Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 47 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. In September 2019, we hired our current president and chief executive officer, Janak M. Amin, and under his leadership team we have developed a commercial lending infrastructure, with a particular focus on expanding our commercial real estate and commercial and industrial loan portfolios, to improve our interest rate risk exposure and increase interest income. Our primary market area now consists of Chester and Lancaster Counties and the surrounding Pennsylvania counties of Cumberland, Dauphin, and Lebanon. Management has also emphasized the importance of attracting commercial deposit accounts from its customers. As a result of these initiatives, we were able to increase our consolidated assets by $11.6 million, or 2.6%, from $439.7 million at December 31, 2023 to $451.3 million at December 31, 2024 and increase our deposits $21.2 million, or 6.4%, from $333.0 million at December 31, 2023 to $354.2 million at December 31, 2024.
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 on a recurring basis consists primarily of debit card income, service charges on deposit accounts, earnings on bank owned life insurance, other service charges and other income. Our results of operations also are affected by our provision for credit losses and noninterest expense. Noninterest expense
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consists primarily of salaries and employee benefits, occupancy and equipment, data and item processing costs, advertising and marketing, professional fees, directors’ fees, FDIC insurance premiums, Pennsylvania shares tax, debit card expenses, and other expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, government policies and actions of regulatory authorities.
For the year ended December 31, 2024, we had net income of $1.8 million compared to net income of $1.9 million for the year ended December 31, 2023. The year over year decrease in earnings of $147,000 was attributable to a decrease in net interest income and an increase in noninterest expense, partially offset by a decrease in the provision for credit losses, an increase in noninterest income and a decrease in income tax expense. Net interest income decreased $1.0 million due to the increase in interest expense on deposits as we increased our rates in the competitive market. In 2024, we had a $487,000 gain on sale of the land and building of a branch location in Oxford, Pennsylvania included in noninterest income. Coinciding with the sale of the Oxford Branch, the Bank relocated to a leased location less than 750 feet away from the previous branch.
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. In September 2019, we hired our current president and chief executive officer, Janak M. Amin, and under his leadership team we have developed a commercial lending infrastructure, with a particular focus on expanding our commercial real estate and commercial and industrial loan portfolios to improve our interest rate risk exposure and increase interest income. Our commercial real estate and commercial and industrial loan portfolios increased from $201.4 million, or 61.7% of total loans at December 31, 2023, to $226.4 million, or 64.7% of total loans at December 31, 2024. 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 a loan production office in Harrisburg, Pennsylvania, and in 2024 we opened an administrative office in Lancaster, Pennsylvania. We expect to hire additional relationship-based loan officers to increase our presence in our market area. 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 $23.2 million, or 7.1%, and $21.2 million, or 6.4%, respectively, during 2024. 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 commercial and industrial lending. Based on our attractive market area and our strategic investment in technology to enhance 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
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accounts. During 2024, management continued an initiative which incentivized our commercial relationship officers to increase transaction accounts with our existing commercial customers. Despite our concentrated efforts, our core deposits decreased $7.1 million, or 3.8%, to $180.4 million at December 31, 2024 from $187.5 million at December 31, 2023 due to the highly competitive deposit market in the high interest rate environment. 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, mobile deposits and smart safes 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 executive management team and increased relationship-based personnel, we expect to grow organically. In 2021, we opened a loan production office in Harrisburg (Dauphin County, Pennsylvania) and in 2024 we opened an Administrative Office in Lancaster (Lancaster County, Pennsylvania). We expect to establish one to two additional loan production offices to support lending teams in our core markets such as Chester and Lancaster Counties, Pennsylvania in future years. We believe opening loan production offices is a more cost-effective method of expansion which can lead to the establishment of branch offices in the future if market conditions warrant. We will seek to expand our presence in Chester, Lancaster, Dauphin, Lebanon and Cumberland Counties, Pennsylvania.
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. In 2022, we hired our Chief Risk and Credit Officer, who has over 35 years of industry experience. Our Chief Risk and Credit Officer is working diligently to enhance the processes of our current team with his vast knowledge and experience. Our nonperforming assets to total assets ratio was 0.25% at December 31, 2024, compared to 0.32% at December 31, 2023. At December 31, 2024, the majority of our nonperforming assets were related to commercial 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 in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
The following represents our critical accounting estimates:
Allowance for credit losses on loans. The allowance for credit losses on loans represents management’s best estimate of expected lifetime credit losses within the Company's loan portfolio as of the balance sheet date. The allowance is established through a provision for credit losses and is increased by recoveries of loans previously charged off. Loan losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan. The calculation of expected credit losses is determined using cash flow methodology, and includes considerations of historical data, current conditions, and reasonable and supportable economic forecasts that may affect collection of the recorded balances. The Company assesses an allowance to groups of loans which share similar risk characteristics or on an individual basis, as deemed appropriate. Changes in the allowance for credit losses on loans, and as a result, the related provision for credit losses, can materially affect financial results. Although the overall balance is
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determined based on specific portfolio segments and individually assessed assets, the entire balance is available to absorb credit losses for loans in the portfolio.
Management of the Company considers the accounting policy relating to the allowance for credit losses to be a critical accounting estimate given the uncertainty in evaluating the level of the allowance required to cover management’s estimate of all expected credit losses over the expected contractual life of our loan portfolios. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain, including making significant estimates of current credit risks and trends using existing quantitative and qualitative information, and reasonable and supportable forecasts of future economic conditions, which may undergo frequent and material changes. Subsequent evaluations of the then-existing loan portfolios, in light of changes in economic conditions, new information regarding existing loans and other factors, may result in significant changes in the allowance for credit losses in those future periods. For example, changes to the Federal Open Market Committee’s (FOMC) forecasted civilian unemployment rate and year-over-year U.S. GDP growth could have a material impact on the model’s estimation of the allowance for credit losses on loans. An immediate increase of 150 basis points in the FOMC’s projected rate of civilian unemployment and a decrease of 100 basis points in the FOMC’s projected rate of U.S. GDP growth would increase the model’s total calculated allowance for credit losses on loans by $42,000, or 1.0%, assuming all other qualitative adjustments are kept at current levels. While management’s current evaluation of the allowance for credit losses indicates the allowance is appropriate, the allowance may need to be increased under different conditions or assumptions. Additionally, changes in those factors and inputs may not occur at the same rate and inputs may be directionally inconsistent, such that improvements in one factor may offset deterioration in others. The impact of utilizing an expected credit losses approach to estimate the allowance for credit losses can and will be significantly influenced by the composition, characteristics and quality of our loan portfolios, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the allowance for credit losses, and therefore, greater volatility to our reported earnings.
The Company’s management reviews the adequacy of the allowance for credit losses on loans on at least a quarterly basis. Refer to Note 1 – “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” included in Part II, Item 8. of this Annual Report on Form 10-K for additional details concerning the determination of the allowance for credit losses on loans.
Comparison of Balance Sheets at December 31, 2024 and December 31, 2023
Total Assets. Total assets increased $11.6 million, or 2.6%, to $451.3 million at December 31, 2024 from $439.7 million at December 31, 2023, primarily reflecting increases in net loans receivable and cash and cash equivalents, partially offset by a decrease in debt securities available-for-sale.
Cash and cash equivalents increased by $5.4 million, or 16.5%, to $37.8 million at December 31, 2024 from $32.4 million at December 31, 2023 due to management intentionally increasing liquidity during 2024 and investing in less debt securities available-for-sale at December 31, 2024.
Net loans receivable increased $23.4 million, or 7.3%, to $344.8 million at December 31, 2024 from $321.4 million at December 31, 2023 due primarily to increases in commercial real estate loans, commercial and industrial loans and consumer and other loans, partially offset by a decrease in one-to four-family residential real estate loans. Commercial real estate loans increased $20.3 million, or 11.0%, to $205.2 million at December 31, 2024 from $184.9 million at December 31, 2023. One- to four-family residential real estate loans decreased $5.0 million, or 4.6%, to $103.5 million at December 31, 2024 from $108.5 million at December 31, 2023. Commercial and industrial loans increased $4.7 million, or 28.6%, to $21.3 million at December 31, 2024 from $16.6 million at December 31, 2023. Consumer and other loans increased $3.4 million, or 58.6%, to $9.3 million at December 31, 2024 from $5.8 million at December 31, 2023. Construction real estate loans decreased $313,000, or 2.9%, to $10.5 million at December 31, 2024 from $10.8 million at December 31, 2023. The increase in commercial real estate and commercial and industrial loans was primarily due to our strategy to expand our commercial loan portfolio to improve our interest rate risk exposure and increase interest income. The decrease in one- to four-family residential real estate was primarily due to amortization of scheduled payments and loan payoffs.
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Management is monitoring the commercial real estate portfolio and concentrations, assessing their associated risks. As part of its risk management process, the Bank segments and stress tests its non-owner occupied commercial real estate portfolio. Approximately 83.5% or $126.2 million of this portfolio was subject to stress testing (loans having exposure under $500,000 and construction loans are not subject to stress testing). The commercial real estate portfolio has an average Loan-to-Value ratio of 59.2% and a Debt Service Coverage ratio of 1.41 times, exclusive of any sponsor or guarantor support at December 31, 2024. The commercial real estate portfolio is diverse with respect to both property type as well as location with limited concentrations.
The Bank’s hospitality portfolio is an area of market focus. Loan exposure to this segment totaled $25.5 million (seven hotel properties) at December 31, 2024. The average Loan-to-Value ratio was low at 58.5% with a strong Debt Service Coverage ratio of 1.90 times, exclusive of any sponsor or guarantor support at December 31, 2024. Two hotels were newly acquired; therefore, the debt service coverage is based on the projected cash flow. Guarantor support for the hospitality sector is strong and loans are supported by experienced hotel operators .
Debt securities available-for-sale decreased $17.8 million, or 26.2%, to $50.3 million at December 31, 2024 from $68.1 million at December 31, 2023 due to funding loans with securities maturity proceeds. The Company had maturities and calls of securities of $49.5 million combined with $596,000 of principal repayments on mortgage-backed securities, partially offset by purchases of $24.7 million of treasury securities, $4.4 million of corporate bonds and $1.5 million of mortgage-backed securities, an increase in the fair market value of debt securities available-for-sale of $1.2 million and $460,000 in net accretion of discounts and premiums. The remaining weighted average life of our debt securities available for sale portfolio was 1.29 years at December 31, 2024.
Premises and equipment increased by $22,000, or 1.1%, to $2.1 million at December 31, 2024, due to additions of $371,000 primarily on leasehold improvements at our Lancaster administrative office, partially offset by depreciation and amortization of fixed assets of $224,000 and the sale of the Oxford Branch that had a book value of $135,000 at the time of the sale.
Bank owned life insurance increased by $218,000, or 2.6%, to $8.5 million at December 31, 2024 from $8.2 million at December 31, 2023, primarily due to the earnings on the existing policies.
Restricted stock decreased by $465,000, or 18.0%, to $2.1 million at December 31, 2024 from $2.6 million at December 31, 2023 due to the redemption of Federal Home Loan Bank of Pittsburgh stock in conjunction with decreased borrowings from the Federal Home Loan Bank of Pittsburgh during 2024.
Deposits and Borrowings. Total deposits increased $21.2 million, or 6.4%, to $354.2 million at December 31, 2024 from $333.0 million at December 31, 2023. The increase in our deposits reflected a $28.2 million increase in certificates of deposit, and a $5.4 million increase in noninterest-bearing demand accounts, partially offset by a $8.6 million decrease in money market accounts, a $2.3 million decrease in interest-bearing demand accounts and a $1.4 million decrease in savings accounts. The increase in certificates of deposit was due to brokered deposits increasing in 2024 to increase liquidity. Noninterest-bearing demand deposits increased primarily due to increased deposit customers from commercial accounts offering cash management services. The money market, interest-bearing and savings accounts decreased as the result of customers needing their liquidity for business needs and moving funds to higher yielding bank products.
Total borrowings from the Federal Home Loan Bank of Pittsburgh decreased $12.6 million, or 22.9%, to $42.5 million at December 31, 2024 from $55.1 million at December 31, 2023 due to $12.6 million of repayments on maturing and amortizing advances. There were no new Federal Home Loan Bank of Pittsburgh borrowings during 2024.
Stockholders’ Equity. Stockholders’ equity increased $1.7 million, or 3.6%, to $48.7 million at December 31, 2024 from $47.0 million at December 31, 2023. The increase was due to net income of $1.8 million for 2024, a decrease of $942,000 in accumulated other comprehensive loss as a result of an increase in the fair market value of our debt securities available-for-sale during 2024, stock based compensation expense of $553,000 and allocation of $170,000 of Employee Stock Ownership Plan (the “ESOP”) shares, partially offset by a decrease of $1.8 million in additional paid in capital for repurchases of common stock.
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Comparison of Operating Results for the Years Ended December 31, 2024 and December 31, 2023
General. Net income decreased $147,000 to $1.8 million for the year ended December 31, 2024 from $1.9 million for the year ended December 31, 2023. The $147,000 year over year decrease in earnings was attributable to a $1.0 million decrease in net interest income and a $394,000 increase in noninterest expense, partially offset by a $669,000 decrease in the provision for credit losses, a $528,000 increase in noninterest income and a $70,000 decrease in income tax expense.
Interest Income. Total interest income increased $3.7 million, or 18.4%, to $23.5 million for the year ended December 31, 2024 from $19.8 million for the year ended December 31, 2023. The increase in interest income resulted from a $41.4 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, partially offset by a decrease in the average balance of restricted stocks. In addition, interest income increased due to a 35 basis points increase in the average yield on interest-earning assets from 5.02% for 2023 to 5.37% for 2024.
Interest income on loans, including fees, increased $2.5 million, or 14.8%, to $19.5 million for 2024 from $17.0 million for 2023. The increase in interest income on loans resulted from an increase in the average balance of loans of $24.3 million to $342.9 million for 2024 from $318.6 million for 2023. The increase in the average balance of loans was due primarily to an increase in the average balances of commercial real estate loans and commercial and industrial loans reflecting our strategy to grow commercial lending. In addition, the increase in interest income on loans was also due to a 36 basis points increase in the average yield on loans from 5.34% for 2023 to 5.70% for 2024 due to the higher interest rate environment.
Interest and dividend income on securities and restricted stock increased $139,000, or 13.3%, to $1.2 million for 2024 from $1.0 million for 2023. The increase in interest income on debt and equity securities of $108,000, or 12.4%, to $977,000 for 2024 from $869,000 for 2023 was due to a 26 basis points increase in the average yield on debt and equity securities to 2.61% in 2024 from 2.35% in 2023 and an increase in the average balance of debt and equity securities of $344,000, or 0.9%, to $37.4 million in 2024 from $37.0 million in 2023. The average yield on debt and equity securities increased due to investing in higher yielding corporate bonds in 2024. The increase in the average balance of debt and equity securities was due to purchases of corporate bonds in community bank issuers, an additional CRA investment in the mortgage-backed securities portfolio and short term treasury securities with excess liquidity. Restricted stock income increased $31,000, or 17.6%, to $207,000 for 2024 from $176,000 for 2023 due to a 147 basis points increase in the average yield on restricted stocks to 8.76% for 2024 from 7.29% for 2023, partially offset by a decrease in the average balance of restricted stocks of $48,000, or 2.0%. The increase in average yield on restricted stock was due to the Federal Home Loan Bank dividend being increased in 2024 and the average balance decreased for 2024 due to the decrease in average borrowings.
Interest income on cash and cash equivalents increased $1.0 million, to $2.8 million in 2024, from $1.8 million in 2023. The increase in interest income on cash and cash equivalents was attributable to an increase in the average balance of cash and cash equivalents of $16.8 million, or 44.2%, to $54.7 million in 2024 from $37.9 million in 2023 due to leaving excess liquidity in cash instead of investing in debt and equity securities. In addition, an increase in the average yield on cash and cash equivalents of 38 basis points to 5.06% for 2024 from 4.68% for 2023 was a result of the increase in market interest rates.
Interest Expense. Interest expense increased $4.7 million or 60.6% to $12.4 million for the year ended December 31, 2024 from $7.7 million for the year ended December 31, 2023 as a result of increases in interest expense on deposits, partially offset by the decrease in interest expense on borrowings. The increase in interest expense reflected a 103 basis points increase in the average cost of interest-bearing liabilities from 2.31% for 2023 to 3.34% for 2024 and a $38.9 million increase in the average balance of interest-bearing liabilities to $371.3 million for 2024 from $332.4 million for 2023.
Interest expense on deposits increased $4.7 million, or 79.5%, to $10.6 million for 2024 from $5.9 million for 2023 as a result of a 119 basis point increase in the average cost of interest-bearing deposits and an increase of $40.9 million in the average balance of our interest-bearing deposits. The weighted average rate paid on interest-bearing deposits increased 119 basis points to 3.29% for 2024 from 2.10% for 2023 as a result of the higher interest rate environment and competition for
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deposits. The average cost of certificates of deposit, traditionally our higher costing deposits, increased to 4.46% for 2024 from 2.99% for 2023 and the average cost of transaction accounts (traditionally our lower costing deposit accounts consisting of demand, savings, and money market accounts) increased by 71 basis points to 2.15% for 2024 from 1.44% for 2023. The increase in the average balance of certificates of deposit which increased by $39.7 million to $159.4 million for 2024 from $119.7 million for 2023 was due to using brokered deposits to increase liquidity. The average balance of interest-bearing transaction accounts increased $1.2 million to $162.9 million for 2024 from $161.6 million for 2023. The increase in the average balance of our transaction accounts primarily reflected management efforts to grow the lower cost deposits.
Interest expense on Federal Home Loan Bank borrowings decreased $22,000, or 1.2%, to $1.8 million for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The decrease in interest expense on Federal Home Loan Bank borrowings was caused by a decrease of $2.0 million in our average balance of Federal Home Loan Bank borrowings to $49.0 million for 2024 compared to $51.0 million for 2023 as a result of maturing Federal Home Loan Bank borrowings not being replaced in 2024, partially offset by the average cost of these funds increasing 15 basis points from 3.49% in 2023 to 3.64% in 2024 due to the higher interest rate environment for most of 2024.
Net Interest Income. Net interest income decreased $1.0 million, or 8.4%, to $11.1 million for the year ended December 31, 2024 from $12.1 million for the year ended December 31, 2023. The decrease in net interest income from 2023 to 2024 was primarily due to the increase in interest expense on deposits, partially offset by the increases in interest income on loans, cash and cash equivalents and investment securities. Our net interest margin decreased 53 basis points to 2.54% for 2024 from 3.07% for 2023. Our net interest rate spread decreased 68 basis points to 2.03% for 2024 from 2.71% for 2023. Average net interest-earning assets increased by $2.5 million to $66.1 million for 2024 from $63.6 million for 2023.
Provision for Credit Losses. We charge provisions for credit losses to operations in order to maintain our allowance for credit losses on loans and reserve for unfunded commitments at a level that is considered reasonable and necessary to absorb expected credit losses inherent in the loan portfolio and expected losses on commitments to grant loans that are expected to be advanced at the consolidated balance sheet date. In determining the level of the allowance for credit losses, we consider our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or conditions change. We assess the allowance for credit losses on a quarterly basis and make provisions for credit losses in order to maintain the allowance.
Based on our evaluation of the above factors and the balance required per our analysis, we recorded a $37,000 reversal of the provision for credit losses for the year ended December 31, 2024 compared to a $632,000 provision for credit losses for the year ended December 31, 2023. The reversal of provision for credit losses was primarily due to lower qualitative factor allocations within the Company’s current expected credit losses methodology and a lower required allowance for unfunded commitments. The allowance for credit losses on loans was $4.4 million, or 1.25%, of loans outstanding at December 31, 2024 and $4.5 million, or 1.38%, of loans outstanding at December 31, 2023.
To the best of our knowledge, we have recorded our best estimate of expected losses in the loan portfolio and for unfunded commitments at December 31, 2024. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for credit losses. In addition, the Pennsylvania Department of Banking and the FDIC, as an integral part of their examination process, will periodically review our allowance for credit losses, and as a result of such reviews, we may have to adjust our allowance for credit losses. However, regulatory agencies are not directly involved in establishing the allowance for credit losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.
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Noninterest Income . Noninterest income information is as follows.
Years Ended
December 31,
Change
Amount
Percent
(Dollars in thousands)
Service charges on deposit accounts
(Loss) gain on equity securities
Bank owned life insurance income
Debit card income
Other service charges
Gain (loss) on disposal of premises and equipment
Other income
Total noninterest income
Noninterest income increased by $528,000, or 67.3%, to $1.3 million for 2024 from $785,000 for 2023. The increase in noninterest income resulted primarily from gains in 2024 versus losses in 2023 resulting from the disposal of premises and equipment. The gain on disposal of premises and equipment was $494,000 in 2024 as a result of the sale of the branch location in Oxford, Pennsylvania for a sales price of $626,000. Coinciding with the sale of the Oxford Branch, the Bank relocated to a leased location less than 750 feet away from the previous branch. The loss on disposal of premises and equipment of $52,000 in 2023 was primarily a result of replacing the non-depository ATMs with full functioning ATMs as a continued investment in our infrastructure and technology.
Noninterest Expense . Noninterest expense information is as follows.
Years Ended
December 31,
Change
Amount
Percent
(Dollars in thousands)
Salaries and employee benefits
Occupancy and equipment
Data and item processing
Advertising and marketing
Professional fees
Directors’ fees
FDIC insurance premiums
Pennsylvania shares tax
Debit card expenses
Other
Total noninterest expenses
Noninterest expense increased $394,000, or 4.0%, to $10.2 million in 2024 from $9.8 million in 2023. The increase in noninterest expense was primarily the result of increases in salaries and employee benefits expense of $165,000, professional fees of $165,000 and data and item processing expense of $135,000. Salaries and employee benefits expense increased $165,000 primarily due to the hiring of additional staff and annual salary increases. Professional fees increased $165,000 primarily due to legal expenses increasing in 2024. Data and item processing increased $135,000, primarily due to investment in our information technology infrastructure.
Income Tax Expense . Income tax expense decreased $70,000, or 12.8%, to $475,000 for 2024 from $545,000 for 2023 due to the decrease in income before income tax expense. The effective tax rate was 21.1% in 2024 compared to 22.1% in 2023. The decrease in the effective tax rate was attributable to a decrease in nondeductible expenses.
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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.
For the Years Ended December 31,
Average
Average
Outstanding
Average
Outstanding
Average
Balance
Interest
Yield/Rate
Balance
Interest
Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans
Debt and equity securities
Restricted stocks
Cash and cash equivalents
Total interest-earning assets
Noninterest-earning assets
Total assets
Interest-bearing liabilities:
Interest-bearing demand deposits
Savings deposits
Money market deposits
Certificates of deposit
Total interest-bearing deposits
Borrowings
Total interest-bearing liabilities
Noninterest-bearing demand deposits
Other noninterest-bearing liabilities
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
Net interest income
Net interest rate spread (1)
Net interest-earning assets (2)
Net interest margin (3)
Average interest-earning assets to average interest-bearing liabilities
Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
Net interest margin represents net interest income divided by average total interest-earning assets.
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Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.
Years Ended
December 31, 2024 vs. 2023
Increase (Decrease) Due to
Total
Increase
Volume
Rate
(Decrease)
(In thousands)
Interest-earning assets:
Loans
Debt and equity securities
Restricted stocks
Cash and cash equivalents
Total interest-earning assets
Interest-bearing liabilities:
Interest-bearing demand deposits
Savings deposits
Money market deposits
Certificates of deposit
Total deposits
Borrowings
Total interest-bearing liabilities
Change in net interest income
Liquidity and Capital Resources
Liquidity Management . Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from sales, maturities and calls of securities. We also have the ability to borrow from the Federal Home Loan Bank of Pittsburgh. At December 31, 2024, we had the ability to borrow approximately $179.5 million from the Federal Home Loan Bank of Pittsburgh, of which $42.5 million had been advanced in addition to $7.0 million held in reserve to secure three letters of credit to collateralize municipal deposits. Additionally, at December 31, 2024, we had the ability to borrow $7.5 million from the Atlantic Community Bankers Bank, $5.0 million from SouthState Bank, N.A. and we also had access to $1.9 million through the Federal Reserve Bank of Philadelphia discount window at December 31, 2024. We did not borrow against the credit lines with the Atlantic Community Bankers Bank, SouthState Bank, N.A. or the Federal Reserve Bank of Philadelphia during the year ended December 31, 2024, except to do our annual testing on the lines.
The board of directors is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We seek to maintain a liquidity ratio of 5.0% or greater. For the year ended December 31, 2024, our liquidity ratio averaged 15.1%. We believe that we had enough sources of liquidity to satisfy our short and long-term liquidity needs as of December 31, 2024.
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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 December 31, 2024, cash and cash equivalents totaled $37.8 million. Unpledged debt securities classified as available-for-sale, which provide additional sources of liquidity, totaled $26.7 million at December 31, 2024.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of December 31, 2024, totaled $151.1 million, or 86.9% of our certificates of deposit, and 42.7% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
Capital Management. At December 31, 2024, Presence Bank exceeded all regulatory capital requirements to which it was subject and was considered “well capitalized” under regulatory guidelines. See “Regulation and Supervision—Federal Bank Regulation—Capital Requirements” and Note 13 of the Notes to the Financial Statements.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At December 31, 2024, we had outstanding commitments to originate loans of $24.0 million, unused lines of credit totaling $12.4 million and $6.7 million in stand-by letters of credit outstanding. We anticipate that we will have sufficient funds available to meet our current lending commitments. Certificates of deposit that are scheduled to mature in less than one year from December 31, 2024 totaled $151.1 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new deposits, which may result in higher levels of interest expense.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for equipment, agreements with respect to borrowed funds and deposit liabilities.
Recent Accounting Pronouncements
Please refer to Note 1 to the Financial Statements for the years ended December 31, 2024 and 2023 beginning on page 52 for a description of recent accounting pronouncements that may affect our balance sheet and results of operations.
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Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
