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, 2020 as well as the unaudited financial statements and the notes thereto, 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;

? the COVID-19 pandemic and its effects on the economic and business environments


   in which we operate;

? 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;






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? 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, including implementing


   an SBA lending program;

? 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.

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 ended December 31, 2020.

Comparison of Financial Condition at September 30, 2021 and December 31, 2020

Total assets decreased $3.9 million, or 4.0%, to $93.6 million at September 30, 2021 from $97.5 million at December 31, 2020. The decrease was primarily due to a decrease in loans and securities available for sale. Securities available for sale decreased $605,000, or 1.2%, to $49.4 million at September 30, 2021 from $50.0 million at December 31, 2020. Loans decreased $3.3 million, or 8.4%, to $36.0 million at September 30, 2021 from $39.3 million at December 31, 2020.

Securities available for sale decreased $605,000, or 1.2%, to $49.4 million at September 30, 2021 from $50.0 million at December 31, 2020. Securities held to maturity decreased $3,000, or 0.68%, to $418,000 at September 30, 2021 from $421,000 at December 31, 2020. The decrease in investment securities was primarily due to calls and contractual repayments of $50.9 million and a reduction in the unrealized gain of securities available for sale of $723,000 offset by purchases of $51.2 million.

Net loans receivable decreased $3.3 million, or 8.4%, to $36.0 million at September 30, 2021 from $39.3 million at December 31, 2020. The decrease in loans receivable was primarily due to a decrease in the residential 1-4 family real estate, commercial and student loan portfolios of $1.4 million, $1.1 million and $804,000, respectively.

At September 30, 2021, our investment in bank-owned life insurance increased $49,000 to $2.5 million from $2.4 million at December 31, 2020. 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.

Deferred income taxes increased $140,000, or 20.4% to $825,000 at September 30, 2021 from $685,000 at December 31, 2020. The increase resulted primarily from the increase in unrealized losses on securities available for sale.

Federal Home Loan Bank of New York ("FHLB") and other stock decreased $25,000, or 11.1%, to $201,000 at September 30, 2021 compared to $226,000 at December 31, 2020 due mainly to the reduction in the FHLB advances.





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Other assets, consisting primarily of prepaid insurance premiums, prepaid expenses and accounts receivable decreased $16,000, or 5.7%, to $261,000 at September 30, 2021 from $276,000 at December 31, 2020 primarily due to a decrease in prepaid insurance and accounts receivable, partly offset by an increase in prepaid expenses.

Total deposits increased $3.4 million, or 4.3%, to $81.6 million at September 30, 2021 from $78.2 million at December 31, 2020. The increase resulted primarily from increases in non-interest bearing checking balances, certificates of deposit, NOW and savings balances of $1.5 million, $1.7 million, $556,000 and $163,000, respectively.

Borrowings decreased $5.4 million, or 83.0%, from $6.5 million at December 31, 2020 to $1.1 million at September 30, 2021, primarily due to the pay-off of the PPP line with the Federal Reserve Bank of New York. At September 30, 2021, we had the ability to borrow an additional $27.0 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 $1.7 million, or 14.5%, to $9.9 million at September 30, 2021 from $11.6 million at December 31, 2020 primarily due to an increase in unrealized losses in our investment portfolio included in accumulated other comprehensive loss and a net loss of $1.2 million for the nine months ended September 30, 2021.

Comparison of Results of Operations for the Quarters Ended September 30, 2021 and September 30, 2020

General. We recorded a net loss of $381,000 for the quarter ended September 30, 2021 compared to a net loss of $70,000 for the quarter ended September 30, 2020. The increase in net loss was primarily from $390,000 of professional fees associated with the Company's announced merger, offset in part by an increase in net interest income.

Net Interest Income. Net interest income increased $127,000, or 28.4%, to $573,000 for the quarter ended September 30, 2021 from $447,000 for the quarter ended September 30, 2020. Interest income on loans decreased $9,000, or 2.2%, primarily due to lower average balances partly offset by an increase in yield. Interest income on mortgage-backed securities increased $50,000, or 39.9%, primarily due to higher yields partly offset by lower average balances. Interest income on investment securities increased $9,000, or 15.5%, primarily due to higher yields partly offset by lower average balances. Interest expense decreased $78,000, or 48.4%, primarily due to lower rates on certificates of deposit partly offset by higher savings and NOW deposit balances.

The average yield on our loans increased 37 basis points, the average yield on our investment securities increased 34 basis points and the average yield on mortgage-backed securities increased 75 basis points during the quarter ended September 30, 2021 compared to the same quarter in 2020. Our net interest rate spread increased 68 basis points to 2.48% for the quarter ended September 30, 2021 from 1.80% for the quarter ended September 30, 2020 and our net interest margin increased 62 basis points to 2.54% for the 2021 quarter from 1.92% for the 2020 quarter. Average interest-earning assets decreased $3.0 million, or 3.3%, to $89.4 million for the quarter ended September 30, 2021 from $92.4 million for the third quarter of 2020.

Interest and Dividend Income. Interest and dividend income increased $48,000, or 7.9%, to $657,000 for the quarter ended September 30, 2021 from $609,000 for the quarter ended September 30, 2020. The increase resulted primarily from an increase in income on investment securities and mortgage-backed securities of $9,000, or 15.5%, and $50,000, or 39.9%, respectively, partly offset by a decrease of $9,000, or 2.2%, on loans.

Interest income on loans decreased $9,000, or 2.2%, to $412,000 for the quarter ended September 30, 2021 from $421,000 for the quarter ended September 30, 2020. The decrease resulted primarily from a $4.4 million decrease in average balances, partly offset by a 37 basis point increase in the average yield on loans to 4.39% for the 2021 quarter from 4.02% for the 2020 quarter.

Interest and dividend income on investment securities increased $9,000 to $66,000 for the quarter ended September 30, 2021 from $57,000 for the quarter ended September 30, 2020. The increase was primarily due to a 34 basis point increase in yield to 1.62% for the quarter ended September 30, 2021 compared to 1.28% for the quarter ended September 30, 2020, partly offset by a $1.7 million decrease in average balances from $17.7 million for the quarter ended September 30, 2020 to $16.1 million for the quarter ended September 30, 2021. Interest income on mortgage-backed securities increased $50,000, or 39.9%, to $174,000 compared to $124,000 for the quarter ended September 30, 2020. The increase was primarily due to a 75 basis point increase in yield to 2.35% for the quarter ended September 30, 2021 from 1.60% for the quarter ended September 30, 2020, partly offset by a $1.5 million decrease in average balances.





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Interest Expense. Interest expense, consisting primarily of the cost of interest-bearing deposits, decreased $78,000, or 48.4%, to $84,000 for the quarter ended September 30, 2021 from $162,000 for the quarter ended September 30, 2020. The decrease in interest expense was due to a decrease of 38 basis points in the cost of interest-bearing liabilities, primarily deposits, to 0.44% for the quarter ended September 30, 2021, from 0.82% for the quarter ended September 30, 2020, primarily due to lower interest paid on certificates of deposit reflecting decreasing market interest rates. Average interest-bearing liabilities decreased $2.8 million, or 3.5%, to $75.5 million for the quarter ended September 30, 2021 from $78.2 million for the quarter ended September 30, 2020. The average balance of savings, NOW and certificates of deposit increased $1.7 million, $1.2 million and $817,000, respectively. The average balance of FHLB advances decreased $373,000 for the quarter ended September 30, 2021 to $1.1 million from $1.5 million for the quarter ended September 30, 2020, while the average balance of advances from the Federal Reserve decreased $6.0 million due to the pay downs of PPP loans that collateralized the FRB line.

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 a $9,000 provision for loan losses recorded for the three month period ended September 30, 2021 and $10,000 for the three month period ended September 30, 2020. The allowance for loan losses was $388,000 at September 30, 2021 compared to $401,000 at December 31, 2020. During the quarter ended September 30, 2021, there was a $27,000 charge-off for a student loan compared to no charge-offs for the quarter ended September 30, 2020. See Note 11 "Contingencies" for an additional discussion on the Company's student loan portfolio.

Noninterest Income. Noninterest income increased $1,000 to $36,000 for the quarter ended September 30, 2021 from $34,000 for the quarter ended September 30, 2020. The increase was primarily due to an increase in income from bank owned life insurance partly offset by a decrease in fees and service charges.

Noninterest Expense. Non-interest expense increased $427,000, or 75.8%, to $991,000 for the quarter ended September 30, 2021 from $564,000 for the quarter ended September 30, 2020. The increase was primarily due to increases in merger related expenses, compensation and benefits and occupancy and equipment expense.

Merger related expenses increased $381,000, due to the announced merger. See Note 2 "Plan of Merger" for a discussion on that plan. Compensation and benefits expense increased $12,000, or 4.5%, primarily due to the higher costs of benefits. Occupancy and equipment expense increased $8,000, or 12.0% due to increased depreciation and repairs.

Income Tax Expense (Benefit). We recorded a $9,000 income tax benefit for the quarter ended September 30, 2021 and a $23,000 income tax benefit for the quarter ended September 30, 2020. Income tax expense (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, income on bank owned life insurance and non-deductible merger related expenses.

Comparison of Results of Operations for the nine months ended September 30, 2021 and September 30, 2020

General. We recorded a net loss of $1.2 million for the nine months ended September 30, 2021 compared to net loss of $229,000 for the nine months ended September 30, 2020. The increase in net loss was primarily from $1.1 million of professional fees associated with the Company's announced merger, offset in part by an increase in net interest income.

Net Interest Income. Net interest income increased $298,000, or 21.6%, to $1.7 million for the nine months ended September 30, 2021 from $1.4 million for the nine months ended September 30, 2020. Interest and dividend income increased $25,000, or 1.3%, for the nine months ended September 30, 2021 compared to the same period in 2020. Interest expense decreased $273,000, or 49.4%, primarily due to decreased balances and rates on certificates of deposit.

Interest income on loans decreased $13,000, or 1.1%. The decrease in interest income on loans was primarily due to lower average balances partly offset by an increase in yield. Average loan balances decreased $2.4 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The yield on the loan portfolio increased 22 basis points to 4.37% for the nine months ended September 30, 2021 from 4.15% for the nine months ended September 30, 2020.





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Interest on mortgage backed securities increased $29,000, or 6.4%, primarily due to higher yield, partly offset by lower average balances. For the nine months ended September 30, 2021, yields on mortgage-backed securities increased 24 basis points to 2.18% from 1.94% for the nine months ended September 30, 2020. The increase in yield was partly offset by a $1.6 million decrease in average balances.

Interest income on investment securities increased $25,000, or 14.2%, primarily due to higher average balances, partly offset by lower yields. The average balance of investment securities increased $4.7 million for the nine months ended September 30, 2021 compared to the same period in 2020, while the average yield decreased 29 basis points to 1.53% for the nine months ended September 30, 2021 from 1.82% for the nine months ended September 30, 2020. Our net interest rate spread increased 41 basis points to 2.37% for the nine months ended September 30, 2021 from 1.96% for the nine months ended September 30, 2020, and our net interest margin increased 34 basis points to 2.45% for the 2021 period from 2.11% for the 2020 period. Average interest-earning assets increased $4.3 million to $91.7 million for the nine months ended September 30, 2021 from $87.4 million for the prior year period.

Interest and Dividend Income. Interest and dividend income increased $25,000, or 1.3%, to $2.0 million for the nine months ended September 30, 2021 from $1.9 million for the nine months ended September 30, 2020. The increase resulted primarily from a $29,000, or 6.4%, increase of interest income on mortgage-backed securities and a $25,000, or 14.2%, increase in interest income on investment securities partly offset by a $13,000, or 1.1%, decrease in interest on loans.

Interest income on loans decreased $13,000, or 1.1%, primarily due to a $2.4 million decrease in average balances partly offset by a 22 basis point increase in yields. to 4.37% for the nine months ended September 30, 2021 from 4.15% for the nine months ended September 30, 2020.

Interest income on mortgage-backed securities increased $29,000, or 6.4%, mainly due to an increase in yield to 2.18% for the nine months ended September 30, 2021 from 1.94% for the nine months ended September 30, 2020. This reduction was partly offset by a $1.6 million decrease in average balances.

Interest income on investment securities increased $25,000, or 14.2%, primarily due to higher average balances partly offset by lower yields. The average yield decreased 29 basis points to 1.53% for the nine month period ended September 30, 2021 from 1.82% for the nine month period ended September 30, 2020. The decrease in yield was offset by a $4.7 million increase in average balances to $17.4 million for the nine months ended September 30, 2021 from $12.8 million for the nine months ended September 30, 2020.

Interest Expense.Interest expense, consisting primarily of the cost of interest-bearing deposits, decreased $273,000, or 49.4%, to $280,000 for the nine months ended September 30, 2021 from $553,000 for the nine months ended September 30, 2020. The decrease in interest expense was due to a decrease in rates paid on interest-bearing liabilities partly offset by an increase in average balances. The yield on interest-bearing liabilities decreased 51 basis points to 0.48% for the nine months ended September 30, 2021 compared to 0.99% for the same period in 2020. This decrease was primarily due to lower rates paid on certificates of deposit. The average yield on certificates of deposit decreased 116 basis point to 0.91% for the nine-month period ended September 30, 2021 compared to 2.07% for the same period in 2020. The average rate paid on borrowings increased seven basis points to 1.15% for the nine months ended September 30, 2021 compared to 1.08% for the same period in 2020. Average certificate of deposit and borrowing balances decreased $313,000, or 1.0%, and $1.3 million or 31.1%, respectively for the nine months ended September 30, 2021 compared to the same period in 2020. The decrease in borrowings was primarily due to paying off the line of credit with the Federal Reserve Bank that was secured by PPP loans.





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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 a $75,000 provision for loan losses recorded for the nine month period ended September 30, 2021 compared to a $31,000 provision for loan losses recorded for the nine month period ended September 30, 2020. There were $97,000 in charge-offs and $9,000 in recoveries of loans during the nine months ended September 30, 2021. There were no charge offs or recoveries in the 2020 period. (See Note 11 "Contingencies" for an additional discussion on the Company's student loan portfolio.)

Noninterest Income. Noninterest income decreased $2,000, or 1.8%, to $103,000 for the nine months ended September 30, 2021 from $105,000 for the nine months ended September 30, 2020. The decrease was primarily due lower fees and service charges partly offset by an increase in income on bank owned life insurance.

Noninterest Expense. Noninterest expense increased $1.2 million, or 65.8%, to $2.9 million for the nine months ended September 30, 2021 from $1.8 million for the nine months ended September 30, 2020. The increase was primarily due to merger-related expenses of $1.1 million and to a lesser extent, increases in occupancy and equipment expense, other expenses, data processing fees and Federal deposit insurance premiums ("FDIC") of $15,000, $18,000, $17,000 and $12,000, respectively, partly offset by a decrease in compensation and benefits expense.

Occupancy and equipment expense increased $15,000, or 7.9%, primarily due to higher depreciation and utility expenses. Other expenses increased $18,000, or 13.1%, primarily due to higher correspondent bank service charges and costs related to the Company's annual meeting and proxy expenses. Data processing fees increased $17,000, or 7.6%, primarily due to increased costs in the Bank's core processing as well as increased network support fees. FDIC insurance premiums increased as a result of prior FDIC credits being used in 2020, not applicable to 2021. Compensation and benefits expense decreased $17,000, or 1.9%, primarily due to lower compensation expense and restricted stock expense.

Income Tax Expense (Benefit). We recorded a $21,000 income tax benefit for the nine months ended September 30, 2021 compared to a $68,000 income tax benefit for the nine months ended September 30, 2020. 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, income on bank owned life insurance and non-deductible merger related expenses.

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