382 million could be drawn on the FHLB via an Overnight Line of Credit Agreement between the Bank and the FHLB. The Bank also has the ability to borrow from the Federal Reserve. At March 31, 2024 the Bank had $5 million in additional availability to borrow against collateral at the Federal Reserve. By placing sufficient collateral in safekeeping at the Federal Reserve Bank, the Bank could borrow at the discount window. The Bank’s liquidity needs also can be met by more aggressively pursuing time deposits, or accessing the brokered time deposit market, including the Certificate of Deposit Account Registry Service (“CDARS”) network.

Cash flows from the Bank’s investment portfolio are laddered, so that securities mature at regular intervals, to provide funds from principal and interest payments at various times as liquidity needs may arise. Contractual maturities are also laddered, with consideration as to the volatility of market prices. At March 31, 2024, approximately 3% of the Bank’s securities had contractual maturity dates of one year or less and approximately 17% had maturity dates of five years or less. Additionally, mortgage-backed securities, which comprised 62% of the investment portfolio at March 31, 2024, provide consistent cash flows for the Bank.

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

Management, on an ongoing basis, closely monitors the Company’s liquidity position for compliance with internal policies and believes that available sources of liquidity are adequate to meet funding needs in the normal course of business. As part of that monitoring process, management calculates the 90-day liquidity each month by analyzing the cash needs of the Bank. Included in the calculation are 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, 2024, the Company had net short-term liquidity of $336 million as compared with $333 million at December 31, 2023.

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.

However, an economic recession could negatively impact the Company’s liquidity. The Bank relies heavily on FHLBNY as a source of funds, particularly with its overnight line of credit. In past economic recessions, some FHLB branches have suspended dividends,

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cut dividend payments, and not bought back excess FHLB stock that members hold in an effort to conserve capital. FHLBNY has stated that it expects to be able to continue to pay dividends, redeem excess capital stock, and provide competitively priced advances in the future. The 11 FHLB branches are jointly liable for the consolidated obligations of the FHLB system. To the extent that one FHLB branch cannot meet its obligations to pay its share of the system’s debt, other FHLB branches can be called upon to make the payment.

Systemic weakness in the FHLB could result in higher costs of FHLB borrowings and increased demand for alternative sources of liquidity that are more expensive, such as brokered time deposits, the discount window at the Federal Reserve, or lines of credit with correspondent banks.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

SENSITIVITY OF NET INTEREST INCOME TO CHANGES IN INTEREST RATES



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

		March 31, 2024		December 31, 2023
Changes in interest rates

+200 basis points	$	(2,173)	$	(4,618)
+100 basis points		1,513		219

-100 basis points		(1,492)		(168)
-200 basis points		(3,049)		(310)

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

ITEM 4 - CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2024 (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, 2024.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

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, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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

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

ITEM 1A – RISK FACTORS

There have been no material changes to the risk factors previously disclosed in Item 1A. Part I of the Company’s Annual Report on Form 10- K for the fiscal year ended December 31, 2023.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Issuer Purchases of Equity Securities



Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
January 1, 2024 - January 31, 2024
Repurchase program(1)		-	$	-	-	187,932
Employee transactions		-	$	-	N/A	N/A

February 1, 2024 - February 29, 2024
Repurchase program(1)		-	$	-	-	187,932
Employee transactions		-	$	-	N/A	N/A

March 1, 2024 - March 31, 2024
Repurchase program(1)		-	$	-	7,000	180,932
Employee transactions		4,507	$	29.39	N/A	N/A

Total:
Repurchase program(1)		-	$	-	7,000	180,932
Employee transactions		4,507	$	29.39	N/A	N/A

(1)On February 25, 2021, the Board of Directors authorized the Company to repurchase up to 300,000 shares of the Company’s common stock (the “2021 Repurchase Program”). The 2021 Repurchase program does not expire and may be suspended or discontinued by the Board of Directors at any time. The remaining number of shares that may be purchased under the 2021 Repurchase Program as of March 31, 2024 was 180,932.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

(Not Applicable.)

ITEM 4 – MINE SAFETY DISCLOSURE

(Not Applicable.)

ITEM 5 – OTHER INFORMATION

During the three months ended March 31, 2024, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement,” as that term is used in SEC regulations.

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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)

10.1		Evans Bank Short Term Incentive Compensation Program for Named Executive Officers & Senior Leadership Team Members (incorporation by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 14, 2024)

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, 2024, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets –March 31, 2024 and December 31, 2023; (ii) Unaudited Consolidated Statements of Income – Three months ended March 31, 2024 and 2023; (iii) Unaudited Statements of Consolidated Comprehensive Income (Loss) – Three months ended March 31, 2024 and 2023; (iv) Unaudited Consolidated Statements of Stockholders' Equity – Three months ended March 31, 2024 and 2023; (v) Unaudited Consolidated Statements of Cash Flows – Three months ended March 31, 2024 and 2023; 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, 2024, formatted in Inline XBRL.

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SIGNATURES

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

Evans Bancorp, Inc.

DATE

May 2, 2024

/s/ David J. Nasca

David J. Nasca

President and CEO

(Principal Executive Officer)

DATE

May 2, 2024

/s/ John B. Connerton

John B. Connerton

Treasurer

(Principal Financial Officer and Principal Accounting Officer)