# Western New England Bancorp, Inc.: Form 10-Q for the period ended Jun 30, 2023

- Company: [Western New England Bancorp, Inc.](/companies/wneb.md) (CIK 1157647)
- Form: 10-Q
- Filed: 2023-08-04
- Accepted by EDGAR: Aug 4, 2023, 16:07 ET
- Period: 2023-06-30
- Accession: 0001387131-23-009319
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1157647/000138713123009319/wneb-10q_063023.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1157647/000138713123009319/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-04-01 to 2023-06-30 | $8.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-01-01 to 2023-06-30 | $13.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $704.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $2.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $2.8m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $8.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.13 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.37 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.13 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.37 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 21,648,235 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 21,682,402 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | −$1.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $797.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2023-01-01 to 2023-06-30 | $3.1m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2023-01-01 to 2023-06-30 | $2.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2023-06-30 | $2.56bn | us-gaap:Assets |
| Total liabilities | at 2023-06-30 | $2.33bn | us-gaap:Liabilities |
| Short-term borrowings | at 2023-06-30 | $7.2m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2023-06-30 | $234.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 66,536 characters.

### Overview.

We strive to remain a leader in meeting the financial service needs of the local community and to provide quality service to the individuals and businesses in the market areas that we have served since 1853. Historically, we have been a community-oriented provider of traditional banking products and services to business organizations and individuals, including products such as residential and commercial real estate loans, commercial and industrial loans, consumer loans and a variety of deposit products. We meet the needs of our local community through a community-based and service-oriented approach to banking.

We have adopted a growth-oriented strategy that continues to focus on increasing commercial lending and residential lending. Our strategy also calls for increasing deposit relationships, specifically core deposits (defined below), and broadening our product lines and services. We believe that this business strategy is best for our long-term success and viability, and complements our existing commitment to high-quality customer service.

In connection with our overall growth strategy, we seek to:

- Grow the Company’s commercial loan portfolio and related commercial deposits by targeting businesses in our primary market areas of Hampden and Hampshire Counties in western Massachusetts and Hartford and Tolland Counties in northern Connecticut to increase the net interest margin and loan income;
- Supplement the Company’s commercial portfolio by growing the Company’s residential real estate portfolio to diversify the Company’s loan portfolio and deepen customer relationships;
- Focus on expanding our retail banking deposit franchise and increase the number of households served within our designated market area;
- Invest in people, systems and technology to grow revenue, improve efficiency and enhance the overall customer experience;
- Grow revenues, increase book value and tangible book value per share (non-GAAP), continue to pay competitive dividends to shareholders and utilize the Company’s stock repurchase plan to leverage our capital and enhance franchise value (tangible book value per share is a non-GAAP measure. See “Explanation of Use of Non-GAAP Financial Measurements” for more information regarding our uses of non-GAAP financial measurements); and
- Consider growth through acquisitions. We may pursue expansion opportunities in existing or adjacent strategic locations with companies that add complementary products to our existing business and at terms that add value to our existing shareholders.

You should read the following financial results for the three months and six months ended June 30, 2023 in the context of this strategy.

- Net income was $2.8 million, or $0.13 per diluted share, for the three months ended June 30, 2023, compared to net income of $5.5 million, or $0.25 per diluted share, for the three months ended June 30, 2022. For the six months ended June 30, 2023, net income was $8.1 million, or $0.37 per diluted share, compared to $10.9 million, or $0.49 per diluted share, for the six months ended June 30, 2022.
- Net interest income decreased $2.6 million, or 13.1%, to $16.8 million, for the three months ended June 30, 2023, from $19.4 million for the three months ended June 30, 2022. The decrease in net interest income was due to an increase in interest expense of $6.7 million, or 535.0%, partially offset by an increase in interest and dividend income of $4.2 million, or 20.2%. During the six months ended June 30, 2023, net interest income decreased $2.7 million, or 7.2%, to $35.4 million, compared to $38.1 million for the six months ended June 30, 2022. The decrease in net interest income was due to an increase in interest expense of $10.6 million, or 424.1%, partially offset by an increase in interest and dividend income of $7.9 million, or 19.4%.
- During the three months ended June 30, 2023, the Company recorded a provision for credit losses of $420,000 under the Current Expected Credit Losses (“CECL”) model, compared to $300,000 during the three months ended June 30, 2022, under the incurred loss model. For the six months ended June 30, 2023, the Company recorded a provision for credit losses of $32,000, under the CECL model, compared to a reversal for credit losses of $125,000, under the incurred loss model, during the six months ended June 30, 2022. The increase was primarily due to changes in the economic environment and related adjustments to the quantitative components of the CECL methodology. The Company recorded net charge-offs of $1.8 million for the six months ended June 30, 2023, as compared to net charge-offs of $102,000 for the six months ended June 30, 2022. The charge-offs for the six months ended June 30, 2023 were related to one commercial loan relationship acquired on October 21, 2016 from Chicopee Bancorp, Inc. that was recently placed on nonaccrual status. The charge-off represented the non-accretable credit mark that was required to be grossed-up to the loan’s amortized cost basis with a corresponding increase to the allowance for credit losses under the CECL implementation. There was no impact to earnings as a result of the charge-off.

### CRITICAL ACCOUNTING POLICIES.

Our consolidated financial statements are prepared in accordance with U.S. GAAP and practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ from those estimates.

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions.

On January 1, 2023, the Company adopted Accounting Standards Update (ASU) 2016-13 *Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments*, which requires the recognition of the allowance for credit losses be estimated using the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities that are determined to have impairment related to credit losses.

There have been no additional material changes to our critical accounting policies during the six months ended June 30, 2023. For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the accompanying unaudited consolidated financial statements and Note 1 of the consolidated financial statements included in our 2022 Annual Report.

### COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2023 AND DECEMBER 31, 2022

At June 30, 2023, total assets were $2.6 billion and increased $9.1 million, or 0.4%, from December 31, 2022. The increase in total assets was primarily due to an increase in total loans of $24.2 million, or 1.2%, an increase in cash and cash equivalents of $1.3 million, or 4.4%, to $31.7 million, partially offset by a decrease in investment securities of $19.0 million, or 5.0%, to $364.4 million.

At June 30, 2023, the available-for-sale (“AFS”) and held-to-maturity (“HTM”) securities portfolio represented 14.2% of total assets, compared to 14.8% at December 31, 2022. At June 30, 2023, the Company’s AFS securities portfolio, recorded at fair market value, decreased $5.5 million, or 3.8%, from $147.0 million at December 31, 2022 to $141.5 million. The HTM securities portfolio, recorded at amortized cost, decreased $7.3 million, or 3.2%, from $230.2 million at December 31, 2022 to $222.9 million at June 30, 2023. The marketable equity securities portfolio decreased $6.2 million, or 100.0%, from $6.2 million at December 31, 2022 due to redemption during the three months ended June 30, 2023. The decrease in the AFS and HTM securities portfolios was primarily due to amortization and payoffs recorded during the six months ended June 30, 2023.

At June 30, 2023, the Company reported unrealized losses on the AFS securities portfolio of $31.2 million, or 18.1% of the amortized cost basis of the AFS securities portfolio, compared to unrealized losses of $32.2 million, or 18.0% of the amortized cost basis of the AFS securities at December 31, 2022. At June 30, 2023, the Company reported unrealized losses on the HTM securities portfolio of $38.0 million, or 17.0%, of the amortized cost basis of the HTM securities portfolio, compared to $39.2 million, or 17.0% of the amortized cost basis of the HTM securities portfolio at December 31, 2022.

The securities in which the Company may invest are limited by regulation. Federally chartered savings banks have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various government-sponsored enterprises, mortgage-backed securities, certain certificates of deposit of insured financial institutions, repurchase agreements, overnight and short-term loans to other banks, corporate debt instruments and marketable equity securities. The securities, with the exception of $7.2 million in corporate bonds, are issued by the United States government or government-sponsored enterprises and are therefore either explicitly or implicitly guaranteed as to the timely payment of contractual principal and interest. These positions are deemed to have no credit impairment, therefore, the disclosed unrealized losses with the securities portfolio relate primarily to changes in prevailing interest rates. In all cases, price improvement in future periods will be realized as the issuances approach maturity.

Management regularly reviews the portfolio for securities in an unrealized loss position. At June 30, 2023 and December 31, 2022, the Company did not record any impairment charges on its securities portfolio and attributed the unrealized losses primarily due to fluctuations in general interest rates or changes in expected prepayments and not due to credit quality.

The primary objective of the Company’s investment portfolio is to provide liquidity and to secure municipal deposit accounts while preserving the safety of principal. The Company expects to strategically redeploy available cash flows from the securities portfolio to fund loan growth and deposit outflows.

At June 30, 2023, total gross loans increased $24.1 million, or 1.2%, to $2.0 billion from December 31, 2022. Residential real estate loans, including home equity loans, increased $9.8 million, or 1.4%, commercial and industrial loans increased $7.3 million, or 3.3%, and commercial real estate loans increased $6.1 million, or 0.6%. All loans where the payments are 90 days or more in arrears as of the closing date of each month are placed on nonaccrual status. If all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $104,000 and $102,000 for the six months ended June 30, 2023 and 2022, respectively.

Total delinquency was 0.27%, of total loans, at June 30, 2023, compared to 0.22%, of total loans, at December 31, 2022. At June 30, 2023, nonperforming loans totaled $5.8 million, or 0.29% of total loans, compared to $5.7 million, or 0.29% of total loans, at December 31, 2022. At June 30, 2023, there were no loans 90 or more days past due and still accruing interest. Nonperforming assets to total assets, was 0.22% at June 30, 2023 and at December 31, 2022. At June 30, 2023 and at December 31, 2022, the Company did not have any other real estate owned. The allowance for credit losses as a percentage of total loans was 0.97% at June 30, 2023, compared to 1.00% at December 31, 2022. At June 30, 2023, the allowance for credit losses as a percentage of nonperforming loans was 341.4%, compared to 350.0% at December 31, 2022. Total classified loans, defined as special mention and substandard loans, decreased $14.5 million, or 23.0%, from $64.0 million, or 3.2% of total loans, at December 31, 2022 to $49.5 million, or 2.5%, of total loans at June 30, 2023. Management continues to remain attentive to any signs of deterioration in borrowers’ financial conditions and is proactive in taking the appropriate steps to mitigate risk. A summary of our past due and nonaccrual loans by class are listed in Note 5 of the accompanying unaudited consolidated financial statements.

Total deposits decreased $71.5 million, or 3.2%, from December 31, 2022 to $2.2 billion at June 30, 2023, due to industry-wide pressures and a competitive market for deposits. Core deposits, which the Company defines as all deposits except time deposits, decreased $194.6 million, or 10.7%, from $1.8 billion, or 81.5% of total deposits, at December 31, 2022, to $1.6 billion, or 75.2% of total deposits, at June 30, 2023. Non-interest-bearing deposits decreased $61.0 million, or 9.5%, to $584.5 million, interest-bearing checking accounts increased $14.1 million, or 9.5%, to $162.8 million, savings accounts decreased $19.1 million, or 8.6%, to $203.4 million, and money market accounts decreased $128.6 million, or 16.1%, to $672.5 million. Time deposits increased $123.1 million, or 29.9%, from $411.7 million at December 31, 2022 to $534.8 million at June 30, 2023. Brokered deposits, which are included within time deposits, totaled $1.7 million at June 30, 2023. There were no brokered deposits at December 31, 2022.

The table below is a summary of our deposit balances for the periods noted:

*(Dollars in thousands)*

| Core Deposits: | June 30, 2023 | March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: | ---: |
| Demand accounts | $584,511 | $625,656 | $645,571 |
| Interest bearing accounts | 162,823 | 133,727 | 148,670 |
| Savings accounts | 203,376 | 218,800 | 222,436 |
| Money market accounts | 672,483 | 721,219 | 801,076 |
| **Total Core Deposits** | $1,623,193 | $1,699,402 | $1,817,753 |
| **Time Deposits:** |  |  |  |
| Time deposits less than $250,000 | $338,667 | $300,907 | $279,953 |
| Time deposits of $250,000 or more | 196,114 | 156,819 | 131,737 |
| **Total Time Deposits:** | 534,781 | 457,726 | 411,690 |
| **Total Deposits:** | $2,157,974 | $2,157,128 | $2,229,443 |

During the six months ended June 30, 2023, the Company experienced a higher level of competition not only from local competitors but also from money market funds and Treasury notes that were offering higher returns. In addition, the Company also saw an unfavorable shift in deposit mix from low cost core deposits to high cost time deposits as customers migrated to higher yields.

The Company continues to focus on the maintenance, development, and expansion of its core deposit base to meet funding requirements and liquidity needs, with an emphasis to retain a long-term customer relationship base and to efficiently compete for and retain deposits in our local market. At June 30, 2023, the Bank’s uninsured deposits represented 28.2% of total deposits, compared to 30.8% at December 31, 2022.

At June 30, 2023, total borrowings increased $85.9 million, or 138.1%, from $62.2 million at December 31, 2022 to $148.1 million. Short-term borrowings decreased $34.2 million, or 82.6%, to $7.2 million, compared to $41.4 million at December 31, 2022. Long-term borrowings increased $120.0 million, from $1.2 million at December 31, 2022, to $121.2 million at June 30, 2023, to replace deposit attrition. Long-term borrowings consisted of $31.2 million outstanding with the FHLB and $90.0 million outstanding under the BTFP. At June 30, 2023, borrowings also consisted of $19.7 million in fixed-to-floating rate subordinated notes.

During the three months ended June 30, 2023, the Company executed a $200.0 million fair value hedge on fixed-rate assets with a remaining maturity of 1.3 years, and an average fixed rate of 4.43%, where the Company exchanged, or swapped, fixed rate payments for floating rate payments. The Company’s hedging program aims to reduce the Company’s sensitivity to interest rates by locking in a spread.

At June 30, 2023, shareholders’ equity was $234.0 million, or 9.1% of total assets, compared to $228.1 million, or 8.9% of total assets, at December 31, 2022. The increase was primarily attributable to net income of $8.1 million and a decrease in accumulated other comprehensive loss of $1.8 million, primarily reflecting the final settlement of the DB Plan during the second quarter of 2023 and corresponding reversal of previously held losses in accumulated other comprehensive income. These increases were partially offset by cash dividends paid of $3.1 million. At June 30, 2023, total shares outstanding were 22,082,403.

The Company’s regulatory capital ratios continue to be strong and in excess of regulatory minimum requirements to be considered well-capitalized as defined by the regulators as well as internal targets. Total Risk-Based Capital Ratio at June 30, 2023 and December 31, 2022 was 14.2%. The Bank’s Tier 1 Leverage Ratio to adjusted average assets was 9.69% at June 30, 2023 and 9.49% at December 31, 2022.

### COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2023 AND JUNE 30, 2022

### General.

The Company reported net income of $2.8 million, or $0.13 per diluted share, for the three months ended June 30, 2023, compared to net income of $5.5 million, or $0.25 per diluted share, for the three months ended June 30, 2022. Return on average assets and return on average equity were 0.43% and 4.72%, respectively, for the three months ended June 30, 2023, compared to 0.87% and 10.22%, respectively, for the three months ended June 30, 2022.

### Net Interest and Dividend Income.

The following tables set forth the information relating to our average balance and net interest income for the three months ended June 30, 2023 and 2022, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.

*(Dollars in thousands)*

| ASSETS: Interest-earning assets | Three Months Ended June 30, 2023 Average Balance | Interest | Average Yield/ Cost(8) | 2022 Average Balance | Interest | Average Yield/ Cost(8) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans(1)(2) | $2,006,909 | $22,572 | 4.51% | $1,949,464 | $18,624 | 3.83% |
| Securities(2) | 374,513 | 2,094 | 2.24 | 414,226 | 2,068 | 2.00 |
| Other investments - at cost | 13,329 | 146 | 4.39 | 9,892 | 30 | 1.22 |
| Short-term investments(3) | 10,326 | 119 | 4.62 | 24,944 | 48 | 0.77 |
| Total interest-earning assets | 2,405,077 | 24,931 | 4.16 | 2,398,526 | 20,770 | 3.47 |
| Total non-interest-earning assets | 154,490 |  |  | 153,939 |  |  |
| Total assets | $2,559,567 |  |  | $2,552,465 |  |  |
| **LIABILITIES AND EQUITY:** |  |  |  |  |  |  |
| **Interest-bearing liabilities** |  |  |  |  |  |  |
| Interest-bearing checking accounts | $143,547 | $248 | 0.69% | $137,984 | $105 | 0.31% |
| Savings accounts | 208,983 | 56 | 0.11 | 224,487 | 48 | 0.09 |
| Money market accounts | 701,116 | 2,330 | 1.33 | 910,801 | 549 | 0.24 |
| Time deposit accounts | 502,062 | 3,435 | 2.74 | 365,383 | 288 | 0.32 |
| Total interest-bearing deposits | 1,555,708 | 6,069 | 1.56 | 1,638,655 | 990 | 0.24 |
| Short-term borrowings and long-term debt | 155,826 | 1,894 | 4.88 | 25,829 | 264 | 4.10 |
| Interest-bearing liabilities | 1,711,534 | 7,963 | 1.87 | 1,664,484 | 1,254 | 0.30 |
| Non-interest-bearing deposits | 591,437 |  |  | 635,678 |  |  |
| Other non-interest-bearing liabilities | 21,832 |  |  | 35,076 |  |  |
| Total non-interest-bearing liabilities | 613,269 |  |  | 670,754 |  |  |
| Total liabilities | 2,324,803 |  |  | 2,335,238 |  |  |
| Total equity | 234,764 |  |  | 217,227 |  |  |
| Total liabilities and equity | $2,559,567 |  |  | $2,552,465 |  |  |
| Less: Tax-equivalent adjustment(2) |  | (122) |  |  | (124) |  |
| Net interest and dividend income |  | $16,846 |  |  | $19,392 |  |
| Net interest rate spread(4) |  |  | 2.27% |  |  | 3.15% |
| Net interest rate spread, on a tax equivalent basis(5) |  |  | 2.29% |  |  | 3.17% |
| Net interest margin(6) |  |  | 2.81% |  |  | 3.24% |
| Net interest margin, on a tax equivalent basis(7) |  |  | 2.83% |  |  | 3.26% |
| Ratio of average interest-earning assets to average interest-bearing liabilities |  |  | 140.52% |  |  | 144.10 |

(1) Loans, including nonaccrual loans, are net of deferred loan origination costs and unadvanced funds.

(2) Loan and securities income are presented on a tax-equivalent basis using a tax rate of 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported on the consolidated statements of net income.

(3) Short-term investments include federal funds sold.

(4) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(5) Net interest rate spread, on a tax-equivalent basis, represents the difference between the tax-equivalent weighted average yield on interest-earning assets and the tax-equivalent weighted average cost of interest-bearing liabilities. See “Explanation of Use of Non-GAAP Financial Measurements.”

(6) Net interest margin represents net interest and dividend income as a percentage of average interest-earning assets.

(7) Net interest margin, on a tax-equivalent basis, represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. See “Explanation of Use of Non-GAAP Financial Measurements.”

(8) Annualized.

**Rate/Volume Analysis.**

The following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest and dividend income and interest expense during the periods indicated. Information is provided in each category with respect to: (1) interest income changes attributable to changes in volume (changes in volume multiplied by prior rate); (2) interest income changes attributable to changes in rate (changes in rate multiplied by prior volume); and (3) the net change.

The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

*(In thousands)*

| Interest-earning assets | Three Months Ended June 30, 2023 compared to Three Months Ended June 30, 2022 Increase (Decrease) Due to Volume | Rate | Net |
| --- | ---: | ---: | ---: |
| Loans (1) | $549 | $3,399 | $3,948 |
| Securities (1) | (198) | 224 | 26 |
| Other investments - at cost | 10 | 106 | 116 |
| Short-term investments | (28) | 99 | 71 |
| **Total interest-earning assets** | 333 | 3,828 | 4,161 |
| **Interest-bearing liabilities** |  |  |  |
| Interest-bearing checking accounts | 4 | 139 | 143 |
| Savings accounts | (3) | 11 | 8 |
| Money market accounts | (126) | 1,907 | 1,781 |
| Time deposit accounts | 108 | 3,039 | 3,147 |
| Short-term borrowings and long-term debt | 1,329 | 301 | 1,630 |
| **Total interest-bearing liabilities** | 1,312 | 5,397 | 6,709 |
| Change in net interest and dividend income (1) | $(979) | $(1,569) | $(2,548) |

(1) Securities, loan income and change in net interest and dividend income are presented on a tax-equivalent basis using a tax rate of 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest income to agree to the amount reported in the consolidated statements of net income. See “Explanation of Use of Non-GAAP Financial Measurements.”

Net interest income decreased $2.6 million, or 13.1%, to $16.8 million, for the three months ended June 30, 2023, from $19.4 million for the three months ended June 30, 2022. The decrease in net interest income was due to an increase in interest expense of $6.7 million, or 535.0%, partially offset by an increase in interest and dividend income of $4.2 million, or 20.2%. Interest expense on deposits increased $5.1 million, or 513.0%, and interest expense on borrowings increased $1.6 million, or 617.4%. The increase in interest expense was a result of competitive pricing on deposits due to the continued higher interest rate environment and the unfavorable shift in the deposit mix from low cost core deposits to high cost time deposits. For the three months ended June 30, 2023, net interest income included $26,000 in Paycheck Protection Program interest and fee income (“PPP Income”), compared to $129,000 for the three months ended June 30, 2022.

The net interest margin was 2.81% for the three months ended June 30, 2023, compared to 3.24% for the three months ended June 30, 2022. The net interest margin, on a tax-equivalent basis, was 2.83% for the three months ended June 30, 2023, compared to 3.26% for the three months ended June 30, 2022. The decrease in the net interest margin was primarily due to an increase in the average cost of interest-bearing liabilities and the unfavorable shift in the deposit mix from low cost core deposits to high cost time deposits, which was partially offset with an increase in the average yield on interest-earning assets.

The average yield on interest-earning assets was 4.14% for the three months ended June 30, 2023, compared to 3.45% for the three months ended June 30, 2022. The average yield on interest-earning assets, on a tax equivalent basis, was 4.16% for the three months ended June 30, 2023, compared to 3.47% for the three months ended June 30, 2022. The average loan yield was 4.49% for the three months ended June 30, 2023, compared to 3.81% for the three months ended June 30, 2022. The average loan yield, on a tax equivalent basis, was 4.51% for the three months ended June 30, 2023, compared to 3.83% for the three months ended June 30, 2022. During the same period, average interest-earning assets increased $6.6 million, or 0.3%to $2.4 billion, primarily due to an increase in average loans of $57.4 million, or 2.9%, an increase in average other investments of $3.4 million, or 34.7%, partially offset by a decrease in average securities of $39.7 million, or 9.6%, and a decrease in average short-term investments, consisting of cash and cash equivalents, of $14.6 million, or 58.6%.

The average cost of total funds, including non-interest bearing accounts and borrowings, increased 117 basis points from 0.22% for the three months ended June 30, 2022 to 1.39% for the three months ended June 30, 2023. The average cost of core deposits, which the Company defines as all deposits except time deposits, increased 49 basis point to 0.64% for the three months ended June 30, 2023, from 0.15% for the three months ended June 30, 2022. The average cost of time deposits increased 242 basis points from 0.32% for the three months ended June 30, 2022 to 2.74% for the three months ended June 30, 2023. The average cost of borrowings, including subordinated debt, increased 78 basis points from 4.10% for the three months ended June 30, 2022 to 4.88% for the three months ended June 30, 2023. Average demand deposits, an interest-free source of funds, decreased $44.3 million, or 7.0%, from $635.7 million, or 28.0% of total average deposits, for the three months ended June 30, 2022, to $591.4 million, or 27.6% of total average deposits, for the three months ended June 30, 2023.

### Provision for (Reversal of) Credit Losses.

The provision for credit losses is reviewed by management based upon our evaluation of economic and business conditions affecting our key lending areas and other conditions, such as new loan products, credit quality trends (including trends in nonperforming loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions using reasonable and supportable forecasts and the impact that such conditions were believed to have had on the collectability of the loan portfolio.

During the three months ended June, 30, 2023, the Company recorded a provision for credit losses of $420,000, under the CECL model, compared to a provision for credit losses of $300,000, under the incurred loss model, during the three months ended June 30, 2022. The increase was primarily due to changes in the economic environment and related adjustments to the quantitative components of the CECL methodology. The provision for credit losses was determined by a number of factors: the continued strong credit performance of the Company’s loan portfolio, changes in the loan portfolio mix and Management’s consideration of existing economic conditions and the economic outlook from the Federal Reserve’s actions to control inflation. The Company also increased the qualitative reserve to consider the potential losses resulting from future recessionary pressures. The Company’s Management continues to monitor macroeconomic variables related to increasing interest rates, inflation and the concerns of an economic downturn, and believes it is appropriately provisioned for the current economic environment.

The Company recorded net recoveries of $25,000 for the three months ended June 30, 2023, as compared to net charge-offs of $48,000 for the three months ended June 30, 2022.

Although we believe that we have established and maintained the allowance for credit losses at adequate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment. If the COVID-19 pandemic has a long-term adverse effect on the ability of our borrowers to satisfy their obligations to us, the demand for our loans or our other products and services, other aspects of our business operations, or on financial markets, real estate markets, or economic growth, this could, depending on the extent of the loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations could be materially and adversely affected.

### Non-interest Income.

Non-interest income decreased $1.1 million, or 41.9%, to $1.6 million for the three months ended June 30, 2023, from $2.7 million for the three months ended June 30, 2022. During the three months ended June 30, 2023, the Company recorded a $1.1 million final termination expense related to the DB Plan termination. During the three months ended June 30, 2023, service charges and fees on deposits decreased $105,000, or 4.5%, primarily due to changes in the Company’s overdraft program that were implemented in the first half of 2023. Income from BOLI increased $36,000, or 7.9%, from the three months ended June 30, 2022 to the three months ended June 30, 2023. Other income from loan-level swap fees on commercial loans decreased $21,000 from the three months ended June 30, 2022 to the three months ended June 30, 2023. During the three months ended June 30, 2023, the Company did not report any loan-level swap fees. During the three months ended June 30, 2022, the Company reported a gain of $141,000 on non-marketable equity investments and reported an unrealized loss on marketable equity securities of $225,000. During the three months ended June 30, 2023, the Company did not have comparable gains or losses.

### Non-interest Expense.

For the three months ended June 30, 2023, non-interest expense increased $118,000, or 0.8%, to $14.6 million from $14.4 million, for the three months ended June 30, 2022. The increase in non-interest expense was due to an increase in professional fees of $84,000, or 11.7%, an increase in data processing of $61,000, or 8.3%, an increase in FDIC insurance expense of $56,000, or 23.9%, an increase in occupancy expense of $26,000, or 2.2%, and an increase in other non-interest expense of $158,000, or 6.6%. These increases were partially offset by a decrease in salaries and benefits of $147,000, or 1.8%, a decrease in advertising expense of $73,000, or 17.7%, and a decrease in furniture and equipment of $47,000, or 8.7%. During the three months ended June 30, 2023, other non-interest expense included $154,000 in expense related to the DB Plan termination. Excluding the DB Plan expense, non-interest expense decreased $36,000, or 0.2%, from the three months ended June 30, 2022 to the three months ended June 30, 2023.

For the three months ended June 30, 2023, the efficiency ratio was 78.9%, compared to 65.2% for the three months ended June 30, 2022. For the three months ended June 30, 2023, the adjusted efficiency ratio, a non-GAAP financial measure, was 74.3% compared to 65.0% for the three months ended June 30, 2022. The efficiency ratio increase was driven by lower revenues, defined as net interest income and non-interest income, during the three months ended June 30, 2023 compared to the three months ended June 30, 2022. See “Explanation of Use of Non-GAAP Financial Measurements” for the related efficiency ratio calculation and a reconciliation of GAAP to non-GAAP financial measures.

### Income Taxes.

Income tax expense for the three months ended June 30, 2023 was $704,000, representing an effective tax rate of 20.3%, compared to $1.9 million, representing an effective tax rate of 25.2%, for three months ended June 30, 2022 due to lower projected pre-tax income for the twelve months ended December 31, 2023.

### COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND JUNE 30, 2022

### General.

For the six months ended June 30, 2023, the Company reported net income of $8.1 million, or $0.37 per diluted share, compared to $10.9 million, or $0.49 per diluted share, for the six months ended June 30, 2022. Return on average assets and return on average equity were 0.64% and 6.98% for the six months ended June 30, 2023, respectively, compared to 0.86% and 9.93% for the six months ended June 30, 2022, respectively.

### Net Interest and Dividend Income.

The following tables set forth the information relating to our average balance and net interest income for the six months ended June 30, 2023 and 2022, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets.

*(Dollars in thousands)*

| ASSETS: Interest-earning assets | Six Months Ended June 30, 2023 Average Balance | Interest | Average Yield/ Cost(8) | 2022 Average Balance | Interest | Average Yield/ Cost(8) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans(1)(2) | $2,000,055 | $44,018 | 4.44% | $1,922,318 | $36,691 | 3.85% |
| Securities(2) | 378,421 | 4,243 | 2.26 | 418,806 | 4,018 | 1.94 |
| Other investments - at cost | 12,717 | 252 | 4.00 | 10,241 | 55 | 1.08 |
| Short-term investments(3) | 8,130 | 173 | 4.29 | 40,899 | 69 | 0.34 |
| Total interest-earning assets | 2,399,323 | 48,686 | 4.09 | 2,392,264 | 40,833 | 3.44 |
| Total non-interest-earning assets | 153,520 |  |  | 148,815 |  |  |
| Total assets | $2,552,843 |  |  | $2,541,079 |  |  |
| **LIABILITIES AND EQUITY:** |  |  |  |  |  |  |
| **Interest-bearing liabilities** |  |  |  |  |  |  |
| Interest-bearing checking accounts | $141,662 | 511 | 0.73 | $135,104 | 200 | 0.30 |
| Savings accounts | 213,863 | 101 | 0.10 | 221,484 | 83 | 0.08 |
| Money market accounts | 739,182 | 4,325 | 1.18 | 894,687 | 1,070 | 0.24 |
| Time deposit accounts | 465,184 | 5,235 | 2.27 | 377,158 | 629 | 0.34 |
| Total interest-bearing deposits | 1,559,891 | 10,172 | 1.32 | 1,628,433 | 1,982 | 0.25 |
| Short-term borrowings and long-term debt | 121,285 | 2,925 | 4.86 | 24,164 | 517 | 4.31 |
| Interest-bearing liabilities | 1,681,176 | 13,097 | 1.57 | 1,652,597 | 2,499 | 0.30 |
| Non-interest-bearing deposits | 615,168 |  |  | 634,387 |  |  |
| Other non-interest-bearing liabilities | 23,572 |  |  | 33,721 |  |  |
| Total non-interest-bearing liabilities | 638,740 |  |  | 668,108 |  |  |
| Total liabilities | 2,319,916 |  |  | 2,320,705 |  |  |
| Total equity | 232,927 |  |  | 220,374 |  |  |
| Total liabilities and equity | $2,552,843 |  |  | $2,541,079 |  |  |
| Less: Tax-equivalent adjustment(2) |  | (239) |  |  | (244) |  |
| Net interest and dividend income |  | $35,350 |  |  | $38,090 |  |
| Net interest rate spread(4) |  |  | 2.50% |  |  | 3.12% |
| Net interest rate spread, on a tax equivalent basis(5) |  |  | 2.52% |  |  | 3.14% |
| Net interest margin(6) |  |  | 2.97% |  |  | 3.21% |
| Net interest margin, on a tax equivalent basis(7) |  |  | 2.99% |  |  | 3.23% |
| Ratio of average interest-earning assets to average interest-bearing liabilities |  |  | 142.72% |  |  | 144.76% |

(1) Loans, including nonaccrual loans, are net of deferred loan origination costs and unadvanced funds.

(2) Loan and securities income are presented on a tax-equivalent basis using a tax rate of 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported on the consolidated statements of net income.

(3) Short-term investments include federal funds sold.

(4) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(5) Net interest rate spread, on a tax-equivalent basis, represents the difference between the tax-equivalent weighted average yield on interest-earning assets and the tax-equivalent weighted average cost of interest-bearing liabilities. See “Explanation of Use of Non-GAAP Financial Measurements.”

(6) Net interest margin represents net interest and dividend income as a percentage of average interest-earning assets.

(7) Net interest margin, on a tax-equivalent basis, represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. See “Explanation of Use of Non-GAAP Financial Measurements.”

(8) Annualized.

**Rate/Volume Analysis.**

The following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest and dividend income and interest expense during the periods indicated. Information is provided in each category with respect to: (1) interest income changes attributable to changes in volume (changes in volume multiplied by prior rate); (2) interest income changes attributable to changes in rate (changes in rate multiplied by prior volume); and (3) the net change.

The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

*(In thousands)*

| Interest-earning assets | Six Months Ended June 30, 2023 compared to Six Months Ended June 30, 2022 Increase (Decrease) Due to Volume | Rate | Net |
| --- | ---: | ---: | ---: |
| Loans (1) | $1,484 | $5,843 | $7,327 |
| Securities (1) | (383) | 608 | 225 |
| Other investments - at cost | 13 | 184 | 197 |
| Short-term investments | (55) | 159 | 104 |
| **Total interest-earning assets** | 1,059 | 6,794 | 7,853 |
| **Interest-bearing liabilities** |  |  |  |
| Interest-bearing checking accounts | 10 | 301 | 311 |
| Savings accounts | (3) | 21 | 18 |
| Money market accounts | (186) | 3,441 | 3,255 |
| Time deposit accounts | 147 | 4,459 | 4,606 |
| Short-term borrowings and long-term debt | 2,078 | 330 | 2,408 |
| **Total interest-bearing liabilities** | 2,046 | 8,552 | 10,598 |
| Change in net interest and dividend income | $(987) | $(1,758) | $(2,745) |

(1) Securities, loan income and change in net interest and dividend income are presented on a tax-equivalent basis using a tax rate of 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest income to agree to the amount reported in the consolidated statements of net income. See “Explanation of Use of Non-GAAP Financial Measurements.”

During the six months ended June 30, 2023, net interest income decreased $2.7 million, or 7.2%, to $35.4 million, compared to $38.1 million for the six months ended June 30, 2022. The decrease in net interest income was due to an increase in interest expense of $10.6 million, or 424.1%, partially offset by an increase in interest and dividend income of $7.9 million, or 19.4%. The increase in interest expense was due to an increase in interest expense on deposits of $8.2 million, or 413.2%, and an increase in interest expense on borrowings of $2.4 million, or 465.8%. For the six months ended June 30, 2023, interest and dividend income included $41,000 in PPP Income, compared to $691,000 during the six months ended June 30, 2022.

The net interest margin for the six months ended June 30, 2023 was 2.97%, compared to 3.21% during the six months ended June 30, 2022. The net interest margin, on a tax-equivalent basis, was 2.99% for the six months ended June 30, 2023, compared to 3.23% for the six months ended June 30, 2022. Excluding PPP Income, the net interest margin decreased 19 basis points from 3.16% for the six months ended June 30, 2022 to 2.97% for the six months ended June 30, 2023. The decrease in the net interest margin was primarily due to an increase in the average cost of interest-bearing liabilities and the unfavorable shift in the deposit mix from low cost core to high cost time deposits, which was partially offset with an increase in the average yield on interest-earning assets.

The average yield on interest-earning assets was 4.07% for the six months ended June 30, 2023, compared to 3.42% for the six months ended June 30, 2022. The average yield on interest-earning assets, on a tax-equivalent basis, was 4.09% for the six months ended June 30, 2023, compared to 3.424% for the six months ended June 30, 2022. The average loan yield was 4.41% for the six months ended June 30, 2023, compared to 3.82% for the six months ended June 30, 2022. The average loan yield, on a tax equivalent basis, was 4.44% for the six months ended June 30, 2023, compared to 3.85% for the six months ended June 30, 2022. During the six months ended June 30, 2023, average interest-earning assets increased $7.1 million, or 0.3% to $2.4 billion, primarily due to an increase in average loans of $77.7 million, or 4.0%, an increase in average other investments of $2.5 million, or 24.2%, partially offset by a decrease in average securities of $40.4 million, or 9.6%, and a decrease in average short-term investments, consisting of cash and cash equivalents, of $32.8 million, or 80.1%.

The average cost of total funds, including non-interest bearing accounts and borrowings, increased 93 basis points from 0.22% for the six months ended June 30, 2022 to 1.15% for the six months ended June 30, 2023. The average cost of core deposits, which the Company defines as all deposits except time deposits, increased 44 basis points to 0.58% for the six months ended June 30, 2023, from 0.14% for the six months ended June 30, 2022. The average cost of time deposits increased 193 basis points from 0.34% for the six months ended June 30, 2022 to 2.27% for the six months ended June 30, 2023. The average cost of borrowings, including subordinated debt, increased 55 basis points from 4.31% for the six months ended June 30, 2022 to 4.86% for the six months ended June 30, 2023. Average demand deposits, an interest-free source of funds, decreased $19.2 million, or 3.0%, from $634.4 million, or 28.0% of total average deposits, for the six months ended June 30, 2022, to $615.2 million, or 28.3% of total average deposits, for the six months ended June 30, 2023.

### Provision for (Reversal of) Credit Losses.

During the six months ended June, 30, 2023, the Company recorded a provision for credit losses of $32,000, under the CECL model, compared to a reversal for credit losses of $125,000, under the incurred loss model, during the six months ended June 30, 2022. The increase was primarily due to changes in the economic environment and related adjustments to the quantitative components of the CECL methodology. The Company recorded net charge-offs of $1.8 million for the six months ended June 30, 2023, as compared to net charge-offs of $102,000 for the six months ended June 30, 2022.

The charge-offs for the six months ended June 30, 2023 were related to one commercial loan relationship acquired on October 21, 2016 from Chicopee Bancorp, Inc. that was recently placed on nonaccrual status. The charge-off represented the non-accretable credit mark that was required to be grossed-up to the loan’s amortized cost basis with a corresponding increase to the allowance for credit losses under the CECL implementation There was no impact to earnings as a result of the charge-off.

Although we believe that we have established and maintained the allowance for credit losses at adequate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment. If the COVID-19 pandemic has a long-term adverse effect on the ability of our borrowers to satisfy their obligations to us, the demand for our loans or our other products and services, other aspects of our business operations, or on financial markets, real estate markets, or economic growth, this could, depending on the extent of the loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations could be materially and adversely affected.

### Non-interest Income.

For the six months ended June 30, 2023, non-interest income decreased $518,000, or 10.2%, from $5.1 million during the six months ended June 30, 2022 to $4.6 million. During the six months ended June 30, 2023, the Company recorded a $1.1 million final termination expense related to the DB Plan termination. During the same period, service charges and fees decreased $92,000, or 2.0%, primarily due to changes in the Company’s overdraft program that were implemented in 2023 and income from BOLI increased $28,000, or 3.1%. Other income from loan-level swap fees on commercial loans decreased $25,000 for the six months ended June 30, 2023. The Company did not have any comparable loan-level swap fee income in 2023. During the six months ended June 30, 2023, the Company reported a gain of $352,000 on non-marketable equity investments, compared to a gain of $141,000 during the six months ended June 30, 2022. During the six months ended June 30, 2022, the Company reported unrealized losses on marketable equity securities of $501,000 and also reported realized losses on the sale of securities of $4,000. The Company did not have comparable investment activity in 2023.

### Non-interest Expense.

For the six months ended June 30, 2023, non-interest expense increased $558,000, or 1.9%, to $29.4 million, compared to $28.9 million for the six months ended June 30, 2022. The increase in non-interest expense was primarily due to an increase in salaries and employee benefits of $45,000, or 0.3%, an increase in professional fees of $264,000, or 20.4%, an increase in FDIC insurance expense of $122,000, or 23.5%, an increase in other non-interest expense of $184,000, or 3.9%, and increase in data processing expense of $91,000, or 6.3%, and an increase in occupancy expense of $11,000, or 0.4%. These increases were partially offset by a decrease in advertising expense of $55,000, or 6.8%, and a decrease in furniture and equipment of $104,000, or 9.6%. During the six months ended June 30, 2023, other non-interest expense included $154,000 in expense related to the DB Plan termination.

For the six months ended June 30, 2023, the efficiency ratio was 73.8%, compared to 66.9% for the six months ended June 30, 2022. For the six months ended June 30, 2023, the adjusted efficiency ratio, a non-GAAP financial measure, was 72.3%, compared to 66.4% for the six months ended June 30, 2022. The adjusted efficiency ratio is a non-GAAP measure. See “Explanation of Use of Non-GAAP Financial Measurements” for the related efficiency ratio calculation and a reconciliation of GAAP to non-GAAP financial measures.

### Income Taxes.

Income tax expense for the six months ended June 30, 2023 was $2.4 million, representing an effective tax rate of 22.7%, compared to $3.6 million, representing an effective tax rate of 24.7%, for six months ended June 30, 2022, due to lower projected pre-tax income for the twelve months ended December 31, 2023.

### Explanation of Use of Non-GAAP Financial Measurements.

We believe that it is common practice in the banking industry to present interest income and related yield information on tax-exempt loans and securities on a tax-equivalent basis, as well as presenting tangible book value per share and adjusted efficiency ratio, and that such information is useful to investors because it facilitates comparisons among financial institutions. However, the adjustment of interest income and yields on tax-exempt loans and securities to a tax-equivalent amount, as well as the presentation of tangible book value per share and adjusted efficiency ratio, may be considered to include financial information that is not in compliance with GAAP. A reconciliation from GAAP to non-GAAP is provided below.

*(In thousands)*

|  | Three Months Ended June 30, 2023 | June 30, 2022 | Six Months Ended June 30, 2023 | June 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Loans (no tax adjustment) | $22,450 | $18,500 | $43,779 | $36,447 |
| Tax-equivalent adjustment (1) | 122 | 124 | 239 | 244 |
| Loans (tax-equivalent basis) | $22,572 | $18,624 | $44,018 | $36,691 |
| Securities (no tax adjustment) | $2,094 | $2,068 | $4,243 | $4,018 |
| Tax-equivalent adjustment (1) | — | — | — | — |
| Securities (tax-equivalent basis) | $2,094 | $2,068 | $4,243 | $4,018 |
| Net interest income (no tax adjustment) | $16,846 | $19,392 | $35,350 | $38,090 |
| Tax-equivalent adjustment (1) | 122 | 124 | 239 | 244 |
| Net interest income (tax-equivalent basis) | $16,968 | $19,516 | $35,589 | $38,334 |

(1) The tax equivalent adjustment is based upon a 21% tax rate.

*(In thousands)*

|  | Three Months Ended June 30, 2023 | June 30, 2022 | Six Months Ended June 30, 2023 | June 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Loans (no tax adjustment) | 4.49% | 3.81% | 4.41% | 3.82% |
| Loans (tax-equivalent basis) | 4.51% | 3.83% | 4.44% | 3.85% |
| Securities (no tax adjustment) | 2.24% | 2.00% | 2.26% | 1.94% |
| Securities (tax-equivalent basis) | 2.24% | 2.00% | 2.26% | 1.94% |
| Interest rate spread (no tax adjustment) | 2.27% | 3.15% | 2.50% | 3.12% |
| Net interest margin (no tax adjustment) | 2.81% | 3.24% | 2.97% | 3.21% |
| Net interest margin (tax-equivalent) | 2.83% | 3.26% | 2.99% | 3.23% |
| Net interest income (no tax adjustment) | $16,846 | $19,392 | $35,350 | $38,090 |
| Less: |  |  |  |  |
| Purchase accounting adjustments | 5 | 64 | (57) | 103 |
| Prepayment penalties and fees | 43 | 26 | 43 | 48 |
| PPP Income | 26 | 129 | 41 | 691 |
| Adjusted net interest income (non-GAAP) | $16,772 | $19,173 | $35,323 | $37,248 |
| Average interest-earning assets | $2,405,077 | $2,398,526 | $2,399,323 | $2,392,264 |
| Average interest-earnings asset, excluding average PPP loans | $2,403,076 | $2,395,463 | $2,397,224 | $2,383,226 |
| Adjusted net interest margin, excluding purchase accounting adjustments, PPP Income, prepayment penalties and average PPP loans (non-GAAP) | 2.80% | 3.21% | 2.97% | 3.16% |
| Income Before Income Taxes (GAAP) | $3,467 | $7,400 | $10,442 | $14,415 |
| Provision (credit) for loan losses | 420 | 300 | 32 | (125) |
| PPP income | (26) | (129) | (41) | (691) |
| Loss on defined benefit plan termination | 1,143 | — | 1,143 | — |
| Income Before Taxes, Provision, PPP Income and Defined Benefit Plan Termination (non-GAAP) | $5,004 | $7,571 | $11,576 | $13,599 |

50

*(In thousands)*

|  | Three Months Ended June 30, 2023 | June 30, 2022 | Six Months Ended June 30, 2023 | June 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Non-interest Expense (GAAP) | $14,551 | $14,433 | $29,447 | $28,889 |
| Net Interest Income (GAAP) | $16,846 | $19,392 | $35,350 | $38,090 |
| Non-interest Income (GAAP) | $1,592 | $2,741 | $4,571 | $5,089 |
| Non-GAAP adjustments: |  |  |  |  |
| Loss on securities, net | — | — | — | 4 |
| Unrealized loss on marketable equity securities | — | 225 | — | 501 |
| Loss on defined benefit plan termination | 1,143 | — | 1,143 | — |
| Gain on non-marketable equity investments | — | (141) | (352) | (141) |
| Non-interest Income for Adjusted Efficiency Ratio (non-GAAP) | $2,735 | $2,825 | $5,362 | $5,453 |
| Total Revenue for Adjusted Efficiency Ratio (non-GAAP) | $19,581 | $22,217 | $40,712 | $43,543 |
| Efficiency Ratio (GAAP) | 78.92% | 65.21% | 73.76% | 66.91% |
| Adjusted Efficiency Ratio (Non-interest Expense (GAAP)/Total Revenue for Adjusted Efficiency Ratio (non-GAAP)) | 74.31% | 64.96% | 72.33% | 66.35% |

*(In thousands)*

|  | June 30, 2023 | June 30, 2022 |
| --- | ---: | ---: |
| Book Value per Share (GAAP) | $10.60 | $9.58 |
| Non-GAAP adjustments: |  |  |
| Goodwill | (0.57) | (0.55) |
| Core deposit intangible | (0.09) | (0.11) |
| Tangible Book Value per Share (non-GAAP) | $9.94 | $8.92 |

### Liquidity and Capital Resources.

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, deposit withdrawals and operating expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investment securities and funds provided by our operations. We can also borrow funds from the FHLB and the Federal Reserve Bank of Boston (the “FRB”) based on eligible collateral of loans and securities. Our material cash commitments include funding loan originations, fulfilling contractual obligations with third-party service providers, maintaining operating leases for certain of our Bank properties and satisfying repayment of our long-term debt obligations.

#### Primary Sources of Liquidity

At June 30, 2023 and December 31, 2022, the Company’s outstanding borrowings with the FHLB were $31.2 million and $36.2 million, respectively. At June 30, 2023, the Company had $380.1 million in available borrowing capacity with the FHLB. The Company can increase its borrowing capacity with the FHLB by pledging additional investments or loans. At June 30, 2023, the Company had $90.0 million in outstanding borrowings under the FRB’s BTFP, with $27.4 million in additional borrowing capacity.

The Company also has a borrowing relationship with the FRB through its primary credit program offered through its Discount Window with a borrowing capacity up to $51.4 million. In addition, the Company also has an available overnight Ideal Way line of credit with the FHLB of $9.5 million. At June 30, 2023 and December 31, 2022, the Company did not have any outstanding balances under either of these lines. The Company has agreements with approved brokers-dealers to participate in the brokered deposit market to support liquidity. At June 30, 2023, the Company had $1.7 million in brokered deposits included within time deposits on the balance sheet. At December 31, 2022, the Company did not have any brokered deposits.

The Company also has available lines of credit of $15.0 million and $50.0 million with other correspondent banks. Interest rates on these lines are determined and reset on a daily basis by each respective bank. At June 30, 2023 and December 31, 2022, we did not have an outstanding balance under either of these lines of credit. In addition, we may enter into reverse repurchase agreements with approved broker-dealers. Reverse repurchase agreements are agreements that allow us to borrow money using our securities as collateral.

We also have outstanding at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. We are also obligated under agreements with the FHLB to repay borrowed funds, under leases for certain of our branches and equipment and for our core processing agreement.

Maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of securities and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds.

The Company’s primary activities are the origination of commercial real estate loans, commercial and industrial loans and residential real estate loans, as well as and the purchase of mortgage-backed and other investment securities. At June 30, 2023, the Company had approximately $136.1 million in loan commitments and letters of credit to borrowers and approximately $329.1 million in available home equity and other unadvanced lines of credit.

Deposit inflows and outflows are affected by the level of interest rates, the products and interest rates offered by competitors and by other factors. At June 30, 2023, time deposit accounts scheduled to mature within one year totaled $517.2 million. Based on the Company’s deposit retention experience and current pricing strategy, we anticipate that a significant portion of these time deposits will remain on deposit. We monitor our liquidity position frequently and anticipate that it will have sufficient funds to meet our current funding commitments for the next 12 months and beyond.

At June 30, 2023, the Company and the Bank exceeded each of the applicable regulatory capital requirements (See Note 13, *Regulatory Capital*, to our consolidated financial statements in our 2022 Annual Report on Form 10-K for further information on our regulatory requirements).

#### Material Cash Commitments

The Company entered into a long-term contractual obligation with a vendor for use of its core provider and ancillary services beginning in 2016. Total remaining contractual obligations outstanding with this vendor as of June 30, 2023 were estimated to be $9.5 million, with $5.0 million expected to be paid within one year and the remaining $4.5 million to be paid within the next three years. Further, the Company has operating leases for certain of its banking offices and ATMs. Our leases have remaining lease terms of less than one year to sixteen years, some of which include options to extend the leases for additional five-year terms up to ten years. Undiscounted lease liabilities totaled $10.6 million as of June 30, 2023. Principal payments expected to be made on our lease liabilities during the twelve months ended June 30, 2024 were $1.5 million. The remaining lease liability payments totaled $9.1 million and are expected to be made after June 30, 2024.

In addition, the Company completed an offering of $20.0 million in aggregate principal amount of its 4.875% fixed-to-floating rate subordinated notes (the “Notes”) to certain qualified institutional buyers in a private placement transaction on April 20, 2021. Unless earlier redeemed, the Notes mature on May 1, 2031. At June 30, 2023, $19.7 million aggregate principle amount of the Notes was outstanding. The Notes will bear interest from the initial issue date to, but excluding, May 1, 2026, or the earlier redemption date, at a fixed rate of 4.875% per annum, payable quarterly in arrears on May 1, August 1, November 1 and February 1 of each year, beginning August 1, 2021, and from and including May 1, 2026, but excluding the maturity date or earlier redemption date, equal to the benchmark rate, which is the 90-day average secured overnight financing rate, plus 412 basis points, determined on the determination date of the applicable interest period, payable quarterly in arrears on May 1, August 1, November 1 and February 1 of each year. The Company may also redeem the Notes, in whole or in part, on or after May 1, 2026, and at any time upon the occurrence of certain events, subject in each case to the approval of the Board of Governors of the Federal Reserve.

We do not anticipate any material capital expenditures during the calendar year 2023, except in pursuance of the Company’s strategic initiatives. The Company does not have any balloon or other payments due on any long-term obligations or any off-balance sheet items other than the commitments and unused lines of credit noted above.

At June 30, 2023, we exceeded each of the applicable regulatory capital requirements. As of June 30, 2023, the most recent notification from the Office of Comptroller of the Currency categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized,” the Bank must maintain minimum total risk-based, Tier 1 risk-based, Common Equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes would change our category.

*(Dollars in thousands)*

| June 30, 2023 Total Capital (to Risk Weighted Assets): | Actual Amount | Ratio | Minimum For Capital Adequacy Purpose Amount | Ratio | Minimum To Be Well Capitalized Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated | $283,047 | 14.16% | $159,946 | 8.00% | N/A | N/A |
| Bank | 269,398 | 13.49 | 159,720 | 8.00 | $199,650 | 10.00% |
| Tier 1 Capital (to Risk Weighted Assets): |  |  |  |  |  |  |
| Consolidated | 243,296 | 12.17 | 119,960 | 6.00 | N/A | N/A |
| Bank | 249,340 | 12. 49 | 119,790 | 6.00 | 159,720 | 8.00 |
| Common Equity Tier 1 Capital (to Risk Weighted Assets) |  |  |  |  |  |  |
| Consolidated | 243,296 | 12.17 | 89,970 | 4.50 | N/A | N/A |
| Bank | 249,340 | 12.49 | 89,842 | 4.50 | 129,772 | 6.50 |
| Tier 1 Leverage Ratio (to Adjusted Average Assets): |  |  |  |  |  |  |
| Consolidated | 243,296 | 9.45 | 103,016 | 4.00 | N/A | N/A |
| Bank | 249,340 | 9.69 | 102,903 | 4.00 | 128,629 | 5.00 |
| **December 31, 2022** |  |  |  |  |  |  |
| Total Capital (to Risk Weighted Assets): |  |  |  |  |  |  |
| Consolidated | $278,729 | 14.20% | $157,042 | 8.00% | N/A | N/A |
| Bank | 264,795 | 13.50 | 156,904 | 8.00 | $196,131 | 10.00 |
| Tier 1 Capital (to Risk Weighted Assets): |  |  |  |  |  |  |
| Consolidated | 239,125 | 12.18 | 117,781 | 6.00 | N/A | N/A |
| Bank | 244,864 | 12.48 | 117,678 | 6.00 | 156,904 | 8.00 |
| Common Equity Tier 1 Capital (to Risk Weighted Assets): |  |  |  |  |  |  |
| Consolidated | 239,125 | 12.18 | 88,336 | 4.50 | N/A | N/A |
| Bank | 244,864 | 12.48 | 88,259 | 4.50 | 127,485 | 6.50 |
| Tier 1 Leverage Ratio (to Adjusted Average Assets): |  |  |  |  |  |  |
| Consolidated | 239,125 | 9.27 | 103,229 | 4.00 | N/A | N/A |
| Bank | 244,864 | 9.49 | 103,166 | 4.00 | 128,957 | 5.00 |

We also have outstanding, at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows.

### OFF-BALANCE SHEET ARRANGEMENTS.

The Company does not have any off-balance sheet arrangements, other than noted above under Material Cash Commitments, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

## Market risk

As filed, 4,067 characters.

Except as set forth below, there have been no material changes in our assessment of our sensitivity to market risk since our presentation in our 2022 Annual Report. Please refer to Item 7A of the 2022 Annual Report for additional information.

#### Interest Rate Risk

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with our financial instruments also change, thereby impacting net interest income, the primary component of our earnings. ALCO utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While ALCO routinely monitors simulated net interest income sensitivity, they also utilize additional tools to monitor potential longer-term interest rate risk.

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on our consolidated balance sheet, as well as for derivative financial instruments. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure, assuming no balance sheet growth.

The repricing and/or new rates of assets and liabilities moved in tandem with market rates. However, in certain deposit products, the use of data from a historical analysis indicated that the rates on these products would move only a fraction of the rate change amount. Pertinent data from each loan account, deposit account and investment security was used to calculate future cash flows. The data included such items as maturity date, payment amount, next repricing date, repricing frequency, repricing index, repricing spread, caps and floors. Prepayment speed assumptions were based upon the difference between the account rate and the current market rate. We also evaluate changes in interest rate sensitivity under various scenarios including but not limited to nonparallel shifts in the yield curve, variances in prepayment speeds and variances to correlations of instrument rates to market indexes.

The table below shows our net interest income sensitivity analysis reflecting the following changes to net interest income for the first year of the simulation model. The analysis assumes no balance sheet growth, a parallel shift in interest rates, and all rate changes were "ramped" over the first 12-month period.

| Changes in Interest Rates 1-12 Months | Estimated Change in Net Interest Income At June 30, 2023 |
| --- | ---: |
| +200 basis points | -1.6% |
| -200 basis points | 0.8% |

The preceding sensitivity analysis does not represent a forecast of net interest income, nor do the calculations represent any actions that management may undertake in response to changes in interest rates. They should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

Periodically, if deemed appropriate, we may use interest rate swaps, floors and caps, which are common derivative financial instruments, to hedge our interest rate exposure to interest rate movements. The Board of Directors has approved hedging policy statements governing the use of these instruments. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for our making fixed payments.

## Controls and procedures

As filed, 1,221 characters.

### Disclosure Controls and Procedures.

Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered by this report. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

### Changes in Internal Control Over Financial Reporting.

There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 298 characters.

For a summary of risk factors relevant to our operations, see Part 1, Item 1A, “Risk Factors” in our 2022 Annual Report. There are no additional material changes in the risk factors relevant to our operations since December 31, 2022 and our update on Form 10-Q for the quarter ended March 31, 2023.

Filed Aug 4, 2023.
Source: SEC EDGAR, the filing index for accession 0001387131-23-009319. Last ingested by Listed: Nov 6, 2026, 17:11 ET. No prices; not investment advice.