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 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.

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.





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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, 2020.

Comparison of Financial Condition at March 31, 2021 and December 31, 2020

Total assets increased $ 628,000, or 0.64%, to $ 98.1 million at March 31, 2021 from $97.5 million at December 31, 2020. The increase was primarily due to higher balances of loans and cash, partly offset by a decrease in investment securities. Loans and cash balances increased $1.3 million and $321,000, respectively, partly offset by a $1.1 million decrease in securities available for sale.

Cash and cash equivalents increased $321,000, or 14.9%, to $2.5 million at March 31, 2021 from $2.1 million at December 31, 2020, as a result of an increase in deposits partly offset by a decrease in borrowings and an increase in loans receivable.

Securities available for sale decreased $1.1 million, or 2.2%, to $48.9 million at March 31, 2021 from $50.0 million at December 31, 2020 primarily due to a decrease in unrealized gains on securities available for sale of $1.0 million.

Net loans receivable increased $1.3 million, or 3.2%, to $40.5 million at March 31, 2021 from $39.3 million at December 31, 2020. The increase in loans receivable was primarily due to increases in the commercial loan and commercial real estate portfolios partly offset by a decrease in the student loan portfolio.

At March 31, 2021, our investment in bank-owned life insurance increased $15,000 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.

Federal Home Loan Bank of New York ("FHLB) and other stock decreased $4,000, or 1.9%, to $ 222,000 at March 31, 2021 compared to $226,000 at December 31, 2020, primarily due to a reduction in FHLB advances.

Deferred income taxes increased $206,000, or 30.1%, from $685,000 at December 31, 2020 to $892,000 at March 31, 2021 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 decreased $29,000, or 10.4%, to $248,000 at March 31, 2021, compared to $276,000 at December 31, 2020, mainly due to a decrease in accounts receivable and prepaid insurance, partly offset by an increase in other prepaid expenses.

Total deposits increased $7.0 million, or 9.0%, to $85.3 million at March 31, 2021 from $78.3 million at December 31, 2020. The increase was primarily due to increases in DDA, NOW and Certificates of Deposit of $3.7 million, or 62.5%, $1.4, million, or 10.7% and $$1.7 million, or 5.7%, respectively.

Borrowings decreased $5.2 million, or 80.6% from $6.5 million at December 31, 2020 to $1.3 million at March 31, 2021, primarily due to the pay-off of the PPP line with the Federal Reserve Bank of New York. At March 31, 2021, we had the ability to borrow an additional $28.2 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 $1.2 million to $10.4 million at March 31, 2021 from $11.6 million at December 31, 2020 primarily due to a $776,000 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 $384,000 loss for the first quarter of 2021.





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Comparison of Results of Operations for the Quarters Ended March 31, 2021 and March 31, 2020

General. We recorded net loss of $384,000 for the quarter ended March 31, 2021 compared to a net loss of $63,000 for the quarter ended March 31, 2020. The increase in net loss was primarily due to a higher non-interest expenses partly offset by an increase in net interest income.

Net Interest Income. Net interest income increased $92,000 to $574,000 for the three months ended March 31, 2021 compared to $482,000 for the three months ended March 31, 2020, primarily due to a decrease in interest expense. Interest and dividend income decreased $8,000, or 1.2%, from $684,000 for the three months ended March 31, 2020 to $676,000 for the three months ended March 31, 2021. Interest expense decreased $100,000, or 49.50% to $102,000 for the three months ended March 31, 2021, compared to $202,000 for the same period in 2020.

The average yield on our loans increased 43 basis points, the average yield on our investment securities decreased 112 basis points and the average yield on mortgage-backed securities decreased 20 basis points during the quarter ended March 31, 2021 compared to the same quarter in 2020. Our net interest rate spread increased 22 basis points to 2.41% for the quarter ended March 31, 2021 from 2.19% for the quarter ended March 31, 2020 and our net interest margin increased 14 basis points to 2.49% for the 2021 quarter from 2.35% for the 2020 quarter. Average interest-earning assets increased $10.9 million, or 13.2%, to $93.5 million for the quarter ended March 31, 2021 from $82.6 million for the first quarter of 2020.

Interest and Dividend Income. Interest and dividend income decreased $8,000 to $676,000 for the quarter ended March 31, 2021 from $684,000 for the quarter ended March 31, 2020. The decrease resulted primarily from a $27,000 decrease in interest income on mortgage-backed securities, and a $11,000 decrease in interest income on federal funds sold and other earning assets, partly offset by a $25,000 increase in interest income on loans and a $5,000 increase in interest income on investment securities.

Interest income on loans increased $25,000, or 5.7%, to $464,000 for the quarter ended March 31, 2021 from $438,000 for the quarter ended March 31, 2020. The increase resulted primarily from a 43 basis point increase in yield to 4.82% for the first quarter of 2021 compared to 4.39% for the first quarter of 2020. The increase in yield was primarily due to an increase in loan origination fees on PPP loans. This increase was partly offset by a decrease in average loan balances of $1.2 million.

Interest and dividend income on investment securities increased $5,000 primarily due to a $9.4 million increase in average balances to $18.5 million for the quarter ended March 31, 2021 from $9.1 million for the quarter ended March 31, 2020, partly offset by a 112 basis point decrease in yield to 1.32% for the quarter ended March 31, 2021 from 2.44% for the quarter ended March 31, 2020. Interest income on mortgage backed securities decreased $27,000 primarily due to a 20 basis point decrease in the yield to 2.06% for the 2021 quarter from 2.26% for the 2020 quarter and a $2.1 million decrease in average balances to $28.8 million for the quarter ended March 31, 2021 from $30.9 million for the quarter ended March 31, 2020. Interest income on federal funds sold and other earning assets decreased $11,000 to $5,000 for the three months ended March 31, 2021 from $16,000 for the three months ended March 31, 2020 primarily due to a decrease in rates.

Interest Expense. Interest expense, consisting of the cost of interest-bearing deposits and borrowings decreased $100,000, or 49.5%, to $102,000 for the quarter ended March 31, 2021 from $202,000 for the quarter ended March 31, 2020. The decrease was primarily due to a decrease of $102,000 in interest expense on deposits partly offset by a $2,000 increase in interest expense on borrowings. The cost of interest-bearing deposits for the quarter ended March 31, 2021 decreased 62 basis points to 0.50% compared to 1.12% for the quarter ended March 31, 2020. Average interest-bearing liabilities increased $8.5 million, or 11.9% to $79.7 million for the quarter ended March 31, 2021 from $71.2 million for the quarter ended March 31, 2020. The average balance of savings deposits, NOW deposits and money market deposits increased $3.1 million, $2.2 million and $536,000, respectively, while the average balance of certificate of deposit decreased $1.7 million. The average balance of borrowings and escrows increased $4.4 million for the quarter ended March 31, 2021 to $6.5 million from $2.1 million for the quarter ended March 31, 2020.

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 $57,000 provision for loan losses recorded for the quarter ended March 31, 2021 compared to an $11,000 provision recorded for the quarter ended March 31, 2020. We had $48,000 of charge-offs for the quarter ended March 31, 2021 compared to $0 for the quarter ended March 31, 2020. There were no recoveries for the quarters ended March 31, 2021 and 2020.





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Non-interest Income. Non-interest income decreased $7,000, or 18.5% for the quarter ending March 31, 2021 compared to March 31, 2020, mainly due to a decrease in fees and service charges earned.

Non-interest Expense. Non-interest expense increased $349,000 or 59.0%, to $941,000 for the quarter ended March 31, 2021 from $591,000 for the quarter ended March 31, 2020. The increase was primarily due to higher professional fees, FDIC premiums and advertising and promotion expense partly offset by a decrease in compensation and benefits expense.

Compensation and benefits decreased $22,000, or 7.3% primarily due to lower salary expense. Professional fees increased $345,000, or 339.5%. Merger related professional fees totaled $361,000 for the quarter ended March 31,2021 and $16,000 for the quarter ended March 31, 2020. FDIC premiums increased due to a one-time credit received from the insurance fund in 2020 that was not received in 2021. Advertising costs increased due to enhanced marketing initiatives.

Income Tax Benefit. We recorded an income tax benefit of $9,000 for the quarter ended March 31, 2021 compared to an income tax benefit of $18,000 for the quarter ended March 31, 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 and income on bank owned life insurance and non-deductible merger related expenses.

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