NB Bancorp, Inc.: Form 10-Q for the period ended Jun 30, 2024

General

Management’s discussion and analysis of the financial condition and results of operations at and for the three and six months ended June 30, 2024 and 2023 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “intend,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

• statements of our goals, intentions and expectations;
• statements regarding our business plans, prospects, growth and operating strategies;
• statements regarding the quality of our loan portfolio; and
• estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

• further weakening in the United States economy in general and the regional and local economies within the Company’s market area;
• the effects of inflationary pressures, labor market shortages and/or supply chain issues;
• the instability or volatility in financial markets and unfavorable general business conditions, globally, nationally or regionally, whether caused by geopolitical concerns, recent disruptions in the banking industry, or other factors;
• unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather, pandemics or other external events;
• changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments, including our mortgage servicing rights asset, or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;
• changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses on loans;
• the effect of any change in federal government enforcement of federal laws affecting the cannabis industry;
• changes in liquidity, including the size and composition of our deposit portfolio, including the percentage of uninsured deposits in the portfolio;
• our ability to access cost-effective funding;
• fluctuations in real estate values and both residential and commercial real estate market conditions;
• demand for loans and deposits in our market area;
• our ability to implement and change our business strategies;
• competition among depository and other financial institutions;
• adverse changes in the securities or secondary mortgage markets;
• changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums;
• changes in the quality or composition of our loan or investment portfolios;
• technological changes that may be more difficult or expensive than expected;
• the inability of third-party providers to perform as expected;
• a failure or breach of our operational or security systems or infrastructure, including cyberattacks;
• our ability to manage market risk, interest rate risk, credit risk, compliance risk, and operational risk;
• our ability to enter new markets successfully and capitalize on growth opportunities;
• changes in consumer spending, borrowing and savings habits;
• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
• our ability to attract and retain key employees; and
• changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2024.

Allowance for Credit Losses

The Company estimates the allowance for credit losses in accordance with the CECL methodology for loans measured at amortized cost. The allowance for credit losses is established based upon the Company's current estimate of expected lifetime credit losses.

Arriving at an appropriate amount of allowance for credit losses involves a high degree of judgment.

The Company estimates credit losses on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. Management's judgement is required for the selection and application of these factors which are derived from historical loss experience as well as assumptions surrounding expected future losses and economic forecasts.

Loans that no longer share similar risk characteristics with any pools of assets are subject to individual assessment and are removed from the collectively assessed pools to avoid double counting. For the loans that are individually assessed, the Company uses either a discounted cash flow (“DCF”) approach or a fair value of collateral approach. The latter approach is used for loans deemed to be collateral dependent or when foreclosure is probable. Changes in these judgements and assumptions could be due to a number of circumstances which may have a direct impact on the provision for credit losses and may result in changes to the amount of allowance. The allowance for credit losses is increased by the provision for credit losses and by recoveries of loans previously charged off. Credit 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.

Income Taxes

We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments may require us to make projections of future taxable income and/or to carryback to taxable income in prior years. The judgments and estimates we make in determining our deferred tax assets and liabilities, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.

Securities Valuation

We classify our debt securities as available-for-sale, which are carried at fair value. We obtain our fair values from one or more third-party services. These services’ fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations and cash flows.

For any debt security with a fair value less than its amortized cost basis, we will determine whether we have the intent to sell the debt security or whether it is more likely than not we will be required to sell the debt security before the recovery of its amortized cost basis. If either condition is met, the Company will recognize a full impairment charge to earnings. For all other debt securities that don't meet either condition and that have expected credit losses, the credit loss will be recognized in earnings. Any non-credit related loss impairment related to all other factors will be recorded in other comprehensive income (loss). Management also assesses the nature of the unrealized losses taking into consideration factors such as changes in risk-free interest rates, general credit spread changes, market supply and demand, creditworthiness of the issuer, and quality of the underlying collateral.

Comparison of Financial Condition as of June 30, 2024 and December 31, 2023

Total Assets. Total assets increased $272.0 million, or 6.0%, to $4.81 billion as of June 30, 2024 from $4.53 billion as of December 31, 2023. The increase was primarily driven by increases in net loans, cash and cash equivalents and available-for-sale securities.

Cash and Cash Equivalents. Cash and cash equivalents increased $56.4 million, or 20.7%, to $328.9 million as of June 30, 2024 from $272.6 million as of December 31, 2023. The increase in cash and cash equivalents was due to deposit growth outpacing loan and investment growth, offset partially by paydowns of Federal Home Loan Bank borrowings.

Securities Available for Sale. Securities available for sale increased $15.6 million, or 8.2%, to $205.1 million as of June 30, 2024 from $189.5 million as of December 31, 2023 due to purchases of U.S. treasuries, government agency and corporate bond debt securities. No securities were sold during the three and six months ended June 30, 2024.

Loans. Net loans increased $202.4 million, or 5.2%, to $4.06 billion as of June 30, 2024 from $3.86 billion as of December 31, 2023. The primary driver of the increase was commercial and industrial loans, which increased $94.4 million, or 19.2%; multi-family residential loans, which increased $57.6 million, or 27.4%; commercial real estate loans, which increased $54.4 million, or 4.6%; one-to-four family residential loans, which increased $21.2 million, or 1.9%; and consumer loans, which increased $18.6 million, or 9.1%; offset partially by a $46.5 million, or 7.5%, decrease in construction and development loans, as $111.0 million of construction and development loans converted to multi-family loans. The increase in our loan portfolio reflects our strategy to prudently grow the balance sheet by continuing to diversify into these higher-yielding loans to improve net margins and manage interest rate risk.

The Company had approximately $415.2 million and $365.9 million in loans to borrowers in the cannabis industry at June 30, 2024 and December 31, 2023, respectively. Of that total, $252.7 million and $207.7 million were direct loans to cannabis companies and were collateralized by real estate at June 30, 2024 and December 31, 2023, respectively.

Federal Home Loan Bank (“FHLB”) Stock. The FHLB is a cooperative bank that provides services to its member financial institutions. The primary reason for our membership in the FHLB is to gain access to a reliable source of wholesale funding and as a tool to manage interest rate risk. We held an investment in FHLB stock of $4.8 million and $14.6 million as of June 30, 2024 and December 31, 2023, respectively. The amount of stock we are required to purchase is in proportion to our FHLB borrowings and level of total assets. Accordingly, the decrease in the FHLB stock from December 31, 2023 to June 30, 2024 is due to the decrease in FHLB borrowings.

Prepaid Expenses and Other Assets. Prepaid expenses and other assets consist primarily of right of use assets related to our long-term leases and derivatives with a positive fair value. These assets increased $2.2 million, or 4.2%, to $55.3 million as of June 30, 2024 from $53.1 million as of December 31, 2023. The increase resulted primarily from a $1.2 million increase in the fair value of derivatives as a result of market and interest rate factors, as well as, an $1.0 million increase in prepaid expenses resulting from new or renewed contracts.

Deposits. Deposits increased $530.6 million, or 15.7%, to $3.92 billion as of June 30, 2024 from $3.39 billion as of December 31, 2023. Core deposits (which we define as all deposits including certificates of deposit, other than brokered deposits) increased $414.2 million, or 12.9%, to $3.62 billion as of June 30, 2024 from $3.20 billion as of December 31, 2023. The increase in deposits was the result of growth in customer deposits, primarily certificates of deposit, which increased $281.5 million, or 21.4%, from the prior quarter, along with money market accounts and noninterest-bearing demand deposit accounts, which increased $78.7 million, or 8.9%, and $60.7 million, or 11.5%, respectively, from December 31, 2023. Additionally, brokered deposits increased $116.4 million, or 63.4%, from December 31, 2023, as a result of lower rates versus alternative funding sources and to support overall liquidity.

The Company had $292.0 million and $277.2 million in deposits from the cannabis industry as of June 30, 2024 and December 31, 2023, respectively.

FHLB Borrowings. FHLB borrowings decreased $222.5 million, or 78.5%, to $60.8 million as of June 30, 2024 from $283.3 million as of December 31, 2023. The decrease in FHLB borrowings was the result of overall deposit growth and growth in brokered deposits due to lower rates.

Accrued expenses and other liabilities. Accrued expenses and other liabilities decreased $23.2 million, or 28.6%, to $58.1 million as of June 30, 2024 from $81.3 million as of December 31, 2023. The decrease resulted from $15.8 million in IPO-related and other accrued expenses, $9.5 million in incentive bonuses being paid, and a $5.3 million reduction in accrued income taxes due to tax credits earned; partially offset by increased accrued interest on brokered deposits due to higher average outstanding balances, increased fair value of derivative liabilities of $1.2 million resulting from market conditions and interest rate movements and an increase for a due to broker related to the settlement of a corporate bond debt security as of June 30, 2024.

Shareholders’ Equity. Total shareholders’ equity decreased $13.5 million, or 1.8%, to $744.5 million as of June 30, 2024 from $758.0 million at December 31, 2023, due to the $32.2 million increase in the unallocated common shares held by the ESOP resulting from the purchase of shares on the open market to fund the ESOP as a result of the conversion, offset partially by $18.2 million in net income for the six months ended June 30, 2024.

Comparison of Operating Results for the Three Months Ended June 30, 2024 and June 30, 2023

Net Income. Net income was $9.5 million for the quarter ended June 30, 2024, compared to net income of $6.2 million for the quarter ended June 30, 2023, an increase of approximately $3.2 million, or 52.0%. The increase was primarily due to a $7.0 million, or 22.0%, increase in net interest income, offset partially by a $3.9 million, or 17.4%, increase in noninterest expense.

Interest and Dividend Income. Interest and dividend income increased $18.9 million, or 36.1%, to $71.1 million for the quarter ended June 30, 2024 from $52.2 million for the quarter ended June 30, 2023, primarily due to a $15.2 million, or 30.4%, increase in interest and fees on loans and a $3.4 million, or 796.1%, increase in interest on short-term investments. The increase in interest and fees on loans was primarily due to an increase of $639.9 million, or 19.1%, in the average balance of the loan portfolio to $3.99 billion for the quarter ended June 30, 2024 from $3.35 billion for the quarter ended June 30, 2023 and an increase of 58 basis points in the weighted average yield for the loan portfolio to 6.58% for the quarter ended June 30, 2024 from 6.00% for the quarter ended June 30, 2023, reflecting the growth of our commercial and consumer loan portfolios. The increase in interest on short-term investments was primarily due to an increase of $244.6 million, or 699.9%, in the average balance of short-term investments to $279.6 million for the quarter ended June 30, 2024 from $35.0 million for the quarter ended June 30, 2023.

Average interest-earning assets increased $851.8 million, to $4.51 billion for the quarter ended June 30, 2024 from $3.66 billion for the quarter ended June 30, 2023. The yield on interest-earning assets increased 61 basis points to 6.34% for the quarter ended June 30, 2024 from 5.73% for the quarter ended June 30, 2023.

Interest Expense. Total interest expense increased $11.9 million, or 58.0%, to $32.4 million for the quarter ended June 30, 2024 from $20.5 million for the quarter ended June 30, 2023. Interest expense on deposit accounts increased $14.1 million, or 80.8%, to $31.6 million for the quarter ended June 30, 2024 from $17.5 million for the quarter ended June 30, 2023. The increase was due to an increase in the average balance of certificates of deposit of $512.6 million to $1.83 billion June 30, 2024 from $1.32 billion for the quarter ended June 30, 2023, an increase in the weighted average rate on certificates of deposit of 142 basis points to 5.04% for the quarter ended June 30, 2024 from 3.62% for the quarter ended June 30, 2023, and an increase in the weighted average rate on money market accounts of 140 basis points to 4.03% for the quarter ended June 30, 2024 from 2.63% for the quarter ended June 30, 2023.

Interest expense on FHLB borrowings decreased $2.2 million, or 73.0%, to $821,000 for the quarter ended June 30, 2024 from $3.0 million for the quarter ended June 30, 2023. The average balance of FHLB borrowings decreased $170.1 million, or 73.3%, to $62.0 million for the quarter ended June 30, 2024 from $232.1 million for the quarter ended June 30, 2023. The decrease in the average balance of FHLB borrowings was the result of growth in brokered deposits due to lower rates, as well as, overall deposit growth.

Net Interest Income. Net interest income increased $7.0 million, or 22.0%, to $38.7 million for the quarter ended June 30, 2024 from $31.7 million for the quarter ended June 30, 2023, primarily due to an $851.8 million, or 23.3%, increase in the average balance of interest-earning assets to $4.51 billion for the quarter ended June 30, 2024 from $3.66 billion for the quarter ended June 30, 2023 and an increase in the weighted average yield on interest-earning assets of 61 basis points to 6.34% June 30, 2024 from 5.73% June 30, 2023.

These increases were offset partially by an increase in the weighted average rate on interest-bearing liabilities of 125 basis points to 4.10% for the quarter ended June 30, 2024 from 2.85% June 30, 2023 and an increase in the average balance of interest-bearing liabilities of $297.5 million, or 10.3%, to $3.18 billion June 30, 2024 from $2.88 billion June 30, 2023.

Provision for Credit Losses. Based on management’s analysis of the adequacy of the allowance for credit losses, a provision of $3.7 million was recorded for the quarter ended June 30, 2024, of which $4.4 million related to the provision for credit losses on loans, compared to a provision of $4.0 million for the quarter ended June 30, 2024. The increase of $471,000, or 11.9%, in the provision for loans was primarily due to the overall increase in the size of the loan portfolio.

Noninterest Income. Noninterest income decreased $114,000, or 3.7%, to $3.0 million for the quarter ended June 30, 2024 from $3.1 million for the quarter ended June 30, 2023. The decrease resulted primarily from a lower volume of executed swap contracts and related income, offset partially by increased customer service fees from increased cash management services and mortgage banking income from the sale of additional residential real estate loans. The table below sets forth our noninterest income for the quarters ended June 30, 2024 and 2023:

(Dollars in thousands)

Noninterest Expense. Noninterest expense increased $3.9 million, or 17.4%, to $26.2 million for the quarter ended June 30, 2024 from $22.3 million for the quarter ended June 30, 2023. Salaries and employee benefit expenses increased $2.3 million, or 16.3%, resulted primarily from the hiring of additional employees consistent with our business strategy to grow the Bank, normal annual salary raises, $628,000 in ESOP compensation expenses and $677,000 in long-term incentive plan expenses during the quarter ended June 30, 2024. Data processing expenses increased $603,000, or 35.0%, during the quarter ended June 30, 2024, primarily the result of higher electronic banking, information technology and system costs. Director and professional service fees increased $558,000, or 32.6%, during the quarter ended June 30, 2024, primarily the result of higher legal fees, lending services, appraisal fee and external audit costs. The table below sets forth our noninterest expense for the quarters ended June 30, 2024 and 2023:

(Dollars in thousands)

33

Income Tax Expense. Income tax expense increased $139,000, or 6.2%, to $2.4 million for the quarter ended June 30, 2024 from $2.2 million for the quarter ended June 30, 2023. The effective tax rate was 20.0% and 26.4% for the quarter ended June 30, 2024 and 2023, respectively. The decrease in the effective tax rate was a result of income tax credits earned during the quarter ended June 30, 2024.

Average Balances and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. Non-accrual loans were included in the computation of average balances. All average balances are daily 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; such fees, discounts and premiums were not material for the periods presented.

(1) Annualized.

(2) 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.

(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average total interest-earning assets.

Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total 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.

(In thousands)

Comparison of Operating Results for the Six Months Ended June 30, 2024 and June 30, 2023

Net Income. Net income was $18.2 million for the six months ended June 30, 2024, compared to net income of $15.0 million the six months ended June 30, 2023, an increase of approximately $3.2 million, or 21.0%. The increase was primarily due to a $14.4 million, or 22.9%, increase in net interest income, partially offset by a $6.4 million, or 14.1%, increase in noninterest expense, a $2.5 million, or 27.6% decrease in non-interest income, a $2.0 million, or 32.4%, increase in the provision for credit losses and a $349,000 million, or 6.4%, increase in income tax expense.

Interest and Dividend Income. Interest and dividend income increased $41.0 million, or 41.8%, to $139.3 million for the six months ended June 30, 2024 from $98.3 million for the six months ended June 30, 2023, primarily due to a $35.5 million, or 37.8%, increase in interest and fees on loans, and a $5.3 million, or 515.7%, increase in interest on short-term investments. The increase in interest and fees on loans was primarily due to an increase of $723.9 million, or 22.5%, in the average balance of the loan portfolio to $3.95 billion for the six months ended June 30, 2024 from $3.22 billion for the six months ended June 30, 2023 and an increase of 72 basis points in the weighted average yield for the loan portfolio to 6.59% for the six months ended June 30, 2024 from 5.87% for the six months ended June 30, 2023, reflecting the growth of our commercial and consumer loan portfolios. The increase in interest on short-term investments was primarily due to an increase of $181.3 million, or 392.1%, in the average balance of short-term investments to $227.6 million for the six months ended June 30, 2024 from $46.3 million for the six months ended June 30, 2023.

Average interest-earning assets increased $868.3 million, or 24.5%, to $4.41 billion for the six months ended June 30, 2024 from $3.54 billion for the six months ended June 30, 2023. The yield on interest-earning assets increased 76 basis points to 6.35% for the six months ended June 30, 2024 from 5.59% for the six months ended June 30, 2023.

Interest Expense. Total interest expense increased $26.7 million, or 75.5%, to $62.0 million for the six months ended June 30, 2024 from $35.3 million for the six months ended June 30, 2023. Interest expense on deposit accounts increased $30.0 million, or 100.9%, to $59.8 million for the six months ended June 30, 2024 from $29.8 million for the six months ended June 30, 2023. The increase was due to an increase in the weighted average rate on certificates of deposit of 167 basis points to 4.97% for the six months ended June 30, 2024 from 3.30% for the six months ended June 30, 2023, an increase in the average balance of certificates of deposit of $429.7 million, or 32.5%, to $1.75 billion for the six months ended June 30, 2024 from $1.32 billion for the six months ended June 30, 2023, an increase in the weighted average rate on money market accounts of 168 basis points to 3.85% for the six months ended June 30, 2024 from 2.17% for the six months ended June 30, 2023 and an increase in the average balance of money market accounts of $107.7 million, or 14.6% to $843.9 million for the six months ended June 30, 2024 from $736.2 million for the six months ended June 30, 2023.

Interest expense on FHLB borrowings decreased $3.4 million, or 61.0%, to $2.2 million for the six months ended June 30, 2024 from $5.5 million for the six months ended June 30, 2023. The average balance of FHLB advances decreased $135.8 million, or 62.8%, to $80.4 million for the six months ended June 30, 2024 from $216.2 million for the six months ended June 30, 2023. The decrease in the average balance of FHLB advances was the result of growth in brokered deposits due to lower rates, as well as, overall deposit growth.

Net Interest Income. Net interest income increased $14.4 million, or 22.9%, to $77.4 million for the six months ended June 30, 2024 from $63.0 million for the six months ended June 30, 2023, primarily due to a $868.3 million, or 24.5%, increase in the average balance of interest-earning assets to $4.41 billion for the six months ended June 30, 2024 from $3.54 billion for the six months ended June 30, 2023 and an increase in the weighted average yield on interest-earning assets of 76 basis points to 6.35% for the six months ended June 30, 2024 from 5.59% for the six months ended June 30, 2023.

These increases were offset partially by an increase in the weighted average rate on interest-bearing liabilities of 144 basis points to 3.99% for the six months ended June 30, 2024 from 2.55% for the six months ended June 30, 2023 and an increase in the average balance of interest-bearing liabilities of $329.5 million, or 11.8%, to $3.12 billion for the six months ended June 30, 2024 from $2.79 billion for the six months ended June 30, 2023.

Provision for Credit Losses. Based on management’s analysis of the adequacy of the allowance for credit losses, a provision of $8.1 million was recorded for the six months ended June 30, 2024, of which $8.3 million related to the provision for credit losses on loans, compared to a provision of $6.1 million for the six months ended June 30, 2023. The increase of $2.0 million, or 32.4%, in the total provision for credit losses was primarily due to the overall increase in the size of the loan portfolio and increases in the qualitative factors on loans collateralized by offices and purchased consumer loans.

Noninterest Income. Noninterest income decreased $2.5 million, or 27.6%, to $6.5 million for the six months ended June 30, 2024 from $9.0 million for the six months ended June 30, 2023. The decrease resulted primarily from one-time employee retention credit income during the six months ended June 30, 2023; offset partially by an increase in other income resulting from a one-time debit and credit card branding signing bonus of $610,000 and increased customer service fees of $484,000 during the six months ended June 30, 2024.

The table below sets forth our noninterest income for the six months ended June 30, 2024 and 2023:

(Dollars in thousands)

Noninterest Expense. Noninterest expense increased $6.4 million, or 14.1%, to $51.8 million for the six months ended June 30, 2024 from $45.4 million for the six months ended June 30, 2023. Salaries and employee benefit expenses increased $4.9 million, or 16.8%, primarily from the hiring of additional employees consistent with our business strategy to grow the Bank, normal annual salary increases, $1.2 million in ESOP compensation expenses and $976,000 in long term incentive plan expenses during the six months ended June 30, 2024. Data processing expenses increased $881,000, or 25.6%, during the six months ended June 30, 2024, primarily the result of higher electronic banking, information technology and system costs. Director and profession service fees increased $802,000, or 23.8%, during the six months ended June 30, 2024, primarily the result of higher legal fees, lending services, appraisal fee and external audit costs. The table below sets forth our noninterest expense for the six months ended June 30, 2024 and 2023:

(Dollars in thousands)

Income Tax Expense. Income tax expense increased $349,000, or 6.4%, to $5.8 million for the six months ended June 30, 2024 from $5.5 million for the six months ended June 30, 2023. The effective tax rate was 24.2% and 26.7% for the six months ended June 30, 2024 and 2023, respectively. The decrease in the effective tax rate was a result of income tax credits earned during the six months ended June 30, 2024.

Average Balances and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. Non-accrual loans were included in the computation of average balances. All average balances are daily 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; such fees, discounts and premiums were not material for the periods presented.

(1) Annualized.

(2) 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.

(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average total interest-earning assets.

Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total 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.

(In thousands)

Liquidity and Capital Resources

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 maturities of securities. We are also able to borrow from the FHLB and the Discount Window at the Federal Reserve Bank of Boston (“FRB”). As of June 30, 2024, we had outstanding advances of $60.8 million from the FHLB. As of June 30, 2024, we had unused borrowing capacity of $770.0 million with the FHLB and $42.5 million available with the FRB. Additionally, as of June 30, 2024, we had $300.0 million of brokered deposits and pursuant to our internal liquidity policy, which allows us to utilize brokered deposits up to 10.0% of our total assets, we had an additional capacity of up to approximately $180.5 million of brokered deposits.

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 short-term investments. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities.

At June 30, 2024, we had $20.8 million in commitments to originate loans outstanding. In addition, we had $413.5 million in unused lines of credit to borrowers, $506.0 million in unadvanced construction loans and $6.7 million in letters of credit outstanding.

Non-brokered certificates of deposit due within one year of June 30, 2024 totaled $1.30 billion, or 33.1%, of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including brokered deposits and FHLB advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the non-brokered certificates of deposit due on or before June 30, 2025, or on our other interest-bearing deposit accounts. We believe, however, based on historical experience and current market interest rates that we will retain upon maturity a large portion of our certificates of deposit with maturities of one year or less as of June 30, 2024.

Our primary investing activity is originating loans. During the six months ended June 30, 2024, we originated $222.2 million of loans.

Financing activities consist primarily of activity in deposit accounts and FHLB advances. We experienced net increases in deposits of $530.6 million for the six months ended June 30, 2024. At June 30, 2024 and December 31, 2023, the level of brokered time deposits was $300.0 million and $183.6 million, respectively. Deposit flows are affected primarily by the overall level of interest rates and the interest rates and products offered by us and our competitors. FHLB advances decreased $222.5 million for the six months ended June 30, 2024.

For additional information, see the consolidated statements of cash flows for the six months ended June 30, 2024 and 2023 included as part of the consolidated financial statements appearing elsewhere in this Form 10-Q.

We are committed to maintaining a strong liquidity position. We continuously monitor our liquidity position and adjustments are made to the balance between sources and uses of funds as deemed appropriate by management. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. These scenarios are incorporated into our contingency funding planning process, which provides the basis for the identification of our liquidity needs. We anticipate that we will have sufficient funds to meet our current funding commitments. In addition, based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

As of June 30, 2024, Needham Bank and NB Bancorp, Inc. exceeded all of their regulatory capital requirements, and were categorized as well-capitalized at that date. Management is not aware of any conditions or events since the most recent notification of well-capitalized status that would change our category. See Note 10 of the notes to consolidated financial statements.

Impact of Inflation and Changing Prices

The consolidated financial statements and related data presented in this Form 10-Q have been prepared in accordance with U.S. GAAP, which requires 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.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2024. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

During the six months ended June 30, 2024, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes in risk factors applicable to the Company from those disclosed in “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.