General

Management's discussion and analysis of the financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2021 as well as the unaudited financial statements and notes appearing on Part I, Item 1 of this quarterly report on Form 10-Q.





              CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect" and words of similar meaning. These forward-looking statements include, but are not limited to:





  ? statements of our goals, intentions and expectations;
  ? statements regarding our business plans, prospects, growth and operating
    strategies;
  ? statements regarding the quality of our loan and investment portfolios; and
  ? estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:





  ? general economic conditions, either nationally or in our market areas, that
    are worse than expected;
  ? economic and/or policy changes related the COVID-19 pandemic;
  ? competition among depository and other financial institutions;
  ? inflation and changes in the interest rate environment that reduce our margins
    or reduce the fair value of financial instruments;
  ? adverse changes in the securities markets;
  ? changes in laws or government regulations or policies affecting financial
    institutions, including changes in regulatory fees and capital requirements;
  ? our ability to enter new markets successfully and capitalize on growth
    opportunities; our ability to consummate our announced Plan of Merger;
  ? our ability to execute on our business strategy to increase commercial real
    estate and multi-family lending and commercial lending;
  ? changes in consumer spending, borrowing and savings habits;
  ? changes in accounting policies and practices, as may be adopted by the bank
    regulatory agencies, the Financial Accounting Standards Board, the Securities
    and Exchange Commission and the Public Company Accounting Oversight Board;
  ? changes in our organization, compensation and benefit plans; and
  ? changes in the financial condition, results of operations or future prospects
    of issuers of securities that we own.




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Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in the Company's Form 10-K for the year December 31, 2021.

Comparison of Financial Condition at March 31, 2022 and December 31, 2021

Total assets decreased $4.9 million, or 5.2%, to $89.5 million at March 31, 2022 from $94.4 million at December 31, 2021. The decrease was primarily due to lower balances of investments and loans. Securities and loans decreased $2.8 million and $2.4 million, respectively, partly offset by a $479,000 increase in deferred income taxes and a $119,000 increase in other assets.

Cash and cash equivalents decreased $330,000, or 9.5%, to $3.1 million at March 31, 2022 from $3.5 million at December 31, 2021, primarily as a result of a decrease in deposits partly offset by a decrease in loans receivable.

Securities available for sale decreased $2.8 million, or 5.3%, to $50.6 million at March 31, 2022 from $53.4 million at December 31, 2021 primarily due to an increase in unrealized losses of $2.3 million. The increase was due to the change in interest rates and was not due to the credit deterioration of the investments.

Net loans receivable decreased $2.4 million, or 7.5%, to $29.3 million at March 31, 2022 from $31.6 million at December 31, 2021. The decrease in loans receivable was primarily due to decreases in the commercial loan, residential loan and student loan portfolios.

At March 31, 2022, our investment in bank-owned life insurance increased $17,000 to $2.5 million from $2.5 million at December 31, 2021. We invest in bank-owned life insurance to provide us with a funding offset for our benefit plan obligations. Bank-owned life insurance also generally provides us noninterest income that is non-taxable. Federal regulations generally limit our investment in bank-owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses, and we have not made any additional contributions to our bank-owned life insurance since 2002.

Federal Home Loan Bank of New York ("FHLB) and other stock decreased $4,000, or 2.2%, to $ 192,000 at March 31, 2022 compared to $197,000 at December 31, 2021, primarily due to a reduction in FHLB advances.

Deferred income taxes increased $479,000, or 51.9%, from $923,000 at December 31, 2021 to $1.4 million at March 31, 2022 primarily due to the increase in net unrealized losses in the securities available for sale portfolio.

Other assets, consisting primarily of prepaid insurance premiums, prepaid expenses and accounts receivable increased $119,000, or 53.2%, to $341,000 at March 31, 2022, compared to $223,000 at December 31, 2021, mainly due to an increase in accounts receivable and prepaid expenses, partly offset by a decrease in prepaid insurance.

Total deposits decreased $2.8 million, or 3.4%, to $80.0 million at March 31, 2022 from $82.9 million at December 31, 2021. The decrease was primarily due to decreases in Certificates of Deposit, NOW and non-interest bearing checking balances of $2.5 million, or 8.8%, $772,000, or 5.1%, and $365,000, or 4.5%, respectively. These decreases were partly offset by increases in savings accounts of $1.4 million, or 5.1%.





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Borrowings decreased $95,000, or 9.4% to $913,000 at March 31, 2022 from $1.0 million at December 31, 2021, primarily due to the pay-downs of advances with the FHLB of New York. At March 31, 2022, we had the ability to borrow an additional $26.0 million or 30% of the Association's assets in FHLB advances and $2.0 million on a Fed Funds line of credit with Atlantic Community Bankers Bank.

Total equity decreased $1.8 million to $7.8 million at March 31, 2022 from $9.6 million at December 31, 2021 primarily due to a $1.8 million increase in accumulated other comprehensive loss (net of tax) due to an increase in unrealized losses in the securities available for sale portfolio and the $30,000 loss for the first quarter of 2022.

Comparison of Results of Operations for the Quarters Ended March 31, 2022 and March 31, 2021

General. We recorded a net loss of $30,000 for the quarter ended March 31, 2022 compared to a net loss of $384,000 for the quarter ended March 31, 2021. The decrease in net loss was primarily due to lower non-interest expenses. In connection with the Company's announced merger, we incurred $21,000 in merger-related expenses in the first quarter of 2022 compared with $361,000 in the first quarter of 2021.

Net Interest Income. Net interest income decreased $7,000 to $566,000 for the three months ended March 31, 2022 compared to $574,000 for the three months ended March 31, 2021, primarily due to a decrease in interest income partly offset by a decrease in interest expense. Interest and dividend income decreased $51,000, or 7.6%, from $676,000 for the three months ended March 31, 2021 to $624,000 for the three months ended March 31, 2022. Interest expense decreased $44,000, or 43.0% to $58,000 for the three months ended March 31, 2022, compared to $102,000 for the same period in 2021.

The average yield on our loans increased three basis points, the average yield on our investment securities decreased three basis points and the average yield on mortgage-backed securities increased 66 basis points during the quarter ended March 31, 2022 compared to the same quarter in 2021. Our net interest rate spread increased 22 basis points to 2.63% for the quarter ended March 31, 2022 from 2.41% for the quarter ended March 31, 2021 and our net interest margin increased 18 basis points to 2.67% for the 2022 quarter from 2.49% for the 2021 quarter. Average interest-earning assets decreased $7.6 million, or 8.1%, to $85.9 million for the quarter ended March 31, 2022 from $93.5 million for the first quarter of 2021.

Interest and Dividend Income. Interest and dividend income decreased $51,000 to $624,000 for the quarter ended March 31, 2022 from $676,000 for the quarter ended March 31, 2021. The decrease resulted primarily from a $103,000 decrease in interest income on loans, partly offset by a $45,000 increase in interest income on mortgage-backed securities.

Interest income on loans decreased $103,000, or 22.3%, to $360,000 for the quarter ended March 31, 2022 from $463,000 for the quarter ended March 31, 2021. The decrease resulted primarily from a decrease in average loan balances of $8.9 million, of which, $3.9 million was due to PPP loan forgiveness.

Interest and dividend income on investment securities increased $8,000 primarily due to a $3.2 million increase in average balances to $21.7 million for the quarter ended March 31, 2022 from $18.5 million for the quarter ended March 31, 2021, partly offset by a three basis point decrease in yield to 1.29% for the quarter ended March 31, 2022 from 1.32% for the quarter ended March 31, 2021. Interest income on mortgage-backed securities increased $45,000 primarily due to a 66 basis point increase in the yield to 2.72% for the 2022 quarter from 2.06% for the 2021 quarter. Interest income on federal funds sold and other earning assets decreased $2,000 to $3,000 for the three months ended March 31, 2022 from $5,000 for the three months ended March 31, 2021 primarily due to a $1.7 million decrease in average balances.

Interest Expense. Interest expense, consisting of the cost of interest-bearing deposits and borrowings decreased $44,000, or 43.0%, to $58,000 for the quarter ended March 31, 2022 from $102,000 for the quarter ended March 31, 2021. The decrease was primarily due to a decrease in interest expense on deposits and borrowings of $38,000 and 6,000, respectively. The cost of interest-bearing deposits for the quarter ended March 31, 2022 decreased 21 basis points to 0.29% compared to 0.50% for the quarter ended March 31, 2021. Average interest-bearing liabilities decreased $5.5 million, or 6.9% to $74.2 million for the quarter ended March 31, 2022 from $79.7 million for the quarter ended March 31, 2021. The average balance of savings deposits and NOW deposits increased $2.1 million and $1.2 million, respectively, while the average balance of certificate of deposit and money market balances decreased $3.2 million and $468,000, respectively. The average balance of borrowings and escrows decreased $5.2 million for the quarter ended March 31, 2022 to $1.3 million from $6.5 million for the quarter ended March 31, 2021.





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Provision for Loan Losses. We establish provisions for loan losses that are charged to operations in order to maintain the allowance for loan losses at a level believed, to the best of management's knowledge, to cover all known and inherent losses in the portfolio both probable and reasonable to estimate at each reporting date. There was an $8,000 provision for loan losses recorded for the quarter ended March 31, 2022 compared to a $57,000 provision recorded for the quarter ended March 31, 2021. There were no charge-offs in the first quarter of 2022 compared to $48,000 in charge-offs for the quarter ended March 31, 2021. There were recoveries of $159 and $0 for the quarters ended March 31, 2022 and 2021, respectively.

Non-interest Income. Non-interest income increased $1,000, or 3.8% for the quarter ending March 31, 2022 compared to March 31, 2021, mainly due to an increase in income on bank owned life insurance.

Non-interest Expense. Non-interest expense decreased $318,000 or 33.8%, to $622,000 for the quarter ended March 31, 2022 from $941,000 for the quarter ended March 31, 2021. The decrease was primarily due to lower merger related expenses. Advertising and promotion expense decreased but was offset by increases in compensation and benefits, occupancy and equipment expense, professional fees and data processing expenses.

Merger-related expenses decreased $340,000, or 94.1% in the first quarter of 2022 compared to the same period in 2021, primarily due to higher legal and investment banking fees incurred in 2021 that did not recur in 2022. Compensation and benefits increased $8,000, or 3.0%, primarily due to higher salary expense. Occupancy and equipment expense increased $7,000, or 10.4%, primarily due to higher depreciation expense. Professional fees increased $6,000, or 6.5%, primarily due to higher Audit and non-merger related legal expenses. Data processing expenses increased $$5,000, or 6.9%, primarily due to increased costs for core-processing and network support. Advertising costs decreased $4,000, or 25.6%, primarily to a reduction in marketing initiatives.

Income Tax Benefit. We recorded an income tax benefit of $1,000 for the quarter ended March 31, 2022 compared to an income tax benefit of $9,000 for the quarter ended March 31, 2021. Income tax expense or benefit is calculated based on pre-tax income or loss adjusted for permanent book to tax differences, such as non-taxable interest income on municipal securities and income on bank owned life insurance and non-deductible merger related expenses.

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