This section is intended to help investors understand the financial performance of HV Bancorp, Inc. and its subsidiary through a discussion of the factors affecting our financial condition as of December 31, 2022 and 2021, and our results of operations for the year ended December 31, 2022 and 2021, respectively. This section should be read in conjunction with the audited consolidated financial statements and notes to the audited consolidated financial statements that appear beginning on page 46 of this annual report.

Overview

HV Bancorp, Inc., through the Bank, provides financial services to individuals
and businesses from our main office in Doylestown, Pennsylvania, and from our
seven full-service banking offices located in Plumsteadville, Philadelphia,
Warrington and Huntingdon Valley, Pennsylvania and Mount Laurel, New Jersey. We
also operate a limited service branch in Philadelphia, Pennsylvania. Our
administrative offices and executive offices are located in Doylestown,
Pennsylvania. Our Business Banking office is located in Philadelphia,
Pennsylvania. We have loan production and sales offices located in Mount Laurel,
New Jersey, Doylestown, Pennsylvania, Huntingdon Valley, Pennsylvania, and
Wilmington, Delaware; and a loan origination office in Montgomeryville,
Pennsylvania. Our primary market area includes Montgomery, Bucks and
Philadelphia Counties in Pennsylvania, Burlington County in New Jersey and New
Castle County in Delaware. Our principal business consists of attracting retail
deposits from the general public in our market area and investing those
deposits, together with funds generated from operations and borrowings,
primarily in one- to four-family residential mortgage loans, commercial real
estate loans (including multi-family loans), construction loans, home equity
loans and lines of credit and, to a lesser extent, consumer loans. We retain our
loans in portfolio depending on market conditions, but we primarily sell our
fixed-rate one- to four-family residential mortgage loans in the secondary
market. We also invest in various investment securities. Our revenue is derived
principally from interest on loans and investments and loan sales. Our primary
sources of funds are deposits, Federal Home Loan Bank ("FHLB") advances and
principal and interest payments on loans and securities.

Our results of operations depend primarily on our net interest income which is
the difference between the interest income we earn on our interest-earning
assets and the interest we pay on our interest-bearing liabilities. Our results
of operations also are affected by our provision for loan losses, non-interest
income and non-interest expense. Non-interest income currently consists
primarily of gains recognized from the sale of residential mortgage loans in the
secondary market, fees for customer services, gain (loss) from derivative
instruments, gain on sale of mortgage servicing rights, net, change in fair
value of loans held-for-sale and sales of securities. Non-interest expense
currently consists primarily of expenses related to salaries and employee
benefits, occupancy, data processing related operations, professional fees and
other expenses.

Our results of operations also may be affected significantly by general, regional, and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Merger with Citizens Financial



As previously announced, on October 18, 2022, the Company, the Bank, Citizens
Financial Services, Inc. ("Citizens Financial"), First Citizens Community Bank
("FCCB") and CZFS Acquisition Company, LLC entered into a merger agreement that
provides that the Company will merge with and into Citizens Financial, with
Citizens Financial remaining as the surviving corporation (the "Merger").
Following the Merger, the Bank will merge with and into FCCB, with FCCB
remaining as the surviving bank (the "Bank Merger").

The Company's shareholders approved the Merger on February 15, 2023. On March
24, 2023,  the Pennsylvania Department of Banking and Securities approved the
Merger and the Bank Merger. On March 30, 2023, the Board of Governors of the
Federal Reserve System approved the Bank Merger and waived the application for
the Merger. The completion of the Merger and the Bank Merger remain subject to
customary closing conditions. The Merger is expected to close in the first half
of 2023.

At the effective time of the Merger, each outstanding share of Company common
stock will be converted into the right to receive, at the election of such
holder, either (i) 0.4000 shares of Citizens Financial common stock, or (ii)
$30.50 in cash, together with cash in lieu of fractional shares, if any. All
such elections are subject to adjustment on a pro rata basis, so that 80% of the
aggregate merger consideration paid to the Company shareholders will be the
stock consideration and the remaining 20% will be the cash consideration.


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Critical Accounting Estimates



The discussion and analysis of the financial condition and results of operations
are based on our financial statements, which are prepared in conformity with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates
and assumptions affecting the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities, and the reported amounts of
income and expenses. 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.

The following represents our critical accounting estimates:



Allowance for loan losses. The allowance for loan losses is the amount estimated
by management as necessary to cover losses inherent in the loan portfolio at the
balance sheet date. The allowance is established through the provision for loan
losses, which is charged to income. Determining the amount of the allowance for
loan losses necessarily involves a high degree of judgment.

The allowance for loan losses represents management's estimate of losses
inherent in the loan portfolio as of the balance sheet 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 loans receivable are 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.

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
the Bank's 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, and general 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. The general component covers pools
of loans by loan class including commercial loans not considered impaired, as
well as smaller balance homogeneous loans, such as residential mortgage, home
equity, home equity lines of credit 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:

• Lending policies and procedures, including underwriting standards and

collection, charge-off, and recovery practices;

• National, regional, and local economic and business conditions as well as


        the condition of various market segments, including the value of
        underlying collateral for collateral dependent loans;


  • Nature and volume of the portfolio and terms of loans;

• Volume and severity of past due, classified and nonaccrual loans as well

as and other loan modifications;

• Existence and effect of any concentrations of credit and changes in the

level of such concentrations; and

• Effect of external factors, such as competition and legal and regulatory

requirements.




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 Pennsylvania Department of Banking
and Securities, as an integral part of their examination process, periodically
review our allowance for loan losses. These agencies may require us to recognize
adjustments to the allowance based on judgments about information available to
them at the time of their examination. A large loss could deplete the allowance
and require increased provisions to replenish the allowance, which would
adversely affect earnings. On January 1, 2023, we adopted CECL.


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See Note 1 of the notes to the audited consolidated financial statements of the Company included in this annual report.



Income Taxes.  Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

Deferred income tax expense results from changes in deferred tax assets and
liabilities between periods. Deferred tax assets are reduced by a valuation
allowance if, based on the weight of the evidence available, it is more likely
than not that some portion or all of a deferred tax asset will not be realized.
See also Note 14- Income Taxes in the Notes to the Consolidated Financial
Statements.

Investment Securities. Securities are evaluated on a quarterly basis, and more
frequently when market conditions warrant such an evaluation, to determine
whether declines in their value are other-than-temporary. To determine whether a
loss in value is other-than-temporary, management utilizes criteria such as
reasons underlying the decline, the magnitude and duration of the decline and
whether or not management intends to sell or expects that it is more likely than
not it will be required to sell the security prior to an anticipated recovery of
fair value. The term "other-than-temporary" is not intended to indicate that the
decline is permanent but indicates that the prospects for a near-term recovery
of value is not necessarily favorable, or that there is lack of evidence to
support a realizable value equal to or greater than the carrying value of the
investment. Once a decline in value for a debt security is determined to be
other-than-temporary, the other-than-temporary impairment is separated into
(a) the amount of the total other-than-temporary impairment related to a
decrease in cash flows expected to be collected from the debt security (the
credit losses) and (b) the amount of the total other-than-temporary impairment
related to other factors. The amount of the total other-than-temporary
impairment related to the credit loss is recognized in earnings. The amount of
the total other-than-temporary impairment related to other factors is recognized
in other comprehensive income (loss).

Fair Value Measurements. Fair value is defined as the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. The fair value
hierarchy requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. A more
detailed description of the fair values measured at each level of the fair value
hierarchy and our methodology can be found in Note 15 of the audited
consolidated financial statements of the Company included in this transition
report on Form 10-K.

Derivative Instruments and Hedging Activities. We use derivative instruments as
part of our overall strategy to manage our exposure to market risks primarily
associated with fluctuations in interest rates. As a matter of policy, we do not
use derivatives for speculative purposes. All of our derivative instruments that
are measured at fair value on a recurring basis and are included in the
consolidated statements of financial condition as mortgage banking derivatives
and other liabilities. The fair value of our derivative instruments, other than
Interest Rate Lock Commitments ("IRLC") is determined by utilizing quoted prices
from dealers in such securities or third-party models utilizing observable
market inputs. The fair value of the Company's IRLC instruments are based upon
the underlying mortgage loan adjusted for the probability of such commitments
being exercised and estimated costs to complete and originate the loan. The
changes in the fair value of derivative instruments are included in non-interest
income in the consolidated statements of income.

To be announced securities ("TBAs") are "forward delivery" securities considered
derivative instruments under derivatives and hedging accounting guidance, (FASB
ASC 815). We utilize TBAs to protect against the price risk inherent in
derivative loan commitments. TBAs are valued based on forward dealer marks from
our approved counterparties. We utilize a third-party market pricing service,
which compiles current prices for instruments from market sources and those
prices represent the current executable price. TBAs are recorded at fair value
on the consolidated statements of financial condition in mortgage derivatives
and other liabilities with changes in fair value recorded in non-interest income
in the consolidated statements of income.

Loan commitments that are derivatives are recognized at fair value on the
consolidated statements of financial condition as mortgage banking derivatives
and as other liabilities with changes in their fair values recorded as a gain in
hedging instruments in non-interest income in the consolidated statements of
income. Outstanding IRLCs are subject to interest rate risk and related price
risk during the period from the date of issuance through the date of loan
funding, cancellation or expiration. Loan commitments generally range between 30
and 90 days; however, the borrower is not obligated to obtain the loan. We are
subject to fallout risk related to IRLCs, which is realized if approved
borrowers choose not to close on the loans within the terms of the IRLCs. We
have used mandatory commitments


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to substantially reduce these risks. See Note 11 Derivatives and Risk Management Activities in the audited consolidated financial statements of the Company in this annual report.

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

Total Assets



Total assets increased $55.7 million to $615.8 million at December 31, 2022,
from $560.1 million at December 31, 2021. The increase was primarily the result
of increases of $143.8 million in loans receivable, net, $40.9 million in
investment securities, $3.7 million in bank-owned life insurance and $1.1
million in other assets, which were offset by decreases of $104.5 million in
cash and cash equivalents, $25.3 million in loans held-for-sale and $3.2 million
in mortgage servicing rights.

Cash and cash equivalents

Cash and cash equivalents decreased $104.5 million to $16.3 million at December 31, 2022 from $120.8 million at December 31, 2021, primarily as a result of increased funding of loans and purchases of investment securities.

Investment Securities



Investment securities increased by $40.9 million to $85.4 million at December
31, 2022 from $44.5 million at December 31, 2021. The increase was primarily due
to purchases of $61.9 million of U.S. Treasury securities, mortgage-backed,
collateralized mortgage obligations and corporate notes offset by $15.8 million
in proceeds from sales and maturities and principal repayments during the year
ended December 31, 2022, $2.3 million in net unrealized loss on
available-for-sale securities and $2.3 million in net unrealized loss on
securities transferred to held-to-maturity. The increase in comprehensive loss
in the available-for-sale portfolio reflects recent increases in market interest
rates.

At December 31, 2022, our held-to-maturity portion of the securities portfolio,
at amortized cost, was $29.8 million, and our available-for-sale portion of the
securities portfolio, at fair value, was $55.7 million compared to $44.5 million
of available-for-sale securities at December 31, 2021. During the quarter ended
June 30, 2022, the Company transferred $30.2 million at amortized cost of
available-to-sale securities to held-to-maturity securities.

Net Loans



Net loans increased $143.8 million to $469.0 million at December 31, 2022, from
$325.2 million at December 31, 2021. Commercial real estate loans increased by
$68.9 million to $185.8 million at December 31, 2022, from $116.9 million at
December 31, 2021 and there was a $24.3 million increase in commercial business
loans to $54.5 million at December 31, 2022, from $30.2 million at December 31,
2021. In addition, one-to-four family residential real estate loans increased
$48.7 million to $155.0 million at December 31, 2022 from $106.3 million at
December 31, 2021 and construction loans increased $26.3 million to $69.2
million at December 31, 2022, from $42.9 million at December 31, 2021.
Offsetting these increases, was a $22.4 million decrease in SBA Paycheck
Protection Program ("PPP") loans to $472,000 at December 31, 2022 from $22.9
million at December 31, 2021 as a result of PPP loan forgiveness from the SBA.
Additionally, home equity and HELOC loans decreased $879,000 to $2.3 million at
December 31, 2022 from $3.2 million at December 31, 2021.
.

In November 2017, the Bank entered into a loan purchase agreement with a broker
to purchase a portfolio of private education loans made to American citizens
attending AMA-approved medical schools in Caribbean nations. The broker serves
as a lender, holder, program designer and developer, administrator, and
secondary market for the loan portfolios they generate. At December 31, 2022,
the balance of the private education loans was $3.7 million. The private student
loans were made following a proven credit criteria and were underwritten in
accordance with the Bank's policies. At December 31, 2022, there was sevens
loans with a balance of approximately $514,000 that were past due 90 days or
more.

Loans Held For Sale

Loans held for sale decreased $25.3 million to $15.2 million at December 31,
2022 from $40.5 million at December 31, 2021. This decrease was primarily a
result of originations of $274.5 million of one- to four-family residential real
estate loans during the year ended December 31, 2022 net of principle sales of
$305.6 million of loans in the secondary market during this same period.


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Deposits



Deposits increased $61.2 million, or 13.2%, to $525.2 million at December 31,
2022, from $464.0 million at December 31, 2021. Our core deposits (consisting of
demand deposits, money market, passbook and statement and checking accounts)
increased $26.4 million, or 6.1%, to $458.2 million at December 31, 2022, from
$431.8 million at December 31, 2021. Certificates of deposit increased $34.8
million, or 108.3%, to $67.0 million at December 31, 2022, from $32.2 million at
December 31, 2021, resulting from increases of $40.9 million in certificates of
deposit issued through brokers offset by a $6.1 million decrease in retail
certificates of deposit.

Advances from the Federal Home Loan Bank



As of December 31, 2022 and December 31, 2021, the Company had $26.6 million and
$26.4 million in advances outstanding, respectively. During July 2020, the
Company refinanced advances of $27.0 million from the Federal Home Loan Bank to
reduce the cost of borrowing.

Advances from the Federal Reserve Paycheck Protection Program Liquidity Facility ("PPPLF")



As of December 31, 2022, there were no advances from the Federal Reserve PPPLF
as a result of repayments of $3.1 million from PPP loan forgiveness from the SBA
compared to $3.1 million at December 31, 2021.

Subordinated Debt



On May 28, 2021, the Company issued a $10.0 million subordinated note. This note
has a maturity date of May 28, 2031, and bears interest at a fixed rate of 4.50%
per annum through May 28, 2026. Thereafter, the note rate is adjustable and
resets quarterly based on the then current 90-day average Secured Overnight
Financing Rate ("SOFR") plus 325 basis points for U.S. dollar denominated loans
as published by the Federal Reserve Bank of New York. The Company may, at its
option, at any time on an interest payment date, on or after May 28, 2026,
redeem the notes, in whole or in part, at par plus accrued interest to the date
of redemption. The balance of subordinated debt, net of unamortized debt
issuance costs, was $10.0 million at December 31, 2022 and 2021.

Total Shareholders' Equity



Total shareholders' equity decreased $543,000 to $42.1 million at December 31,
2022, compared to $42.6 million at December 31, 2021. The decrease resulted
primarily from other comprehensive losses of $3.1 million due to the fair value
adjustments, net of deferred tax, on the investment securities
available-for-sale portfolio, which reflects recent increases in market interest
rates and $372,000 in treasury stock repurchases primarily as part of the stock
repurchase plan. Offsetting these decreases was net income of $2.2 million for
the year ended December 31, 2022, share based compensation expense of $535,000,
ESOP shares committed to be released of $46,000 and stock option exercises of
$136,000. See Note 10 of the Notes to the Audited Consolidated Financial
Statements.

Comparison of Statements of Income for the Year Ended December 31, 2022 and 2021

General



Net income decreased $1.9 million, or 46.3%, to $2.2 million for the year ended
December 31, 2022 from $4.1 million for the year ended December 31, 2021. The
decrease in net income for the year ended December 31, 2022 was primarily due to
a decrease of $5.5 million in in non-interest income, an increase of $982,000 in
provision for loan losses and a $526,000 increase in non-interest expense
partially offset by an increase of $4.3 million in net interest income and a
decrease of $889,000 in income tax expense as compared to the year ended
December 31, 2021.

Interest Income



Total interest income increased $6.2 million, or 37.1%, to $22.9 million for the
year ended December 31, 2022 from $16.7 million for the year ended December 31,
2021. The increase was primarily the result of a $4.6 million increase in
interest and fees on loans, $1.1 million increase in interest on investment
securities and a $440,000 increase in interest-earning deposits with banks. The
average yield on our interest-earning assets increased 118 basis points to 4.15%
for the year ended December 31, 2022 as compared to 2.97% for the year ended
December 31, 2021 due to the rising interest rate environment. The average
balance of our interest-earning assets decreased by $12.1 million to $550.8
million for the year ended December 31, 2022 as compared to $562.9 million for
the year ended December 31,


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2021. The decrease was primarily a result of a decrease in the average balance
of interest-earning deposits of $68.1 million offset by a $42.5 million increase
in the average balance of investment securities and a $13.3 million increase in
the average balance of loans.

Interest and fees on loans increased $4.6 million, or 29.3%, to $20.3 million
for the year ended December 31, 2022 from $15.7 million for the year ended
December 31, 2021. This increase resulted from a $13.3 million increase in the
average balance of loans to $402.1 million for the year ended December 31, 2022
from $388.8 million for the year ended December 31, 2021, primarily as a result
of increases in commercial real estate and other commercial business and
construction loans offset by a decrease in the average balance in PPP loans and
loans held for sale. The average yield on loans increased 101 basis points to
5.06% for the year ended December 31, 2022 from 4.05% for the year ended
December 31, 2021.

Interest and dividends on investments, mortgage-backed securities and
collateralized mortgage obligations increased $1.1 million to $1.8 million for
the year ended December 31, 2022 from $706,000 for the year ended December 31,
2021. Interest on investment securities increased as a result of $959,000
increases in interest income on U.S. Government Agency securities, corporate
bonds and municipal securities to $1.5 million for 2022 from $572,000 for 2021
and a $128,000 increase in interest income on mortgage-backed securities and
collateral mortgage obligation securities to $262,000 for the year ended
December 31, 2022, from $134,000 for the year ended December 31, 2021. The
average yield on investment securities increased to 2.37% for the year ended
December 31, 2022 from 2.12% for the year ended December 31, 2021. The average
balance of investment securities increased by $42.5 million to $75.7 million for
the year ended December 31, 2022, from $33.2 million for the year ended December
31, 2021.

Interest on interest-earning deposits increased $440,000 to $621,000 for the
year ended December 31, 2022 from $181,000 for the year ended December 31, 2021
due to an increase of 74 basis points in the average yield on interest-earning
deposits with banks to 0.87% for the year ended December 31, 2022, from 0.13%
for the year ended December 31, 2021 as result of the increase in the Fed Funds
rate during 2022. Offsetting this increase was a decrease in the average balance
of interest-earning deposits of $68.1 million to $71.0 million for the year
ended December 31, 2022, from $139.1 million for the year ended December 31,
2021.


Interest Expense

Total interest expense increased $1.8 million to $4.0 million for the year ended
December 31, 2022 from $2.2 million for the year ended December 31, 2021
primarily due to a $1.6 million increase in interest on deposits, $183,000
increase in interest expense from subordinated debt and $86,000 increase in
interest expense on advances from the Federal Home Loan Bank offset by a $71,000
decrease in interest expense on advances from the PPPLF.

Interest on deposits increased $1.6 million to $3.1 million for the year ended
December 31, 2022 from $1.5 million for the year ended December 31, 2021 as a
result of an increase in the average cost of deposits of 41 basis points to
0.78% for the year ended December 31, 2022 from 0.37% for the year ended
December 31, 2021. Offsetting this increase, was a decrease in the average
interest-bearing deposits of $4.8 million from $401.3 million during the year
ended December 31, 2021 to $396.5 million during the year ended December 31,
2022. The average rate paid on money market deposits was 0.83% for the year
ended December 31, 2022 compared to 0.57% for the year ended December 31, 2021
as a result of the rising interest rate environment. In addition, the average
rate paid on demand deposits was 0.61% for the year ended December 31, 2022
compared to 0.18% for the year ended December 31, 2021 as a result of the rising
interest rate environment. The decrease in the average balance of
interest-bearing deposits was primarily the result of a decrease of $5.2 million
in the average balance of our certificates of deposit offset by a $377,000
increase in the average balance of our core deposit accounts. The decrease in
the average balance of our certificates of deposit of $5.2 million from $48.1
million for the year ended December 31, 2021, to $42.9 million for the year
ended December 31, 2022, was primarily the result of a decrease of $14.1 million
in the average balance in retail certificates of deposit offset by an increase
of $8.9 million for the year ended December 31, 2022 in the average balance in
certificates of deposit issued through brokers to $13.3 million for the year
ended December 31, 2022 from $4.4 million for the year ended December 31, 2021.
The average cost of certificates of deposit was 1.60% for the year ended
December 31, 2022, as compared to 0.90% for the year ended December 31, 2021.

Interest on advances from the Federal Home Loan Bank increased $86,000 to
$481,000 for the year ended December 31, 2022 from $395,000 for the year ended
December 31, 2021 primarily as a result of an increase in the average balance of
Federal Home Loan Bank advances. The average balance of Federal Home Loan Bank
advances increased by $2.6 million to $28.9 million during the year ended
December 31, 2022 as compared to $26.3 million during the year ended December
31, 2021. In addition, the average cost of Federal Home Loan Bank advances
increased by 16 basis points to 1.66% for the year ended December 31, 2022 from
1.50% for the year ended December 31, 2021.

Interest expense on advances from the PPPLF decreased $71,000 to $1,000 for the
year ended December 31, 2022 from $72,000 for the year ended December 31, 2021.
The decrease was primarily the result of a $23.4 million decrease in the average
balance in advances from the PPPLF to $495,000 for the year ended December 31,
2022 from $23.9 million for the year ended December 31, 2021, and a


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decrease in average cost of advances from the PPPLF to 20 basis points for the
year ended December 31, 2022, from 30 basis points for the year ended December
31, 2021.

Interest expense on subordinated debt increased $183,000 to $451,000 for the
year ended December 31, 2022 from $268,000 for the year ended December 31, 2021
as a result of an increase in the average balance of the subordinated debt. The
average balance of the subordinated debt increased by $4.5 million to $10.0
million during the year ended December 31, 2022 as compared to $5.5 million
during the year ended December 31, 2021. Offsetting this increase, was a
decrease in the average cost of the subordinated debt to 4.51% for the year
ended December 31, 2022 from 4.87% for the year ended December 31, 2021. On May
28, 2021, the Company sold and issued a $10.0 million in aggregate principal
amount 4.50% fixed to floating rate subordinated note due 2031 (see footnote 9
subordinated debt in the consolidated financial statements for further
discussion).


Net Interest Income

Net interest income increased $4.3 million, or 30.0%, to $18.8 million for the
year ended December 31, 2022 from $14.5 million for the year ended December 31,
2021 as our net interest-earning assets increased by $9.0 million to $114.9
million for the year ended December 31, 2022 from $105.9 million for the year
ended December 31, 2021. Our interest rate spread increased by 74 basis points
to 3.22% for the year ended December 31, 2022 from 2.48% for the year ended
December 31, 2021. Our net interest margin increased by 85 basis points to 3.42%
for the year ended December 31, 2022 from 2.57% for the year ended December 31,
2021.




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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 years
indicated. No tax-equivalent yield adjustments have been made. All average
balances are daily average balances. Non-accrual loans were included in the
computation of average balances but have been reflected in the table as loans
carrying a zero yield. The yields set forth below include the effect of deferred
fees, discounts and premiums that are amortized or accreted to interest income
or interest expense.

                                                              For the Year Ended December 31,
                                                    2022                                       2021
                                                   Interest                                   Interest
                                    Average        Income/        Yield/       Average        Income/        Yield/
                                    Balance        Expense         Cost        Balance        Expense         Cost
                                                                  (Dollars in thousands)
Interest-earning assets:
Loans (1)                          $  402,064     $   20,345         5.06 %   $  388,814     $   15,734         4.05 %
Cash and cash equivalents              71,030            621         0.87 %      139,050            181         0.13 %
Investment securities                  75,676          1,793         2.37 %       33,243            706         2.12 %
Restricted investment in bank
stock                                   1,984            112         5.65 %        1,829             87         4.76 %

Total interest-earning assets 550,754 22,871 4.15 %


     562,936         16,708         2.97 %
Non-interest-earning assets            29,441                                     27,006
Total assets                       $  580,195                                 $  589,942

Interest-bearing liabilities:
Demand deposits                    $  146,512     $      890         0.61 %   $  178,279     $      320         0.18 %
Money market deposit accounts         111,772            930         0.83 %       89,460            507         0.57 %
Passbook and statement savings
accounts                               38,931             48         0.12 %       34,003             48         0.14 %
Checking accounts                      56,367            546         0.97 %       51,463            169         0.33 %
Certificates of deposit                42,904            686         1.60 %       48,129            434         0.90 %
Total deposits                        396,486          3,100         0.78 %      401,334          1,478         0.37 %
Federal Home Loan Bank advances        28,905            481         1.66 %       26,338            395         1.50 %
Federal Reserve PPPLF                     495              1         0.20 %       23,880             72         0.30 %
Subordinated debt                       9,997            451         4.51 %        5,503            268         4.87 %
Total interest-bearing
liabilities                           435,883          4,033         0.93 %      457,055          2,213         0.48 %
Non-interest-bearing
liabilities:
Checking                               91,705                                     80,312
Other                                  12,086                                     13,495
Total liabilities                     539,674                                    550,862
Shareholders' Equity                   40,521                                     39,080
Total liabilities and
Shareholders' equity               $  580,195                                 $  589,942

Net interest income                               $   18,838                                 $   14,495
Interest rate spread (2)                                             3.22 %                                     2.48 %
Net interest-earning assets (3)    $  114,871                                 $  105,881
Net interest margin (4)                                              3.42 %                                     2.57 %
Average interest-earning assets
to average
  interest-bearing liabilities                                     126.35 %                                   123.17 %

(1) Includes loans held for sale.

(2) Interest rate spread represents the difference between the average yield on

average interest-earning assets and the average cost of average

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.





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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 years 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.

                                                                    For Year Ended
                                                               December 31, 2022 vs 2021
                                                                                              Total
                                                      Increase (Decrease) Due to            Increase
                                                     Volume                  Rate          (Decrease)
                                                                      (In thousands)
Interest-earning assets:
Loans                                            $           553         $       4,058     $     4,611
Cash and cash equivalents                                    (49 )                 489             440
Investment securities                                        996                    91           1,087
Restricted investment in bank stock                            8                    17              25
Total interest-earning assets                              1,508                 4,655           6,163
Interest-bearing liabilities:
Demand deposits                                              (48 )                 618             570
Money market deposit accounts                                146                   277             423
Passbook and statement savings accounts                        6                    (6 )             -
Checking accounts                                             17                   360             377
Certificates of deposit                                      (43 )                 295             252
Total deposits                                                78                 1,544           1,622
Federal Home Loan Bank advances                               40                    46              86
Federal Reserve PPPLF                                        119                  (190 )           (71 )
Subordinated debt                                            268                   (85 )           183
Total interest-bearing liabilities                           505                 1,315           1,820
Change in net interest income                    $         1,003         $       3,340     $     4,343



Provision for Loan Losses

We establish a provision for loan losses, which is charged to operations, in
order to maintain the allowance for loan losses at a level we consider necessary
to absorb credit losses incurred in the loan portfolio that are both probable
and reasonably estimated at the balance sheet date. In determining the level of
the allowance for loan losses, we consider past and current loss experience,
evaluations of real estate collateral, current economic conditions, volume and
type of lending, adverse situations that may affect a borrower's ability to
repay a loan and the levels of non-performing loans. The amount of the allowance
is based on estimates, and actual losses may vary from such estimates as more
information becomes available or economic conditions change.

This evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as circumstances change as more information
becomes available. The allowance for loan losses is assessed on a quarterly
basis and provisions are made for loan losses as required in order to maintain
the allowance. Provision for loan losses increased by $982,000 to $1.5 million
for the year ended December 31, 2022 primarily as a result of increased
originations in commercial real estate and other commercial business loans.
During the year ended December 31, 2022, total charge-offs of $397,000 were
recorded and $81,000 of recoveries were received. During the year ended December
31, 2021, total charge-offs of $210,000 were recorded and $8,000 of recoveries
were received.
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Non-Interest Income



Non-interest income decreased $5.5 million to $7.9 million for the year ended
December 31, 2022, from $13.4 million for the year ended December 31, 2021. The
decrease in non-interest income compared to 2021 was primarily due to decreases
of $8.4 million in the gain on sale of loans offset by a $1.0 million gain on
sale of mortgage servicing rights, net, a $730,000 increase in change in fair
value of loans held-for-sale, a $426,000 decrease in loss from derivative
instruments, an increase of $348,000 in other income and an increase of $338,000
in fees for customer services. The gain on sale of loans, net decreased $8.4
million to $6.5 million for the year ended December 31, 2022, from $14.9 million
for the year ended December 31, 2021, primarily as a result of lower volume of
loan sales, which decreased $365.0 million from $670.6 million for the year
ended December 31, 2021, to $305.6 million for the year ended December 31, 2022.
Offsetting this decrease, was a $1.0 million gain on sale of mortgage servicing
rights, net resulting from the sale of approximately $3.2 million of the
mortgage servicing rights during year ended December 31, 2022. In addition,
there was a decrease of $730,000 in the change of fair value from ($1.4) million
for the year ended December 31, 2021 to ($623,000) for the year ended December
31, 2022 and a $426,000 decrease in loss on derivative instruments from a loss
on derivative instruments of $1.2 million for the year ended December 31, 2021
to a loss of $777,000 for the year end December 31, 2022. Fees for customer
services increased $338,000 to $833,000 for the year ended December 31, 2022,
from $495,000 for the year ended December 31, 2021 primarily as a result of an
increase in cash management fees and other commercial fees compared to the prior
year. Finally, other income increased $352,000 to $729,000 for the year ended
December 31, 2022 from $377,000 for the year ended December 31, 2021. Included
in other income for the year ended December 31, 2022 was $354,000 in gain on
settlement of bank-owned life insurance ("BOLI").

Non-Interest Expense



Non-interest expense increased $526,000 or 2.4%, to $22.4 million for the year
ended December 31, 2022, from $21.9 million for the year ended December 31,
2021. The increase for the year ended December 31, 2022 compared to the year
ended December 31, 2021 primarily reflected increases of $495,000 in merger
expenses, $336,000 in other expenses and $191,000 in professional fees offset by
decreases of $165,000 in mortgage operation expenses, $163,000 in data
processing related operations and $148,000 in salaries and employee benefits.


Included in non-interest expense for the year ended December 31, 2022 was
$495,000 of expenses associated with the Merger. In addition, other expenses
increased $336,000 or 17.8%, to $2.2 million for the year ended December 31,
2022 from $1.9 million for the year ended December 31, 2021. Professional fees
increased $191,000, or 19.7% to $1.2 million for the year ended December 31,
2022 from $971,000 for the year ended December 31, 2021 primarily as a result of
increases in expenses related to other consulting fees and accounting and
auditing fees. Offsetting these increases was a decrease of $165,000 in mortgage
operation expenses which decreased to $357,000 for the year ended December 31,
2022 from $522,000 for the year ended December 31, 2021. Data processing related
operations costs decreased $163,000, or 11.1% to $1.3 million for the year ended
December 31, 2022 from $1.5 million for the year ended December 31, 2021 as a
result of decreased loan originations. Finally, salaries and employee benefits
expense decreased by $148,000 to $13.5 million for the year ended December 31,
2022, from $13.7 million for the year ended December 31, 2021.

Income Tax Expense



Income tax expense was $575,000 for the year ended December 31, 2022 compared to
$1.5 million for the year ended December 31, 2021 as a result of the decrease in
income before taxes. Federal income taxes included in total taxes for the years
ended December 31, 2022 and 2021 were $568,000 and $1.1 million, respectively,
with effective federal tax rates of 20.2% and 19.1%, respectively. The increase
in the effective rate for 2022 compared to 2021 was a result of non-deductible
merger expenses offset by a decrease in income before taxes and tax-exempt
bank-owned life insurance death benefits.

Pennsylvania state tax was a benefit of ($130,000) for the year ended December
31, 2022 compared to expense of $308,000 with an effective rate of 5.6% for the
year ended December 31, 2021. The decrease in the effective tax rate for the
year ended December 31, 2022 compared to a year ago reflected a decrease in
income before taxes. In addition, included in total taxes for the year ended
December 31, 2022 and 2021, was $100,000 and

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$103,000 of New Jersey state tax, respectively and $37,000 of Delaware state tax for the year ended December 31, 2022.

Liquidity and Capital Resources



Liquidity Management. Liquidity describes our ability to meet the financial
obligations that arise in the ordinary course of business. Liquidity is
primarily needed to meet the borrowing and deposit withdrawal requirements of
our customers and to fund current and planned expenditures. Our primary sources
of funds are deposits, principal and interest payments on loans and securities,
and proceeds from sales, maturities and calls of securities. In addition, we can
use brokered certificates of deposit as a funding source of our asset base. As
of December 31, 2022, the Company had brokered certificates of deposit of $40.9
million, or 6.6% of total asset with an average cost of 3.77%. As of December
31, 2021, there were no brokered certificates of deposit outstanding.

We also have the ability to borrow from the Federal Home Loan Bank of
Pittsburgh. Huntingdon Valley Bank had Federal Home Loan Bank of Pittsburgh
advances of $27.0 million outstanding with unused borrowing capacity of $115.8
million as of December 31, 2022. Additionally, at December 31, 2022, we had the
ability to borrow $6.0 million from the Atlantic Community Bankers Bank. We have
not borrowed against the credit lines with the Atlantic Community Bankers Bank
for the year ended December 31, 2022.

The board of directors is responsible for establishing and monitoring our
liquidity targets and strategies in order to ensure that sufficient liquidity
exists for meeting the borrowing needs and deposit withdrawals of our customers
as well as unanticipated contingencies. We believe that we have enough sources
of liquidity to satisfy our short and long-term liquidity needs as of December
31, 2022.

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 interest-earning deposits and securities; and (4) the objectives of our
asset/liability management program. Excess liquid assets are invested generally
in interest-earning deposits 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 and interest-earnings deposits in other banks. The levels of these assets
are dependent on our operating, financing, lending and investing activities
during any given period. At December 31, 2022, cash and cash equivalents totaled
$16.3 million. Securities classified as available-for-sale, which provide
additional sources of liquidity, totaled $55.7 million at December 31, 2022.

Our cash flows are comprised of three primary classifications: cash flows from
operating activities, investing activities, and financing activities. Net cash
provided by operating activities was $30.5 million and $42.9 million for the
year ended December 31, 2022 and 2021, respectively. Net cash used in investing
activities, which consists primarily of disbursements for loan originations and
the purchase of securities, offset by principal collections on loans and
proceeds from maturing securities, was $193.0 million and $32.2 million for the
year ended December 31, 2022 and 2021, respectively. During the year ended
December 31, 2022 and 2021, we sold $10.0 million and $5.5 million,
respectively, in securities available-for-sale. Net cash provided by (used in)
financing activities was $58.0 million and ($304.5) million for the year ended
December 31, 2022 and 2021, respectively. Net cash used in financing activities
for the year ended December 31, 2022 consisted primarily of an increase in
deposits of $61.2 million offset by repayments of $3.1 million to the PPPLF. Net
cash used in financing activities for the year ended December 31, 2021 consisted
primarily of a decrease in deposits of $266.8 million, repayments of $45.6
million from the PPPLF offset by proceeds of $10.0 million from the issuance of
subordinated debt.

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 December 31, 2022, totaled $57.9 million, or 11.0%, 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
  44

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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. Huntingdon Valley Bank is subject to various regulatory
capital requirements, including a risk-based capital measure. The risk-based
capital guidelines include both a definition of capital and a framework for
calculating risk-weighted assets by assigning Statement of Financial Condition
assets and off-balance sheet items to broad risk categories. At December 31,
2022, Huntingdon Valley Bank exceeded all regulatory capital requirements and
was considered "well capitalized" under regulatory guidelines. See Note 10 of
the Notes to the Audited Consolidated 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
December 31, 2022, we had outstanding commitments to originate loans of $30.7
million and unused lines of credit totaling $94.2 million. 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 December 31, 2022 totaled $57.9 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 accounts, which may result in higher levels of interest expense.

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

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 7A. Quantitative and Qualitative Disclosures About Market Risk

Not required for smaller reporting companies.

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