This discussion and analysis reflects our financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the accompanying financial statements. You should read the information in this section in conjunction with the business and financial information regarding the Company and Bank provided in this Form 10-Q and in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commissionon March 25, 2022and annual report on Form 10-K/A filed with the Securities and Exchange Commissionon April 29, 2022.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "assume," "plan," "seek," "expect," "will," "may," "should," "indicate," "would," "believe," "contemplate," "continue," "target" and words of similar meaning. These forward-looking statements include, but are not limited to:
· statements of our objectives, intentions and expectations;
· statements regarding our business plans, prospects, growth and operating strategies; · statements regarding the asset quality of our loan and investment portfolios; and
· estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this quarterly report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
· conditions relating to the COVID-19 pandemic, including the severity and duration of the associated economic slowdown either
or in our market areas, that are worse than expected;
Government action in response to the COVID-19 pandemic and its
effects on our business and operations, including vaccination mandates and their effects on our workforce, human capital
our ability to manage our operations in the current economic environment
conditions nationally and in our market area; · adverse changes in the financial services industry, securities and local real estate markets (including real estate values);
significant increases in our loan losses, in particular due to
our inability to resolve classified and non-performing assets
reduce risks associated with our loans, and management's
in determining the adequacy of the allowance for loan losses;
the credit risks of lending activities, including variations in the level
and trend of loan delinquencies and write-offs and in our
for loan losses and provision for loan losses; 27 Table of Contents
· competition between deposit taking institutions and other financial institutions;
· our success in increasing our commercial real estate and commercial and industrial lending; · our ability to attract and maintain deposits and our success in introducing new financial products; · our ability to improve our asset quality even as we increase our commercial real estate lending; · inflation and changes in interest rates generally, including changes in the relative differences between short-term and long-term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;
· fluctuations in demand for loans;
· technological changes that may be more difficult or costly than expected;
· changes in consumer spending, borrowing and savings habits; · declines in the yield on our assets resulting from a low interest rate environment; · risks related to a high concentration of loans secured by real estate located in our market area; · our ability to enter new markets successfully and capitalize on growth opportunities; · changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; · changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the
Financial Accounting Standards Board, the Securities and Exchange Commissionor the Public Company Accounting Oversight Board; · changes in our compensation and benefit plans, and our ability to retain key members of our senior management team and to address staffing needs in response to product demand or to implement our strategic plans;
· past due loans and changes in the underlying cash flows of our borrowers;
· our ability to control costs and expenses, particularly those associated with operating as a publicly traded company; · a failure or breach of our operational or security systems or infrastructure, including cyberattacks; · our ability to manage market risk, credit risk and operational risk in the current economic environment; · the ability of key third-party service providers to perform their obligations to us; and · other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services described elsewhere in this quarterly report.
Due to these and a wide variety of other uncertainties, our actual future results may differ materially from the results indicated by these forward-looking statements.
28 Table of Contents Overview Our business has traditionally focused on originating fixed-rate one- to four-family residential real estate loans and offering retail deposit accounts. In
September 2019, we hired our current president and chief executive officer, Janak M. Amin, and under his leadership team we have begun the process of developing a commercial lending infrastructure, with a particular focus on expanding our commercial real estate and commercial and industrial loan portfolios to diversify our balance sheet, improve our interest rate risk exposure and increase interest income. Our primary market area now consists of Chesterand LancasterCounties and the surrounding Pennsylvaniacounties of Cumberland, Dauphin, and Lebanon. Management has also emphasized the importance of attracting commercial deposit accounts from its customers. As a result of these initiatives and the completion of our initial public stock offering on July 14, 2021, we were able to increase our consolidated assets by $53.4 million, or 17.0%, from $314.9 millionat December 31, 2021to $368.4 millionat March 31, 2022and increase our deposits by $35.0 million, or 13.9%, from $251.1 millionat December 31, 2021to $286.1 millionat March 31, 2022. Our results of operations depend primarily on our net interest income and, to a lesser extent, noninterest income. Net interest income is the difference between the interest income we earn on our interest- earning assets, consisting primarily of loans, debt securities and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting primarily of savings accounts, demand accounts, money market accounts, certificates of deposit and borrowings. Noninterest income consists primarily of debit card income, service charges on deposit accounts, earnings on bank owned life insurance, other service charges and other income. Our results of operations also are affected by our provision for loan losses and noninterest expenses. Noninterest expenses consists primarily of salaries and employee benefits, occupancy and equipment, data and item processing costs, advertising and marketing, professional fees, directors' fees, FDICinsurance premiums, debit card expenses, and other expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, government policies and actions of regulatory authorities. For the three months ended March 31, 2022, we reported net income of $245,000compared to net income of $51,000for the three months ended March 31, 2021. The period over period increase in earnings of $194,000was primarily attributable to an increase in net interest income, partially offset by increases in noninterest expenses and income tax expense.
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. In
March 2020, the World Health Organizationdeclared COVID-19 a global pandemic and the United Statesdeclared a National Public Health Emergency. The COVID-19 pandemic has impacted the level of economic activity in our market area. In response to the pandemic, the governments of the Commonwealth of Pennsylvaniaand of most other states have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. As of March 31, 2022, most of these restrictions have been removed and many businesses have been allowed to re-open. To address the economic impact of COVID-19 in the United States, the CARES Act was signed into law on March 27, 2020. The CARES Act included a number of provisions that affected us, including accounting relief for TDRs. The CARES Act also established the PPP through the Small Business Administration("SBA"), which allowed us to lend money to small businesses to help maintain employee payrolls through the crisis with guarantees from the SBA. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls and meets certain other requirements. We originated approximately $6.0 millionof PPP loans in the first and second quarters of 2021. The PPP program ended in May 2021. As of March 31, 2022, all PPP loans originated by the Company have been fully forgiven. $28,000and $-0- of loan income (interest and fees) for PPP loans was recognized for the three months ended March 31, 2022and 2021, respectively. We 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 of December 31, 2019are exempt from TDR classification under U.S.29
January 1, 2022. 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.
Critical accounting estimates
The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with accounting principles generally accepted in
the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations. In 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an "emerging growth company" we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards. Allowance for loan losses. The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the statement of financial condition date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of a loan receivable is charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. The general component covers pools of loans by loan class including construction and commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential mortgages and consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include: (1) lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices; (2) national, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans; (3) nature and volume of the portfolio and terms of loans; (4) volume and severity of past due, classified and nonaccrual loans as well as loan modifications; (5) existence and effect of any concentrations of credit and changes in the level of such concentrations; (6) effect of external factors, such as competition and legal and regulatory requirements; (7) experience, 30
ability, and depth of lending department management and other relevant staff; and (8) quality of loan review and board of directors oversight. Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation. As a result of the COVID-19 pandemic, we increased certain of our qualitative loan portfolio risk factors relating to local and national economic conditions as well as industry conditions and concentrations, which have experienced deterioration due to the effects of the COVID-19 pandemic. An unallocated component of the allowance for loan losses is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. 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
FDICand the PADOB, as an integral part of their examination process, periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. Deferred tax assets. We make estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expenses. We also estimate a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision. In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies, these assumptions require us to make judgments about future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings. Realization of a deferred tax asset requires us to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. Valuation allowances are provided to reduce deferred tax assets to an amount that is more likely than not to be realized. In evaluating the need for a valuation allowance, we must estimate our taxable income in future years and the impact of tax planning strategies. If we were to determine that we would not be able to realize a portion of our net deferred tax asset in the future for which there is no valuation allowance, an adjustment to the net deferred tax asset would be charged to earnings in the period such determination was made. Conversely, if we were to make a determination that it is more likely than not that the deferred tax assets for which we had established a valuation allowance would be realized, the related valuation allowance would be reduced and a benefit to earnings would be recorded. Estimation of fair values. Fair values for securities available-for-sale are obtained from an independent third-party pricing service. Where available, fair values are based on quoted prices on a nationally recognized securities exchange. If quoted prices are not available, fair values are measured using quoted market prices for similar benchmark securities. Management generally makes no adjustments to the fair value quotes provided by the pricing source. The fair values of foreclosed real estate and the underlying collateral value of impaired loans are typically determined based on evaluations by third parties, less estimated costs to sell. When necessary, appraisals are updated to reflect changes in market conditions.
Comparison of the financial situation at
Total assets. Total assets increased
$53.4 millionto $368.4 millionat March 31, 2022from $314.9 millionat December 31, 2021. The increase in assets was primarily due to increases in net loans receivable and cash and cash equivalents. 31 Table of Contents
Growth was driven by loan growth and liquidity to fund future loan growth. Gross loans increased
$25.5 millionto $278.5 millionat March 31, 2022from December 31, 2021, primarily due to growth in the commercial real estate and construction portfolios. Debt securities available-for-sale decreased $1.5 millionto $24.1 millionat March 31, 2022from $25.6 millionat December 31, 2021, primarily due to a combination of a decrease in the fair market value of debt securities available-for-sale due to the increase in market interest rates during the first quarter of 2022 and principal repayments on mortgage-backed securities. Net loans receivable increased $25.4 million, or 10.2%, to $274.6 millionat March 31, 2022from $249.2 millionat December 31, 2021primarily due to increases in commercial real estate and construction loans. Commercial real estate loans increased $21.6 million, or 18.2%, to $139.8 millionat March 31, 2022from $118.3 millionat December 31, 2021. The increase in commercial real estate loans was primarily due to the continued implementation of our strategy to expand our commercial loan portfolio to diversify our balance sheet. Construction loans increased $3.8 million, or 27.8%, to $17.6 millionat March 31, 2022from $13.8 millionat December 31, 2021primarily due to new construction loans and to a lesser extent draws on existing commitments. One-to four-family residential real estate loans increased $158,000, or 0.1%, to $106.2 millionat March 31, 2022from $106.0 millionat December 31, 2021. All PPP loans were fully forgiven at March 31, 2022, previously classified as commercial and industrial loans. Debt securities available-for-sale decreased $1.5 million, or 6.2%, to $24.1 millionat March 31, 2022from $25.6 millionat December 31, 2021due to a $1.1 milliondecrease in the fair market value of debt securities available for sale due to the increase in market interest rates during the quarter and $505,000of principal repayments on mortgage-backed securities.
Cash and cash equivalents increased by
Deposits and borrowings. Total deposits increased
$35.0 million, or 13.9%, to $286.1 millionat March 31, 2022from $251.1 millionat December 31, 2021. The increase in our deposits reflected a $16.9 millionincrease in certificates of deposit, a $12.5 millionincrease in money market accounts, a $3.4 millionincrease in interest-bearing demand accounts, a $2.6 millionincrease in interest-bearing demand deposits, partially offset by a $288,000decrease in savings accounts. The increase in certificates of deposit was due to offering a deposit special and increasing listing service deposits. Money market and demand deposit accounts increased primarily due to management's continuing focus on increasing the commercial deposit accounts of its customers. The slight decrease in savings accounts was attributable to movement of funds into other deposit products. Total borrowings from the Federal Home Loan Bank of Pittsburghincreased $18.8 million, or 112.6%, to $35.5 millionat March 31, 2022from $16.7 millionat December 31, 2021due to additional advances to fund future loan originations. Stockholders' Equity. Stockholders' equity decreased $610,000, or 1.3%, to $45.2 millionat March 31, 2022from $45.8 millionat December 31, 2021. The decrease was due to an increase of $855,000in accumulated other comprehensive loss as a result of a decrease in the fair market value of our debt securities available-for-sale year to date 2022, partially offset by first quarter net income of $245,000.
Comparison of operating results for the three months ended
General. Net income increased
$194,000or 380.4%, to $245,000for the three months ended March 31, 2022from $51,000for the three months ended March 31, 2021. The $194,000period over period increase in earnings was attributable to a $541,000increase in interest and dividend income, partially offset by a $236,000increase in noninterest expenses, a $51,000increase in income tax expense, a $31,000decrease in noninterest income, a $21,000increase in the provision for loan losses and a $8,000increase in interest expense. Interest and dividend income. Total interest and dividend income increased $541,000, or 24.1%, to $2.8 millionfor the three months ended March 31, 2022from $2.2 millionfor the three months ended March 31, 2021. The increase in interest and dividend income was the result of a $67.7 millionincrease period over period in the average balance of interest-earning assets, driven by a $70.2 millionincrease in average loan balances, partially offset by a decrease in the average balance of debt and equity securities available for sale of $2.3 million. 32 Table of Contents
Interest income on loans, including fees, increased
$559,000, or 26.1%, to $2.7 millionfor the three months ended March 31, 2022as compared to $2.1 millionfor the three months ended March 31, 2021, reflecting an increase in the average balance of loans to $264.9 millionfor the three months ended March 31, 2022from $194.6 millionfor the three months ended March 31, 2021and an 19 basis points decrease in the average yield on loans. The increase in the average balance of loans was due primarily to increases in the average balances of commercial real estate and construction loans reflecting our strategy to grow commercial lending. The average yield on loans decreased to 4.12% for the three months ended March 31, 2022from 4.41% for the three months ended March 31, 2021, as a result of the low interest rate environment. The three months ended March 31, 2022included $28,000of PPP loan income from interest and net fees. Interest income on securities and restricted stocks decreased $24,000, or 25.8%, to $69,000for the three months ended March 31, 2022from $93,000for the three months ended March 31, 2021. The decrease in interest income on debt and equity securities available for sale was due to a decrease in the average balance of debt and equity securities available for sale of $2.3 million, or 7.99%, to $26.0 millionfor the three months ended March 31, 2022from $28.3 millionfor the three months ended March 31, 2021, and a 19 basis points decrease in the average yield on debt and equity securities available for sale to 0.93% for the three months ended March 31, 2022from 1.12% for the three months ended March 31, 2021. The decrease in the average balance of debt and equity securities available for sale was primarily due to the decrease in market value. The average yield on debt and equity securities available for sale decreased due to calls of higher-yielding securities which were replaced by significantly lower-yielding investment securities purchased in 2021. Restricted stocks income is also included in the interest income on securities. Restricted stock income decreased $4,000for the three months ended March 31, 2022from the three months ended March 31, 2021due to a 332 basis points decrease in the average yield on restricted stocks to 2.63% for the three months ended March 31, 2022from 5.95% for the three months ended March 31, 2021. The decrease in yield on restricted stock is due to the Federal Home Loan Bankdividend being paid in arrears and the average balance increasing $507,000, or 53.71%, to $1.5 millionfor the three months ended March 31, 2022from $1.0 millionfor the three months ended March 31, 2021. Interest income on cash and cash equivalents increased $6,000, or 100.0%, to $12,000for the three months ended March 31, 2022, from $6,000for the three months ended March 31, 2021. The increase in interest income on cash and cash equivalents was attributable to an increase in the average yield on cash and cash equivalents of five basis points to 0.11% for the three months ended March 31, 2022from 0.06% for the three months ended March 31, 2021. The decrease in the average balance of cash and cash equivalents of $762,000, or 1.8%, to $42.7 millionfor the three months ended March 31, 2022from $43.4 millionfor the three months ended March 31, 2021was due to using liquidity to fund loan growth. Interest expense. Interest expense increased $8,000, or 1.4%, to $584,000for the three months ended March 31, 202220from $576,000for the three months ended March 31, 2021as a result of an increase in interest expense on borrowings, partially offset by the decrease in the interest expense on deposits. The increase was due to an increase in the average balances of interest-bearing liabilities of $41.0 millionto $273.0 millionfor the three months ended March 31, 2022from $232.0 millionfor the three months ended March 31, 2021, partially offset by a 13 basis points decrease in the average cost of interest-bearing liabilities from 0.99% for the three months ended March 31, 2021to 0.86% for the three months ended March 31, 2022. Interest expense on deposits decreased $32,000, or 6.9%, to $435,000for the three months ended March 31, 2022from $467,000for the three months ended March 31, 2021as a result of a 14 basis points decrease in the average cost of interest-bearing deposits, partially offset by an increase in the average balance of our interest-bearing deposits. The decrease in the average cost of deposits was primarily due to a 19 basis points decrease in the average cost of certificates of deposit, traditionally our higher costing deposits, to 1.40% for the three months ended March 31, 2022from 1.59% for the three months ended March 31, 2021. In addition, the average cost of transaction accounts, traditionally our lower costing deposit accounts, consisting of demand, savings, and money market accounts decreased by four basis points to 0.36% for the three months ended March 31, 2022from 0.40% for the three months ended March 31, 2021, partially offset by the increase in the average balance of interest-bearing transaction accounts of $28.6 millionto $157.0 millionfor the three months ended March 31, 2022from $128.4 millionfor the three months ended March 31, 2021. The weighted average rate paid on deposits, including non-interest bearing deposits, decreased 15 basis points to 0.66% for the three months ended March 31, 2022from 0.81% for the three months ended March 31, 2021as a result of replacing new certificates of deposit upon the maturing of existing certificates of deposit at lower rates. The increase in the average balance of our transaction accounts primarily reflected management's focus on increasing the commercial deposit accounts of its customers in 2022. 33
Interest expense on
Federal Home Loan Bankborrowings increased $40,000, or 36.7%, to $149,000for the three months ended March 31, 2022from $109,000for the three months ended March 31, 2021. The increase in interest expense on Federal Home Loan Bankborrowings was caused by a $12.6 millionincrease in our average balance of Federal Home Loan Bankborrowings to $30.4 millionfor the three months ended March 31, 2022compared to $17.9 millionfor the three months ended March 31, 2021as a result of increasing our liquidity in the rising rate environment, partially offset by a decrease in the average cost of these funds of 48 basis points to 1.96% for the three months ended March 31, 2022from 2.44% for the three months ended March 31, 2021as lower cost borrowings were purchased in the first quarter of 2022. Net interest income. Net interest income increased $533,000, or 32.0%, to $2.2 millionfor the three months ended March 31, 2022as compared to $1.7 millionfor the three months ended March 31, 2021. The increase in net interest income for the three months ended March 31, 2022compared to the three months ended March 31, 2021was primarily due to the increase in interest income on loans and a decrease in interest expense on deposits. Average net interest-earning assets increased by $26.8 millionto $62.0 millionfor the three months ended March 31, 2022from $35.2 millionfor the three months ended March 31, 2021. Our net interest margin increased 17 basis points to 2.66% for the three months ended March 31, 2022from 2.49% for the three months ended March 31, 2021. Our net interest rate spread increased 13 basis points to 2.50% for the three months ended March 31, 2022from 2.37% for the three months ended March 31, 2021. 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 evaluation of the above factors, we recorded a $90,000provision for loan losses for the three months ended March 31, 2022compared to a $69,000provision for loan losses for the three months ended March 31, 2021. The increase in the provision for loan losses was primarily driven by loan growth. We have seen a decrease in historical loss factors in the current year driven by no charge- offs in 2021 and no charge-offs to date in 2022. The allowance for loan losses was $3.2 million, or 1.16%, of loans outstanding at March 31, 2022and $3.1 million, or 1.24%, of loans outstanding at December 31, 2021. To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at March 31, 2022. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the PADOB and the FDIC, as an integral part of their examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management. 34
Non-interest income. Information on non-interest income is as follows.
Three Months Ended March 31, Change 2022 2021 Amount Percent (Dollars in thousands)
Service charges on deposit accounts
$ 42 $ 44 $ (2)(4.5) % Loss on equity investments (40) (15) (25)
Bank owned life insurance income 44 41 3
7.3 Debit card income 48 51 (3) (5.9) Other service charges 17 19 (2) (10.5) Other income 11 13 (2) (15.4) Total noninterest income
$ 122 $ 153 $ (31)(20.3) % Noninterest income decreased by $31,000, or 20.3%, to $122,000for the three months ended March 31, 2022from $153,000for the three months ended March 31, 2021. The decrease in noninterest income resulted primarily from an increase in the loss on equity investments. The loss on equity investments increased $25,000as a result of the decrease in fair value of the equity investments.
Non-interest expenses. Information on non-interest charges is as follows.
Three Months Ended March 31, Change 2022 2021 Amount Percent (Dollars in thousands) Salaries and employee benefits
$ 981 $ 917 $ 647.0 % Occupancy and equipment 150 153 (3) (2.0) Data and item processing 242 243 (1) (0.4) Advertising and marketing 22 11 11 100.0 Professional fees 167 86 81 94.2 Directors' fees 61 61 - - FDIC insurance premiums 22 47 (25) (53.2) Pennsylvania shares tax 80 - 80 100.0 Debit card expenses 34 37 (3) (8.1) Other 173 141 32 22.7 Total noninterest expenses $ 1,932 $ 1,696 $ 23613.9 %
Noninterest expenses increased
$236,000, or 13.9%, to $1.9 millionfor the three months ended March 31, 2022from $1.7 millionfor the three months ended March 31, 2021. The increase in noninterest expenses was primarily the result of increases in professional fees of $81,000, Pennsylvaniashares tax of $80,000, salaries and employee benefits expense of $64,000and other expense of $32,000, partially offset by a decrease in FDICinsurance premiums of $25,000. Professional fees increased $81,000primarily due to ongoing compliance expense due to becoming an SECregistrant in the third quarter of 2021. Pennsylvaniashares tax increased $80,000due to the Bank being subject to the tax as part of the mutual to stock conversion. Salaries and employee benefits expense increased $64,000primarily due to ESOP expense beginning in the third quarter of 2021, the hiring of additional staff and annual salary increases. Other expense increased $32,000primarily due to an increase in travel, educational and training expenses as a result of more COVID-19 restrictions being lifted and an increase in insurance premiums compared to the prior period. FDICinsurance premiums decreased $25,000due to the decrease in the FDICquarterly multiplier when comparing the three months ended March 31, 2022to the three months ended March 31, 2021. Income tax expense. Income tax expense increased $51,000, to $55,000for the three months ended March 31, 2022from $4,000for the three months ended March 31, 2021. The effective tax rates were 18.3% and 7.3% for the three month periods ended March 31, 2022and 2021, respectively. The increase in income tax expense for the three months ended March 31, 2022as compared to the three months ended March 31, 2021was primarily due to an increase in income before income taxes. 35 Table of Contents
Average balances and yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or interest expense. Deferred loan fees totaled
$69,000and $55,000for the three months ended March 31, 2022and 2021, respectively. For the Three Months Ended March 31, 2022 2021 Average Average Outstanding Average Outstanding Average Balance Interest Yield/Rate (4) Balance Interest Yield/Rate (4) (Dollars in thousands) Interest-earning assets: Loans $ 264,856 $ 2,7034.12 % $ 194,611 $ 2,1444.41 % Debt and equity securities available for sale 26,007 59 0.93 % 28,265 79 1.12 % Restricted stocks 1,451 10 2.63 % 944 14 5.95 % Cash and cash equivalents 42,676 12 0.11 % 43,438 6 0.06 %
Total interest-earning assets 334,990 2,784
3.36 % 267,258 2,243 3.36 % Noninterest-earning assets 8,943 8,657 Total assets
$ 343,933 $ 275,915Interest-bearing liabilities: Interest-bearing demand deposits $ 72,34251 0.28 % $ 64,65251 0.32 % Savings deposits 21,906 19 0.35 % 18,895 16 0.33 % Money market deposits 62,757 70 0.45 % 44,879 59 0.52 % Certificates of deposit 85,551 295 1.40 % 85,719 341 1.59 % Total interest-bearing deposits 242,556 435 0.73 % 214,145 467 0.87 % Long-term borrowings 30,444 149 1.96 % 17,887 109 2.44 % Total interest-bearing liabilities 273,000 584 0.86 % 232,032 576 0.99 % Noninterest-bearing demand deposits 23,882 20,602 Other noninterest-bearing liabilities 1,122 1,223 Total liabilities 298,004 253,857 Stockholders' equity 45,929 22,058 Total liabilities and stockholders' equity $ 343,933275,915 Net interest income $ 2,200 $ 1,667
Net interest rate spread (1) 2.50 % 2.37 % Net interest-earning assets (2)
$ 61,990 $ 35,226Net interest margin (3) 2.66 % 2.49 % Average interest-earning assets to interest-bearing liabilities 122.71 % 115.18 %
The net interest rate spread represents the difference between the weighted average yield (1) of interest-bearing assets and the weighted average rate of
(2) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets. (4) Annualized. 36 Table of Contents Rate/Volume Analysis The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total increase (decrease) column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below. Three Months Ended March 31, 2022 vs. 2021 Increase (Decrease) Due to Total Increase Volume Rate (Decrease) (In thousands) Interest-earning assets: Loans
$ 3,098 $ (2,539) $ 559
Debt and equity securities available for sale (25)
5 (20) Restricted stocks 30 (34) (4) Cash and cash equivalents - 6 6 Total interest-earning assets 3,103 (2,562) 541 Interest-bearing liabilities:
Interest-bearing demand deposits 25
(25) - Savings deposits 10 (7) 3 Money market deposits 93 (82) 11 Certificates of deposit (3) (43) (46) Total deposits 125 (157) (32) Borrowings 306 (266) 40
Total interest-bearing liabilities 431
(423) 8 Change in net interest income
$ 2,672 $ (2,139) $ 533
Non-performing assets and allowance for loan losses
Non-performing loans. Loans are reviewed on a weekly basis by management and again by our credit committee on a monthly basis. Management determines that a loan is impaired or non-performing when it is probable at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent. When a loan is determined to be impaired, the measurement of the loan in the allowance for loan losses is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Non-accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. All loans that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and in the process of collection. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method. A loan is classified as a troubled debt restructuring if, for economic or legal reasons related to the borrower's financial difficulties, we grant a concession to the borrower that we would not otherwise consider. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of the principal amount due. Interest income on restructured loans is accrued after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six consecutive months.
The CARES Act, in addition to providing financial assistance to businesses and consumers, created a federally backed mortgage forbearance program, protects borrowers from negative credit reports due to mortgage-related loans. national emergency and provided financial institutions with the ability to temporarily suspend
certain requirements under
U.S.GAAP related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. The Federal banking regulatory agencies have likewise issued guidance encouraging financial institutions to work prudently with borrowers whoare, or may be, unable to meet their contractual payment obligations because of the effects of COVID-19. That guidance, with concurrence of the Financial Accounting Standards Board, and provisions of the CARES Act allow modifications made on a good faith basis in response to COVID-19 to borrowers whowere generally current with their payments prior to any relief, to not be treated as troubled debt restructurings. Modifications may include payment deferrals, fee waivers, extensions of repayment term, or other delays in payment. We have worked with our customers affected by COVID-19 and accommodated a significant amount of loan modifications across our loan portfolios. To the extent that additional modifications meet the criteria previously described, such modifications are not expected to be classified as troubled debt restructurings. As of March 31, 2022, we are no longer tracking COVID-19 deferrals as all of these loans have returned to normal payment status. Real estate owned. When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal to determine the current market value of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for loan losses, or, if the existing allowance is inadequate, charged to expense of the current period. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell. We had no real estate owned at March 31, 2022or as of December 31, 2021. 38 Table of Contents
Non-Performing Assets. The following table sets forth information regarding our non-performing assets. Non-accrual loans include non-accruing troubled debt restructurings of
$340,000and $379,000as of March 31, 2022and December 31, 2021, respectively. March 31, December 31, 20222021 (Dollars in thousands) Non-accrual loans: Real estate:
One- to four-family residential
659 Commercial 444 453 Construction 502 541 Commercial and industrial - - Consumer - - Total non-accrual loans 1,575 1,653 Accruing loans past due 90 days or more Real estate: One- to four-family residential 110
- Commercial - - Construction - - Commercial and industrial - - Consumer - -
Total accruing loans past due 90 days or more 110
- Total non-performing loans
$ 1,685$ 1,653 Foreclosed assets - - Total non-performing assets $ 1,685$ 1,653 Non-accruing troubled debt restructurings: Real estate: One- to four-family residential -
- Commercial 184 190 Construction 156 189 Commercial and industrial - - Consumer - - Total
$ 340$ 379
Total Distressed Debt Restructured Loans
Total non-performing loans to total loans 0.61 % 0.65 % Total non-accrual loans to total loans 0.57 % 0.65 % Total non-performing assets to total assets 0.46 %
Non-performing loans were
$1.7 million, or 0.61% of total loans, at March 31, 2022and $1.7 million, or 0.65% of total loans, at December 31, 2021. During the three months ended March 31, 2022, payments on non-accrual loans were offset by a loan becoming greater than 90 days and still accruing that is well secured and in the process of collection. 39
Allowance for loan losses. The following table shows our loan loss provision activity for the periods indicated.
At or For the
Three months completed
2022 2021 (Dollars in thousands)
Allowance for loan losses at beginning of year $ 3,145
$ 2,854 Provision for loan losses 90 69 Charge-offs: Real estate:
One- to four-family residential -
- Commercial - - Construction - - Commercial and industrial - - Consumer - - Total charge-offs - - Recoveries: Real estate:
One- to four-family residential -
- Commercial - - Construction - - Commercial and industrial 1 1 Consumer - - Total recoveries 1 1 Net (charge-offs) recoveries 1 1 Allowance at end of period $ 3,236 $ 2,924
Allowance to non-accrual loans 205.46 % 124.69 % Allowance to total loans outstanding at the end of the period 1.16 % 1.45 % Net (charge-offs) recoveries to average loans outstanding during the period - % - % The provision for loan losses increased
$21,000, or 30.4%, to $90,000for the three months ended March 31, 2022from $69,000for the three months ended March 31, 2021. The increase for the three months ended March 31, 2022was due to loan growth. We have seen a decrease in historical loss factors driven by no charge-offs in 2021 and no charge-offs to date in 2022.
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 the
Federal Home Loan Bank of Pittsburgh. At March 31, 2022, we had the ability to borrow approximately $123.2 millionfrom the Federal Home Loan Bank of Pittsburgh, of which $35.5 millionhad been advanced in addition to $10.2 millionheld in reserve to secure two letters of credit to collateralize municipal deposits. Additionally, at March 31, 2022, we had the ability to borrow $3.0 millionfrom the Atlantic Community Bankers Bankand we also maintained a line of credit of $2.0 millionwith the Federal Reserve Bank of Philadelphiaat March 31, 2022. We did not borrow against the credit lines with the Atlantic Community Bankers Bankor the Federal Reserve Bank of Philadelphiaduring the three months ended March 31, 2022or 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 40 Table of Contents
unanticipated contingencies. We seek to maintain a liquidity ratio of 5.0% or greater. For the three months ended
March 31, 2022and 2021, our liquidity ratio averaged 39.8% and 22.7%, respectively. We believe that we had enough sources of liquidity to satisfy our short and long-term liquidity needs as of March 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 cash and cash equivalents and securities; and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in cash and cash equivalents and short-and intermediate-term securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents, which include federal funds sold. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2022, cash and cash equivalents totaled $54.8 million. Debt securities classified as available-for-sale, which provide additional sources of liquidity, totaled $24.1 millionat March 31, 2022. We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of March 31, 2022, totaled $39.8 million, or 42.4% of our certificates of deposit, and 13.9% 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 Bankadvances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered. Capital management. At March 31, 2022, Presence Bankexceeded all regulatory capital requirements and was considered "well capitalized" under regulatory guidelines due to its compliance with the Community Bank Leverage ratio. See Note 8 of the Notes to the Financial Statements.
Off-balance sheet arrangements and 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. At
March 31, 2022, we had outstanding commitments to originate loans of $26.4 million, unused lines of credit totaling $10.4 millionand $2.6 millionin stand-by letters of credit outstanding. We anticipate that we will have sufficient funds available to meet our current lending commitments. Certificates of deposit that are scheduled to mature in less than one year from March 31, 2022totaled $39.8 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 Bankadvances 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. 41
Impact of inflation and price changes
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.
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