Quarterly Report (10-q)

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐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: 001-40612

(Exact name of registrant as specified in its charter)

Maryland

86-3947794

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

185 E Lincoln Highway

Coatesville, PA 19320

(Address of Principal Executive Offices)

(610) 384-8282

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading symbol	Name of Exchange on which registered
Common Shares, par value $0.01 per share	PBBK	The NASDAQ Stock Market, LLC

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 ☒ 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 ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer ☐


Non-accelerated filer	☒	Smaller reporting company	☒	Emerging growth company	☒

If an emerging growth company, indicate by check mark 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 ☒

As Common Stock, $0.01 par value - 2,809,425 shares outstanding as of May 12, 2023.

Table of Contents

TABLE OF CONTENTS

		Page

Part I	Financial Information

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of March 31, 2023 (Unaudited) and December 31, 2022	3

	Condensed Consolidated Statements of Income for the three months ended March 31, 2023 and 2022 (Unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2023 and 2022 (Unaudited)	5

	Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2023 and 2022 (Unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (Unaudited)	7

	Notes to Condensed Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45

Item 4.	Controls and Procedures	45

Part II	Other Information

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	46

Exhibit Index

Signatures

Table of Contents

PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

PB BANKSHARES, INC.

Condensed Consolidated Balance Sheets

(dollars in thousands, except per share data)


	March 31,		December 31,
	2023		2022
	(Unaudited)

Assets
Cash and due from banks	$	21,421	$	15,918
Federal funds sold		13,030		1,186
Interest earning deposits with banks		503		100

Cash and cash equivalents		34,954		17,204

Debt securities available-for-sale, at fair value		32,457		52,047
Equity securities, at fair value		779		762
Restricted stocks, at cost		2,232		2,251
Loans receivable, net of allowance for credit losses of $4,090 at March 31, 2023 and $3,992 at December 31, 2022		308,808		300,855
Premises and equipment, net		1,940		1,693
Deferred income taxes, net		1,541		1,656
Accrued interest receivable		1,134		1,123
Bank owned life insurance		7,530		7,487
Other assets		1,691		1,469

Total Assets	$	393,066	$	386,547

Liabilities and Stockholders' Equity

Liabilities
Deposits	$	295,437	$	289,495
Borrowings		47,701		47,638
Accrued expenses and other liabilities		3,637		3,427

Total Liabilities		346,775		340,560

Commitments and contingencies - see note 8

Stockholders' Equity
Preferred Stock, $0.01 par value, 10,000,000 shares authorized; -0- issued and outstanding at March 31, 2023 and December 31, 2022		—		—
Common Stock, $0.01 par value, 40,000,000 shares authorized; 2,809,425 (including 108,115 restricted shares) and 2,845,076 (including 108,115 restricted shares) issued and outstanding at March 31, 2023 and December 31, 2022, respectively		27		27
Additional paid-in capital		25,357		25,721
Retained earnings		25,048		24,779
Unearned ESOP shares, 199,962 shares at March 31, 2023 and December 31, 2022		(2,608)		(2,608)
Accumulated other comprehensive loss		(1,533)		(1,932)

Total Stockholders' Equity		46,291		45,987

Total Liabilities and Stockholders' Equity	$	393,066	$	386,547

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PB BANKSHARES, INC.

Condensed Consolidated Statements of Income

Three months ended March 31, 2023 and 2022

(dollars in thousands, except per share data)

(Unaudited)


	2023		2022
Interest and Dividend Income
Loans, including fees	$	3,798	$	2,703
Securities		183		69
Other		388		12
Total Interest and Dividend Income		4,369		2,784

Interest Expense
Deposits		928		435
Borrowings		396		149
Total Interest Expense		1,324		584

Net interest income		3,045		2,200

Provision for Credit Losses		183		90

Net interest income after provision for credit losses		2,862		2,110

Noninterest Income
Service charges on deposit accounts		47		42
Gain (Loss) on equity investments		12		(40)
Bank owned life insurance income		43		44
Debit card income		50		48
Other service charges		19		17
Loss on disposal of equipment		(40)		—
Other income		7		11
Total Noninterest Income		138		122

Noninterest Expenses
Salaries and employee benefits		1,349		981
Occupancy and equipment		164		150
Data and item processing		267		242
Advertising and marketing		25		22
Professional fees		180		167
Directors’ fees		107		61
FDIC insurance premiums		40		22
Pennsylvania shares tax		77		80
Debit card expenses		35		34
Other		221		173
Total Noninterest Expenses		2,465		1,932

Income before income tax expense		535		300

Income Tax Expense		126		55

Net Income	$	409	$	245
Earnings per common share - basic and diluted	$	0.16	$	0.10

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PB BANKSHARES, INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

Three months ended March 31, 2023 and 2022

(In thousands)

(Unaudited)



	2023		2022
Net Income	$	409	$	245

Other Comprehensive Income (Loss)
Unrealized gains (losses) on debt securities available-for-sale:
Unrealized holding gains (losses) arising during period		505		(1,082)
Tax effect		(106)		227

Other comprehensive income (loss)		399		(855)


Total Comprehensive Income (Loss)	$	808	$	(610)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PB BANKSHARES, INC.

Condensed Consolidated Statements of Stockholders’ Equity

Three months ended March 31, 2023 and 2022

(In thousands)

(Unaudited)


									Accumulated
			Additional					Unearned	Other
	Common		Paid-In		Retained		ESOP		Comprehensive
	Stock		Capital		Earnings		Shares		Income (Loss)		Total
Balance, January 1, 2022	$	28	$	26,176	$	22,665	$	(2,753)	$	(282)	$	45,834

Net income		—		—		245		—		—		245
Other comprehensive loss		—		—		—		—		(855)		(855)

Balance, March 31, 2022	$	28	$	26,176	$	22,910	$	(2,753)	$	(1,137)	$	45,224

Balance, January 1, 2023	$	27	$	25,721	$	24,779	$	(2,608)	$	(1,932)	$	45,987

Net income		—		—		409		—		—		409
Repurchased common stock, 35,651 shares		—		(498)		—		—		—		(498)
Adoption of CECL		—		—		(140)		—		—		(140)
Stock based compensation expense		—		134		—		—		—		134
Other comprehensive income		—		—		—		—		399		399

Balance, March 31, 2023	$	27	$	25,357	$	25,048	$	(2,608)	$	(1,533)	$	46,291

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PB BANKSHARES, INC.

Condensed Consolidated Statements of Cash Flows

Three months ended March 31, 2023 and 2022

(In thousands)

(Unaudited)


	2023		2022
Cash Flows from Operating Activities
Net income	$	409	$	245
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses		183		90
Depreciation and amortization		74		74
Loss on disposal of premises and equipment		40		—
Net accretion of securities premiums and discounts		(86)		(5)
Deferred income tax benefit		46		27
(Gain) Loss on equity securities		(12)		40
Deferred loan fees, net		52		(9)
Earnings on bank owned life insurance		(43)		(44)
Stock-based compensation expense		134		—
Increase in accrued interest receivable and other assets		(257)		(437)
Increase in accrued expenses and other liabilities		7		(4)

Net Cash Provided by (Used in) Operating Activities		547		(23)

Cash Flows from Investing Activities
Activity in debt securities available-for-sale:
Maturities, calls, and principal repayments		20,181		505
Dividends on equity securities reinvested		(5)		(2)
Redemption (purchase) of restricted stocks		19		(811)
Net increase in loans receivable		(8,162)		(25,522)
Purchases of premises and equipment		(337)		(12)

Net Cash Provided by (Used in) Investing Activities		11,696		(25,842)

Cash Flows from Financing Activities
Net increase in deposits		5,942		34,982
Repurchased common stock		(498)		—
Advances of borrowings		6,900		19,000
Repayments of borrowings		(6,837)		(184)

Net Cash Provided by Financing Activities		5,507		53,798

Increase in cash and cash equivalents		17,750		27,933

Cash and Cash Equivalents, Beginning of Period		17,204		26,864

Cash and Cash Equivalents, End of Period	$	34,954	$	54,797

Supplementary Cash Flows Information
Interest paid	$	1,231	$	570
Right-to-use lease assets and liability		—		247
Income taxes paid	$	—	$	—

Supplementary Non-Cash Flows Information
Unrealized gain (loss) on securities available-for-sale	$	505	$	(1,082)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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1. Basis of Presentation

Organization and Nature of Operations

PB Bankshares, Inc., a Maryland Corporation (the “Company”) is the holding company of Presence Bank (the “Bank”) and was formed in connection with the conversion of the Bank from the mutual to the stock form of organization. On July 14, 2021, the mutual to stock conversion of the Bank was completed and the Company became the parent holding company for the Bank. Shares of the Company began trading on the Nasdaq Capital Market on July 15, 2021. The Company is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Bank”).

The Bank is a state-chartered savings bank established in 1919. The main office is located in Coatesville, Pennsylvania with three other branches located in New Holland, Oxford, and Georgetown, Pennsylvania. The Bank is principally engaged in the business of attracting deposits from the general public and using these deposits, together with borrowings and other funds, to make loans primarily secured by real estate and, to a lesser extent, consumer loans. The Bank competes with other banking and financial institutions in its primary market communities encompassing Chester, Cumberland, Dauphin, Lancaster, and Lebanon Counties in Pennsylvania. The Bank is regulated by the Federal Deposit Insurance Corporation (the “FDIC”) and the Pennsylvania Department of Banking and Securities (the “PADOB”).

Principles of Consolidation

The consolidated financial statements include accounts of the Company and its wholly-owned subsidiary, the Bank. The Bank also includes the accounts of CSB Investments, Inc. (“CSB”), a wholly-owned subsidiary of the Bank located in Wilmington, Delaware. The sole purpose of CSB is to maintain and manage the Bank’s investment portfolio. All significant intercompany accounts and transactions have been eliminated in consolidation.

Interim Financial Information

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to the Securities and Exchange Commission’s Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

In the opinion of management, all adjustments considered necessary (consisting only of normal recurring accruals) for a fair presentation have been included. Operating results for the three month period ended March 31, 2023 are not necessarily indicative of the results for the year ending December 31, 2023 or any other interim periods. For further information, refer to the audited consolidated financial statements and notes thereto for the year ended December 31, 2022 as filed in the annual report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2023.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated balance sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses on loans, the valuation of deferred tax assets, and estimation of fair values.

While management uses available information to recognize estimated losses on loans, future additions to the allowance for credit losses may be necessary based on changes in economic conditions and underlying collateral values, if any. In addition, the FDIC and PADOB, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses. These agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examinations.

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2. Recent Accounting Pronouncements

This section provides a summary description of recent ASUs issued by the FASB to the ASC that had or that management expects may have an impact on the financial statements issued upon adoption. The Company is classified as an emerging growth company and has elected 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. Effective dates reflect this election.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration. ASU 2016-13 was effective for the Company on January 1, 2023. The adjustment recorded at adoption established a reserve for unfunded loan commitments of $177,000. This adjustment, net of tax, reduced the opening retained earnings of the Company and the Bank by $140,000 as of the date of adoption.

In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. ASU 2022-02 was effective for the Company on January 1, 2023. There was no material impact to the Company at adoption.

The following table illustrates the impact of adopting ASC 326 (in thousands):


	December 31, 2022		January 1, 2023		January 1, 2023
	As Previously				As Reported
	Reported		Impact of		Under
	(Incurred Loss)		ASC 326		ASC 326
Assets:
Loans, net	$	300,855	$	—	$	300,855

Deferred income taxes, net		1,656		37		1,693

Liabilities:
Reserve for credit losses on unfunded commitments		—		177		177

Total equity:	$	45,987	$	(140)	$	45,847

The following accounting policies have been updated in connection with the adoption of ASC 326 and apply to periods beginning after December 31, 2022. Accounting policies applying to prior periods are described in the 2022 Annual Report.

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Allowance for Credit Losses on Loans: The allowance for credit losses on loans is established through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the allowance for credit losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

The allowance represents management’s current estimate of expected credit losses over the contractual term of loans, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. No allowance for credit loss is recorded on accrued interest receivable and amounts written-off are reversed by an adjustment to interest income. Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. Loans that share common risk characteristics are evaluated collectively using a discounted cash flow approach for all loans. The discounted cash flow approach used by the Company utilizes loan-level cash flow projections and pool-level assumptions. For all loan pools, cash flow projections and estimated expected losses are based in part on benchmarked peer data.

Management’s estimate of the allowance for credit losses on loans that are collectively evaluated also includes a qualitative assessment of available information relevant to assessing collectability that is not captured in the loss estimation process. This includes forecast that are reasonable and supportable concerning expectations of future economic conditions. The reasonable and supportable forecast period is a year. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

These qualitative risk factors include:

Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.

National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.

Nature and volume of the portfolio and terms of loans.

Volume and severity of past due, classified and nonaccrual loans as well as other loan modifications.

Existence and effect of any concentrations of credit and changes in the level of such concentrations.

Effect of external factors, such as competition and legal and regulatory requirements.

Experience, ability, and depth of lending management and other relevant staff.

Quality of loan review and Board of Director oversight.

The effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses.

10.

Changes in inflationary environment.

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for credit losses calculation for our loan portfolio.

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The evaluation also considers the following risk characteristics of each loan portfolio segment:

●

One- to four-family residential real estate loans carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.

●

Commercial real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because repayment of these loans may be dependent upon the profitability and cash flows of the business or project.

●

Construction loans carry risks that the project may not be finished according to schedule, the project may not be finished according to budget, and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure or other factors unrelated to the project.

●

Commercial and industrial loans carry risks associated with the successful operation of a business because repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much reliability.

●

Consumer loans carry risk associated with the continued creditworthiness of the borrower and the value of the collateral, if any. These loans are typically either unsecured or secured by rapidly depreciating assets. They are also likely to be immediately and adversely affected by job loss, divorce, illness, personal bankruptcy, or other changes in circumstances.

Loans that do not share common risk characteristics with other loans are evaluated individually and are not included in the collective analysis. The allowance for credit losses on loans that are individually evaluated may be estimated based on their expected cash flows, or, in the case of loans for which repayment is expected substantially through the operation or sale of collateral when the borrower is experiencing financial difficulty, may be measured based on the fair value of the collateral less estimated costs to sell.

An unallocated component of the allowance for loan losses is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Reserve for Unfunded Commitments: The Company records a reserve, reported in other liabilities, for expected credit losses on commitments to extend credit that are not unconditionally cancelable by the Company. The reserve for unfunded commitments is measured based on the principles utilized in estimating the allowance for credit losses on loans and an estimate of the amount of unfunded commitments expected to be advanced. Changes in the reserve for unfunded commitments are recorded through the provision for credit losses.

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3. Debt and Equity Securities

The amortized cost, gross unrealized gains and losses, and fair value of securities available-for-sale and equity securities are as follows (in thousands):

Gross Unrealized

March 31, 2023

Amortized Cost

Gains

Losses

Fair Value

Debt securities:

Agency bonds

21,243

—

(1,709)

19,534

Treasury securities

9,944

—

(16)

9,928

Mortgage-backed securities

—

Collateralized mortgage obligations

3,118

—

(219)

2,899

Total available-for-sale debt securities

34,398

(1,944)

32,457

Equity securities:

Mutual funds (fixed income)

779


			Gross Unrealized		Gross Unrealized
December 31, 2022	Amortized Cost		Gains		Losses		Fair Value
Debt securities:
Agency bonds	$	21,243	$	—	$	(2,126)	$	19,117
Treasury securities		29,859		2		(42)		29,819
Mortgage-backed securities		97		2		—		99
Collateralized mortgage obligations		3,293		—		(281)		3,012
Total available-for-sale debt securities	$	54,492	$	4	$	(2,449)	$	52,047

Equity securities:
Mutual funds (fixed income)							$	762

The table below indicates the length of time individual available-for-sale securities have been in a continuous unrealized loss position at March 31, 2023 and December 31, 2022 (in thousands):

March 31, 2023

Less than 12 Months

12 Months or More

Total

Unrealized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

Agency bonds

—

19,534

(1,709)

19,534

(1,709)

Treasury securities

9,928

(16)

—

9,928

(16)

Collateralized mortgage obligations

202

(4)

2,697

(215)

2,899

(219)

Total

10,130

(20)

22,231

(1,924)

32,361

(1,944)


December 31, 2022	Less than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Agency bonds	$	—	$	—	$	19,117	$	(2,126)	$	19,117	$	(2,126)
Treasury securities		9,928		(42)		—		—		9,928		(42)
Collateralized mortgage obligations		1,479		(106)		1,533		(175)		3,012		(281)

Total	$	11,407	$	(148)	$	20,650	$	(2,301)	$	32,057	$	(2,449)

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As of March 31, 2023 and December 31, 2022, the mortgage-backed securities and collateralized mortgage obligations included in the securities portfolio consist of securities issued by U.S. government sponsored agencies. There were no private label mortgage-backed securities or collateralized mortgage obligations held in the securities portfolio as of March 31, 2023 and December 31, 2022.

At March 31, 2023, 47 agency bonds, two treasury securities and 35 collateralized mortgage obligations were in an unrealized loss position. In analyzing an issuer’s financial condition, management considers whether downgrades by bond rating agencies have occurred and industry analysts’ reports.

As of March 31, 2023, management believes that the estimated fair value of securities disclosed above is primarily dependent upon the movement in market interest rates particularly given the negligible inherent credit risk associated with these securities. Although the fair value will fluctuate as the market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in market yielding investments. Additionally, all securities remain highly rated and all issuers have continued to make timely payments of interest and principal.

As the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost basis, which may be maturity, the Company concluded that a credit loss did not exist in its portfolio at March 31, 2023, and therefore, no allowance for credit losses was recorded.

There were no securities sold during the three months ended March 31, 2023 or March 31, 2022. The amortized cost and fair value of debt securities available-for-sale at March 31, 2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands).


	Available-for-Sale
	Amortized Cost		Fair Value		Yield
Due less than one year	$	9,944	$	9,928	3.34	%
Due one year through five years		21,243		19,534	0.62
Due after five years through ten years		—		—	—
Mortgage-backed securities		93		96	4.89
Collateralized mortgage obligations		3,118		2,899	1.95

Total available-for-sale debt securities	$	34,398	$	32,457	1.54	%

At March 31, 2023 and December 31, 2022, the Company had securities with fair values totaling $1,829,000 and $1,810,000, respectively, pledged to secure borrowings.

At March 31, 2023 and December 31, 2022, the Company had securities with fair values totaling $18,765,000 and $21,604,000, respectively, pledged primarily for public fund depositors.

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4. Loans Receivable and Allowance for Credit Losses

On January 1, 2023, the Company adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. All loan information presented as of March 31, 2023 is in accordance with ASC 326. All loan information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP.

The Company’s loans are stated at their face amount, net of deferred fees and costs and discounts, and consist of the classes of loans included in the table below. The Company has elected to exclude accrued interest receivable, totaling $1.1 million at March 31, 2023, from the amortized cost basis of loans.

Major classifications of net loans receivable at March 31, 2023 and December 31, 2022 are as follows (in thousands):


	March 31,		December 31,
	2023		2022
Real estate:
One-to four-family residential	$	109,411	$	110,387
Commercial		157,309		148,567
Construction		17,284		20,406
Commercial and industrial		19,611		17,874
Consumer and other		9,938		8,203

		313,553		305,437
Deferred loan fees, net		(655)		(590)
Allowance for credit losses		(4,090)		(3,992)

Total loans receivable, net	$	308,808	$	300,855

The following table summarizes the activity in the allowance for credit losses - loans by loan class for the three months ended March 31, 2023 (in thousands):

Allowance for Credit Losses - Loans

Beginning

Balance

Provisions

Prior to

Impact of

for Credit

Adoption of

Losses -

Ending

ASC 326

Charge-offs

Recoveries

Loans

Balance

Real Estate:

One- to four-family residential

1,156

—

(28)

1,188

Commercial

1,829

—

122

2,026

Construction

316

(34)

—

(42)

240

Commercial and industrial

308

(84)

(75)

108

258

Consumer and other

—

109

Unallocated

296

(5)

—

(22)

269

Total

3,992

—

(75)

157

4,090

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The following table summarizes the activity in the allowance for credit losses - loans by loan class for the three months ended March 31, 2022 (in thousands):


	Allowance for Loan Losses
	Beginning						Provisions		Ending
	Balance		Charge-offs		Recoveries		(Recovery)		Balance
Real Estate:
One- to four-family residential	$	1,217	$	—	$	—	$	(124)	$	1,093
Commercial		1,357		—		—		349		1,706
Construction		194		—		—		(11)		183
Commercial and industrial		191		—		1		(77)		115
Consumer and other		33		—		—		(4)		29
Unallocated		153		—		—		(43)		110

Total	$	3,145	$	—	$	1	$	90	$	3,236

The following table presents a breakdown of the provision for credit losses for the periods indicated (in thousands):


	Three Months Ended March 31,
	2023		2022
Provision for credit losses:
Provision for loans	$	157	$	90
Provision for unfunded commitments		26		—

Total provision for credit losses	$	183	$	90

The following tables present the amortized cost basis of loans on nonaccrual status and the the amortized cost basis of loans on nonaccrual status for which there was no related allowance for credit losses as of March 31, 2023 and December 31, 2022 (in thousands):


	March 31, 2023
			Nonaccural
	Nonaccrual		With No ACL
Real estate:
One- to four-family residential	$	207	$	207
Commercial		403		403
Construction		145		—
Commercial and industrial		69		69

Total	$	824	$	679


	December 31, 2022
			Nonaccural
	Nonaccrual		With No ACL
Real estate:
One- to four-family residential	$	330	$	330
Commercial		416		416
Construction		147		—
Commercial and industrial		156		156

Total	$	1,049	$	902

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The following table presents the amortized cost basis of collateral-dependent loans by loan class as of March 31, 2023 (in thousands):


	March 31, 2023
					Total
	Real Estate		Non-Real Estate		Collateral		Allowance for
	Secured		Secured		Dependent		Credit Losses-
	Loans		Loans		Loans		Loans
Real estate:
One- to four-family residential	$	419	$	—	$	419	$	—
Commercial		1,542		—		1,542		—
Construction		145		—		145		81
Commercial and industrial		242		69		311		—
Consumer and other		—		—		—		—

Total	$	2,348	$	69	$	2,417	$	81

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The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of March 31, 2023 (in thousands):


	Year of Origination
															Revolving
															Loans
													Revolving		Converted to
	2023		2022		2021		2020		2019		Prior		Loans		Term Loans		Total
Real estate: one- to four-family residential
Pass	$	1,442	$	18,420	$	19,833	$	14,102	$	10,605	$	34,030	$	8,507	$	1,451	$	108,390
Special Mention		—		—		—		—		—		602		—		—		602
Substandard		—		—		—		—		—		419		—		—		419
Total real estate: one- to four-family residential	$	1,442	$	18,420	$	19,833	$	14,102	$	10,605	$	35,051	$	8,507	$	1,451	$	109,411

Real estate: commercial
Pass	$	13,433	$	44,771	$	48,927	$	22,756	$	3,717	$	19,998	$	1,897	$	268	$	155,767
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		1,300		—		242		1,542
Total real estate: commercial	$	13,433	$	44,771	$	48,927	$	22,756	$	3,717	$	21,298	$	1,897	$	510	$	157,309

Real estate: construction
Pass	$	—	$	9,896	$	5,708	$	451	$	—	$	102	$	409	$	—	$	16,566
Special Mention		—		98		475		—		—		—		—		—		573
Substandard		—		—		—		—		—		—		—		145		145
Total real estate: construction	$	—	$	9,994	$	6,183	$	451	$	—	$	102	$	409	$	145	$	17,284

Commercial and industrial
Pass	$	3,703	$	3,839	$	2,709	$	1,058	$	271	$	25	$	7,695	$	—	$	19,300
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		69		—		—		110		—		132		311
Total commercial and industrial	$	3,703	$	3,839	$	2,778	$	1,058	$	271	$	135	$	7,695	$	132	$	19,611

Consumer and other
Pass	$	—	$	2,014	$	2,011	$	1,063	$	—	$	—	$	4,850	$	—	$	9,938
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total consumer and other	$	—	$	2,014	$	2,011	$	1,063	$	—	$	—	$	4,850	$	—	$	9,938

Total loans, gross
Pass	$	18,578	$	78,940	$	79,188	$	39,430	$	14,593	$	54,155	$	23,358	$	1,719	$	309,961
Special Mention		—		98		475		—		—		602		—		—		1,175
Substandard		—		—		69		—		—		1,829		—		519		2,417
Total loans, gross	$	18,578	$	79,038	$	79,732	$	39,430	$	14,593	$	56,586	$	23,358	$	2,238	$	313,553


	Pass		Special Mention		Substandard		Doubtful		Total
Real estate:
One- to four-family residential	$	109,236	$	607	$	544	$	—	$	110,387
Commercial		146,999		—		1,568		—		148,567
Construction		20,259		—		147		—		20,406
Commercial and industrial		17,472		—		402		—		17,874
Consumer and other		8,203		—		—		—		8,203

Total loans, gross	$	302,169	$	607	$	2,661	$	—	$	305,437

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A loan is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” loans include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Loans classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Loans classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific allowance for credit losses is not warranted. Loans that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management. Loans that are performing as agreed are classified as “pass”.

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of March 31, 2023 (in thousands):


													Loans
													Receivable
											Total		90 or More
	30‑59 Days		60‑89 Days		90 or More		Total Past				Loans		Days and
	Past Due		Past Due		Days Past Due		Due		Current		Receivable		and Accruing
Real estate:
One- to four-family residential	$	450	$	14	$	31	$	495	$	108,916	$	109,411	$	—
Commercial		—		—		402		402		156,907		157,309		—
Construction		—		—		145		145		17,139		17,284		—
Commercial and industrial		—		—		69		69		19,542		19,611		—
Consumer and other		—		—		—		—		9,938		9,938		—

Total loans, gross	$	450	$	14	$	647	$	1,111	$	312,442	$	313,553	$	—


													Loans
													Receivable
											Total		90 or More
	30‑59 Days		60‑89 Days		90 or More		Total Past				Loans		Days and
	Past Due		Past Due		Days Past Due		Due		Current		Receivable		and Accruing
Real estate:
One- to four-family residential	$	382	$	—	$	33	$	415	$	109,972	$	110,387	$	—
Commercial		—		—		416		416		148,151		148,567		—
Construction		—		—		147		147		20,259		20,406		—
Commercial and industrial		—		—		156		156		17,718		17,874		—
Consumer and other		—		—		—		—		8,203		8,203		—

Total loans, gross	$	382	$	—	$	752	$	1,134	$	304,303	$	305,437	$	—

The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider resulting in a modified loan. The Company may modify loans through rate reductions, extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.

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The Company identifies loans for potential modification primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future.

No loans were modified during the three months ended March 31, 2023 and 2022 to borrowers experiencing financial difficulty.

The Company closely monitors the performance of modified loans to understand the effectiveness of its modification efforts. Upon the determination that all or a portion of a modified loan is uncollectible, that amount is charged against the allowance for credit losses. There were no payment defaults during the three months ended March 31, 2023 of modified loans.

At March 31, 2023 and December 31, 2022, there was no other real estate owned. There was no real estate in process of foreclosure as of March 31, 2023 and December 31, 2022.

5. Leases

On January 1, 2022, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. The implementation of the new standard resulted in recognition of right-of-use assets and lease liabilities totaling $247,000 at the date of adoption, which are related to the Company’s lease of premises and equipment used in operations.

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable prepaid rent, initial direct costs and any incentives received from the lessor.

The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

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The following tables present information about the Company’s leases as of March 31, 2023 and December 31, 2022, and for the three months ended March 31, 2023 and 2022 (dollars in thousands):


		March 31,			December 31,
		2023			2022
Right-to-use assets	$	928			953
Lease liability	$	885			910
Weighted average remaining lease term		12.56	years		12.67	years
Weighted average discount rate		4.48	%		4.43	%

		Three Months			Three Months
		Ended			Ended
		March 31,			March 31,
		2023			2022
Operating lease cost	$	26		$	15
Short-term lease cost		20			—
Total lease costs	$	46		$	15

Cash paid for amounts included in the measurement of lease liabilities	$	33		$	16

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows:


	As of
	March 31,
Lease payments due (in thousands):	2023

Nine months ending December 31, 2023	$	99
2024		130
2025		122
2026		70
2027		66
Thereafter		713
Total undiscounted cash flows		1,200
Discount		315
Lease Liability	$	885

6. Borrowings

The Company has an unsecured line of credit with Atlantic Community Bankers Bank (“ACBB”) of up to $7,500,000, expiring on June 30, 2023, which it intends to renew annually. Interest on the line of credit is charged at fed funds rate plus 0.25%. The Company had no outstanding borrowings under the ACBB line of credit at March 31, 2023 and December 31, 2022. The Company has an unsecured line of credit with SouthState Bank, N.A. of up to $5,000,000. There were no borrowing outstanding under the SouthState Bank, N.A. line of credit at March 31, 2023. The Company also has the ability to borrow up to $2,000,000 through the Federal Reserve Bank’s discount window. Funds obtained through the discount window are secured by the Company’s U.S. Government and agency obligations. There were no borrowings outstanding through the discount window at March 31, 2023 and December 31, 2022.

The Company has an open-ended line of credit (short-term borrowing) of $45,630,000 to obtain advances from the Federal Home Loan Bank (“FHLB”). Interest on the line of credit is charged at the FHLB’s overnight rate of 5.15% and 4.45% at March 31, 2023 and December 31, 2022 respectively. The Company had no outstanding borrowings under this line of credit at March 31, 2023 and December 31, 2022.

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Maximum borrowing capacity with the FHLB was approximately $164,350,000 and $155,601,000 at March 31, 2023 and December 31, 2022, respectively. The Company has three unfunded letters of credit with the FHLB for $13,000,000 at March 31, 2023 and two letters of credit with FHLB that totaled $8,300,000 at December 31, 2022 that is pledged to secure public funds.

Borrowings from the FHLB at March 31, 2023 and December 31, 2022 consist of the following (dollars in thousands):


	March 31,				December 31,
	2023				2022
			Weighted				Weighted
Maturity	Amount		Rate		Amount		Rate
2023	$	4,500	3.86	%	$	11,057	3.16	%
2024		11,500	4.95			11,500	4.55
2026		2,356	1.32			2,559	1.32
2027		19,500	2.69			19,500	2.69
2028		6,900	3.85			—	—
2032		2,945	1.83			3,022	1.83

Total borrowings	$	47,701	3.39	%	$	47,638	3.12	%

7. Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

The Company had the following off-balance sheet financial instruments whose contract amounts represent credit risk at March 31, 2023 and December 31, 2022 (in thousands):


	March 31,		December 31,
	2023		2022
Commitments to grant loans	$	45,259	$	41,154
Unfunded commitments under lines of credit		11,285		11,520
Standby letters of credit		2,961		3,029

Total off-balance sheet financial instruments	$	59,505	$	55,703

Outstanding loan commitments represent the unused portion of loan commitments available to individuals and companies as long as there is no violation of any condition established in the contract. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based upon management’s credit evaluation of the customer. Various types of collateral may be held, including property and marketable securities. The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers.

8. Contingencies

In the normal course of business, the Company is subject to various lawsuits involving matters generally incidental to its business. As of March 31, 2023 management is of the opinion that the ultimate liability, if any, resulting from any pending

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actions or proceedings will not have a material effect on the consolidated statement of financial condition or of operations of the Company.

9. Stock-Based Compensation

The Company’s stockholders approved the PB Bankshares, Inc. 2022 Equity Incentive Plan (the “2022 Equity Incentive Plan”) at the Annual Meeting on September 28, 2022. An aggregate of 388,815 shares of authorized but unissued common stock of the Company was reserved for future grants of incentive and nonqualified stock options and restricted stock awards and restricted stock units under the 2022 Equity Incentive Plan. Of the 388,815 authorized shares, the maximum number of shares of the Company’s common stock that may be issued under the 2022 Equity Incentive Plan pursuant to the exercise of stock options is 277,725 shares, and the maximum number of shares of the Company’s common stock that may be issued as restricted stock awards or restricted stock units is 111,090 shares.

The product of the number of shares granted and the grant date market price of the Company’s common stock determine the fair value of restricted stock under the Company’s 2022 Equity Incentive Plan. Management recognizes compensation expense for the fair value of restricted stock on a straight-line basis over the requisite service period for the entire award. As of March 31, 2023 and December 31, 2022, there were 14,628 shares available for future awards under this plan, which includes 11,653 shares available for incentive and non-qualified stock options and 2,975 shares available for restricted stock awards. The stock options and restricted shares vest over a five-year period.

Stock option expense was $69,000 for the three month period ended March 31, 2023. At March 31, 2023, total unrecognized compensation cost related to stock options was $1,268,000.

A summary of the Company’s stock option activity and related information for the three month period ended March 31, 2023 was as follows (dollars in thousands, except per share data):

March 31, 2023

Weighted-Average

Remaining

Weighted-Average

Contractual Life

Aggregate Intrinsic

Options

Exercise Price

(in years)

Value

Outstanding, January 1, 2023

266,072

12.28

9.88

—

Granted

—

Exercised

—

Forfeited

—

Outstanding, March 31, 2023

266,072

12.28

9.63

205

Exercisable, March 31, 2023

—

Restricted stock expense was $65,000 for the three month period ended March 31, 2023. At March 31, 2023, the unrecognized compensation expense relating to non-vested stock outstanding was $1,229,000.

A summary of the Company’s restricted stock activity and related information for the three month period ended March 31, 2023, is as follows:


			Weighted-Average
		Number of	Grant Date
	Shares		Fair Value
Non-vested, January 1, 2023		108,115	$	12.28
Granted		—		—
Vested		—		—
Forfeited		—		—

Non-vested at March 31, 2023		108,115	$	12.28

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10. Regulatory Matters

The Bank is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of March 31, 2023, the Bank met all capital adequacy requirements to which it was subject.

Prompt corrective action regulations provide five classifications; well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2023, the most recent regulatory notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.

The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer will face limitations on dividends, stock repurchases and certain discretionary bonus payments to management based on the amount of the shortfall. Under Basel III rules, banks must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The required capital conservation buffer is 2.50%.

On January 1, 2023, the Company adopted ASC 326. Regulatory capital rules permitted the Bank to phase-in the day-one effects of adopting ASC 326 over a three-year transition period. The Bank elected not to take the phase-in but rather to reduce its regulatory capital in the first quarter of 2023 for the day-one effects of adopting ASC 326 in the amount of $140,000.

The following tables present actual and required capital ratios as of March 31, 2023 under the Basel III Capital Rules. Bank capital levels required to be considered well capitalized are based upon prompt corrective action regulations. As of December 31, 2022 the Bank had elected the community bank leverage ratio framework (“CBLR” framework).

Under the final rule, an eligible banking organization can opt out of the CBLR framework and revert back to the risk-weighting framework without restriction. As of March 31, 2023, the Bank was a qualifying community banking organization as defined by the federal banking agencies, but elected to revert back to the risk weighting framework without restriction.

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Actual and required capital amounts (in thousands) and ratios are presented below at quarter-end.

To be Well Capitalized under

For Capital

Prompt Corrective Action

March 31, 2023

Actual

Adequacy Purposes

Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

Total capital (to risk-weighted assets)

42,406

13.35

25,406

8.00

31,757

10.00

Tier 1 capital (to risk-weighted assets)

38,437

12.10

19,054

6.00

25,406

8.00

Common equity (to risk-weighted assets)

38,437

12.10

14,291

4.50

20,642

6.50

Tier 1 capital (to average assets)

38,437

10.06

15,281

4.00

19,102

5.00


					To be Well Capitalized under
					Prompt Corrective Action
December 31, 2022	Actual					Provisions
	Amount		Ratio			Amount		Ratio
Tier 1 capital (to average assets)		37,987	10.00	%		$	33,998	9.00	%

11. Earnings Per Share

The factors used in the earning per share computation follow (dollars in thousands, except per share data):


	Three Months Ended		Three Months Ended
	March 31,		March 31,
	2023		2022
Net income	$	409	$	245

Weighted average common shares outstanding		2,731,251		2,777,250
Less: Average unearned ESOP shares		(199,962)		(211,071)

Weighted average shares outstanding (basic)		2,531,289		2,566,179

Dilutive common stock equivalents		15,469		—

Weighted average shares outstanding (diluted)		2,546,758		2,566,179

Basic earnings per common share	$	0.16	$	0.10
Diluted earnings per common share	$	0.16	$	0.10

12. Fair Value of Financial Instruments

The Company groups its assets and liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or

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liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

Fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is determined at a reasonable point within the range that is most representative of fair value under current market conditions.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective quarter ends, and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each quarter end.

An asset’s or liability’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following methods and assumptions were used by the Company in estimating fair value disclosures for its financial assets and liabilities:

Debt and Equity Securities (Carried at Fair Value)

The fair value of debt and equity securities (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt and equity securities without relying exclusively on quoted market prices for the specific debt and equity securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

Individually Evaluated Collateral Dependent Loans (Generally Carried at Fair Value)

The estimated fair value of individually evaluated collateral dependent loans is based on the value of the underlying collateral or the value of the underlying collateral, less estimated cost to sell, as appropriate. Collateral is generally real estate; however, collateral may include vehicles, equipment, inventory, accounts receivable, and/or other assets. The value of real estate collateral is generally determined using a market valuation approach based on an appraisal conducted by an independent, licensed appraiser. The value of other assets may also be based on an appraisal, market quotations, aging schedules or other sources. Any fair value adjustments are recorded in the period incurred as a provision for credit losses on the Consolidated Statements of Income. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. At March 31, 2023, the fair value consisted of the recorded investment in loans of $64,000, net of a valuation allowance of $81,000. At December 31, 2022, the fair value consisted of the recorded investment in the loans of $52,000, net of a valuation allowance of $95,000. Collateral dependent individually evaluated loans are included in Loans Receivable in the table below, which details the fair value of all the Company’s financial instruments.

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For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2023 and December 31, 2022 are as follows (in thousands):

Quoted

Prices in

Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

March 31, 2023

Total

(Level 1)

(Level 2)

(Level 3)

Agency bonds

19,534

—

19,534

—

Treasury securities

9,928

—

Mortgage-backed securities

—

Collateralized mortgage obligations

2,899

—

2,899

—

Mutual funds

779

—

Total assets measured at fair value on a recurring basis

33,236

10,707

22,529

—


			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
December 31, 2022	Total		(Level 1)		(Level 2)		(Level 3)
Agency bonds	$	19,117	$	—	$	19,117	$	—
Treasury securities		29,819		29,819		—		—
Mortgage-backed securities		99		—		99		—
Collateralized mortgage obligations		3,012		—		3,012		—
Mutual funds		762		762		—		—

Total assets measured at fair value on a recurring basis	$	52,809	$	30,581	$	22,228	$	—

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2023 and December 31, 2022 are as follows (in thousands):


			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
March 31, 2023	Total		(Level 1)		(Level 2)		(Level 3)
Individually evaluated collateral dependent loans	$	64	$	—	$	—	$	64

Total assets measured at fair value on a nonrecurring basis	$	64	$	—	$	—	$	64

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			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
December 31, 2022	Total		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	52	$	—	$	—	$	52

Total assets measured at fair value on a nonrecurring basis	$	52	$	—	$	—	$	52

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to measure fair value at March 31, 2023 and December 31, 2022 (dollars in thousands):


March 31, 2023
Asset Description	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
Individually evaluated collateral dependent loans	$	64	Appraisal of collateral	Selling expenses and discounts ⁽¹⁾	68.4% (68.4%)


December 31, 2022
Asset Description	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
Impaired loans	$	52	Appraisal of collateral	Selling expenses and discounts ⁽¹⁾	68.4% (68.4%)

(1)	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

The carrying amounts and fair values of the Company’s financial instruments as of the indicated dates are presented in the following table:


		March 31, 2023				December 31, 2022
	Fair Value	Carrying		Estimated		Carrying		Estimated
(In thousands)	Hierarchy	Amounts		Fair Values		Amounts		Fair Values
Financial assets:
Cash and cash equivalents	1	$	34,954	$	34,954	$	17,204	$	17,204
Debt securities - available-for-sale	1 & 2		32,457		32,457		52,047		52,047
Equity securities	1		779		779		762		762
Restricted stocks	2		2,232		2,232		2,251		2,251
Loans, net	3		308,808		312,356		300,855		303,108
Accrued interest receivable	1		1,134		1,134		1,123		1,123
Bank owned life insurance	2		7,530		7,530		7,487		7,487

Financial liabilities:
Demand deposits, savings, and money market	1		182,150		182,150		176,370		176,370
Certificates of deposit	2		113,287		108,444		113,125		106,818
Borrowings	2		47,701		47,601		47,638		46,990
Accrued interest payable	1		517		517		424		424

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13. Noninterest Revenues

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and investments. In addition, certain noninterest income streams such as gains on equity investments, income associated with bank owned life insurance, and loan fees are also not in scope of the guidance. Topic 606 is applicable to noninterest revenue streams such as service charges on deposit accounts and gains on sale of other real estate owned. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service Fees on Deposit Accounts

Service charges on deposit accounts consist of fees on depository accounts, which includes NSF fees, miscellaneous deposit-based service fees, monthly maintenance fees for consumer and commercial, and account analysis and related fees (commercial).

Service charges and fees charged daily are a result of an event or service being provided on the day with the Company recognizing the revenue on the same day. The Company has determined that all performance obligations for daily service charges and fees are met on the same day as the transaction and, therefore, should be recognized as these occur.

Monthly maintenance/service charges and fees are charged on the last day of the month (i.e. the same month as charges are incurred) after the system has completed its processing. The Company has determined that all performance obligations for monthly fees are typically met during the month or the same day as the customer has not met its obligation. As monthly fees are typically incurred by the customer throughout the month, the fees should be recognized upon completion of the month since the performance obligations have been met for those services.

Account analysis service charges and fees are recorded on a monthly basis on the last day of the month. The Company has determined that all performance obligations for account analysis fees are met during the month.

Debit Card Income

Debit card income consists of interchange fees from consumer debit card networks and other card related services. Interchange rates are set by the card networks. Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur.

Gains on Sale of Other Real Estate Owned

The sale of other real estate owned is currently recognized on the closing date of sale when all performance obligations have been met, and control of the asset has been transferred to the buyer. Any gains are included in noninterest expenses in the consolidated statements of operations.

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For the Company, there are no other material revenue streams within the scope of Topic 606. The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2023 and 2022 (in thousands):


	Three Months Ended
	March 31,
Noninterest income in scope of Topic 606	2023		2022
Service charges on deposit accounts	$	47		42
Debit card income		50		48
Other service charges		19		17
Loss on sale of premises and equipment		(40)		—
Other noninterest income		7		11
Noninterest income (in scope for Topic 606)		83		118
Noninterest income (out of scope for Topic 606)		55		4
Total noninterest income	$	138	$	122

Contract Balances

A contract assets balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transaction activity, or standard month-end revenue accruals. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term contracts with customers, and therefore, does not experience significant contract balances. As of March 31, 2023 and December 31, 2022, the Company did not have any significant contract balances.

Contract Acquisition Costs

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize as an expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the assets that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic the Company did not capitalize any contract acquisition cost.

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

This discussion and analysis reflects our financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the accompanying financial statements. You should read the information in this section in conjunction with the business and financial information regarding the Company and Bank provided in this Form 10-Q and in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2023.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “target” 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 asset quality of our loan and investment portfolios; and


	·	estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations 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. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this quarterly report.

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;

•

changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses;

•

our ability to access cost-effective funding;

•

recent events involving the failure of financial institutions may adversely affect our business, and the market price of our common stock;

•

fluctuations in real estate values and both residential and commercial real estate market conditions;

•

demand for loans and deposits in our market area;

•

our ability to implement and change our business strategies;

•

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;

•

the rate of delinquencies and amounts of loans charged-off;

•

adverse changes in the securities markets;

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•

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 capitalize on strategic opportunities;

•our ability to successfully introduce new products and services;

•

our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;

•our ability to retain our existing customers;

•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 or the Public Company Accounting Oversight Board;

•changes in our organization, compensation and benefit plans;

•changes in the quality or composition of our loan or investment portfolios;

•

a breach in security of our information systems, including the occurrence of a cyber incident or a deficiency in cyber security;

•

conditions relating to the COVID-19 pandemic;

•political instability or civil unrest;

•acts of war or terrorism;

•

competition and innovation with respect to financial products and services by banks, financial institutions and non-traditional providers, including retail businesses and technology companies;

•the failure to attract and retain skilled people;

•

any future FDIC insurance premium increases, or special assessment may adversely affect our earnings;

•the fiscal and monetary policies of the federal government and its agencies; and

•

other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services described elsewhere in this quarterly report.

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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Overview

Our business has traditionally focused on originating fixed-rate one- to four-family residential real estate loans and offering retail deposit accounts. In September 2019, we hired our current president and chief executive officer, Janak M. Amin, and under his leadership team we have developed a commercial lending infrastructure, with a particular focus on expanding our commercial real estate and commercial and industrial loan portfolios to diversify our balance sheet, improve our interest rate risk exposure and increase interest income. Our primary market area now consists of Chester and Lancaster Counties and the surrounding Pennsylvania counties of Cumberland, Dauphin, and Lebanon. Management has also emphasized the importance of attracting commercial deposit accounts from its customers. As a result of these initiatives and the completion of our initial public stock offering on July 14, 2021, we were able to grow and strengthen our balance sheet. There was an increase in our consolidated assets of $6.5 million, or 1.7%, from $386.5 million at December 31, 2022 to $393.1 million at March 31, 2023 and an increase in our deposits of $5.9 million, or 2.1%, from $289.5 million at December 31, 2022 to $295.4 million at March 31, 2023.

Our results of operations depend primarily on our net interest income and, to a lesser extent, noninterest income. Net interest income is the difference between the interest income we earn on our interest- earning assets, consisting primarily of loans, debt securities and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting primarily of savings accounts, demand accounts, money market accounts, certificates of deposit and borrowings. Noninterest income consists primarily of debit card income, service charges on deposit accounts, earnings on bank owned life insurance, other service charges and other income. Our results of operations also are affected by our provision for credit losses and noninterest expenses. Noninterest expenses consists primarily of salaries and employee benefits, occupancy and equipment, data and item processing costs, advertising and marketing, professional fees, directors’ fees, FDIC insurance premiums, Pennsylvania shares tax, debit card expenses, and other expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, government policies and actions of regulatory authorities.

For the three months ended March 31, 2023, we reported net income of $409,000 compared to net income of $245,000 for the three months ended March 31, 2022. The period over period increase in earnings of $164,000 was primarily attributable to an increase in net interest income, partially offset by increases in noninterest expenses, provision for credit losses and income tax expense.

Critical Accounting Estimates

The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

In 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

Allowance for credit losses on loans. We establish the allowance for credit losses through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the allowance for credit losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

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The allowance for credit losses (“ACL”) at March 31, 2023 represents the Company’s current estimate of the lifetime credit losses expected from its loan portfolio. Management estimates the ACL by projecting a lifetime loss rate conditional on a forecast of economic parameters and other qualitative adjustments, for the loans’ expected remaining term.

Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. In addition, management’s estimate of expected credit losses is based on the discounted cash flows over the remaining life of loans held for investment, and changes in expected prepayment behavior may result in changes in the remaining life of loans and expected credit losses.

The allowance may be affected materially by a variety of qualitative factors that the Company considers to reflect its current judgement of various events and risks that are not measured in our statistical procedures. These qualitative risk factors include: (1) lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices; (2) national, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans; (3) nature and volume of the portfolio and terms of loans; (4) volume and severity of past due, classified and nonaccrual loans as well as loan modifications; (5) existence and effect of any concentrations of credit and changes in the level of such concentrations; (6) effect of external factors, such as competition and legal and regulatory requirements; (7) experience, ability, and depth of lending department management and other relevant staff; (8) quality of loan review and board of directors oversight; (9)The effect of other external factors (i.e. competition, legal and regulatory requirements); and (10) the level of estimated credit losses change in the inflationary environment. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. In evaluating the level of the allowance, we consider a range of possible assumptions and outcomes related to the various factors identified above. The level of the allowance is particularly sensitive to changes in the actual and forecasted probability of default of benchmarked banks and changes in current conditions or reasonably expected future conditions affecting the collectability of loans.

Although we believe that we use the best information available to establish the allowance for credit losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the FDIC and the PADOB, as an integral part of their examination process, periodically review our allowance for credit losses, and as a result of such reviews, we may have to adjust our allowance for credit losses. However, regulatory agencies are not directly involved in establishing the allowance for credit losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Deferred tax assets. We make estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expenses. We also estimate a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision.

In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies, these assumptions require us to make judgments about future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

Realization of a deferred tax asset requires us to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. Valuation allowances are provided to reduce deferred tax assets to an amount that is more likely than not to be realized. In evaluating the need for a valuation allowance, we must estimate our taxable income in future years and the impact of tax planning strategies. If we were to determine that we would not be able to realize a portion of our net deferred tax asset in the future for which there is no valuation allowance, an adjustment to the

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net deferred tax asset would be charged to earnings in the period such determination was made. Conversely, if we were to make a determination that it is more likely than not that the deferred tax assets for which we had established a valuation allowance would be realized, the related valuation allowance would be reduced and a benefit to earnings would be recorded.

Estimation of fair values. Fair values for securities available-for-sale are obtained from an independent third-party pricing service. Where available, fair values are based on quoted prices on a nationally recognized securities exchange. If quoted prices are not available, fair values are measured using quoted market prices for similar benchmark securities. Management generally makes no adjustments to the fair value quotes provided by the pricing source. The fair values of foreclosed real estate and the underlying collateral value of individually evaluated collateral dependent loans are typically determined based on evaluations by third parties, less estimated costs to sell. When necessary, appraisals are updated to reflect changes in market conditions.

Comparison of Financial Condition at March 31, 2023 and December 31, 2022

Total assets. Total assets increased $6.5 million to $393.1 million at March 31, 2023 from $386.5 million at December 31, 2022. The increase in assets was primarily due to increases in cash and cash equivalents and net loans receivable, partially offset by a decrease in debt securities available-for-sale. Growth was driven by maturity of short-term treasury securities that were not reinvested in additional securities and commercial loan growth. Cash and cash equivalents increased $17.8 million to $35.0 million at March 31, 2023 from $17.2 million at December 31, 2022. Gross loans increased $8.1 million to $313.6 million at March 31, 2023 from $305.4 million at December 31, 2022, primarily due to growth in the commercial real estate portfolio. Debt securities available-for-sale decreased $17.5 million to $34.5 million at March 31, 2023 from $52.0 million at December 31, 2022, primarily due to the maturity of short-term treasury securities.

Net loans receivable increased $8.0 million, or 2.6%, to $308.8 million at March 31, 2023 from $300.9 million at December 31, 2022 primarily due to increases in the commercial real estate portfolio. Commercial real estate loans increased $8.7 million, or 5.9%, to $157.3 million at March 31, 2023 from $148.6 million at December 31, 2022. The increase in commercial real estate loans was primarily due to the continued implementation of our strategy to expand our commercial loan portfolio to diversify our balance sheet. Commercial and industrial loans increased $1.7 million, or 9.7%, to $19.6 million at March 31, 2023 from $17.9 million at December 31, 2022 primarily due to the same strategy to expand and diversify our portfolio. Consumer and other loans increased $1.7 million, or 21.2%, to $9.9 million at March 31, 2023 from $8.2 million at December 31, 2022. Construction real estate loans decreased $3.1 million, or 15.3%, to $17.3 million at March 31, 2023 from $20.4 million at December 31, 2022 primarily due to construction completion and conversion to real estate loans.

Cash and cash equivalents increased $17.8 million, or 103.2%, to $35.0 million at March 31, 2023 from $17.2 million at December 31, 2022 due to an increase in fed funds sold and cash and due from banks. The increase was due to the maturity of $19.6 million of short-term treasury securities that was not reinvested.

Debt securities available-for-sale decreased $19.6 million, or 37.6%, to $32.5 million at March 31, 2023 from $52.0 million at December 31, 2022 due to the maturity of $20.2 million of treasury securities, partially offset by, a $505,000 year to date increase in the fair market value of debt securities available for sale due to the decreases in market interest rates.

Deposits and borrowings. Total deposits increased $5.9 million, or 2.1%, to $295.4 million at March 31, 2023 from $289.5 million at December 31, 2022. The increase in our deposits reflected a $11.7 million increase in interest-bearing demand deposits accounts, a $162,000 increase in certificates of deposit, a $132,000 increase in noninterest-bearing demand deposit accounts, partially offset by a $3.3 million decrease in savings accounts and a $2.8 million decrease in money market accounts due to customers utilizing their deposits. Demand deposits increased primarily due to management’s continuing focus on increasing the commercial deposit accounts of its customers. The increase in certificates of deposit was due to offering a deposit special to maintain current certificate of deposit customers, partially offset by a decrease in listing service deposits that were not replaced. Uninsured deposits, excluding public deposits, which are secured with pledged investments and FHLB Letters of Credit, were approximately $55.9 million and $49.8 million, or 18.9% and 17.2% of total deposits at March 31, 2023 and December 31, 2022, respectively.

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Total borrowings from the FHLB increased $63,000, or 0.1%, to $47.7 million at March 31, 2023 from $47.6 million at December 31, 2022 due to replacement of advances that matured during the first quarter of 2023.

Stockholders’ Equity. Stockholders’ equity increased $304,000, or 0.7%, to $46.3 million at March 31, 2023 from $46.0 million at December 31, 2022. The increase was due to an increase of $409,000 for current period net income and a decrease of $399,000 in accumulated other comprehensive loss as a result of an increase in the fair market value of our debt securities available-for-sale year to date 2023, partially offset by the repurchase of 35,651 shares of stock for $498,000.

Comparison of Operating Results for the Three Months Ended March 31, 2023 and March 31, 2022

General. Net income increased $164,000, or 66.9%, to $409,000 for the three months ended March 31, 2023 from $245,000 for the three months ended March 31, 2022. The $164,000 period over period increase in earnings was attributable to a $1.6 million increase in interest and dividend income and a $16,000 increase in noninterest income, partially offset by a $740,000 increase in interest expenses, a $533,000 increase in noninterest expense, a $235,000 increase in income tax expense; and a $93,000 increase in the provision for credit losses.

Interest and dividend income. Total interest and dividend income increased $1.6 million, or 56.9%, to $4.4 million for the three months ended March 31, 2023 from $2.8 million for the three months ended March 31, 2022. The increase in interest and dividend income was the result of a 130 basis points increase in the average yield on interest-earning assets. The average yield on average interest-earning assets increased to 4.66% for the three months ended March 31, 2023 from 3.36% for the three months ended March 31, 2022. The increase was also due to a $44.9 million increase period over period in the average balance of interest-earning assets, driven by a $39.5 million increase in average loan balances and an $8.8 million increase in the average balance of debt and equity securities available for sale, partially offset by a $4.5 million decrease in the average balance of cash and cash equivalents.

Interest income on loans, including fees, increased $1.1 million, or 40.5%, to $3.8 million for the three months ended March 31, 2023 as compared to $2.7 million for the three months ended March 31, 2022, reflecting a 93 basis points increase in the average yield on loans to 5.05% for the three months ended March 31, 2023 from 4.12% for the three months ended March 31, 2022 and an increase in the average balance of loans to $304.4 million for the three months ended March 31, 2023 from $264.9 million for the three months ended March 31, 2022. The average yield on loans increased as a result of the higher interest rate environment when new loans were originated and the increase in the variable rate loan yields. The increase in the average balance of loans was due primarily to an increase in the average balances of commercial real estate loans reflecting our strategy to grow commercial lending. The three months ended March 31, 2023 and 2022 included $-0- and $28,000, respectively, of PPP loan income in interest and net fees.

Interest income on securities and restricted stocks increased $114,000, or 165.2%, to $183,000 for the three months ended March 31, 2023 from $69,000 for the three months ended March 31, 2022. The increase in interest income on debt and equity securities available for sale of $83,000 for the three months ended March 31, 2023 from the three months ended March 31, 2022 was due to a 70 basis points increase in the average yield on debt and equity securities available for sale to 1.63% for the three months ended March 31, 2023 from 0.93% for the three months ended March 31, 2022 and an increase in the average balance of debt and equity securities available for sale of $8.8 million, or 33.8%, to $34.8 million for the three months ended March 31, 2023 from $26.0 million for the three months ended March 31, 2022. The increase in the average yield and balance of debt and equity securities available for sale was primarily due to the purchase of higher yielding treasury securities during 2022. Restricted stock income is also included in the interest income on securities. Restricted stock income increased $31,000 for the three months ended March 31, 2023 from the three months ended March 31, 2022 due to a 477 basis points increase in the average yield on restricted stocks to 7.40% for the three months ended March 31, 2023 from 2.63% for the three months ended March 31, 2022 and due to an increase in the average balance of restricted stocks of $778,000, or 53.6%, to $2.2 million for the three months ended March 31, 2023 from $1.5 million for the three months ended March 31, 2022. The increase in average yield on restricted stock was due to the Federal Home Loan Bank dividend increasing and the average balance in restricted stocks increased due to increases in Federal Home Loan Bank borrowings that requires an increase in restricted stock.

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Interest income on cash and cash equivalents increased $376,000, to $388,000 for the three months ended March 31, 2023, from $12,000 for the three months ended March 31, 2022. The increase in interest income on cash and cash equivalents was attributable to an increase in the average yield on cash and cash equivalents of 396 basis points to 4.07% for the three months ended March 31, 2023 from 0.11% for the three months ended March 31, 2022, partially offset by a decrease in the average balance of cash and cash equivalents. The increase in the average yield of cash and cash equivalents was due to the Federal Reserve Bank increasing the Fed Funds rate by 475 basis points during 2022 and year to date 2023. The decrease in the average balance of cash and cash equivalents of $4.5 million, or 10.5%, to $38.2 million for the three months ended March 31, 2023 from $42.7 million for the three months ended March 31, 2022 was due to funding loan originations and investing in treasury securities.

Interest expense. Interest expense increased $740,000, or 126.7%, to $1.3 million for the three months ended March 31, 2023 20from $584,000 for the three months ended March 31, 2022 as a result of increases in interest expense on borrowings and deposits in the rising interest rate environment. The increase was due to an 86 basis points increase in the average cost of interest-bearing liabilities from 0.86% for the three months ended March 31, 2022 to 1.72% for the three months ended March 31, 2023 and an increase in the average balance of interest-bearing liabilities of $38.5 million to $311.5 million for the three months ended March 31, 2023 from $273.0 million for the three months ended March 31, 2022.

Interest expense on deposits increased $493,000, or 113.3%, to $928,000 for the three months ended March 31, 2023 from $435,000 for the three months ended March 31, 2022 as a result of a 70 basis points increase in the average cost of interest-bearing deposits and an increase of $20.6 million in the average balance of our interest-bearing deposits. The increase in the average cost of deposits was primarily due to a 81 basis points increase in the average cost of certificates of deposit, traditionally our higher costing deposits, to 2.21% for the three months ended March 31, 2023 from 1.40% for the three months ended March 31, 2022. The average cost of transaction accounts, traditionally our lower costing deposit accounts, consisting of demand, savings, and money market accounts increased 49 basis points to 0.85% for the three months ended March 31, 2023 from 0.36% for the three months ended March 31, 2022. The increase in rates was due to the rising interest rate environment. An increase of $26.8 million in the average certificates of deposits to $112.3 million for the three months ended March 31, 2023 from $85.6 million for the three months ended March 31, 2022 was partially offset by a decrease in the average balance of our transaction accounts by $6.2 million to $150.8 million for the three months ended March 31, 2023 from $157.0 million for the three months ended March 31, 2022 due to customers moving money to certificates of deposits and utilizing their deposits. The certificates of deposits increased due to promotional specials to increase deposits in the rising rate environment.

Interest expense on Federal Home Loan Bank borrowings increased $247,000, or 165.8%, to $396,000 for the three months ended March 31, 2023 from $149,000 for the three months ended March 31, 2022. The increase in interest expense on Federal Home Loan Bank borrowings resulted from an increase in the average cost of these funds of 132 basis points to 3.28% for the three months ended March 31, 2023 from 1.96% for the three months ended March 31, 2022 as higher cost Federal Home Loan Bank borrowings were incurred during 2023 to increase liquidity. There was an increase of $17.9 million in the average Federal Home Loan Bank borrowings to $48.3 million for the three months ended March 31, 2023 from $30.4 million for the three months ended March 31, 2022 as a result of using Federal Home Loan Bank borrowings to fund loan growth.

Net interest income. Net interest income increased $845,000, or 38.4%, to $3.0 million for the three months ended March 31, 2023 as compared to $2.2 million for the three months ended March 31, 2022. The increase in net interest income for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to the increases in interest income on loans, cash and cash equivalents and debt securities available-for-sale, partially offset by increases in interest expense on deposits and borrowings. Average net interest-earning assets increased by $6.1 million to $68.1 million for the three months ended March 31, 2023 from $62.0 million for the three months ended March 31, 2022. Our net interest margin increased 60 basis points to 3.26% for the three months ended March 31, 2023 from 2.66% for the three months ended March 31, 2022. Our net interest rate spread increased 44 basis points to 2.94% for the three months ended March 31, 2023 from 2.50% for the three months ended March 31, 2022.

Provision for credit losses. We charge provisions for credit losses to operations in order to maintain our allowance for credit losses on loans and reserve for unfunded commitments at a level that is considered reasonable and necessary to absorb expected credit losses inherent in the loan portfolio and expected losses on commitments to grant loans that are expected to be advanced at the consolidated balance sheet date. In determining the level of the allowance for credit losses,

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we consider our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or conditions change. We assess the allowance for credit losses on a quarterly basis and make provisions for credit losses in order to maintain the allowance.

Based on our evaluation of the above factors, we recorded a $183,000 provision for credit losses for the three months ended March 31, 2023 compared to a $90,000 provision for credit losses for the three months ended March 31, 2022. The increase in the provision for credit losses was primarily driven by loan growth and in part to including $26,000 of provision for unfunded commitments as a result adopting ASC 326 as of January 1, 2023. The allowance for credit losses was $4.1 million, or 1.30%, of loans outstanding at March 31, 2023 and $4.0 million, or 1.31%, of loans outstanding at December 31, 2022.

To the best of our knowledge, we have recorded our best estimate of expected losses in the loan portfolio and for unfunded commitments at March 31, 2023. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for credit losses. In addition, the PADOB and the FDIC, as an integral part of their examination process, will periodically review our allowance for credit losses, and as a result of such reviews, we may have to adjust our allowance for credit losses. However, regulatory agencies are not directly involved in establishing the allowance for credit losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.

Noninterest income. Noninterest income information is as follows.


	Three Months Ended
	March 31,				Change
	2023		2022		Amount		Percent

	(Dollars in thousands)
Service charges on deposit accounts	$	47	$	42	$	5	11.9	%
Gain (Loss) on equity investments		12		(40)		52	130.0
Bank owned life insurance income		43		44		(1)	(2.3)
Debit card income		50		48		2	4.2
Other service charges		19		17		2	11.8
Loss on disposal of equipment		(40)		—		(40)	(100.0)
Other income		7		11		(4)	(36.4)
Total noninterest income	$	138	$	122	$	16	13.1	%

Noninterest income increased by $16,000, or 13.1%, to $138,000 for the three months ended March 31, 2023 from $122,000 for the three months ended March 31, 2022. The increase in noninterest income resulted primarily from an increase in the gain (loss) on equity investments, partially offset by the increase in the loss on sale of premises and equipment. The gain on equity investments net increased $52,000 as a result of the increase in fair value of the equity investments. The $40,000 loss on disposal of equipment was a result of replacing the non-depository ATMs with full functioning ATMs as part of our continued investment in our infrastructure and technology. The new ATMs improve the client experience by providing twenty-four hours seven days a week access to banking services.

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Noninterest Expenses. Noninterest expenses information is as follows.


	Three Months Ended
	March 31,				Change
	2023		2022		Amount		Percent

	(Dollars in thousands)
Salaries and employee benefits	$	1,349	$	981	$	368	37.5	%
Occupancy and equipment		164		150		14	9.3
Data and item processing		267		242		25	10.3
Advertising and marketing		25		22		3	13.6
Professional fees		180		167		13	7.8
Directors’ fees		107		61		46	75.4
FDIC insurance premiums		40		22		18	81.8
Pennsylvania shares tax		77		80		(3)	(3.8)
Debit card expenses		35		34		1	2.9
Other		221		173		48	27.7
Total noninterest expenses	$	2,465	$	1,932	$	533	27.6	%

Noninterest expenses increased $533,000, or 27.6%, to $2.5 million for the three months ended March 31, 2023 from $1.9 million for the three months ended March 31, 2022. The increase in noninterest expenses was primarily the result of increases in salaries and employee benefits expense of $368,000, other of $48,000 and Directors’ fees of $46,000. Salaries and employee benefits expense increased $368,000 primarily due to stock-based compensation expense of $101,000 for the first quarter of 2023, the hiring of additional staff and annual salary increases. Other expense increased $48,000 due to the increases in Bank ordered loan appraisal fees, education and training expenses, and stationery & supplies. Directors’ fees increased $46,000 primarily due to stock-based compensation expense of $32,000 for the first quarter of 2023, adding an additional Director in November 2022 and fee increases to all Directors.

Income tax expense. Income tax expense increased $71,000, to $126,000 for the three months ended March 31, 2023 from $55,000 for the three months ended March 31, 2022. The effective tax rates were 23.6% and 18.3% for the three month periods ended March 31, 2023 and 2022, respectively. The increase in income tax expense for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily due to an increase in income before income taxes and relatively consistent levels of income not subject to taxes.

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Average balances and yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or interest expense.


	For the Three Months Ended March 31,
	2023							2022
	Average							Average
	Outstanding					Average		Outstanding					Average
	Balance			Interest		Yield/Rate (4)		Balance			Interest		Yield/Rate (4)

	(Dollars in thousands)
Interest-earning assets:
Loans	$	304,396		$	3,798	5.05	%	$	264,856		$	2,703	4.12	%
Debt and equity securities available for sale		34,787			142	1.63	%		26,007			59	0.93	%
Restricted stocks		2,229			41	7.40	%		1,451			10	2.63	%
Cash and cash equivalents		38,206			388	4.07	%		42,676			12	0.11	%
Total interest-earning assets		379,618			4,369	4.66	%		334,990			2,784	3.36	%
Noninterest-earning assets		9,200							8,943
Total assets	$	388,818						$	343,933

Interest-bearing liabilities:
Interest-bearing demand deposits	$	77,583			111	0.58	%	$	72,342			51	0.28	%
Savings deposits		21,250			18	0.35	%		21,906			19	0.35	%
Money market deposits		51,992			186	1.45	%		62,757			70	0.45	%
Certificates of deposit		112,342			613	2.21	%		85,551			295	1.40	%
Total interest-bearing deposits		263,167			928	1.43	%		242,556			435	0.73	%
Borrowings		48,325			396	3.28	%		30,444			149	1.96	%
Total interest-bearing liabilities		311,492			1,324	1.72	%		273,000			584	0.86	%
Noninterest-bearing demand deposits		27,775							23,882
Other noninterest-bearing liabilities		3,017							1,122
Total liabilities		342,284							298,004
Stockholders' equity		46,534							45,929
Total liabilities and stockholders' equity	$	388,818						$	343,933
Net interest income				$	3,045						$	2,200
Net interest rate spread (1)						2.94	%						2.50	%
Net interest-earning assets (2)	$	68,126						$	61,990
Net interest margin (3)						3.26	%						2.66	%
Average interest-earning assets to interest-bearing liabilities		121.87	%						122.71	%

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(1)	Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(2)	Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(3)	Net interest margin represents net interest income divided by average total interest-earning assets.

(4)	Annualized.

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Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total increase (decrease) column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.


	Three Months Ended
	March 31, 2023 vs. 2022
	Increase (Decrease) Due to				Total
					Increase
	Volume		Rate		(Decrease)

	(In thousands)
Interest-earning assets:
Loans	$	402	$	693	$	1,095
Debt and equity securities available for sale		20		63		83
Restricted stocks		5		26		31
Cash and cash equivalents		(1)		377		376
Total interest-earning assets		426		1,159		1,585

Interest-bearing liabilities:
Interest-bearing demand deposits		4		56		60
Savings deposits		(1)		—		(1)
Money market deposits		(12)		128		116
Certificates of deposit		92		226		318
Total deposits		83		410		493
Borrowings		86		161		247
Total interest-bearing liabilities		169		571		740
Change in net interest income	$	257	$	588	$	845

Non-Performing Assets and Allowance for Credit Losses

Non-performing loans. Loans are reviewed on a weekly basis by management and again by our credit committee on a monthly basis. Non-accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. All loans that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and in the process of collection. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method.

Real estate owned. When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal to determine the current market value of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for credit losses. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell. We had no real estate owned at March 31, 2023 or as of December 31, 2022.

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Non-Performing Assets. The following table sets forth information regarding our non-performing assets.


		March 31,			December 31,
	2023			2022

	(Dollars in thousands)
Non-accrual loans:
Real estate:
One- to four-family residential	$	207		$	330
Commercial		403			416
Construction		145			147
Commercial and industrial		69			156
Consumer and other		—			—
Total non-accrual loans		824			1,049

Accruing loans past due 90 days or more
Real estate:
One- to four-family residential		—			—
Commercial		—			—
Construction		—			—
Commercial and industrial		—			—
Consumer		—			—
Total accruing loans past due 90 days or more		—			—
Total non-performing loans	$	824		$	1,049
Foreclosed assets		—			—
Total non-performing assets	$	824		$	1,049


Total non-performing loans to total loans		0.26	%		0.34	%
Total non-accrual loans to total loans		0.26	%		0.34	%
Total non-performing assets to total assets		0.21	%		0.27	%

Non-performing loans were $824,000, or 0.26% of total loans, at March 31, 2023 and $1.0 million, or 0.34% of total loans, at December 31, 2022. During the three months ended March 31, 2023, payments on non-accrual loans, the return of a one-to four-family residential real estate loan from non-accrual to accruing status and partial charge-off on a commercial and industrial loan resulted in the decrease in non-accrual loans.

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Allowance for credit losses. The following table sets forth activity in our allowance for credit losses for the periods indicated.


	At or For the Three Months Ended March 31,
	2023			2022

	(Dollars in thousands)
Allowance for credit losses at beginning of year	$	3,992		$	3,145
Provision for credit losses		157			90
Charge-offs:
Real estate:
One- to four-family residential		—			—
Commercial		—			—
Construction		—			—
Commercial and industrial		(75)			—
Consumer and other		—			—
Total charge-offs		(75)			—

Recoveries:
Real estate:
One- to four-family residential		15			—
Commercial		—			—
Construction		—			—
Commercial and industrial		1			1
Consumer and other		—			—
Total recoveries		16			1

Net (charge-offs) recoveries		(59)			1

Allowance for credit losses at end of period	$	4,090		$	3,236

Allowance to non-accrual loans		496.36	%		205.46	%
Allowance to total loans outstanding at the end of the period		1.30	%		1.16	%
Net charge-offs to average loans outstanding during the period (annualized)		0.08	%		—	%

The provision for credit losses increased $93,000, or 103.3%, to $183,000 for the three months ended March 31, 2023 from $90,000 for the three months ended March 31, 2022. The increase for the period ended March 31, 2023 was due to loan growth during the current period and in part for including the provision for unfunded commitments of $26,000 as a result of the adoption of Current Expected Credit Losses accounting standard in the first quarter of 2023. An additional partial charge-off of a previously written down commercial and industrial loan for $75,000 was taken in the first quarter of 2023, partially offset by recoveries of $16,000. Delinquencies remain benign, reserves are deemed to be adequate and the allowance coverage ratio has improved from the first quarter a year ago. The allowance to total loans outstanding at the end of the period was 1.30% at March 31, 2023, improving from 1.16% at March 31, 2022 and remaining consistent with December 31, 2022 at 1.31%.

Liquidity and Capital Resources

Liquidity management. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from sales, maturities and calls of securities. We also have the ability to borrow from the Federal Home Loan Bank of Pittsburgh. At March 31, 2023, we had the ability to borrow approximately $164.4 million from the Federal Home Loan Bank of Pittsburgh, of which $47.7 million had been advanced in addition to $13.0 million held in reserve to secure three letters of credit to collateralize municipal deposits. Additionally, at March 31, 2023, we had the ability to borrow $7.5 million from the Atlantic Community Bankers Bank, $5.0 million from SouthState Bank, N.A.

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and we also maintained a line of credit of $2.0 million with the Federal Reserve Bank of Philadelphia at March 31, 2023. We did not borrow against the credit line with the Atlantic Community Bankers Bank, SouthState Bank, N.A., or the Federal Reserve Bank of Philadelphia during the three months ended March 31, 2023. We did not borrow against the credit line with the Atlantic Community Bankers Bank or the Federal Reserve Bank of Philadelphia during the three months ended March 31, 2022

The board of directors is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We seek to maintain a liquidity ratio of 5.0% or greater. For the three months ended March 31, 2023 and 2022, our liquidity ratio averaged 12.0% and 14.6%, respectively. We believe that we had enough sources of liquidity to satisfy our short and long-term liquidity needs as of March 31, 2023.

We monitor and adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand; (2) expected deposit flows; (3) yields available on cash and cash equivalents and securities; and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in cash and cash equivalents and short-and intermediate-term securities.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents, which include federal funds sold. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2023, cash and cash equivalents totaled $35.0 million. Debt securities classified as available-for-sale, which provide additional sources of liquidity, totaled $32.5 million at March 31, 2023.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of March 31, 2023, totaled $45.3 million, or 40.0% of our certificates of deposit, and 15.3% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Capital management. At March 31, 2023, Presence Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines. See Note 10 of the Notes to the Financial Statements for more information regarding our capital resources.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At March 31, 2023, we had outstanding commitments to originate loans of $45.3 million, unused lines of credit totaling $11.3 million and $3.0 million in stand-by letters of credit outstanding. We anticipate that we will have sufficient funds available to meet our current lending commitments. Certificates of deposit that are scheduled to mature in less than one year from March 31, 2023 totaled $45.3 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new deposits, which may result in higher levels of interest expense.

Contractual obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for equipment, agreements with respect to borrowed funds and deposit liabilities.

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Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. Higher inflation and its impacts, nationally or in the markets that the Company servers could adversely affect, among other things, real estate valuations, unemployment levels, the ability of businesses to remain viable, and consumer and business confidence, which could lead to decreases in demand for loans and deposits and increases in loan delinquencies and defaults.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company is not required to provide the information related to this item.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.

As of the end of the period covered by this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on their evaluation of the Company’s disclosure controls and procedures as of March 31, 2023, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are operating in an effective manner.

Internal control over financial reporting.

The Company adopted Financial Accounting Standards Board Accounting Standards Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and related updates, as described further in Note 2 to the consolidated interim financial statements, effective January 1, 2023. Related to the adoption of these new accounting standards, the Company modified certain internal controls and designed and implemented certain new internal controls over the measurement of the allowance for credit losses on loans and the reserve for unfunded commitments and related disclosures. New internal controls related primarily to the modeling of expected credit losses on loans, including controls over critical data and other inputs and model results.

Except as noted above, there were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2023 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

As of March 31, 2023, the Company is not currently a named party in a legal proceeding, the outcome of which would have a material effect on the financial condition or results of operations of the Company.

Item 1A. Risk Factors

A smaller reporting company is not required to provide the information related to this item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered securities during the quarter ended March 31, 2023.

The following table reports information regarding repurchases by the Company of its common stock in each month of the quarter ended March 31, 2023:


						Total Number
						of Shares		Maximum
						Purchased as		Number of
						Part of		Shares that
						Publicly		May Yet Be
		Total Number		Average Price		Announced		Purchased
		of Shares		Paid Per		Plans or		Under Plans or
Period		Purchased		Share		Programs		Programs (1)
	January 1 through January 31, 2023		—	$	—		—		—
	February 1 through February 28, 2023		35,651		13.97		75,940		201,785
	March 1 through March 31, 2023		—		—		—		—
	Total		35,651	$	13.97		75,940		201,785

(1)

On August 5, 2022, the Company announced it adopted a stock repurchase program. The stock repurchase program authorizes the Company to repurchase up to an aggregate of 277,725 shares, or approximately 10% of its then outstanding shares. The repurchase program permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The repurchase program will expire on August 1, 2023, unless extended by the Board of Directors.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

See Exhibit Index.

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EXHIBIT INDEX


Exhibit No.		Description

31.1†		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2†		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1†		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2†		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS†		XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH†		XBRL Taxonomy Extension Schema Document

101.CAL†		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF†		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB†		XBRL Taxonomy Extension Label Linkbase Document

101.PRE†		XBRL Taxonomy Extension Presentation Linkbase Document
104†		Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

† Filed herewith.

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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, duly authorized.

Date: May 15, 2023


	PB BANKSHARES, INC.

	By:	/s/ Janak M. Amin
	Name:	Janak M. Amin
	Title:	President and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Lindsay S. Bixler
	Name:	Lindsay S. Bixler
	Title:	Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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PB Bankshares (NASDAQ:PBBK)
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From May 2023 to May 2024

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