PB BANKSHARES, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
This discussion and analysis reflects our financial information 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 audited consolidated financial statements, which appear beginning on page 49 of this Annual Report on Form 10-K. You should read the information in this section in conjunction with the business and financial information regarding the Company provided in this Annual Report on Form 10-K.
Overview
Our business has traditionally focused on originating fixed-rate one- to four-family residential real estate loans and offering retail deposit accounts. InSeptember 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 ofChester andLancaster Counties and the surroundingPennsylvania counties ofCumberland ,Dauphin , andLebanon . Management has also emphasized the importance of attracting commercial deposit accounts from its customers. As a result of these initiatives, we were able to increase our consolidated assets by$39.6 million , or 14.4%, from$275.3 million atDecember 31, 2020 to$314.9 million atDecember 31, 2021 and increase our deposits$19.7 million , or 8.5%, from$231.4 million atDecember 31, 2020 to$251.1 million atDecember 31, 2021 . 34
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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 expense. Noninterest expense 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 year endedDecember 31, 2021 , we had net income of$785,000 compared to a net loss of$415,000 for the year endedDecember 31, 2020 . The year over year increase in earnings of$1.2 million was attributable to increases in net interest income and noninterest income and a decrease in provision for loan losses partially offset by increases in noninterest expense and income tax expense. Net interest income increased$1.2 million due to the increase in interest income on loans as we increased our commercial lending and decreased our interest expense on deposits in the low interest rate environment of 2021. We were also able to decrease our provision for loan losses in 2021 as the COVID-19 pandemic contributed to an increase in our allowance for loan losses in 2020 that stabilized in 2021.
Impact of the COVID-19 outbreak
During the first quarter of 2020, global financial markets experienced significant volatility resulting from the spread of COVID-19. InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic andthe United States declared a National Public Health Emergency. In response to the pandemic, the governments of theCommonwealth of Pennsylvania and of most other states took 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 were deemed to be non-essential. As ofDecember 31, 2021 , most of these restrictions have been removed and most non-essential businesses have been allowed to re-open. To address the economic impact of COVID-19 inthe United States , the CARES Act was signed into law onMarch 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 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, 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 inMay 2021 . As ofDecember 31, 2021 ,$859,000 of PPP loans were outstanding.$266,000 of loan income (interest and fees, net) for PPP loans was recognized during the year endedDecember 31, 2021 .
In response to the COVID-19 pandemic, we have implemented protocols and processes to help protect our employees, customers and communities. These measures include:
Temporary operation of our branches under a drive-thru model with
lobby service by appointment only, leveraging our business continuity plans and
? capabilities that include divided and dispersed critical operations teams
in separate locations and, where possible, have employees work from home. We
have also set up a Pandemic Response Team.
The safety and health of our staff and customers is our top priority.
We have installed plexiglass sneeze barriers in all counter areas, in each of
? our branches. Hand sanitizer is available at each of the counters
stations/new account desks, and floors are marked to encourage customers to
stay six feet apart. All employees also have access to gloves, hand sanitizer,
and disinfectant wipes at work.
Provide assistance to our customers affected by the COVID-19 pandemic, which
? includes payment deferrals, waiver of certain fees, and suspension of ownership
foreclosures was provided in 2020. 35 Table of Contents
Currently fully vaccinated Pennsylvanians may choose not to wear a mask unless
? they are required by a business or organization. The Company raised 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 COVID-19 related legislation, COVID-19 related modifications to loans that were current as ofDecember 31, 2019 are exempt from TDR classification underU.S. GAAP through the earlier ofJanuary 1, 2022 , or 60 days after the national emergency concerning COVID-19 declared by the President ofthe 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 ofDecember 31, 2021 , we had granted short-term payment deferrals on 78 loans, totaling approximately$23.5 million in aggregate principal amount, that were otherwise performing. As ofDecember 31, 2021 , all of these loans have returned to normal payment status with 62 of these loans for$21.0 million being current, two of these loans for$455,000 being past due greater than 30 days and 14 of these loans for$2.0 million being paid off. 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 and could have an adverse effect on our business and results of operations.
Business strategy
Our business strategy is to operate as a well-capitalized and profitable community bank dedicated to providing personal service to our individual and business customers. We believe that we have a competitive advantage in the markets we serve because of our over 100-year history in the community, and our knowledge of the local marketplace. Our culture is anchored in a philosophy that puts our employees, customers and communities at the forefront of everything we do. We are proud of our diverse and experienced team of employees and strive to be the most loved bank that allows families, customers and our communities to prosper. The following are the key elements of our business strategy: Grow our loan portfolio with a focus on increasing commercial real estate and commercial and industrial lending. Our principal business activity historically has been the origination of residential mortgage loans for retention in our loan portfolio. InSeptember 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. Our commercial real estate and commercial and industrial loan portfolios increased from$71.3 million , or 37.6% of total loans atDecember 31, 2020 , to$130.1 million , or 51.4% of total loans atDecember 31, 2021 . We view the growth of commercial lending as a means of increasing our interest income and fee income while establishing relationships with local businesses. We intend to continue to build relationships with small and medium-sized businesses in our market area, targeting locally owned family businesses and not-for-profit organizations. During 2021, we opened two loan production offices inHarrisburg andElizabethtown, Pennsylvania , and we expect to hire additional relationship-based loan officers to increase our presence in our market area. Beginning in 2021,Presence Bank was qualified by the SBA to participate in the PPP loan program and management originated approximately$6.0 million of PPP loans in the first half of 2021. We believe all of these actions have properly positioned our institution to achieve prudent, organic and consistent growth in the future. The capital we raised in our initial public offering supported an increase in our lending limits, which enables us to expand existing customer relationships as well as provide capacity for new customers. Strategically Grow our Balance Sheet. As a result of our efforts to build our management team and infrastructure and given our long-time presence in our market area, we believe we are well positioned to increase, on a managed basis, our assets and liabilities, particularly loans and deposits.Presence Bank increased its gross loans and deposits$63.5 million , or 33.5%, and$19.7 million , or 8.5%, respectively, during 2021. We underwent a significant rebranding effort and have updated and improved our website, Internet and mobile banking and other technology infrastructure that prioritizes the customer experience and moves away from the traditional branch model. We also believe we can capitalize on commercial deposit and personal banking relationships derived from an increase in commercial real estate and 36
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commercial and industrial loans. Based on our attractive market and our strategic investment in technology to improve the customer experience, we believe we are well positioned to strategically grow our balance sheet.
Increase our share of lower-cost core deposits. We are making a concerted effort to reduce our reliance on higher cost certificates of deposit in favor of obtaining lower cost retail and commercial deposit accounts. Increasing our core deposits will provide a stable source of funds to support loan growth at costs consistent with improving our net interest rate spread and margin. We consider our core deposits to include demand deposit (checking), money market and savings accounts. During 2021, management continued an initiative which incentivized our commercial relationship officers to increase transaction accounts with our existing commercial customers. Our core deposits increased$28.7 million , or 19.7%, to$174.2 million atDecember 31, 2021 from$145.5 million atDecember 31, 2020 . We have also made significant investments in our technology-based products. For example, we have enhanced our suite of deposit related products, including remote deposit capture, commercial cash management and mobile deposits in order to accommodate business customers and a new Internet banking platform to create long-lasting retail deposits. We plan to continue to aggressively market our core transaction accounts, emphasizing our high-quality service and competitive pricing of these products while also making further investments in technology so that we can continue to deliver high-quality, innovative products and services to our customers. Organically grow through loan production offices and through opportunistic bank or branch acquisitions. As a result of our new executive management team and increased relationship-based personnel, we expect to grow organically. In 2021, we opened two loan production offices inHarrisburg (Dauphin County, Pennsylvania ) andElizabethtown (Lancaster County, Pennsylvania ). We expect to establish one to two additional loan production offices to support lending teams in our core markets such asChester andLancaster Counties,Pennsylvania in future years. We believe opening loan production offices is a more cost-effective method to expansion which can lead to the establishment of branch offices in the future if market conditions warrant. In addition to this organic growth, we will also consider acquisition opportunities of other financial institutions or specific branches of financial institutions that we believe would enhance the value of our franchise and yield potential financial benefits for our stockholders. We will seek to expand our presence inChester ,Lancaster ,Dauphin ,Lebanon andCumberland Counties,Pennsylvania . However, we currently have no understandings or agreements with respect to acquiring any financial institutions or branch acquisitions. Manage credit risk to maintain a low level of non-performing assets. We believe strong asset quality is a key to our long-term financial success. Our strategy for credit risk management focuses on having an experienced team of credit professionals, well-defined policies and procedures, conservative loan underwriting criteria and active credit monitoring. Our nonperforming assets to total assets ratio was 0.52% atDecember 31, 2021 , compared to 1.02% atDecember 31, 2020 . AtDecember 31, 2021 , the majority of our nonperforming assets were related to one- to four-family residential real estate loans. We will continue to increase our investment in our credit review function, both in experienced personnel as well as ancillary systems, as necessary, in order to be able to evaluate more complex loans and better manage credit risk, which will also support our intended loan growth.
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 inthe United States of America . The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations. In 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an "emerging growth company" we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made 37 Table of Contents 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 items represent our critical accounting estimates and policies:
Allowance for loan losses. 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 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 director 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 in 2020, which have experienced deterioration due to the effects of the COVID-19 pandemic. During 2021, the Bank reduced certain qualitative risk factors as a result of no 2021 charge-offs and experienced management and board of director oversight; however, most of the qualitative factors remained at 2020 elevated levels due to the unknown long-term COVID-19 effects. 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. 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, theFDIC and thePennsylvania Department of Banking , 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 38
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management responsibility. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively impact earnings.
See Note 1 and Note 3 of the notes to the Company’s financial statements.
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.
See Note 1 and Note 7 of the notes to the Company’s financial statements.
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.
See Note 1 and Note 13 of the notes to the Company’s financial statements.
Comparison of balance sheets at
Total Assets. Total assets increased$39.6 million , or 14.4%, to$314.9 million atDecember 31, 2021 from$275.3 million atDecember 31, 2020 , primarily reflecting an increase in net loans receivable, partially offset by a decrease in cash and cash equivalents. Cash and cash equivalents decreased by$23.7 million , or 46.9%, to$26.9 million atDecember 31, 2021 from$50.6 million atDecember 31, 2020 due to an increase in loans receivable and partially offset by deposits increasing during the
COVID-19 pandemic. 39 Table of Contents Net loans receivable increased$63.2 million , or 33.9%, to$249.2 million atDecember 31, 2021 from$186.0 million atDecember 31, 2020 primarily due to increases in commercial real estate, commercial and industrial and construction real estate loans. Commercial real estate loans increased$51.2 million , or 86.1%, to$110.7 million atDecember 31, 2021 from$59.5 million atDecember 31, 2020 . Commercial and industrial loans increased$7.6 million , or 64.5%, to$19.4 million atDecember 31, 2021 from$11.8 million atDecember 31, 2020 . Construction real estate loans increased$5.1 million , or 58.1%, to$13.8 million atDecember 31, 2021 from$8.7 million atDecember 31, 2020 . One- to four-family residential real estate loans decreased$389,000 , or 0.4%, to$106.0 million atDecember 31, 2021 from$106.4 million atDecember 31, 2020 . The increase in commercial real estate, commercial and industrial and construction real estate loans was primarily due to our strategy to expand our commercial loan portfolio to diversify our balance sheet. Debt securities available-for-sale decreased$228,000 , or 0.9%, to$25.6 million atDecember 31, 2021 from$25.9 million atDecember 31, 2020 due to a strategy of maintaining the current portfolio. The Company had maturities and calls of securities of$1.0 million combined with$3.6 million of principal repayments on mortgage-backed securities and a decrease in the fair market value of debt securities available-for-sale of$625,000 due to the increase in market interest rates during 2021, partially offset by purchases of$5.0 million ofU.S. Government and agency obligations and mortgage-backed securities and$28,000 in net accretion of discounts and amortization of premiums.
Premises and equipment decreased by
Bank owned life insurance increased by$674,000 , or 10.2%, to$7.3 million atDecember 31, 2021 from$6.6 million atDecember 31, 2020 , primarily due to the purchase of additional insurance policies totaling$500,000 in the first quarter of 2021. Restricted stock decreased by$162,000 , or 15.5%, to$884,000 atDecember 31, 2021 from$1.0 million atDecember 31, 2020 due to decreased borrowings from theFederal Home Loan Bank of Pittsburgh during 2021. Deposits and Borrowings. Total deposits increased$19.7 million , or 8.5%, to$251.1 million atDecember 31, 2021 from$231.4 million atDecember 31, 2020 . The increase in our deposits reflected a$15.4 million increase in money market accounts, a$9.4 million increase in interest-bearing demand accounts, a$3.4 million increase in savings accounts and a$495,000 increase in noninterest-bearing demand accounts, partially offset by a$9.0 million decrease in certificates of deposits. The increase in money market, demand and savings accounts primarily reflected deposit customers increasing cash balances during the COVID-19 pandemic and government stimulus measures as well as management's continued focus on increasing the commercial deposit accounts of its customers in 2021. Certificates of deposit decreased due to management strategically not replacing high rate deposits with a deposit special in the current interest rate environment. Total borrowings from theFederal Home Loan Bank of Pittsburgh decreased$3.9 million , or 18.8%, to$16.7 million atDecember 31, 2021 from$20.6 million atDecember 31, 2020 due to principal repayments and maturities on our advances. Stockholders' Equity. Stockholders' equity increased$23.8 million , or 108.6%, to$45.8 million atDecember 31, 2021 from$22.0 million atDecember 31, 2020 . The increase was due to net proceeds from the stock offering of$26.2 million , net income of$785,000 for 2021, partially offset by the unallocated ESOP of$2.8 million atDecember 31, 2021 and a decrease of$371,000 in accumulated other comprehensive income (loss) as a result of a decrease in the fair market value of our debt securities available-for-sale during 2021.
Comparison of operating results for the years ended
General. Net profit increased
decrease in the provision for loan losses and a
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Interest Income. Total interest income increased$996,000 , or 11.0%, to$10.1 million for the year endedDecember 31, 2021 from$9.1 million for the year endedDecember 31, 2020 . The increase in interest income resulted from a$50.2 million increase year over year in the average balance of interest-earning assets, primarily in loans, cash and cash equivalents and debt securities available-for-sale and restricted stocks, partially offset by a 30 basis points decrease in the average yield on interest-earning assets from 3.74% for 2020 to 3.44% for 2021. Interest income on loans, including fees, increased$1.2 million , or 14.4%, to$9.7 million for 2021, reflecting an increase in the average balance of loans to$219.1 million for 2021 from$179.9 million for 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, commercial and industrial and construction real estate loans reflecting our strategy to grow commercial lending, partially offset by the decline in the average balances of one- to four-family residential loans. The average yield on loans decreased to 4.42% for 2021 from 4.71% for 2020, as a result of a decrease in market interest rates sinceDecember 31, 2020 . Interest income in 2021 also included$266,000 of PPP loan income from deferred interest and fees. Interest income on debt securities available-for-sale decreased$191,000 , or 40.2%, to$284,000 for 2021 from$475,000 for 2020. The decrease in interest income on debt securities available-for-sale was due to a 92 basis points decrease in the average yield on debt securities available-for-sale to 1.00% in 2021 from 1.92% in 2020, partially offset by an increase in the average balance of debt securities available-for-sale of$3.6 million , or 14.7%, to$28.4 million in 2021 from$24.7 million in 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 sinceDecember 31, 2020 . The increase in the average balance of debt securities available-for-sale was due to purchases ofU.S. Government and agency obligations and mortgage-backed securities with our excess liquidity. Interest income on cash and cash equivalents decreased$5,000 , or 11.9%, to$37,000 in 2021, from$42,000 in 2020. The decrease in cash and cash equivalents was attributable to a decrease in the average yield on cash and cash equivalents by three basis points to 0.08% for 2021 from 0.11% for 2020 as a result of the decrease in short-term market interest rates sinceDecember 31, 2020 , partially offset by an increase in the average balance of cash and cash equivalents of$7.5 million , or 20.7%, to$44.1 million in 2021 from$36.5 million in 2020 due to increased liquidity on our balance sheet as a result of the higher cash balances held due to the conversion and the stock offering during 2021, customers increased their savings due to the pandemic and growth of the commercial depositors. Interest Expense. Interest expense decreased$233,000 , or 9.6%, to$2.2 million for the year endedDecember 31, 2021 from$2.4 million for the year endedDecember 31, 2020 as a result of decreases 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 1.15% for 2020 to 0.91% for 2021, partially offset by a$29.3 million increase in the average balance of interest-bearing liabilities to$240.0 million for 2021 from$210.7 million for 2020. Interest expense on deposits decreased$119,000 , or 6.3%, to$1.8 million for 2021 from$1.9 million for 2020 as a result of a 21 basis points decrease in the average cost of interest-bearing deposits, partially offset by an increase of$34.5 million in the average balance of our interest-bearing deposits. The decrease in the average cost of deposits was primarily due to a 27 basis points decrease in the average cost of certificates of deposit, traditionally our higher costing deposits, to 1.55% for 2021 from 1.82% for 2020, partially offset by an increase in the average balance of certificates of deposit, which increased by$6.5 million to$81.3 million for 2021 from$74.8 million for 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 ten basis points to 0.37% for 2021 from 0.47% for 2020, partially offset by the increase in the average balance of interest-bearing transaction accounts of$28.1 million to$141.7 million for 2021 from$113.6 million for 2020. The weighted average rate paid on deposits decreased 21 basis points to 0.80% for 2021 from 1.01% for 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 at a lower cost. The increase in the average balance of our transaction accounts primarily reflected deposit customers increasing cash balances during the COVID-19 pandemic, 41
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government stimulus efforts and management's focus on increasing the commercial deposit accounts of its customers in 2020, 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 onFederal Home Loan Bank borrowings decreased$114,000 , or 21.3%, to$422,000 for the year endedDecember 31, 2021 from$536,000 for the year endedDecember 31, 2020 . The decrease in interest expense onFederal Home Loan Bank borrowings was caused by a$5.1 million decrease in our average balance ofFederal Home Loan Bank borrowings to$17.0 million for 2021 compared to$22.2 million for 2020 as a result of our increased cash position, partially offset by an increase in the average cost of these funds of two basis points from 2.42% in 2020 to 2.44% in 2021 as lower cost borrowings matured during 2021. Net Interest Income. Net interest income increased$1.2 million , or 18.5%, to$7.9 million for the year endedDecember 31, 2021 from$6.6 million for the year endedDecember 31, 2020 . The increase in net interest income from 2020 to 2021 was primarily due to the increase in interest income on loans and decreases in interest expense on deposits and borrowings. Average net interest-earning assets increased by$20.8 million to$52.4 million for 2021 from$31.6 million for 2020. Our net interest margin decreased five basis points to 2.69% for 2021 from 2.74% for 2020. Our net interest rate spread decreased six basis points to 2.53% for 2021 from 2.59% for 2020. 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 allowance.
Based on our assessment of the above factors, we recorded a
provision for loan losses for the year ended
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 the COVID-19 pandemic on economic conditions and our borrowers' ability to repay loans, partially offset by loan growth. During 2021, the Bank reduced certain qualitative risk factors as a result of no 2021 charge offs and experienced management and board of director oversight; however, most of the qualitative factors remained at 2020 elevated levels due to the unknown long-term COVID-19 effects. The allowance for loan losses was$3.1 million , or 1.24%, of loans outstanding atDecember 31, 2021 compared to$2.9 million , or 1.51%, of loans outstanding atDecember 31, 2020 . To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate atDecember 31, 2021 . However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, thePennsylvania Department of Banking and theFDIC , as an integral part of their examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management. 42
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Non-interest income. Information on non-interest income is as follows.
Years Ended December 31, Change 2021 2020 Amount Percent (Dollars in thousands)
Service charges on deposit accounts$ 176 $ 183 $ (7) (3.8) % Gain on sale of other real estate owned - 30 (30) (100.0) (Loss) gain on equity investments (25) 18 (43) (238.9) Bank owned life insurance 174 127 47 37.0 Debit card income 216 183 33 18.0 Other service charges 89 75 14 18.7 Other income 160 50 110 220.0 Total noninterest income$ 790 $ 666 $ 124 18.6 % Noninterest income increased by$124,000 , or 18.6%, to$790,000 for 2021 from$666,000 for 2020. The increase in noninterest income resulted primarily from increases in other income, bank owned life insurance, debit card income and other service charges, partially offset by an increase in loss on equity investments, no gain on sale of other real estate owned and a decrease in service charges on deposit accounts. Other income increased$110,000 primarily related to the income related to the termination of the pension plan. Income from bank owned life insurance increased$47,000 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$33,000 as a result of an increased volume of transactions when comparing 2021 to 2020. Other service charges increased$14,000 primarily due to an increase in return check fees. Loss on equity investments increased$43,000 due to a$25,000 loss in 2021 due to a decrease in the fair market value of the investment during 2021 as compared to a gain of$18,000 for 2020. Gain on sale of other real estate owned was$30,000 for 2020 with no sales of other real estate owned in 2021. Service charges on deposit accounts decreased$7,000 due to a decrease in overdraft protection charges.
Non-interest expenses. Information on non-interest charges is as follows.
Years Ended December 31, Change 2021 2020 Amount Percent (Dollars in thousands) Salaries and employee benefits$ 3,994 $ 3,469 $ 525 15.1 % Occupancy and equipment 568 708 (140) (19.8) Data and item processing 969 1,161 (192) (16.5) Advertising and marketing 91 112 (21) (18.8) Professional fees 484 667 (183) (27.4) Directors' fees 243 241 2 0.8 FDIC insurance premiums 194 105 89 84.8 Debit card expenses 143 136 7 5.1 Other 724 495 229 46.3 Total noninterest expenses$ 7,410 $ 7,094 $ 316 4.5 %
Non-interest expenses increased
The increase in noninterest expenses was primarily the result of increases in salaries and employee benefits expense of$525,000 , other expense of$229,000 andFDIC insurance premiums of$89,000 , partially offset by decreases in data and item processing of$192,000 , professional fees of$183,000 and occupancy and equipment of$140,000 . Salaries and employee benefits expense increased$525,000 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$229,000 as a result of added expenses related to the implementation of a cloud-based loan platform,SEC reporting software and identity theft restoration services associated with our flagship checking products.FDIC insurance premiums increased$89,000 primarily due to increases in the total assessment base and theFDIC quarterly multiplier when comparing 2021 to 2020. 43
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Data and item processing expense decreased$192,000 primarily due to 2020 Internet banking expenses of$237,000 as a result of early termination fees incurred with the transition to a new provider. Professional fees decreased$183,000 primarily due to decreases associated with non-recurring interim Chief Financial Officer consultant fees, partially offset by an increase in legal fees. Occupancy and equipment decreased$140,000 primarily due to increases of$69,000 in loss on disposal of fixed assets related to rebranding and$67,000 in equipment expense mostly due to purchases of new equipment in 2020 with no such activity in 2021. Income Tax Expense (Benefit). Income tax expense increased$310,000 , or 221.4%, to an expense of$170,000 for 2021 from a benefit of$(140,000) for 2020. The increase in income tax expense for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 was due to an increase in income before income taxes. The effective tax rate was 17.8% in 2021. 44
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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, 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$618,000 and$585,000 for the years endedDecember 31, 2021 and 2020, respectively. For the Years Ended December 31, 2021 2020 Average Average Outstanding Average Outstanding Average Balance Interest Yield/Rate Balance Interest Yield/Rate (Dollars in thousands) Interest-earning assets: Loans$ 219,100 $ 9,695 4.42 %$ 179,873 $ 8,477 4.71 % Debt securities available-for-sale and restricted stocks 28,339 284 1.00 % 24,714 475 1.92 % Equity securities 903 44 4.89 % 1,116 70 6.29 % Cash and cash equivalents 44,098 37 0.08 % 36,526 42 0.11 % Total interest-earning assets 292,440 10,060 3.44 % 242,229 9,064 3.74 % Noninterest-earning assets 8,681
6,574 Total assets$ 301,121 $ 248,803 Interest-bearing liabilities: Interest-bearing demand deposits$ 71,879 214 0.30 %$ 61,548 230 0.37 % Savings deposits 20,465 69 0.34 % 18,533 75 0.41 % Money market deposits 49,388 232 0.47 % 33,568 226 0.67 % Certificates of deposit 81,277 1,261 1.55 % 74,843 1,364 1.82 % Total interest-bearing deposits 223,009 1,776 0.80 % 188,492 1,895 1.01 % Long-term borrowings 17,022 422 2.44 % 22,162 536 2.42 % Total interest-bearing liabilities 240,031 2,198 0.91 % 210,654 2,431 1.15 % Noninterest-bearing demand deposits (1) 30,188
14,868
Other noninterest-bearing liabilities 823 672 Total liabilities 271,042 226,194 Stockholders' equity 30,079 22,609 Total liabilities and stockholders' equity$ 301,121 248,803 Net interest income$ 7,862 $ 6,633 Net interest rate spread (2) 2.53 % 2.59 % Net interest-earning assets (3)$ 52,409 $ 31,575
Net interest margin (4) 2.69 % 2.74 % Average interest-earning assets to interest-bearing liabilities 121.83 %
114.99%
Includes deposits allocated to the subscription of shares, whereas interest was (1) calculated by the Company at five basis points and paid by the transfer of shares
agent.
The net interest rate spread represents the difference between the weighted average yield (2) of interest-bearing 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. 45 Table of Contents 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. There were no out-of-period items or adjustments required to be excluded from the table below. Years Ended December 31, 2021 vs. 2020 Increase (Decrease) Due to Total Increase Volume Rate (Decrease) (In thousands) Interest-earning assets: Loans$ 1,848 $ (630) $ 1,218 Debt securities available-for-sale and restricted stocks 70 (261) (191) Equity securities (13) (13) (26) Cash and cash equivalents 8 (13) (5) Total interest-earning assets 1,913 (917) 996 Interest-bearing liabilities:
Interest-bearing demand deposits 38
(54) (16) Savings deposits 8 (14) (6) Money market deposits 106 (100) 6 Certificates of deposit 117 (220) (103) Total deposits 269 (388) (119) Borrowings (124) 10 (114)
Total interest-bearing liabilities 145
(378) (233) Change in net interest income$ 1,768 $ (539) $ 1,229
Cash and capital resources
Liquidity Management. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from sales, maturities and calls of securities. We also have the ability to borrow from theFederal Home Loan Bank of Pittsburgh . AtDecember 31, 2021 , we had the ability to borrow approximately$107.5 million from theFederal Home Loan Bank of Pittsburgh , of which$16.7 million had been advanced in addition to$2.5 million held in reserve to secure one letter of credit to collateralize municipal deposits. Additionally, atDecember 31, 2021 , we had the ability to borrow$3.0 million from theAtlantic Community Bankers Bank and we also maintained a line of credit of$2.0 million with theFederal Reserve Bank of Philadelphia atDecember 31, 2021 . We did not borrow against the credit lines with theAtlantic Community Bankers Bank or theFederal Reserve Bank of Philadelphia during the year endedDecember 31, 2021 . 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 20.0% or greater. For the year endedDecember 31, 2021 , our liquidity ratio averaged 40.1% due to the COVID-19 pandemic and our initial public offering. We believe that we had enough sources of liquidity to satisfy our short and long-term liquidity needs as ofDecember 31, 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 46
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asset/liability management program. Excess liquid assets are generally invested in cash and cash equivalents and short to medium 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. AtDecember 31, 2021 , cash and cash equivalents totaled$26.9 million . Debt securities classified as available-for-sale, which provide additional sources of liquidity, totaled$25.6 million atDecember 31, 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 ofDecember 31, 2021 , totaled$35.9 million , or 46.6% of our certificates of deposit, and 14.3% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits andFederal 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. AtDecember 31, 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 "Regulation and Supervision-Federal Bank Regulation-Capital Requirements" and Note 11 of the Notes to the Financial Statements.
Off-balance sheet arrangements and global 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. AtDecember 31, 2021 , we had outstanding commitments to originate loans of$24.8 million , unused lines of credit totaling$9.2 million and$3.2 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 fromDecember 31, 2021 totaled$35.9 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 utilizeFederal Home Loan Bank advances or raise interest rates on deposits to attract new deposits, which may result in higher levels of interest expense. Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for equipment, agreements with respect to borrowed funds and deposit liabilities.
Recent accounting pronouncements
Please refer to note 1 of the financial statements for the years ended
47 Table of Contents
Impact of inflation and price changes
The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles inthe 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.
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