PB Bankshares, Inc. - Quarter Report: 2021 September (Form 10-Q)

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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 September 30, 2021

☐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 - 2,777,250 shares outstanding as of November 12, 2021.

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TABLE OF CONTENTS

		Page

Part I	Financial Information

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020	3

	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020 (Unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020 (Unaudited)	5

	Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020 (Unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (Unaudited)	7

	Notes to Condensed Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50

Item 4.	Controls and Procedures	50

Part II	Other Information

Item 1.	Legal Proceedings	50

Item 1A.	Risk Factors	50

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3.	Defaults Upon Senior Securities	51

Item 4.	Mine Safety Disclosures	51

Item 5.	Other Information	51

Item 6.	Exhibits	51

Exhibit Index

Signatures

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PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

PB BANKSHARES, INC.

Condensed Consolidated Balance Sheets

(dollars in thousands, except per share data)


	September 30,
	2021		December 31,
	(Unaudited)		2020*
Assets
Cash and due from banks	$	40,966	$	25,899
Federal funds sold		4,936		24,592
Interest bearing deposits with banks		100		100

Cash and cash equivalents		46,002		50,591

Debt securities available-for-sale, at fair value		27,082		25,877
Equity securities		866		864
Restricted stocks, at cost		887		1,046
Loans receivable, net of allowance for loan losses of $3,077 at September 30, 2021 and $2,854 at December 31, 2020		225,948		186,045
Premises and equipment, net		1,963		2,106
Deferred income taxes, net		913		672
Accrued interest receivable		974		851
Bank owned life insurance		7,269		6,639
Other assets		582		633

Total Assets	$	312,486	$	275,324

Liabilities and Stockholders' Equity

Liabilities
Deposits	$	248,547	$	231,416
Long-term borrowings		16,698		20,553
Accrued expenses and other liabilities		1,706		1,386

Total Liabilities		266,951		253,355

Commitments and contingent liabilities – see Note 7

Stockholders' Equity
Preferred Stock, $0.01 par value, 10,000,000 shares authorized; -0- issued and outstanding at September 30, 2021 and December 31, 2020		—		—
Common Stock, $0.01 par value, 40,000,000 shares authorized; 2,777,250 and -0- issued and outstanding at September 30, 2021 and December 31, 2020, respectively		28		—
Additional paid-in capital		26,171		—
Retained earnings		22,420		21,880
Unearned ESOP shares		(2,898)		—
Accumulated other comprehensive (loss) income		(186)		89

Total Stockholders' Equity		45,535		21,969

Total Liabilities and Stockholders' Equity	$	312,486	$	275,324

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

*Derived from the audited financial statements of Prosper Bank (now Presence Bank).

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PB BANKSHARES, INC.

Condensed Consolidated Statements of Income

(dollars in thousands, except per share data)

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Interest and Dividend Income
Loans, including fees	$	2,552	$	2,156	$	7,081	$	6,376
Securities		77		133		255		436
Other		18		2		29		37
Total Interest and Dividend Income		2,647		2,291		7,365		6,849

Interest Expense
Deposits		434		468		1,348		1,403
Borrowings		104		131		317		408
Total Interest Expense		538		599		1,665		1,811

Net interest income		2,109		1,692		5,700		5,038

Provision for Loan Losses		83		73		221		621

Net interest income after provision for loan losses		2,026		1,619		5,479		4,417

Noninterest Income
Service charges on deposit accounts		38		53		129		119
Gain on sale of other real estate owned		—		—		—		30
(Loss) gain on equity investments		8		—		(6)		20
Bank owned life insurance income		45		31		130		93
Debit card income		51		49		165		138
Other service charges		21		19		68		61
Other income		23		14		51		32
Total Noninterest Income		186		166		537		493

Noninterest Expenses
Salaries and employee benefits		1,051		915		2,865		2,580
Occupancy and equipment		153		150		441		416
Data and item processing		241		242		728		663
Advertising and marketing		37		63		65		82
Professional fees		135		105		305		375
Directors’ fees		60		61		182		180
FDIC insurance premiums		59		32		163		64
Other real estate owned, net		—		45		—		45
Debit card expenses		33		33		106		100
Other		186		64		507		261
Total Noninterest Expenses		1,955		1,710		5,362		4,766

Income before income tax expense		257		75		654		144

Income Tax Expense		47		10		114		12

Net Income	$	210	$	65	$	540	$	132
Net income per common share - basic and diluted	$	0.08		N/A	$	0.21		N/A

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

(In thousands)

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Net Income	$	210	$	65	$	540	$	132

Other Comprehensive (Loss) Income
Unrealized (losses) gains on debt securities available-for-sale:
Unrealized holding (losses) gains arising during period		—		(78)		(347)		295
Tax effect		—		16		72		(62)

		—		(62)		(275)		233

Total Comprehensive Income	$	210	$	3	$	265	$	365

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

(In thousands)

(Unaudited)


									Accumulated
			Additional					Unearned	Other
	Common		Paid-In		Retained		ESOP		Comprehensive
	Stock		Capital		Earnings		Shares		Income (Loss)		Total
Balance, July 1, 2020	$	—	$	—	$	22,362	$	—	$	203	$	22,565

Net income		—		—		65		—		—		65
Other comprehensive loss		—		—		—		—		(62)		(62)

Balance, September 30, 2020	$	—	$	—	$	22,427	$	—	$	141	$	22,568

Balance, July 1, 2021	$	—	$	—	$	22,210	$	—	$	(186)	$	22,024

Net income		—		—		210		—		—		210
Common stock issued		28		26,171		—		—		—		26,199
Unearned ESOP shares		—		—		—		(2,898)		—		(2,898)
Other comprehensive loss		—		—		—		—		—		—

Balance, September 30, 2021	$	28	$	26,171	$	22,420	$	(2,898)	$	(186)	$	45,535

Balance, January 1, 2020	$	—	$	—	$	22,295	$	—	$	(92)	$	22,203

Net income		—		—		132		—		—		132
Other comprehensive income		—		—		—		—		233		233

Balance, September 30, 2020	$	—	$	—	$	22,427	$	—	$	141	$	22,568

Balance, January 1, 2021	$	—	$	—	$	21,880	$	—	$	89	$	21,969

Net income		—		—		540		—		—		540
Common stock issued		28		26,171		—		—		—		26,199
Unearned ESOP shares		—		—		—		(2,898)		—		(2,898)
Other comprehensive loss		—		—		—		—		(275)		(275)

Balance, September 30, 2021	$	28	$	26,171	$	22,420	$	(2,898)	$	(186)	$	45,535

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

(In thousands)

(Unaudited)


	Nine Months Ended
	September 30,
	2021		2020
Cash Flows from Operating Activities
Net income	$	540	$	132
Adjustments to reconcile change in net income to net cash provided by (used in) operating activities:
Provision for loan losses		221		621
Depreciation and amortization		172		150
Gain on disposal of premises and equipment		(4)		—
Net accretion of securities premiums and discounts		(24)		(74)
Deferred income tax benefit		(169)		(199)
Loss (gain) on equity securities		6		(20)
Deferred loan fees, net		144		(32)
Realized gain on sale of other real estate owned		—		(30)
Earnings on bank owned life insurance		(130)		(93)
Increase in accrued interest receivable and other assets		(72)		(821)
Increase in accrued expenses and other liabilities		320		254

Net Cash Provided by (Used in) Operating Activities		1,004		(112)

Cash Flows from Investing Activities
Activity in debt securities available-for-sale:
Purchases		(4,998)		(17,834)
Maturities, calls, and principal repayments		3,470		16,530
Dividends on equity securities reinvested		(8)		—
Purchase of bank owned life insurance		(500)		—
Redemption of restricted stocks		159		216
Net increase in loans receivable		(40,268)		(5,420)
Purchases of premises and equipment		(25)		(405)

Net Cash Used in Investing Activities		(42,170)		(6,913)

Cash Flows from Financing Activities
Net increase in deposits		17,131		46,123
Stock subscription proceeds		26,199		—
Purchase of ESOP shares		(2,898)		—
Repayments of borrowings		(3,855)		(5,272)

Net Cash Provided by Financing Activities		36,577		40,851

(Decrease) Increase in cash and cash equivalents		(4,589)		33,826

Cash and Cash Equivalents, Beginning of Period		50,591		12,969

Cash and Cash Equivalents, End of Period	$	46,002	$	46,795

Supplementary Cash Flows Information
Interest paid	$	1,707	$	1,849
Income taxes	$	70	$	165

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 formerly Prosper 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 included accounts of the Company and its wholly-owned subsidiary, the Bank. The Bank also include 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.

Risks and Uncertainties

The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Bank’s customers operate and could impair their ability to fulfill their financial obligations to the Bank. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Bank operates. While there has been no material impact to the Bank’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Bank. The Bank’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 escalates further or is unsuccessful, the Bank could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Bank’s operations, the Bank is disclosing potentially material items of which it is aware.

COVID-19 mitigation measures have been lifted in Pennsylvania. The masking order was lifted on June 28, 2021. Fully vaccinated Pennsylvanians may choose not to wear a mask unless they are required by a business or organization. The Bank lifted its mask mandate for fully vaccinated customers and associates in June 2021.

The Conversion and Our Organizational Structure

On July 14, 2021, PB Bankshares, Inc. completed its initial public offering and the mutual-to-stock conversion of the Bank. The Bank is now a wholly owned subsidiary of the Company. The shares of the Company’s common stock began trading on the Nasdaq Capital Market on July 15, 2021, under the ticker symbol “PBBK.”

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The Company sold 2,777,250 shares of common stock at $10.00 per share for gross offering proceeds of $27,773,000. The Company’s Employee Stock Ownership Plan (the “ESOP”) purchased 8% or 222,180 shares of the Company’s common stock in the open market for $2,898,000 and completed the purchases on July 30, 2021.

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. 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 for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2021 are not necessarily indicative of the results for the year ending December 31, 2021 or any other interim periods. For further information, refer to the audited consolidated financial statements and notes thereto for the year ended December 31, 2020 contained in the Company’s definitive prospectus dated May 14, 2021 as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on May 24, 2021.

The Company has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein.

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 statement of financial condition 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 loan losses, 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 loan 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 loan 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.

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 Issued, But Not Yet Effective Accounting Pronouncements

During February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. The ASU was initially effective for non-public business entities’ financial statements issued for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. In June 2020, the FASB issued ASU 2020-05. Under ASU 2020-05, private companies may apply the new leases standard for fiscal years beginning after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022. Earlier application is permitted. Due to the

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Company’s extended transition period election, the amendments are effective for fiscal years beginning after December 15, 2021. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.

During June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application is permitted. Due to the Company’s extended transition period election, the amendments are effective for fiscal years beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. An internal team has been formed and the Company will hire a vendor to assist with expected credit loss projections.

During August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2021. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements.

During May 2019, the FASB issued ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief.” The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings. The effective date and transition methodology for the amendments in ASU 2019-05 are the same as in ASU 2016-13. The Company is currently assessing the impact that ASU 2019-05 will have on its consolidated financial statements.

During November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” This ASU addresses issues raised by stakeholders during the implementation of ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Among other narrow-scope improvements, the new ASU clarifies guidance around how to report expected recoveries. “Expected recoveries” describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. While applying the credit losses standard, stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (also known as PCD assets). In response to this question, the ASU permits organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The effective date and transition methodology for the amendments in ASU 2019-11 are the same as in ASU 2016-13. The Company is currently assessing the impact that ASU 2019-11 will have on its consolidated financial statements.

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During December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.” The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. The amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements.

During January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. The amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements.

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.The Company does not have any loans and other financial instruments that are directly or indirectly influenced by LIBOR.

In August 2021, the FASB issued ASU 2021-06, “'Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants”. The ASU is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2021-06 to have a material impact on its consolidated financial statements.

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Recently Adopted Accounting Pronouncements

In December 2020, the Consolidated Appropriates Act of 2021 (“CAA”) was passed. Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the CARES Act, including the Paycheck Protection Program (PPP) loan program and treatment of certain loan modifications related to the COVID-19 pandemic. See Note 4 for the further discussion of COVID-19 loans.

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

September 30, 2021

Amortized Cost

Gains

Losses

Fair Value

Debt securities:

Agency bonds

21,741

—

(200)

21,541

Mortgage-backed securities

137

—

154

Collateralized mortgage obligations

5,285

103

(1)

5,387

Total available-for-sale debt securities

27,163

120

(201)

27,082

Equity securities:

Mutual funds (fixed income)

866


			Gross Unrealized		Gross Unrealized
December 31, 2020	Amortized Cost		Gains		Losses		Fair Value
Debt securities:
Agency bonds	$	17,254	$	22	$	(1)	$	17,275
Mortgage-backed securities		164		20		—		184
Collateralized mortgage obligations		8,192		226		—		8,418
Total available-for-sale debt securities	$	25,610	$	268	$	(1)		25,877
Equity securities:
Mutual funds (fixed income)							$	864

The table below indicates the length of time individual available-for-sale securities have been in a continuous unrealized loss position at September 30, 2021 and December 31, 2020 (in thousands):

September 30, 2021

Less than 12 Months

12 Months or More

Total

Unrealized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

Agency bonds

21,041

(200)

—

21,041

(200)

Collateralized mortgage obligations

126

(1)

—

126

(1)

21,167

(201)

—

21,167

(201)


December 31, 2020	Less than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Agency bonds	$	1,249	$	(1)	$	—	$	—	$	1,249	$	(1)
Collateralized mortgage obligations		6		—		—		—		6		—

	$	1,255	$	(1)	$	—	$	—	$	1,255	$	(1)

As of September 30, 2021 and December 31, 2020, 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 held in the securities portfolio as of September 30, 2021 and December 31, 2020.

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At September 30, 2021, 47 agency bonds and one collateralized mortgage obligation were in an unrealized loss position for less than 12 months. At December 31, 2020, four agency bonds and one collateralized mortgage obligation were in an unrealized loss position for less than 12 months. In analyzing an issuer’s financial condition, management considers whether downgrades by bond rating agencies have occurred and industry analysts’ reports.

As of September 30, 2021, 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.

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 does not consider these securities to be other-than-temporarily impaired as of September 30, 2021.

There were no securities sold during the three and nine months ended September 30, 2021 or September 30, 2020. The amortized cost and fair value of debt securities available-for-sale at September 30, 2021, 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
Due less than one year	$	—	$	—
Due one year through five years		21,741		21,541
Due after five years through ten years		—		—
Mortgage-backed securities		137		154
Collateralized mortgage obligations		5,285		5,387

	$	27,163	$	27,082

At September 30, 2021 and December 31, 2020, the Company had securities totaling $1,991,000 and $2,004,000, respectively, pledged to secure borrowings.

At September 30, 2021 and December 31, 2020, the Company had securities totaling $13,765,000 and $7,810,000, respectively, pledged primarily for public fund depositors.

4. Loans Receivable and Allowance for Loan Losses

Major classifications of net loans receivable at September 30, 2021 and December 31, 2020 are as follows (in thousands):


	September 30,		December 31,
	2021		2020
Real estate:
One-to four-family residential	$	103,767	$	106,413
Commercial		88,495		59,514
Construction		13,910		8,700
Commercial and industrial		20,531		11,801
Consumer loans		3,022		3,056

		229,725		189,484
Deferred loan fees, net		(700)		(585)
Allowance for loan losses		(3,077)		(2,854)

	$	225,948	$	186,045

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The following table summarizes the activity in the allowance for loan losses by loan class for the three months ended September 30, 2021 (in thousands):


	Allowance for Loan Losses




	Beginning						Provisions		Ending
	Balance		Charge-offs		Recoveries		(Recovery)		Balance
Real Estate:
One- to four-family residential	$	1,315	$	—	$	—	$	(6)	$	1,309
Commercial		991		—		—		103		1,094
Construction		201		—		—		11		212
Commercial and industrial		219		—		1		(17)		203
Consumer		37		—		—		—		37
Unallocated		230		—		—		(8)		222

	$	2,993	$	—	$	1	$	83	$	3,077

The following table summarizes the activity in the allowance for loan losses by loan class for the nine months ended September 30, 2021 and information in regard to the allowance for loan losses and the recorded investment in loans receivable by loan class as of September 30, 2021 (in thousands):


	Allowance for Loan Losses
											Ending		Ending
											Balance:		Balance:
											Individually		Collectively
											Evaluated		Evaluated
	Beginning						Provisions		Ending		for		for
	Balance		Charge-offs		Recoveries		(Recovery)		Balance		Impairment		Impairment
Real Estate:
One- to four-family residential	$	1,339	$	—	$	—	$	(30)	$	1,309	$	—	$	1,309
Commercial		1,033		—		—		61		1,094		—		1,094
Construction		121		—		—		91		212		50		162
Commercial and industrial		136		—		2		65		203		—		203
Consumer		37		—		—		—		37		—		37
Unallocated		188		—		—		34		222		—		222

	$	2,854	$	—	$	2	$	221	$	3,077	$	50	$	3,027

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	Loans Receivable
			Ending		Ending
			Balance:		Balance:
			Individually		Collectively
			Evaluated		Evaluated
	Ending		for		for
	Balance		Impairment		Impairment
Real estate:
One- to four-family residential	$	103,767	$	1,102	$	102,665
Commercial		88,495		1,610		86,885
Construction		13,910		546		13,364
Commercial and industrial		20,531		—		20,531
Consumer		3,022		—		3,022

	$	229,725	$	3,258	$	226,467

The following table summarizes the activity in the allowance for loan losses by loan class for the three months ended September 30, 2020 (in thousands):


	Allowance for Loan Losses




	Beginning						Provisions		Ending
	Balance		Charge-offs		Recoveries		(Recovery)		Balance
Real Estate:
One- to four-family residential	$	1,048	$	—	$	—	$	(33)	$	1,015
Commercial		777		—		—		73		850
Construction		65		—		—		7		72
Commercial and industrial		121		—		2		(38)		85
Consumer		—				—		—		—
Unallocated		625		—		—		64		689

	$	2,636	$	—	$	2	$	73	$	2,711

The following table summarizes the activity in the allowance for loan losses by loan class for the nine months ended September 30, 2020 and information in regard to the allowance for loan losses and the recorded investment in loans receivable by loan class as of December 31, 2020 (in thousands):


	Allowance for Loan Losses
											Ending		Ending
											Balance:		Balance:
											Individually		Collectively
											Evaluated		Evaluated
	Beginning						Provisions		Ending		for		for
	Balance		Charge-offs		Recoveries		(Recovery)		Balance		Impairment		Impairment
Real Estate:
One- to four-family residential	$	935	$	(14)	$	—	$	94	$	1,015	$	—	$	1,015
Commercial		687		—		264		(101)		850		25		825
Construction		42		—		—		30		72		22		50
Commercial and industrial		29		—		5		51		85		—		85
Consumer		13		(4)		—		(9)		—		—		—
Unallocated		133		—		—		556		689		—		689

	$	1,839	$	(18)	$	269	$	621	$	2,711	$	47	$	2,664

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	Loans Receivable
			Ending		Ending
			Balance:		Balance:
			Individually		Collectively
			Evaluated		Evaluated
	Ending		for		for
	Balance		Impairment		Impairment
Real estate:
One- to four-family residential	$	106,413	$	1,494	$	104,919
Commercial		59,514		1,671		57,843
Construction		8,700		640		6,731
Commercial and industrial		11,801		—		13,130
Consumer		3,056		—		3,056

	$	189,484	$	3,805	$	185,679

The following table summarizes information in regard to impaired loans by loan portfolio class as of September 30, 2021 (in thousands):


			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Real estate:
One- to four-family residential	$	1,101	$	1,105	$	—
Commercial		1,610		1,693		—
Construction		358		367		—
With an allowance recorded:
Real estate:
One- to four-family residential	$	—	$	—	$	—
Commercial		—		—		—
Construction		189		225		50
Total:
Real estate:
One- to four-family residential	$	1,101	$	1,105	$	—
Commercial		1,610		1,693		—
Construction		547		592		50

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The following table summarizes information in regard to impaired loans by loan portfolio class as of December 31, 2020 (in thousands):


			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Real estate:
One- to four-family residential	$	1,494	$	1,580	$	—
Commercial		1,183		1,183		—
Construction		376		383		—
With an allowance recorded:
Real estate:
One- to four-family residential	$	—	$	—	$	—
Commercial		488		561		16
Construction		264		300		24
Total:
Real estate:
One- to four-family residential	$	1,494	$	1,580	$	—
Commercial		1,671		1,744		16
Construction		640		683		24

The following table summarizes information in regard to impaired loans by loan portfolio class for the three and nine months ended September 30, 2021 and September 30, 2020 (in thousands):


		Three Months Ended September 30,								Nine Months Ended September 30,
		2021				2020				2021				2020
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Real estate:
One- to four-family residential	$	1,114		10	$	818	$	7	$	1,102	$	35	$	1,381	$	14
Commercial		1,621		15		1,691		—		1,641		45		1,717		—
Construction		361		—		384		3		367		—		383		9
With an allowance recorded:
Real estate:
One- to four-family residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial		—		—		280		—		—		—		284		—
Construction		201		—		263		—		226		—		264		—
Total:
Real estate:
One- to four-family residential	$	1,114	$	10	$	818	$	7	$	1,102	$	35	$	1,381	$	14
Commercial		1,621		15		1,971		—		1,641		45		2,001		—
Construction		562		—		647		3		593		—		647		9

The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2021 and December 31, 2020 (in thousands):


	September 30,		December 31,
	2021		2020
Real estate:
One- to four-family residential	$	687	$	1,600
Commercial		462		575
Construction		546		640

	$	1,695	$	2,815

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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 September 30, 2021 (in thousands):

Pass

Special Mention

Substandard

Doubtful

Total

Real estate:

One- to four-family residential

101,321

1,377

1,069

—

103,767

Commercial

87,083

350

1,062

—

88,495

Construction

13,364

—

546

—

13,910

Commercial and industrial

20,531

—

20,531

Consumer

3,022

—

3,022

225,321

1,727

2,677

—

229,725


	Pass		Special Mention		Substandard		Doubtful		Total
Real estate:
One- to four-family residential	$	103,557	$	850	$	2,006	$	—	$	106,413
Commercial		57,957		364		1,193		—		59,514
Construction		8,060		—		640		—		8,700
Commercial and industrial		11,801		—		—		—		11,801
Consumer		3,056		—		—		—		3,056

	$	184,431	$	1,214	$	3,839	$	—	$	189,484

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 September 30, 2021 (in thousands):


													Loans
													Receivable
					Greater						Total		>90 Days
	30‑59 Days		60‑89 Days		Than 90		Total Past				Loans		and
	Past Due		Past Due		Days		Due		Current		Receivables		Accruing
Real estate:
One- to four-family residential	$	788	$	—	$	196	$	984	$	102,783	$	103,767	$	—
Commercial		89		—		462		551		87,944		88,495		—
Construction		—		—		546		546		13,364		13,910		—
Commercial and industrial		—		—		—		—		20,531		20,531
Consumer		—		—		—		—		3,022		3,022		—

	$	877	$	—	$	1,204	$	2,081	$	227,644	$	229,725	$	—

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													Loans
													Receivable
					Greater						Total		>90 Days
	30‑59 Days		60‑89 Days		Than 90		Total Past				Loans		and
	Past Due		Past Due		Days		Due		Current		Receivables		Accruing
Real estate:
One- to four-family residential	$	790	$	49	$	491	$	1,330	$	105,083	$	106,413	$	—
Commercial		—		—		488		488		59,026		59,514		—
Construction		—		—		640		640		8,060		8,700		—
Commercial and industrial		—		—		—		—		11,801		11,801
Consumer		—		—		—		—		3,056		3,056		—

	$	790	$	49	$	1,619	$	2,458	$	187,026	$	189,484	$	—

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 which is then identified as a troubled debt restructuring (“TDR”). 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.

Additionally, the Company is working with borrowers impacted by COVID-19 and providing modifications to include principal and interest payment deferrals. These modifications are excluded from troubled debt restructuring classification under Section 4013 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act or under applicable interagency guidance of the federal banking regulators. As of September 30, 2021, we had granted short-term payment deferrals on 68 loans, totaling approximately $22,398,000 in aggregate principal amount, that were otherwise performing. As of September 30, 2021, all loans have returned to normal payment status, with 66 of these loans, totaling $21,932,000, being current and two of these loans, totaling $466,000 being past due greater than 30 days as of September 30, 2021.

The Company identifies loans for potential restructure 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 and nine months ended September 30, 2021 and 2020 which met the definition of a troubled debt restructuring. After a loan is determined to be a troubled debt restructuring, we continue to track its performance under the most recent restructured terms. The commercial loan and construction loan troubled debt restructurings completed in 2017 were in default for the three and nine months ended September 30, 2021 and 2020, the loans had a balance of $385,000 and $489,000 as of September 30, 2021 and September 30, 2020, respectively.

At September 30, 2021 and 2020, there was no other real estate owned. There was no real estate in process of foreclosure as of September 30, 2021 and December 31, 2020.

5. Long-Term Borrowings

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 0.29% and 0.41% at September 30, 2021 and December 31, 2020 respectively. The Company had $0 outstanding under this line of credit at September 30, 2021 and December 31, 2020.

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The Company has an unsecured line of credit with Atlantic Community Bankers Bank (“ACBB”) of up to $3,000,000, expiring on September 30, 2022. Interest on the line of credit is charged at 0.50%. The Company had $0 outstanding under this line of credit at September 30, 2021 and December 31, 2020. In addition to the unsecured line of credit with ACBB, the Company also has the ability to borrow up to $2,000,000 through the Federal Reserve Company’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 September 30, 2021 and December 31, 2020.

Maximum borrowing capacity was approximately $99,433,000 and $88,751,000 at September 30, 2021 and December 31, 2020, respectively. The Company has one unfunded letter of credit with FHLB for $2,750,000 and $4,250,000 at September 30, 2021 and December 31, 2020, respectively.

Borrowings from the FHLB at September 30, 2021 and December 31, 2020 consist of the following (dollars in thousands):


	September 30,				December 31,
	2021				2020
			Weighted				Weighted
Maturity	Amount		Rate		Amount		Rate
2021		17	1.24			3,872	2.37
2022		8,124	2.11			8,124	2.11
2023		8,557	2.78			8,557	2.78

	$	16,698	2.45	%	$	20,553	2.44	%

6. 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 September 30, 2021 and December 31, 2020 (in thousands):


	September 30,		December 31,
	2021		2020
Commitments to grant loans	$	20,321	$	15,900
Unfunded commitments under lines of credit		8,718		7,612

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.

7. Contingencies

In the normal course of business, the Company is subject to various lawsuits involving matters generally incidental to its business. As of September 30, 2021 management is of the opinion that the ultimate liability, if any, resulting from any

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

8. Regulatory Matters

Bank and bank holding companies are 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 September 30, 2021, the Bank meets all capital adequacy requirements to which it is 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 September 30, 2021, 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 institution’s category.

In 2019, the federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, the community bank leverage ratio framework (“CBLR framework”), for qualifying community banking organizations, consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule became effective on January 1, 2020 and was elected by the Bank as of December 31, 2020 and September 30, 2021. In April 2020, the federal banking agencies issued an interim final rule that made temporary changes to the CBLR framework, pursuant to section 4012 of the CARES Act, and a second interim final rule that provided a graduated increase in the community bank leverage ratio requirement after the expiration of the temporary changes implemented pursuant to section 4012 of the CARES Act.

The community bank leverage ratio removes the requirement for qualifying banking organizations to calculate and report risk-based capital but rather only requires a Tier 1 to average assets (leverage) ratio. Qualifying banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than the required minimums will be considered to have satisfied the generally applicable risk based and leverage capital requirements in the agencies’ capital rules (generally applicable rule) and, if applicable, will be considered to have met the well capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act. Under the final rules the community bank leverage ratio minimum requirement is 8.5% for calendar year 2021 and 9% for calendar year 2022 and beyond. The final rule allows for a two-quarter grace period to improve a ratio that falls below the required level, provided that the bank maintains a leverage ratio of 7.5% for calendar year 2021 and 8% for calendar year 2022 and beyond.

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 September 30, 2021, the Bank was a qualifying community banking organization as defined by the federal banking agencies and elected to measure capital adequacy under the CBLR framework.

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

To be Well Capitalized under

Prompt Corrective Action

September 30, 2021

Actual

Provisions

Amount

Ratio

Amount

Ratio

Tier 1 capital (to average assets)

35,279

11.17

26,841

8.50

To be Well Capitalized under

Prompt Corrective Action

December 31, 2020

Actual

Provisions

Amount

Ratio

Amount

Ratio

Tier 1 capital (to average assets)

21,880

8.15

21,471

8.00

9. Earnings Per Share

The factors used in the earning per share computation follow:



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2021		2021
Net income	$	210	$	540

Weighted average common shares outstanding		2,777,250		2,777,250
Less: Average unearned ESOP shares		(222,180)		(222,180)

Average shares		2,555,070	$	2,555,070

Basic and diluted earnings per share	$	0.08	$	0.21

There were no shares outstanding for the three or nine months ended September 30, 2020.

10. 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 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.

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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.

Impaired Loans (Generally Carried at Fair Value)

Impaired loans are those that are accounted for under FASB ASC 310, Accounting by Creditors for Impairment of a Loan (“FASB ASC 310”), in which the Company has measured impairment generally based on the net fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. 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 September 30, 2021, the fair value consists of the recorded investment in the loans of $139,000, net of a valuation allowance of $50,000. At December 31, 2020, the fair value consists of the recorded investment in the loans of $712,000, net of a valuation allowance of $40,000. Impaired loans are included in Loans Receivable in the table below.

Off-Balance Sheet Financial Instruments (Disclosed at Cost)

Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing. The fair values are considered immaterial.

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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 September 30, 2021 and December 31, 2020 are as follows (in thousands):

Quoted

Prices in

Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

September 30, 2021

Total

(Level 1)

(Level 2)

(Level 3)

Agency bonds

21,541

—

21,541

—

Mortgage-backed securities

154

—

154

—

Collateralized mortgage obligations

5,387

—

5,387

—

Mutual funds

866

—

27,948

866

27,082

—


			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
December 31, 2020	Total		(Level 1)		(Level 2)		(Level 3)
Agency bonds	$	17,275	$	—	$	17,275	$	—
Mortgage-backed securities		184		—		184		—
Collateralized mortgage obligations		8,418		—		8,418		—
Mutual funds		864		864		—		—

	$	26,741	$	864	$	25,877	$	—

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2021 and December 31, 2020 are as follows (in thousands):

Quoted

Prices in

Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

September 30, 2021

Total

(Level 1)

(Level 2)

(Level 3)

Impaired loans

139

—

139

—

139

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			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
December 31, 2020	Total		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	712	$	—	$	—	$	712

	$	712	$	—	$	—	$	712

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 September 30, 2021 and December 31, 2020 (dollars in thousands):


September 30, 2021
Asset Description	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
Impaired loans	$	139	Appraisal of collateral	Selling expenses and discounts ⁽¹⁾	51.5% - 51.5% (51.5%)


December 31, 2020
Asset Description	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
Impaired loans	$	712	Appraisal of collateral	Selling expenses and discounts ⁽¹⁾	9.2% - 38.1% (28.8%)

(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:


		September 30, 2021				December 31, 2020
	Fair Value	Carrying		Estimated		Carrying		Estimated
(In thousands)	Hierarchy	Amounts		Fair Values		Amounts		Fair Values
Financial assets:
Cash and cash equivalents	1	$	46,002	$	46,002	$	50,591	$	50,591
Debt securities - available-for-sale	2		27,082		27,082		25,877		25,877
Equity securities	1		866		866		864		864
Restricted stocks	2		887		887		1,046		1,046
Loans, net	3		225,948		221,732		186,045		188,311
Accrued interest receivable	1		974		974		851		851
Bank owned life insurance	2		7,269		7,269		6,639		6,639

Financial liabilities:
Demand deposits, savings, and money market	1		170,153		170,153		145,517		145,517
Certificates of deposit	2		78,394		78,718		85,899		87,431
Long-Term borrowings	2		16,698		17,007		20,553		21,279
Accrued interest payable	1		186		186		228		228

11. 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 new 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.

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Service Fees on Deposit Accounts

Service charges on deposit accounts consist of fees on depository accounts 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.

For the Company, there are no other material revenue streams within the scope of Topic 606. The following tables present noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2021 and 2020 (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Noninterest income	2021		2020		2021		2020
In scope of Topic 606 Service charges on deposit accounts	$	38		53	$	129		119
Debit card income		51		49		165		138
Other service charges		21		19		68		61
Other noninterest income		23		14		51		32
Noninterest income (in scope for Topic 606)		133		135		413		350
Noninterest income (out of scope for Topic 606)		53		31		124		143
Total noninterest income	$	186	$	166	$	537	$	493

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

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customers, and therefore, does not experience significant contract balances. As of September 30, 2021 and 2020, 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 prospectus dated May 14, 2021 as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on May 24, 2021.

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,” “believe,” “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:

conditions relating to the COVID-19 pandemic, including the severity and duration of the associated economic slowdown either nationally or in our market areas, that are worse than expected;

Government action in response to the COVID-19 pandemic and its effects on our business and operations, including vaccination mandates and their effects on our workforce, human capital resources and infrastructure;


	·	our ability to manage our operations under the current economic conditions nationally and in our market area;


	·	adverse changes in the financial services industry, securities and local real estate markets (including real estate values);


	·	significant increases in our loan losses, including as a result of our inability to resolve classified and non-performing assets or reduce risks associated with our loans, and management’s assumptions in determining the adequacy of the allowance for loan losses;

	·	credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses;


	·	competition among depository and other financial institutions;

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	·	our success in increasing our commercial real estate and commercial and industrial lending;


	·	our ability to attract and maintain deposits and our success in introducing new financial products;


	·	our ability to improve our asset quality even as we increase our commercial real estate lending;


	·	changes in interest rates generally, including changes in the relative differences between short-term and long-term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;


	·	fluctuations in the demand for loans;


	·	technological changes that may be more difficult or expensive than expected;


	·	changes in consumer spending, borrowing and savings habits;


	·	declines in the yield on our assets resulting from the current low interest rate environment;


	·	risks related to a high concentration of loans secured by real estate located in our market area;


	·	our ability to enter new markets successfully and capitalize on growth opportunities;


	·	changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;


	·	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 compensation and benefit plans, and our ability to retain key members of our senior management team and to address staffing needs in response to product demand or to implement our strategic plans;


	·	loan delinquencies and changes in the underlying cash flows of our borrowers;


	·	our ability to control costs and expenses, particularly those associated with operating as a publicly traded company;


	·	a failure or breach of our operational or security systems or infrastructure, including cyberattacks;


	·	our ability to manage market risk, credit risk and operational risk in the current economic environment;


	·	the ability of key third-party service providers to perform their obligations to us; 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 begun the process of developing 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 increase our consolidated assets by $37.2 million, or 13.5%, from $275.3 million at December 31, 2020 to $312.5 million at September 30, 2021 and increase our deposits by $17.1 million, or 7.4%, from $231.4 million at December 31, 2020 to $248.5 million at September 30, 2021. Outside of the initiatives noted, the growth was driven by the conversion and the stock offering with net proceeds of $26.2 million.

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 loan 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, 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 September 30, 2021, we reported net income of $210,000 compared to net income of $65,000 for the three months ended September 30, 2020. The period over period increase in earnings of $145,000 was primarily attributable to an increase in net interest income, partially offset by increases in noninterest expenses and income tax expense.

For the nine months ended September 30, 2021, we reported net income of $540,000 compared to net income of $132,000 for the nine months ended September 30, 2020. The period over period increase in earnings of $408,000 was primarily attributable to an increase in net interest income and a decrease in the provision for loan losses, partially offset by increases in noninterest expenses and income tax expense.

Impact of COVID-19 Outbreak

During the first quarter of 2020, global financial markets experienced significant volatility resulting from the spread of COVID-19. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has restricted the level of economic activity in our market area. In response to the pandemic, the governments of the Commonwealth of Pennsylvania and of most other states have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. As of September 30, 2021, many of these restrictions have been removed and many non-essential businesses have been allowed to re-open in a limited capacity, adhering to social distancing and disinfection guidelines. These measures have dramatically increased unemployment in the United States and have negatively impacted many businesses, and thereby threatened the repayment ability of some of our borrowers.

To address the economic impact of COVID-19 in the United States, the CARES Act was signed into law on March 27, 2020. The CARES Act included a number of provisions that affected us, including accounting relief for TDRs. The CARES Act also established the PPP through the Small Business Administration (“SBA”), which allowed us to lend money to small businesses to help maintain employee payrolls through the crisis with guarantees from the SBA. Under this program,

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loan amounts may be forgiven if the borrower maintains employee payrolls and meets certain other requirements. We originated approximately $6.0 million of PPP loans in the first and second quarters of 2021. The PPP program ended in May 2021. As of September 30, 2021, $2.9 million of PPP loans were outstanding. $133,000 and $192,000 of loan income (interest and fees) for PPP loans was recognized for the three and nine months ended September 30, 2021, respectively.

In response to the COVID-19 pandemic, we implemented protocols and processes to help protect our employees, customers and communities. These measures included:

●

Temporarily operating our branches under a drive-through model with appointment-only lobby service, leveraging our business continuity plans and capabilities that include critical operations teams being divided and dispersed to separate locations and, when possible, having employees work from home. We have also established a Pandemic Response team.

●

The safety and health of our staff and our customers is our highest priority. We have installed plexiglass sneeze barriers in all teller areas, in each of our branch offices. Hand sanitizer is available at each of the teller stations/new accounts desks, and floors are marked to encourage customers to stay six feet apart. Facemasks are mandatory for all employees at work. All employees also have access to gloves, hand sanitizer, and disinfectant wipes while at work.

●

Offering assistance to our customers affected by the COVID-19 pandemic, which includes payment deferrals, waiving certain fees, and suspending property foreclosures.

●

Currently fully vaccinated Pennsylvanians may choose not to wear a mask unless they are required by a business or organization. The Company has lifted its mask mandate for fully vaccinated customers and associates.

We have implemented various consumer and commercial loan modification programs to provide our borrowers relief from the economic impacts of COVID-19. Based on guidance in the CARES Act and recent COVID-19 related legislation, COVID-19 related modifications to loans that were current as of December 31, 2019 are exempt from TDR classification under U.S. GAAP through the earlier of January 1, 2022, or 60 days after the national emergency concerning COVID-19 declared by the President of the United States terminates. In addition, the bank regulatory agencies issued interagency guidance stating that COVID-19 related short-term modifications (i.e., six months or less) granted to loans that were current as of the loan modification program implementation date are not TDRs.

As of September 30, 2021, we had granted short-term payment deferrals on 68 loans, totaling approximately $22.4 million in aggregate principal amount, that were otherwise performing. As of September 30, 2021, all of these loans have returned to normal payment status with 66 of these loans for $21.9 million being current and two of these loans for $466,000 being past due greater than 30 days.

Given the unprecedented uncertainty and rapidly evolving economic effects and social impacts of the COVID-19 pandemic, the future direct and indirect impact on our business, results of operations and financial condition are highly uncertain. Should current economic conditions persist or continue to deteriorate, we expect that this macroeconomic environment will have a continued adverse effect on our business and results of operations, which could include, but not be limited to: decreased demand for our products and services, protracted periods of lower interest rates, increased noninterest expenses, including operational losses, and increased credit losses due to deterioration in the financial condition of our consumer and commercial borrowers, including declining asset and collateral values, which may continue to increase our provision for loan losses and net charge-offs.

Critical Accounting Policies

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

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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.

The following represents our critical accounting policies:

Allowance for loan losses. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the statement of financial condition date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of a loan receivable is charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on 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 other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. The general component covers pools of loans by loan class including construction and commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential mortgages and consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. 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; and (8) quality of loan review and board of directors oversight. 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. As a result of the COVID-19 pandemic, we increased certain of our qualitative loan portfolio risk factors relating to local and national economic conditions as well as industry conditions and concentrations, which have experienced deterioration due to the effects of the COVID-19 pandemic. 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.

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Although we believe that we use the best information available to establish the allowance for loan 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 loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan 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 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 impaired 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 September 30, 2021 and December 31, 2020

Total assets. Total assets increased $37.2 million to $312.5 million at September 30, 2021 from $275.3 million at December 31, 2020. The increase in assets was primarily due to increases in cash and due from banks, net loans receivable and debt securities available-for-sale. Growth was driven by increased liquidity from the completion of the Company’s initial public stock offering and loan growth. Gross loans increased $40.2 million to $229.7 million at September 30, 2021 from December 31, 2020, primarily in the commercial real estate, commercial and industrial and construction portfolios. Debt securities available-for-sale increased $1.2 million to $27.1 million at September 30, 2021 from $25.9 million at December 31, 2020, primarily due to purchases of U.S. Government and agency obligations, partially offset by a combination of principal repayments on mortgage-backed securities, and a decrease in the fair market value of debt securities available-for-sale due to the increase in market interest rates during the first three quarters of 2021.

Net loans receivable increased $39.9 million, or 21.4%, to $225.9 million at September 30, 2021 from $186.0 million at December 31, 2020 primarily due to increases in commercial real estate, commercial and industrial, and construction

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loans. Commercial real estate loans increased $29.0 million, or 48.7%, to $88.5 million at September 30, 2021 from $59.5 million at December 31, 2020. Commercial and industrial loans increased $8.7 million, or 74.0%, to $20.5 million at September 30, 2021 from $11.8 million at December 31, 2020. Construction loans increased $5.2 million, or 59.9%, to $13.9 million at September 30, 2021 from $8.7 million at December 31, 2020 primarily due to new construction loans and to a lesser extent draws on existing commitments. One-to four-family residential real estate loans decreased $2.6 million, or 2.5%, to $103.8 million at September 30, 2021 from $106.4 million at December 31, 2020. The increase in commercial real estate and commercial and industrial loans was primarily due to the continued implementation of our strategy to expand our commercial loan portfolio to diversify our balance sheet. We had $2.9 million in PPP loans outstanding at September 30, 2021, which are classified as commercial and industrial loans. The decrease in one-to four-family residential loans was primarily the result of customers refinancing their loans elsewhere at lower rates as we continued to reduce our investment in one-to four-family residential loans as part of our business strategy.

Debt securities available-for-sale increased $1.2 million, or 4.7%, to $27.1 million at September 30, 2021 from $25.9 million at December 31, 2020 primarily due to purchases of $5.0 million of U.S. Government and agency obligations, partially offset by a combination of $3.5 million of principal repayments on mortgage-backed securities, and a $347,000 decrease in the fair market value of debt securities available-for-sale due to the increase in market interest rates during the first three quarters of 2021.

Cash and cash equivalents decreased by $4.6 million, or 9.1%, to $46.0 million at September 30, 2021 from $50.6 million at December 31, 2020 due to the use of cash to fund loan originations, purchase debt securities, and pay off maturing Federal Home Loan Bank borrowings, partially offset by the offering proceeds of our initial public stock offering.

Deposits and borrowings. Total deposits increased $17.1 million, or 7.4%, to $248.5 million at September 30, 2021 from $231.4 million at December 31, 2020. The increase in our deposits reflected a $11.4 million increase in interest-bearing demand accounts, a $9.6 million increase in money market accounts, a $2.6 million increase in savings accounts and $1.0 million increase in noninterest-bearing demand accounts, partially offset by a $7.5 million decrease in certificates of deposit. The increase in demand, money market, and savings accounts primarily reflected deposit customers increasing cash balances during the COVID-19 pandemic and government stimulus measures as well as management’s continuing focus on increasing the commercial deposit accounts of its customers during 2021. The decrease in certificates of deposit is due to management strategically not replacing high rate deposits with a deposit special in the current interest rate environment.

Total borrowings from the Federal Home Loan Bank of Pittsburgh decreased $3.8 million, or 18.5%, to $16.7 million at September 30, 2021 from $20.6 million at December 31, 2020 due to principal repayments on and maturities of our advances.

Stockholders’ Equity. Stockholders’ equity increased $23.5 million, or 107.3%, to $45.5 million at September 30, 2021 from $22.0 million at December 31, 2020. The increase was due to net proceeds from the stock offering of $26.2 million, net income of $540,000 for the first three quarters of 2021, partially offset by the unallocated ESOP of $2.9 million at September 30, 2021 and a decrease of $275,000 in accumulated other comprehensive income (loss) as a result of a decrease in the fair market value of our debt securities available-for-sale year to date 2021.

Comparison of Operating Results for the Three Months Ended September 30, 2021 and September 30, 2020

General. Net income increased $145,000 or 223.1%, to $210,000 for the three months ended September 30, 2021 from $65,000 for the three months ended September 30, 2020. The $145,000 period over period increase in earnings was attributable to a $356,000 increase in interest and dividend income, a $61,000 decrease in interest expense and a $20,000 increase in noninterest income, partially offset by a $245,000 increase in noninterest expenses, a $37,000 increase in income tax expense and a $10,000 increase in the provision for loan losses.

Interest and dividend income. Total interest and dividend income increased $356,000, or 15.5%, to $2.6 million for the three months ended September 30, 2021 from $2.3 million for the three months ended September 30, 2020. The increase in interest and dividend income was the result of a $56.9 million increase period over period in the average balance of interest-earning assets, primarily in loans and cash and cash equivalents, partially offset by a 20 basis points decrease in the average yield on interest-earning assets from 3.59% for the three months ended September 30, 2020 to 3.39% for the three months ended September 30, 2021.

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Interest income on loans, including fees, increased $396,000, or 18.4%, to $2.6 million for the three months ended September 30, 2021 as compared to $2.2 million for the three months ended September 30, 2020, reflecting an increase in the average balance of loans to $224.6 million for the three months ended September 30, 2021 from $178.8 million for the three months ended September 30, 2020, partially offset by a 26 basis points decrease in the average yield on loans. The increase in the average balance of loans was due primarily to increases in the average balances of commercial real estate and commercial and industrial loans reflecting our strategy to grow commercial lending, partially offset by the decline in the average balance of one- to four-family residential loans. The average yield on loans decreased to 4.49% for the three months ended September 30, 2021 from 4.75% for the three months ended September 30, 2020, as a result of a decrease in market interest rates since September 30, 2020. The three months ended September 30, 2021 included $133,000 of PPP loan income from interest and net fees.

Interest income on securities decreased $56,000, or 42.1%, to $77,000 for the three months ended September 30, 2021 from $133,000 for the three months ended September 30, 2020. The decrease in interest income on debt securities available for sale and restricted stocks was due to a 92 basis points decrease in the average yield on debt securities available for sale and restricted stocks to 0.93% for the three months ended September 30, 2021 from 1.85% for the three months ended September 30, 2020, partially offset by an increase in the average balance of debt securities available for sale and restricted stocks of $3.9 million, or 15.7%, to $28.5 million for the three months ended September 30, 2021 from $24.6 million for the three months ended September 30, 2020. The average yield on debt securities available for sale decreased due to calls of higher-yielding securities which were replaced by significantly lower-yielding investment securities due to the decrease in market interest rates since September 30, 2020. The increase in the average balance of debt securities available for sale was due to purchases of U.S. Government and agency obligations and mortgage-backed securities with our excess liquidity since September 30, 2020.

Interest income on cash and cash equivalents increased $16,000, or 800.0%, to $18,000 for the three months ended September 30, 2021, from $2,000 for the three months ended September 30, 2020. 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 11 basis points to 0.13% for the three months ended September 30, 2021 from 0.02% for the three months ended September 30, 2020 as a result of the higher cash balances held due to the conversion and the stock offering during 2021. The increase in the average balance of cash and cash equivalents of $7.5 million, or 15.7%, to $55.0 million for the three months ended September 30, 2021 from $47.5 million for the three months ended September 30, 2020 was due to increased liquidity on our balance sheet as customers increased their savings.

Interest expense. Interest expense decreased $61,000, or 10.2%, to $538,000 for the three months ended September 30, 2021 20from $599,000 for the three months ended September 30, 2020 as a result of a decrease in interest expense on deposits and borrowings. The decrease in interest expense reflected a 20 basis points decrease in the average cost of interest-bearing liabilities from 1.08% for the three months ended September 30, 2020 to 0.88% for the three months ended September 30, 2021, partially offset by a $22.1 million increase in the average balance of interest-bearing liabilities to $242.3 million for the three months ended September 30, 2021 from $220.1 million for the three months ended September 30, 2020.

Interest expense on deposits decreased $34,000, or 7.3%, to $434,000 for the three months ended September 30, 2021 from $468,000 for the three months ended September 30, 2020 as a result of a 17 basis points decrease in the average cost of interest-bearing deposits, partially offset by an increase in the average balance of our interest-bearing deposits. The decrease in the average cost of deposits was primarily due to a 20 basis points decrease in the average cost of certificates of deposit, traditionally our higher costing deposits, to 1.52% for the three months ended September 30, 2021 from 1.72% for the three months ended September 30, 2020, partially offset by an increase in the average balance of certificates of deposit, which increased by $1.9 million to $79.4 million for the three months ended September 30, 2021 from $77.4 million for the three months ended September 30, 2020. In addition, the average cost of transaction accounts, traditionally our lower costing deposit accounts, consisting of demand, savings, and money market accounts decreased by eight basis points to 0.36% for the three months ended September 30, 2021 from 0.44% for the three months ended September 30, 2020, partially offset by the increase in the average balance of interest-bearing transaction accounts of $24.9 million to $146.3 million for the three months ended September 30, 2021 from $121.4 million for the three months ended September 30, 2020. The weighted average rate paid on deposits, including non-interest bearing deposits, decreased 24 basis points to 0.63% for the three months ended September 30, 2021 from 0.87% for the three months ended September 30, 2020 as a result of the decline in market rates of interest as we reduced rates on savings, money market, and demand deposit accounts as well as on new certificates of deposit

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issued upon the maturing of existing certificates of deposit. The increase in the average balance of our transaction accounts primarily reflected deposit customers increasing cash balances during the COVID-19 pandemic, government stimulus efforts and management’s focus on increasing the commercial deposit accounts of its customers in 2020 and which continued in the first three quarters of 2021. The increase in the average balance of certificates of deposit was due to offering higher average rates as compared to other financial institutions in our market area.

Interest expense on Federal Home Loan Bank borrowings decreased $27,000, or 20.6%, to $104,000 for the three months ended September 30, 2021 from $131,000 for the three months ended September 30, 2020. The decrease in interest expense on Federal Home Loan Bank borrowings was caused by a $4.6 million decrease in our average balance of Federal Home Loan Bank borrowings to $16.7 million for the three months ended September 30, 2021 compared to $21.4 million for the three months ended September 30, 2020 as a result of our increased average cash balances reducing the need for additional liquidity, partially offset by an increase in the average cost of these funds of five basis points to 2.45% for the three months ended September 30, 2021 from 2.40% for the three months ended September 30, 2020 as lower cost borrowings matured during 2020 and in the first three quarters of 2021.

Net interest income. Net interest income increased $417,000, or 24.6%, to $2.1 million for the three months ended September 30, 2021 as compared to $1.7 million for the three months ended September 30, 2020. The increase in net interest income for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily due to the increase in interest income on loans and decrease in interest expense on deposits and borrowings. Average net interest-earning assets increased by $34.7 million to $66.6 million for the three months ended September 30, 2021 from $31.9 million for the three months ended September 30, 2020. Our net interest margin decreased four basis points to 2.71% for the three months ended September 30, 2021 from 2.67% for the three months ended September 30, 2020. Our net interest rate spread for the three months ended September 30, 2021 and 2020 was the same for both periods at 2.51%.

Provision for loan losses. We establish provisions for loan losses which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses inherent in the loan portfolio that are both probable and reasonably estimable at the consolidated balance sheet date. In determining the level of the allowance for loan losses, 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 loan losses on a quarterly basis and make provisions for loan losses in order to maintain the allowan6ce.

Based on our evaluation of the above factors, we recorded an $83,000 provision for loan losses for the three months ended September 30, 2021 compared to a $73,000 provision for loan losses for the three months ended September 30, 2020. The increase in the provision for loan losses was primarily driven by loan growth. We have seen a decrease in historical loss factors in the current year driven by no charge- offs to date in 2021. The allowance for loan losses was $3.1 million, or 1.34%, of loans outstanding at September 30, 2021 and $2.9 million, or 1.51%, of loans outstanding at December 31, 2020.

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at September 30, 2021. 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 loan losses. In addition, the PADOB and the FDIC, as an integral part of their examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.

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Noninterest income. Noninterest income information is as follows.


	Three Months Ended
	September 30,				Change
	2021		2020		Amount		Percent

	(Dollars in thousands)
Service charges on deposit accounts	$	38	$	53	$	(15)	(28.3)	%
Gain on equity investments		8		—		8	100.0
Bank owned life insurance		45		31		14	45.2
Debit card income		51		49		2	4.1
Other service charges		21		19		2	10.5
Other income		23		14		9	64.3
Total noninterest income	$	186	$	166	$	20	12.0	%

Noninterest income increased by $20,000, or 12.0%, to $186,000 for the three months ended September 30, 2021 from $166,000 for the three months ended September 30, 2020. The increase in noninterest income resulted primarily from increases in income from bank owned life insurance and gain on equity investments, partially offset by a decrease in service charges on deposit accounts. Income from bank owned life insurance increased $14,000 due to the purchase of three additional insurance policies totaling $1.8 million in the fourth quarter of 2020 and first quarter of 2021. Gain on equity investments increased $8,000 as a result of the change in fair value of the equity investments. Services charges on deposits decreased $15,000 to $38,000 for the three months ended September 30, 2021 as compared to the same prior year period due to less transactional fees for the third quarter of 2021.

Noninterest Expenses. Noninterest expenses information is as follows.


	Three Months Ended
	September 30,				Change
	2021		2020		Amount		Percent

	(Dollars in thousands)
Salaries and employee benefits	$	1,051	$	915	$	136	14.9	%
Occupancy and equipment		153		150		3	2.0
Data and item processing		241		242		(1)	(0.4)
Advertising and marketing		37		63		(26)	(41.3)
Professional fees		135		105		30	28.6
Directors’ fees		60		61		(1)	(1.6)
FDIC insurance premiums		59		32		27	84.4
Other real estate owned, net		—		45		(45)	100.0
Debit card expenses		33		33		—	—
Other		186		64		122	190.6
Total noninterest expenses	$	1,955	$	1,710	$	245	14.3	%

Noninterest expenses increased $245,000, or 14.3%, to $2.0 million for the three months ended September 30, 2021 from $1.7 million for the three months ended September 30, 2020. The increase in noninterest expenses was primarily the result of increases in salaries and employee benefits expense of $136,000, other expense of $122,000, professional fees of $30,000 and FDIC insurance premiums of $27,000, partially offset by a decrease in other real estate owned expense, net of $45,000 and advertising and marketing of $26,000. Salaries and employee benefits expense increased $136,000 primarily due to ESOP expense beginning in the third quarter of 2021, the hiring of additional staff, annual salary increases, and the implementation of supplemental executive retirement plans for certain executive officers beginning in the third quarter of 2020. Other expense increased $122,000 as a result of added expenses related to the implementation of a cloud-based loan platform, SEC reporting software subscription in addition to identity theft restoration services associated with our flagship checking products. Professional fees increased $30,000 primarily due to expenses associated with being a public company, primarily legal. FDIC insurance premiums increased $27,000 primarily due to increases in the total assessment base and the FDIC quarterly multiplier when comparing the three months ended September 30, 2021 to the three months ended September 30, 2020. Other real estate owned expense was zero for the three months ended September 30, 2021 as compared to $45,000 for the three months ended September 30, 2020 due to cost associated with the sale of an other real estate owned property for the three months ended September 30, 2020. Advertising and marketing decreased $26,000 primarily due to limited advertising campaigns in the third quarter of 2021.

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Income tax expense. Income tax expense increased $37,000, or 370.0%, to $47,000 for the three months ended September 30, 2021 from $10,000 for the three months ended September 30, 2020. The effective tax rates were 18.3% and 13.3% for the three month period ended September 30, 2021 and 2020, respectively. The increase in income tax expense for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 was primarily due to an increase in income before income 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. Deferred loan fees totaled $157,000 and $31,000 for the three months ended September 30, 2021 and 2020, respectively.


	For the Three Months Ended September 30,
	2021							2020
	Average							Average
	Outstanding					Average		Outstanding					Average
	Balance			Interest		Yield/Rate (5)		Balance			Interest		Yield/Rate (5)

	(Dollars in thousands)
Interest-earning assets:
Loans	$	224,574		$	2,552	4.49	%	$	178,819		$	2,156	4.75	%
Debt securities available for sale and restricted stocks		28,469			68	0.93	%		24,606			117	1.85	%
Equity securities		890			9	4.19	%		1,084			16	5.75	%
Cash and cash equivalents		55,038			18	0.13	%		47,575			2	0.02	%
Total interest-earning assets		308,971			2,647	3.39	%		252,084			2,291	3.59	%
Noninterest-earning assets		10,169							5,626
Total assets	$	319,140						$	257,710

Interest-bearing liabilities:
Interest-bearing demand deposits	$	74,316			55	0.29	%	$	67,918			63	0.37	%
Savings deposits		20,907			18	0.34	%		19,205			18	0.36	%
Money market deposits		51,005			57	0.45	%		34,242			51	0.59	%
Certificates of deposit		79,371			304	1.52	%		77,433			336	1.72	%
Total interest-bearing deposits		225,599			434	0.76	%		198,798			468	0.93	%
Long-term borrowings		16,730			104	2.45	%		21,359			131	2.40	%
Total interest-bearing liabilities		242,329			538	0.88	%		220,157			599	1.08	%
Noninterest-bearing demand deposits (1)		46,389							14,251
Other noninterest-bearing liabilities		(762)							619
Total liabilities		287,956							235,027
Stockholders' equity		31,184							22,683
Total liabilities and stockholders' equity	$	319,140							257,710
Net interest income				$	2,109						$	1,692
Net interest rate spread (2)						2.51	%						2.51	%
Net interest-earning assets (3)	$	66,642						$	31,927
Net interest margin (4)						2.71	%						2.67	%
Average interest-earning assets to interest-bearing liabilities		127.50	%						114.50	%

(1)	Including stock subscriptions restricted deposits, whereas interest was calculated by the Company at five basis points and paid by the stock transfer agent.

(2)	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.

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

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

(5)	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 net 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
	September 30, 2021 vs. 2020
	Increase (Decrease) Due to				Total
					Increase
	Volume		Rate		(Decrease)

	(In thousands)
Interest-earning assets:
Loans	$	2,173	$	(1,777)	$	396
Debt securities available for sale and restricted stocks		71		(120)		(49)
Equity securities		(11)		4		(7)
Cash and cash equivalents		1		15		16
Total interest-earning assets		2,234		(1,878)		356

Interest-bearing liabilities:
Interest-bearing demand deposits		24		(32)		(8)
Savings deposits		6		(6)		0
Money market deposits		99		(93)		6
Certificates of deposit		33		(65)		(32)
Total deposits		162		(196)		(34)
Borrowings		(111)		84		(27)
Total interest-bearing liabilities		51		(112)		(61)
Change in net interest income	$	2,183	$	(1,766)	$	417

Comparison of Operating Results for the Nine months Ended September 30, 2021 and September 30, 2020

General. Net income increased $408,000 or 309.1%, to $540,000 for the nine months ended September 30, 2021 from $132,000 for the nine months ended September 30, 2020. The $408,000 period over period increase in earnings was attributable to a $516,000 increase in interest and dividend income, a $400,000 decrease in the provision for loan losses, a $146,000 decrease in interest expenses and a $44,000 increase in noninterest income, partially offset by a $596,000 increase in noninterest expenses and a $102,000 increase in income tax expense.

Interest and dividend income. Total interest and dividend income increased $516,000, or 7.5%, to $7.4 million for the nine months ended September 30, 2021 from $6.8 million for the nine months ended September 30, 2020. The increase in interest and dividend income resulted from a $51.5 million increase period over period in the average balance of interest-earning assets, primarily in loans and cash and cash equivalents, partially offset by a 45 basis points decrease in the average yield on interest-earning assets from 3.87% for the nine months ended September 30, 2020 to 3.42% for the nine months ended September 30, 2021.

Interest income on loans, including fees, increased $705,000, or 11.1%, to $7.1 million for the nine months ended September 30, 2021 as compared to $6.4 million for the nine months ended September 30, 2020, reflecting an increase in the average balance of loans to $211.4 million for the nine months ended September 30, 2021 from $178.5 million for the nine months ended September 30, 2020, partially offset by a 29 basis points decrease in the average yield on loans. The increase in the average balance of loans was due primarily to increases in the average balances of commercial real estate and commercial and industrial loans reflecting our strategy to grow commercial lending, partially offset by the decline in the average balance of one- to four-family residential loans. The average yield on loans decreased to 4.47% for the nine months ended September 30, 2021 from 4.76% for the nine months ended September 30, 2020, as a result of a decrease in market interest rates since September 30, 2020. The nine months ended September 30, 2021 included $192,000 of PPP loan income from interest and net fees.

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Interest income on securities decreased $181,000, or 41.5%, to $255,000 for the nine months ended September 30, 2021 from $436,000 for the nine months ended September 30, 2020. The decrease in interest income on debt securities available for sale and restricted stocks was due to a 109 basis points decrease in the average yield on debt securities available for sale and restricted stocks to 1.02% for the nine months ended September 30, 2021 from 2.11% for the nine months ended September 30, 2020, partially offset by an increase in the average balance of debt securities available for sale and restricted stocks of $4.7 million, or 19.5%, to $28.7 million for the nine months ended September 30, 2021 from $24.0 million for the nine months ended September 30, 2020. The average yield on debt securities available for sale decreased due to calls of higher-yielding securities which were replaced by significantly lower-yielding investment securities due to the decrease in market rates since September 30, 2020. The increase in the average balance of debt securities available for sale was due to purchases of U.S. Government and agency obligations and mortgage-backed securities with our excess liquidity since September 30, 2020.

Interest income on cash and cash equivalents decreased $8,000, or 21.6%, to $29,000 for the nine months ended September 30, 2021, from $37,000 for the nine months ended September 30, 2020. The decrease in interest income on cash and cash equivalents was attributable to an decrease in the average yield on cash and cash equivalents of seven basis points to 0.08% for the nine months ended September 30, 2021 from 0.15% for the nine months ended September 30, 2020 as a result of the decrease in short-term market interest rates since September 30, 2020. The increase in the average balance of cash and cash equivalents of $14.1 million, or 42.8%, to $47.1 million for the nine months ended September 30, 2021 from $33.0 million for the nine months ended September 30, 2020 was due to increased liquidity on our balance sheet as customers increased their savings and as a result of government stimulus.

Interest expense. Interest expense decreased $146,000, or 8.1%, to $1.7 million for the nine months ended September 30, 2021 from $1.8 million for the nine months ended September 30, 2020 as a result of a decrease in interest expense on deposits and borrowings. The decrease in interest expense reflected a 24 basis points decrease in the average cost of interest-bearing liabilities from 1.17% for the nine months ended September 30, 2020 to 0.93% for the nine months ended September 30, 2021, partially offset by a $33.9 million increase in the average balance of interest-bearing liabilities to $238.9 million for the nine months ended September 30, 2021 from $204.9 million for the nine months ended September 30, 2020.

Interest expense on deposits decreased $55,000, or 3.9%, to $1.3 million for the nine months ended September 30, 2021 from $1.4 million for the nine months ended September 30, 2020 as a result of a 24 basis points decrease in the average cost of deposits, partially offset by an increase in the average balance of our interest-bearing deposits. The decrease in the average cost of deposits was primarily due to a 30 basis points decrease in the average cost of certificates of deposit, traditionally our higher costing deposits, to 1.57% for the nine months ended September 30, 2021 from 1.87% for the nine months ended September 30, 2020 partially offset by an increase in the average balance of certificates of deposit which increased by $11.0 million to $82.5 million for the nine months ended September 30, 2021 from $71.5 million for the nine months ended September 30, 2020. In addition, the average cost of transaction accounts, traditionally our lower costing deposit accounts, decreased 12 basis points to 0.37% for the nine months ended September 30, 2021 from 0.49% for the nine months ended September 30, 2020, partially offset by an increase in the average balance of transaction interest-bearing accounts consisting of demand, savings, and money market accounts, which increased by $28.4 million to $139.2 million for the nine months ended September 30, 2021 from $110.8 million for the nine months ended September 30, 2020. The weighted average rate paid on deposits, including non-interest bearing deposits, decreased 24 basis points to 0.71% for the nine months ended September 30, 2021 from 0.95% for the nine months ended September 30, 2020 as a result of the decline in market rates of interest as we reduced rates on savings, money market, and demand deposit accounts as well as on new certificates of deposit issued upon the maturing of existing certificates of deposit. The increase in the average balance of our transaction accounts primarily reflected deposit customers increasing cash balances during the COVID-19 pandemic, government stimulus and management’s focus on increasing the commercial deposit accounts of its customers in 2020 and which continued in 2021. The increase in the average balance of certificates of deposit was due to offering higher average rates as compared to other financial institutions in our market area.

Interest expense on borrowings decreased $91,000, or 22.3%, to $317,000 for the nine months ended September 30, 2021 from $408,000 for the nine months ended September 30, 2020. The decrease in interest expense on borrowings was caused by a $5.5 million decrease in our average balance of borrowings to $17.1 million for the nine months ended September 30, 2021 compared to $22.7 million for the nine months ended September 30, 2020, partially offset by an increase in the average

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cost of these funds of eight basis points from 2.36% for the nine months ended September 30, 2020 to 2.44% for the nine months ended September 30, 2021 as lower cost borrowings matured during 2020 and in the first nine months of 2021.

Net interest income. Net interest income increased $662,000, or 13.1%, to $5.7 million for the nine months ended September 30, 2021 as compared to $5.0 million for the nine months ended September 30, 2020. The increase in net interest income for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to the increase in interest income on loans and decrease in interest expense on deposits and borrowings. Average net interest-earning assets increased to $49.3 million for the nine months ended September 30, 2021 from $31.7 million for the nine months ended September 30, 2020. Our net interest margin decreased 19 basis points to 2.65% for the nine months ended September 30, 2021 from 2.84% for the nine months ended September 30, 2020. Our net interest rate spread for the nine months ended September 30, 2021 decreased 21 basis points to 2.49% from 2.70% for the nine months ended September 30, 2020.

Based on our evaluation of the above factors, we recorded a $221,000 provision for loan losses for the nine months ended September 30, 2021 compared to a $621,000 provision for loan losses for the nine months ended September 30, 2020. The decrease in the provision for loan losses was primarily due to adding additional reserves during 2020 to take into account the uncertain impacts of COVID-19 on economic conditions and our borrowers’ ability to repay loans, partially offset by loan growth. We have seen a decrease in historical loss factors in the current year driven by no charge-offs to date in 2021. The allowance for loan losses was $3.1 million, or 1.34%, of loans outstanding at September 30, 2021 and $2.9 million, or 1.51%, of loans outstanding at December 31, 2020.

Noninterest income. Noninterest income information is as follows.


	Nine Months Ended
	September 30,				Change
	2021		2020		Amount		Percent

	(Dollars in thousands)
Service charges on deposit accounts	$	129	$	119	$	10	8.4	%
Gain on sale of other real estate owned		—		30		(30)	(100.0)
(Loss) gain on equity investments		(6)		20		(26)	(130.0)
Bank owned life insurance		130		93		37	39.8
Debit card income		165		138		27	19.6
Other service charges		68		61		7	11.5
Other income		51		32		19	59.4
Total noninterest income	$	537	$	493	$	44	8.9	%

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Noninterest income increased by $44,000, or 8.9%, to $537,000 for the nine months ended September 30, 2021 from $493,000 for the nine months ended September 30, 2020. The increase in noninterest income resulted primarily from an increase in income from bank owned life insurance, debit card income and service charges on deposits, partially offset by a decrease in the gain on sale of other real estate owned and loss on equity investments. Income from bank owned life insurance increased $37,000 due to the purchase of six additional insurance policies totaling $1.8 million in the fourth quarter of 2020 and first quarter of 2021. Debit card income increased $27,000 as a result of increased volume of transactions when comparing the nine months ended September 30, 2021 to the same period in 2020. Income from service charges on deposit accounts increased $10,000 due to the increase in core deposits since September 30, 2020. Gain on sale of other real estate owned was $30,000 for the nine months ended September 30, 2020 with no sales of other real estate owned in 2021. Loss on equity investments increased $26,000 to a $6,000 loss due to a decrease in the fair market value of the investment during the nine months ended September 30, 2021 as compared to a gain of $20,000 for the same period in 2020.

Noninterest Expenses. Noninterest expenses information is as follows.


	Nine Months Ended
	September 30,				Change
	2021		2020		Amount		Percent

	(Dollars in thousands)
Salaries and employee benefits	$	2,865	$	2,580	$	285	11.0	%
Occupancy and equipment		441		416		25	6.0
Data and item processing		728		663		65	9.8
Advertising and marketing		65		82		(17)	(20.7)
Professional fees		305		375		(70)	(18.7)
Directors’ fees		182		180		2	1.1
FDIC insurance premiums		163		64		99	154.7
Other real estate owned, net		—		45		(45)	(100.0)
Debit card expenses		106		100		6	6.0
Other		507		261		246	94.3
Total noninterest expenses	$	5,362	$	4,766	$	596	12.5	%

Noninterest expenses increased $596,000, or 12.5%, to $5.4 million for the nine months ended September 30, 2021 from $4.8 million for the nine months ended September 30, 2020. The increase in noninterest expenses was primarily the result of increases in salaries and employee benefits expense of $285,000, other expense of $246,000, FDIC insurance premiums of $99,000 and data and item processing expense of $65,000, partially offset by a decrease in professional fees of $70,000. Salaries and employee benefits expense increased $285,000 primarily due to ESOP expense beginning in the third quarter of 2021, the hiring of additional staff, annual salary increases, and the implementation of supplemental executive retirement plans for certain executive officers beginning in the third quarter of 2020. Other expense increased $246,000 as a result of added expenses related to the implementation of a cloud-based loan platform, SEC reporting software subscription in addition to identity theft restoration services associated with our flagship checking products. FDIC insurance premiums increased $99,000 primarily due to increases in the total assessment base and the FDIC quarterly multiplier when comparing the nine months ended September 30, 2021 to the nine months ended September 30, 2020. Data and item processing expense increased $65,000 primarily due to increases in information technology expenses and internet banking as a result of annual contract increases and additional services, partially offset by a decrease in outsourced IT expense. Professional fees decreased $70,000 primarily due to decreases associated with non-recurring interim Chief Financial Officer consultant fees, partially offset by an increase in legal fees.

Income tax expense. Income tax expense increased $102,000, or 850.0% to $114,000 for the nine months ended September 30, 2021 from $12,000 for the nine months ended September 30, 2020. The effective tax rates were 17.4% and 8.3% for the nine month period ended September 30, 2021 and 2020, respectively. The increase in income tax expense for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily due to an increase in income before income 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. Deferred loan fees totaled $265,000 and $64,000 for the nine months ended September 30, 2021 and 2020, respectively.


	For the Nine Months Ended September 30,
	2021							2020
	Average							Average
	Outstanding					Average		Outstanding					Average
	Balance			Interest		Yield/Rate (5)		Balance			Interest		Yield/Rate (5)

	(Dollars in thousands)
Interest-earning assets:
Loans	$	211,415		$	7,081	4.47	%	$	178,499		$	6,376	4.76	%
Debt securities available for sale and restricted stocks		28,682			220	1.02	%		24,007			381	2.11	%
Equity securities		909			35	5.07	%		1,137			55	6.47	%
Cash and cash equivalents		47,126			29	0.08	%		32,994			37	0.15	%
Total interest-earning assets		288,132			7,365	3.42	%		236,637			6,849	3.87	%
Noninterest-earning assets		8,791							5,602
Total assets	$	296,923						$	242,239

Interest-bearing liabilities:
Interest-bearing demand deposits	$	71,375			159	0.30	%	$	60,868			174	0.38	%
Savings deposits		20,275			51	0.34	%		20,216			59	0.39	%
Money market deposits		47,583			171	0.48	%		29,724			166	0.74	%
Certificates of deposit		82,505			967	1.57	%		71,469			1,004	1.87	%
Total interest-bearing deposits		221,738			1,348	0.81	%		182,277			1,403	1.03	%
Long-term borrowings		17,135			317	2.44	%		22,661			408	2.36	%
Total interest-bearing liabilities		238,873			1,665	0.93	%		204,938			1,811	1.17	%
Noninterest-bearing demand deposits (1)		32,663							14,052
Other noninterest-bearing liabilities		556							635
Total liabilities		272,092							219,625
Stockholders' equity		24,831							22,614
Total liabilities and stockholders' equity	$	296,923							242,239
Net interest income				$	5,700						$	5,038
Net interest rate spread (2)						2.49	%						2.70	%
Net interest-earning assets (3)	$	49,259						$	31,699
Net interest margin (4)						2.65	%						2.84	%
Average interest-earning assets to interest-bearing liabilities		120.62	%						115.47	%

(1)	Includes stock subscription restricted deposits, whereas interest was calculated by the Company at five basis points and paid by the stock transfer agent.

(2)	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.

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

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

(5)	Annualized.

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Rate/Volume Analysis


	Nine Months Ended
	September 30, 2021 vs. 2020
	Increase (Decrease) Due to				Total
					Increase
	Volume		Rate		(Decrease)

	(In thousands)
Interest-earning assets:
Loans	$	1,567	$	(862)	$	705
Debt securities available for sale and restricted stocks		99		(260)		(161)
Equity securities		(15)		(5)		(20)
Cash and cash equivalents		21		(29)		(8)
Total interest-earning assets		1,672		(1,156)		516

Interest-bearing liabilities:
Interest-bearing demand deposits		40		(55)		(15)
Savings deposits		—		(8)		(8)
Money market deposits		132		(127)		5
Certificates of deposit		206		(243)		(37)
Total deposits		378		(433)		(55)
Borrowings		(130)		39		(91)
Total interest-bearing liabilities		248		(394)		(146)
Change in net interest income	$	1,424	$	(762)	$	662

Non-Performing Assets and Allowance for Loan Losses

Non-performing loans. Loans are reviewed on a weekly basis and again by our credit committee on a monthly basis. Management determines that a loan is impaired or non-performing when it is probable at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent. When a loan is determined to be impaired, the measurement of the loan in the allowance for loan losses is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. 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.

A loan is classified as a troubled debt restructuring if, for economic or legal reasons related to the borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of the principal amount due. Interest income on restructured loans is accrued after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six consecutive months.

The CARES Act, in addition to providing financial assistance to both businesses and consumers, creates a forbearance program for federally-backed mortgage loans, protects borrowers from negative credit reporting due to loan accommodations related to the national emergency, and provides financial institutions the option to temporarily suspend

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certain requirements under U.S. GAAP related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. The Federal banking regulatory agencies have likewise issued guidance encouraging financial institutions to work prudently with borrowers who are, or may be, unable to meet their contractual payment obligations because of the effects of COVID-19. That guidance, with concurrence of the Financial Accounting Standards Board, and provisions of the CARES Act allow modifications made on a good faith basis in response to COVID-19 to borrowers who were generally current with their payments prior to any relief, to not be treated as troubled debt restructurings. Modifications may include payment deferrals, fee waivers, extensions of repayment term, or other delays in payment. We have worked with our customers affected by COVID-19 and accommodated a significant amount of loan modifications across its loan portfolios. To the extent that additional modifications meet the criteria previously described, such modifications are not expected to be classified as troubled debt restructurings.

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 loan losses, or, if the existing allowance is inadequate, charged to expense of the current period. 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 September 30, 2021 or as of December 31, 2020.

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Non-Performing Assets. The following table sets forth information regarding our non-performing assets. Non-accrual loans include non-accruing troubled debt restructurings of $385,000 and $478,000 as of September 30, 2021 and December 31, 2020, respectively.


		September 30,			December 31,
	2021			2020

	(Dollars in thousands)
Non-accrual loans:
Real estate:
One- to four-family residential	$	687		$	1,600
Commercial		462			575
Construction		546			640
Commercial and industrial		—			—
Consumer		—			—
Total non-accrual loans		1,695			2,815

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	$	1,695		$	2,815
Foreclosed assets		—			—
Total non-performing assets	$	1,695		$	2,815

Non-accruing troubled debt restructurings:
Real estate:
One- to four-family residential		—			—
Commercial		196			214
Construction		189			264
Commercial and industrial		—			—
Consumer		—			—
Total	$	385		$	478

Total accruing troubled debt restructured loans	$	576		$	594
Total non-performing loans to total loans		0.74	%		1.49	%
Total non-accrual loans to total loans		0.74	%		1.49	%
Total non-performing assets to total assets		0.54	%		1.02	%

Non-performing loans decreased to $1.7 million, or 0.74% of total loans, at September 30, 2021 from $2.8 million, or 1.49% of total loans, at December 31, 2020. This decrease was due to a $822,000 reduction in non-performing one-to four-family residential loans primarily due to the $362,000 pay-off of one relationship in the first quarter of 2021, a $258,000 pay-off of one relationship in the second quarter of 2021 and a $61,000 pay-off of one relationship in the third quarter of 2021. Non-performing construction loans decreased $63,000 primarily due to a pay-down of $50,000 on one relationship in the first quarter of 2021.

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


	At or For the Three Months Ended September 30,						At or For the Nine Months Ended September 30,
	2021			2020			2021			2020

	(Dollars in thousands)						(Dollars in thousands)
Allowance for loan losses at beginning of period	$	2,993		$	2,636		$	2,854		$	1,839
Provision for loan losses		83			73			221			621
Charge-offs:
Real estate:
One- to four-family residential		—			—			—			(14)
Commercial		—			—			—			—
Construction		—			—			—			—
Commercial and industrial		—			—			—			—
Consumer		—			—			—			(4)
Total charge-offs		—			—			—			(18)

Recoveries:
Real estate:
One- to four-family residential		—			—			—			—
Commercial		—			—			—			264
Construction		—			—			—			—
Commercial and industrial		1			2			2			5
Consumer		—			—			—			—
Total recoveries		1			2			2			269

Net (charge-offs) recoveries		1			2			2			251

Allowance at end of period	$	3,077		$	2,711		$	3,077		$	2,711

Allowance to non-performing loans		181.53	%		96.31	%		181.53	%		96.31	%
Allowance to total loans outstanding at the end of the period		1.34	%		1.51	%		1.34	%		1.51	%
Net (charge-offs) recoveries to average loans outstanding during the period		—	%		—	%		—	%		—	%

The provision for loan losses increased $10,000, or 13.7%, to $83,000 for the three months ended September 30, 2021 from $73,000 for the three months ended September 30, 2020. The provision for loan losses decreased $400,000, or 64.4%, to $221,000 for the nine months ended September 30, 2021 from $621,000 for the nine months ended September 30, 2020. The increase for the three months ended September 30, 2021 was due to loan growth. The decrease for the nine months ended September 30, 2021was primarily due to adjustment of certain qualitative factors to take into account the uncertain impacts of the COVID-19 pandemic on economic conditions and borrowers’ ability to repay loans, partially offset by the loan growth during the nine months ended September 30, 2020. We have seen a decrease in historical loss factors in the nine months ended September 30, 2021 driven by no charge-offs to date in 2021.

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

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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 September 30, 2021, we had the ability to borrow approximately $99.4 million from the Federal Home Loan Bank of Pittsburgh, of which $16.7 million had been advanced in addition to $2.8 million held in reserve to secure one letter of credit to collateralize municipal deposits. Additionally, at September 30, 2021, we had the ability to borrow $3.0 million from the Atlantic Community Bankers Bank and we also maintained a line of credit of $2.0 million with the Federal Reserve Bank of Philadelphia at September 30, 2021. We did not borrow against the credit lines with the Atlantic Community Bankers Bank or the Federal Reserve Bank of Philadelphia during the three or nine months ended September 30, 2021 or 2020.

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 and nine months ended September 30, 2021, our liquidity ratio averaged 19.9% and 18.6%, respectively, due to the COVID-19 pandemic. We believe that we had enough sources of liquidity to satisfy our short and long-term liquidity needs as of September 30, 2021.

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 September 30, 2021, cash and cash equivalents totaled $46.0 million. Debt securities classified as available-for-sale, which provide additional sources of liquidity, totaled $27.1 million at September 30, 2021.

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 September 30, 2021, totaled $32.4 million, or 41.3% of our certificates of deposit, and 13.0% 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 September 30, 2021, Presence Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines due to its compliance with the Community Bank Leverage ratio. See Note 8 of the Notes to the Financial Statements.

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 September 30, 2021, we had outstanding commitments to originate loans of $20.3 million, unused lines of credit totaling $8.7 million and $1.6 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 September 30, 2021 totaled $32.4 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.

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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.

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.

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 September 30, 2021, 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.

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 September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

As of September 30, 2021, 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.

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

On March 12, 2021, PB Bankshares, Inc. filed a Registration Statement on Form S-1 with the Securities and Exchange Commission in connection with the mutual to stock conversion of Prosper Bank (now Presence Bank) and the related offering of common stock by PB Bankshares, Inc. The Registration Statement (File No. 333-254209) was declared effective by the Securities and Exchange Commission on May 14, 2021. PB Bankshares, Inc. registered 2,777,250 shares of common stock, par value $0.01 per share, pursuant to the Registration Statement for an aggregate offering price of $27.8 million. The stock offering commenced on May 24, 2021, and ended on July 14, 2021.

Piper Sandler & Co. (“Piper Sandler”) was engaged to assist in the marketing of the common stock and for records management services. For its services, Piper Sandler received a fee of $379,000. Piper Sandler was also reimbursed $152,000 for its reasonable out-of-pocket expenses, inclusive of its legal fees and expenses.

The stock offering resulted in gross proceeds of $27.8 million, through the sale of 2,777,250 shares of common stock at a price of $10.00 per share.

Expenses related to the offering were approximately $1.6 million, including $531,000 paid to Piper Sandler. Net proceeds of the offering were approximately $26.2 million. PB Bankshares, Inc. contributed approximately $15.7 million of the net proceeds of the offering to the Bank and approximately $10.5 million of the net proceeds were retained by PB Bankshares, Inc. prior to the ESOP purchases on the open market. The net proceeds contributed to the Bank have been invested in cash, short-term instruments and loans. The net proceeds retained by PB Bankshares, Inc. have been deposited with a correspondent bank.

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: November 15, 2021


	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)