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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2024

or

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

 

Commission File Number: 001-16767

 

Western New England Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Massachusetts		73-1627673
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

 

141 Elm Street, Westfield, Massachusetts		01086
(Address of principal executive offices)		(Zip Code)

 

(413) 568-1911

(Registrant’s telephone number, including area code)

 

---

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	WNEB	NASDAQ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

Yes ☒     No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  

Yes ☒      No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☒
	Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐    No ☒ 

 

At August 5, 2024 the registrant had 21,318,286 shares of common stock, $0.01 par value, issued and outstanding.

 

 

TABLE OF CONTENTS

 

			Page
FORWARD-LOOKING STATEMENTS			i
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements of Western New England Bancorp, Inc. and Subsidiaries (Unaudited)
	Consolidated Balance Sheets – June 30, 2024 and December 31, 2023		1
	Consolidated Statements of Net Income – Three and Six Months Ended June 30, 2024 and 2023		2
	Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2024 and 2023		3
	Consolidated Statements of Changes in Shareholders’ Equity – Three and Six Months Ended June 30, 2024 and 2023		4
	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2024 and 2023		6
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		63
Item 4.	Controls and Procedures		63
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		64
Item 1A.	Risk Factors		64
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		64
Item 3.	Defaults upon Senior Securities		64
Item 4.	Mine Safety Disclosures		64
Item 5.	Other Information		64
Item 6.	Exhibits		65

 

 

FORWARD–LOOKING STATEMENTS

 

We may, from time to time, make written or oral “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to Western New England Bancorp, Inc.’s (the “Company”) financial condition, liquidity, results of operations, future performance, and business. Forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

 

●

unpredictable changes in general economic conditions, financial markets, fiscal, monetary and regulatory policies, including actual or potential stress in the banking industry;

●

the duration and scope of potential pandemics, including the emergence of new variants and the response thereto;

●

changes in economic conditions which could materially impact credit quality trends and the ability to generate loans and gather deposits;

●

inflation and governmental responses to inflation, including recent sustained increases and potential future increases in interest rates that reduce margins;

●

the effect on our operations of governmental legislation and regulation, including changes in accounting regulation or standards, the nature and timing of the adoption and effectiveness of new requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Basel guidelines, capital requirements and other applicable laws and regulations;

●

significant changes in accounting, tax or regulatory practices or requirements;

●

new legal obligations or liabilities or unfavorable resolutions of litigation;

●

disruptive technologies in payment systems and other services traditionally provided by banks;

●

the highly competitive industry and market area in which we operate;

●

changes in business conditions and inflation;

●

operational risks or risk management failures by us or critical third parties, including without limitation with respect to data processing, information systems, cybersecurity, technological changes, vendor issues, business interruption, and fraud risks;

●

failure or circumvention of our internal controls or procedures;

●

changes in the securities markets which affect investment management revenues;

●

increases in Federal Deposit Insurance Corporation deposit insurance premiums and assessments;

●

the soundness of other financial services institutions which may adversely affect our credit risk;

●

certain of our intangible assets may become impaired in the future;

●

new lines of business or new products and services, which may subject us to additional risks;

●

changes in key management personnel which may adversely impact our operations;

●

severe weather, natural disasters, acts of war or terrorism and other external events which could significantly impact our business; and

●

other risk factors detailed from time to time in our SEC filings.

 

Investors should consider these risks, uncertainties, and other factors in addition to the factors under the heading “Risk Factors” included in this filing and our other filings with the SEC.

 

Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except to the extent required by law.

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS.

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(Dollars in thousands, except share data)

 

		June 30,				December 31,
		2024				2023
ASSETS
Cash and due from banks		$	23,236			$	20,784
Federal funds sold			1,947				2,991
Interest-bearing deposits and other short-term investments			28,275				5,065
Total cash and cash equivalents			53,458				28,840
Securities available-for-sale, at fair value			135,089				137,115
Securities held-to-maturity, at amortized cost (Fair value of $177,475 at June 30, 2024 and $187,692 at December 31, 2023)			217,632				223,370
Marketable equity securities, at fair value			233				196
Total investment securities			352,954				360,681
Federal Home Loan Bank stock and other restricted stock, at amortized cost			7,143				3,707
Total Loans			2,026,226				2,027,317
Less: Allowance for Credit Losses			(19,444	)			(20,267	)
Net loans			2,006,782				2,007,050
Premises and equipment, net			24,738				25,575
Accrued interest receivable			8,737				8,528
Bank-owned life insurance			76,100				75,145
Deferred tax asset, net			14,292				13,636
Goodwill			12,487				12,487
Core deposit intangible			1,625				1,813
Other assets			27,754				27,109
TOTAL ASSETS		$	2,586,070			$	2,564,571
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest-bearing deposits		$	553,329			$	579,594
Interest-bearing deposits			1,618,480				1,564,150
Total deposits			2,171,809				2,143,744
Borrowings:
Short-term borrowings			6,570				16,100
Long-term debt			128,277				120,646
Subordinated debt			19,731				19,712
Total borrowings			154,578				156,458
Other liabilities			23,206				26,960
TOTAL LIABILITIES			2,349,593				2,327,162
SHAREHOLDERS' EQUITY:
Preferred stock - $0.01 par value, 5,000,000 shares authorized, none outstanding at June 30, 2024 and December 31, 2023			—				—
Common stock - $0.01 par value, 75,000,000 shares authorized, 21,357,849 shares issued and outstanding at June 30, 2024; 21,666,807 shares issued and outstanding at December 31, 2023			214				217
Additional paid-in capital			123,417				125,448
Unearned compensation – Employee Stock Ownership Plan (“ESOP”)			(2,150	)			(2,394	)
Unearned compensation - Equity Incentive Plan			(1,836	)			(1,111	)
Retained earnings			140,469				136,993
Accumulated other comprehensive loss			(23,637	)			(21,744	)
TOTAL SHAREHOLDERS’ EQUITY			236,477				237,409
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	2,586,070			$	2,564,571

 

See accompanying notes to unaudited consolidated financial statements.

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME – UNAUDITED

(Dollars in thousands, except per share data)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2024				2023				2024				2023
Interest and dividend income:
Residential and commercial real estate loans		$	20,950			$	19,103			$	41,903			$	37,355
Commercial and industrial loans			3,310				3,264				6,515				6,266
Consumer loans			80				83				163				158
Total interest income from loans			24,340				22,450				48,581				43,779
Investment securities, taxable			2,139				2,044				4,252				4,120
Investment securities, tax-exempt			1				2				2				4
Marketable equity securities			1				48				1				119
Total interest and dividend income from investment securities			2,141				2,094				4,255				4,243
Other investments			148				146				284				252
Short-term investments			173				119				286				173
Total interest income from cash and cash equivalents			321				265				570				425
Total interest and dividend income			26,802				24,809				53,406				48,447
Interest expense:
Deposits			10,335				6,069				19,628				10,172
Short-term borrowings			186				646				469				1,349
Long-term debt			1,557				995				2,985				1,069
Subordinated debt			254				253				508				507
Total interest expense			12,332				7,963				23,590				13,097
Net interest and dividend income			14,470				16,846				29,816				35,350
(Reversal of) provision for credit losses			(294	)			420				(844	)			32
Net interest and dividend income after (reversal of) provision for credit losses			14,764				16,426				30,660				35,318
Non-interest income:
Service charges and fees			2,341				2,241				4,560				4,428
Income from bank-owned life insurance			502				494				955				934
Net unrealized gain on marketable equity securities			4				—				12				—
Loss on sale of premises and equipment			—				—				(6	)
Gain on non-marketable equity investments			987				—				987				352
Loss on defined benefit plan termination			—				(1,143	)			—				(1,143	)
Total non-interest income			3,834				1,592				6,508				4,571
Non-interest expense:
Salaries and employees benefits			7,901				8,089				16,145				16,520
Occupancy			1,218				1,203				2,581				2,551
Furniture and equipment			483				492				967				978
Data processing			846				792				1,708				1,545
Software			566				526				1,265				1,040
Debit card and ATM processing expense			643				528				1,195				1,018
Professional fees			581				803				1,150				1,560
FDIC insurance assessment			323				290				733				642
Advertising			339				339				688				756
Other expenses			1,414				1,489				2,664				2,837
Total non-interest expense			14,314				14,551				29,096				29,447
Income before income taxes			4,284				3,467				8,072				10,442
Income tax provision			771				704				1,598				2,375
Net income		$	3,513			$	2,763			$	6,474			$	8,067
Earnings per common share:
Basic earnings per share		$	0.17			$	0.13			$	0.31			$	0.37
Weighted average basic shares outstanding			21,056,173				21,634,683				21,118,571				21,666,713
Diluted earnings per share		$	0.17			$	0.13			$	0.31			$	0.37
Weighted average diluted shares outstanding			21,163,762				21,648,235				21,217,543				21,682,402
Dividends per share		$	0.07			$	0.07			$	0.14			$	0.14

 

See accompanying notes to unaudited consolidated financial statements.

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED

(Dollars in thousands)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2024				2023				2024				2023
Net income		$	3,513			$	2,763			$	6,474			$	8,067
Other comprehensive income (loss):
Securities available-for-sale:
Unrealized (loss) gain			(13	)			(1,631	)			(2,549	)			985
Tax effect			13				428				656				(247	)
Net-of-tax amount			—				(1,203	)			(1,893	)			738
Defined benefit pension plan:
Gain arising during the period			—				358				—				358
Reclassification adjustment:
Defined benefit plan termination loss realized in income (1)			—				1,143				—				1,143
Unrealized actuarial gain on defined benefit plan			—				1,501				—				1,501
Tax effect			—				(421	)			—				(421	)
Net-of-tax amount			—				1,080				—				1,080
Other comprehensive (loss) gain			—				(123	)			(1,893	)			1,818
Comprehensive income		$	3,513			$	2,640			$	4,581			$	9,885

 

(1)

Realized losses on defined benefit plan termination are recognized as a component of non-interest income in the consolidated statements of net income. The tax effects associated with the reclassification adjustment were $321,000 for the three and six months ended June 30, 2023.

 

See accompanying notes to unaudited consolidated financial statements.

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED

THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023

(Dollars in thousands, except share data)

 

		Common Stock												Unearned				Unearned Compensation-								Accumulated
		Shares				Par Value				Paid-in Capital				Compensation- ESOP				Equity Incentive Plan				Retained Earnings				Comprehensive- Loss				Total
BALANCE AT DECEMBER 31, 2023			21,666,807			$	217			$	125,448			$	(2,394	)		$	(1,111	)		$	136,993			$	(21,744	)		$	237,409
Net income			—				—				—				—				—				2,961				—				2,961
Comprehensive loss			—				—				—				—				—				—				(1,893	)			(1,893	)
Common stock held by ESOP committed to be released (71,240 shares)			—				—				30				122				—				—				—				152
Share-based compensation - equity incentive plan			—				—				—				—				505				—				—				505
Forfeited equity incentive plan shares reissued in connection with 2021 LTI performance share grant (4,219 shares)			—				—				35				—				(35	)			—				—				—
Repurchase of common stock			(221,947	)			(3	)			(1,831	)			—				—				—				—				(1,834	)
Issuance of common stock in connection with equity incentive plan			182,830				2				1,531				—				(1,533	)			—				—				—
Cash dividends declared and paid on common stock ($0.07 per share)			—				—				—				—				—				(1,504	)			—				(1,504	)
BALANCE AT MARCH 31, 2024			21,627,690			$	216			$	125,213			$	(2,272	)		$	(2,174	)		$	138,450			$	(23,637	)		$	235,796
Net income			—				—				—				—				—				3,513				—				3,513
Comprehensive income			—				—				—				—				—				—				—				—
Common stock held by ESOP committed to be released (71,240 shares)			—				—				9				122				—				—				—				131
Share-based compensation - equity incentive plan			—				—				—				—				318				—				—				318
Repurchase of common stock			(269,841	)			(2	)			(1,785	)			—				—				—				—				(1,787	)
Forfeited equity incentive plan shares (2,384 shares)			—				—				(20	)			—				20				—				—				—
Cash dividends declared and paid on common stock ($0.07 per share)			—				—				—				—				—				(1,494	)			—				(1,494	)
BALANCE AT JUNE 30, 2024			21,357,849			$	214			$	123,417			$	(2,150	)		$	(1,836	)		$	140,469			$	(23,637	)		$	236,477

 

See accompanying notes to unaudited consolidated financial statements.

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED

THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023

(Dollars in thousands, except share data)

 

		Common Stock								Additional				Unearned				Unearned Compensation-								Accumulated Other
		Shares				Par Value				Paid-in Capital				Compensation- ESOP				Equity Incentive Plan				Retained Earnings				Comprehensive Loss				Total
BALANCE AT DECEMBER 31, 2022			22,216,789			$	222			$	128,899			$	(2,906	)		$	(1,012	)		$	127,982			$	(25,042	)		$	228,143
Cumulative effect accounting adjustment(1)			—				—				—				—				—				9				—				9
Net income			—				—				—				—				—				5,304				—				5,304
Comprehensive income			—				—				—				—				—				—				1,941				1,941
Common stock held by ESOP committed to be released (74,993 shares)			—				—				52				128				—				—				—				180
Share-based compensation - equity incentive plan			—				—				—				—				529				—				—				529
Forfeited equity incentive plan shares reissued in connection with 2020 LTI performance share grant (19,761 shares)			—				—				180				—				(180	)			—				—				—
Repurchase of common stock			(143,896	)			(1	)			(1,350	)			—				—				—				—				(1,351	)
Issuance of common stock in connection with equity incentive plan			136,454				1				1,348				—				(1,349	)			—				—				—
Forfeited equity incentive plan shares reissued in connection with 2023 LTI grant (2,742 shares)			—				—				27				—				(27	)			—				—				—
Cash dividends declared and paid on common stock ($0.07 per share)			—				—				—				—				—				(1,533	)			—				(1,533	)
BALANCE AT MARCH 31, 2023			22,209,347			$	222			$	129,156			$	(2,778	)		$	(2,039	)		$	131,762			$	(23,101	)		$	233,222
Net income			—				—				—				—				—				2,763				—				2,763
Comprehensive loss			—				—				—				—				—				—				(123	)			(123	)
Common stock held by ESOP committed to be released (74,993 shares)			—				—				22				128				—				—				—				150
Share-based compensation - equity incentive plan			—				—				—				—				300				—				—				300
Repurchase of common stock			(126,944	)			(1	)			(785	)			—				—				—				—				(786	)
Cash dividends declared and paid on common stock ($0.07 per share)			—				—				—				—				—				(1,528	)			—				(1,528	)
BALANCE AT JUNE 30, 2023			22,082,403			$	221			$	128,393			$	(2,650	)		$	(1,739	)		$	132,997			$	(23,224	)		$	233,998

 

See accompanying notes to unaudited consolidated financial statements.

 

(1)

Represents gross transition adjustment amount of $13,000, net of taxes of $4,000, to reflect the cumulative impact on retained earnings pursuant to the Company’s adoption of Accounting Standards Update (“ASU”) 2016-13 Financial Instruments-Credit Losses on Financial Instruments and relevant amendments.

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(Dollars in thousands)

 

		Six Months Ended June 30,
		2024				2023
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	6,474			$	8,067
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
(Reversal of) provision for credit losses			(844	)			32
Depreciation and amortization of premises and equipment			1,110				1,110
(Accretion) amortization of purchase accounting adjustments, net			(51	)			77
Amortization of core deposit intangible			188				188
Net amortization of premiums and discounts on securities and mortgage loans			585				661
Net amortization of deferred costs on mortgage loans			219				232
Net amortization of premiums on subordinated debt			19				19
Share-based compensation expense			823				829
ESOP expense			283				330
Net change in unrealized gains on marketable equity securities			(12	)			—
Loss on disposal of premises and equipment, net			6				—
Income from bank-owned life insurance			(955	)			(934	)
Net change in:
Accrued interest receivable			(209	)			328
Other assets			(936	)			(3,549	)
Other liabilities			(3,565	)			(9,124	)
Net cash provided by (used in) operating activities			3,135				(1,734	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities held-to-maturity			(1,100	)			—
Proceeds from calls, maturities, and principal collections of securities held-to-maturity			6,633				7,055
Purchases of securities available-for-sale			(9,367	)			—
Proceeds from calls, maturities, and principal collections of securities available-for-sale			8,446				6,069
Proceeds from redemption and sales of marketable equity securities			—				6,237
Loan originations and principal payments, net			957				(24,800	)
(Purchase) redemption of Federal Home Loan Bank of Boston stock			(3,436	)			126
Purchases of premises and equipment			(311	)			(797	)
Proceeds from sale of premises & equipment			12				18
Net cash provided by (used in) investing activities			1,834				(6,092	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits			28,065				(71,469	)
Net change in short-term borrowings			(9,530	)			(34,160	)
Repayment of long-term debt			(90,369	)			—
Proceeds from issuance of long-term debt			98,000				120,000
Cash dividends paid			(2,998	)			(3,061	)
Repurchase of common stock			(3,519	)			(2,137	)
Net cash provided by financing activities			19,649				9,173
NET CHANGE IN CASH AND CASH EQUIVALENTS:			24,618				1,347
Beginning of period			28,840				30,342
End of period		$	53,458			$	31,689
Supplemental cash flow information:
Net change in cash due to broker for common stock repurchased		$	102				—
Interest paid			25,877			$	12,311
Taxes paid			2,282				4,770

 

See the accompanying notes to unaudited consolidated financial statements.

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

JUNE 30, 2024

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations and Basis of Presentation. Western New England Bancorp, Inc. (“WNEB,” “Company,” “we,” or “us”) is a Massachusetts-chartered stock holding company for Westfield Bank, a federally-chartered savings bank (“Bank”).

 

The Bank operates 25 banking offices in Hampden County and Hampshire County in western Massachusetts and Hartford County and Tolland County in northern Connecticut, and its primary sources of revenue are interest income from loans as well as interest income from investment securities. The West Hartford Financial Services Center serves as the Company’s Connecticut hub, housing Commercial Lending, Cash Management and a Mortgage Loan Officer. The Bank’s deposits are insured up to the maximum Federal Deposit Insurance Corporation (“FDIC”) coverage limits.

 

Wholly-owned Subsidiaries. Elm Street Securities Corporation, WFD Securities, Inc. and CSB Colts, Inc., are Massachusetts-chartered securities corporations, formed for the primary purpose of holding qualified securities. WB Real Estate Holdings, LLC is a Massachusetts-chartered limited liability company that holds real property acquired as security for debts previously contracted by the Bank.

 

Principles of Consolidation. The consolidated financial statements include the accounts of Western New England Bancorp, Inc., the Bank, CSB Colts, Inc., Elm Street Securities Corporation, WB Real Estate Holdings, LLC and WFD Securities, Inc. All material intercompany balances and transactions have been eliminated in consolidation.

 

Estimates. The accompanying consolidated financial statements and related disclosures have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates, assumptions and judgements that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses for the periods then ended. Actual results could differ from those estimates. Estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for credit losses and goodwill impairment.

 

Basis of Presentation. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial condition as of June 30, 2024, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented. The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results of operations for the year ending December 31, 2024. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

 

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2023, included in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”).

 

Reclassifications. Amounts in the prior period financial statements are reclassified when necessary to conform to the current year presentation.

 

 

 

2. EARNINGS PER SHARE (“EPS”)

 

Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. If rights to dividends on unvested awards are non-forfeitable, these unvested awards are considered outstanding in the computation of basic earnings per share. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by us relate to stock options and certain performance-based restricted stock awards and are determined using the treasury stock method. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. There were no anti-dilutive shares outstanding during the three and six months ended June 30, 2024 and 2023, respectively.

 

Earnings per common share for the three and six months ended June 30, 2024 and 2023 have been computed based on the following:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2024				2023				2024				2023
		(Dollars in thousands, except per share data)
Net income applicable to common stock		$	3,513			$	2,763			$	6,474			$	8,067
Average number of common shares issued			21,516				22,148				21,578				22,184
Less: Average unallocated ESOP Shares			(274	)			(348	)			(282	)			(357	)
Less: Average unvested performance-based equity incentive plan shares			(186	)			(166	)			(177	)			(160	)
Average number of common shares outstanding used to calculate basic earnings per common share			21,056				21,634				21,119				21,667
Effect of dilutive performance-based equity incentive plan			108				14				99				15
Average number of common shares outstanding used to calculate diluted earnings per common share			21,164				21,648				21,218				21,682
Net income per common share:
Basic earnings per common share		$	0.17			$	0.13			$	0.31			$	0.37
Diluted earnings per common share		$	0.17			$	0.13			$	0.31			$	0.37

 

 

 

3. COMPREHENSIVE INCOME (LOSS)

 

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income (loss).

 

The components of accumulated other comprehensive loss included in shareholders’ equity are as follows:

 

		June 30, 2024				December 31, 2023
		(Dollars in thousands)
Net unrealized losses on securities available-for-sale		$	(31,715	)		$	(29,166	)
Tax effect			8,078				7,422
Net-of-tax amount			(23,637	)			(21,744	)
Accumulated other comprehensive loss		$	(23,637	)		$	(21,744	)

 

 

4.  INVESTMENT SECURITIES

 

The following tables summarize the amortized cost and fair value of securities available-for-sale and held-to-maturity at June 30, 2024 and December 31, 2023, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss on securities available-for-sale. The Company did not record an allowance for credit losses on its securities held-to-maturity portfolio as of June 30, 2024 and December 31, 2023.

 

		June 30, 2024
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(Dollars in thousands)
Securities available-for-sale:
Debt securities:
Government-sponsored enterprise obligations		$	14,929			$	—			$	(3,131	)		$	11,798
State and municipal bonds			135				—				—				135
Corporate bonds			5,000				—				(683	)			4,317
Total debt securities			20,064				—				(3,814	)			16,250
Mortgage-backed securities:
Government-sponsored mortgage-backed securities			140,359				—				(26,530	)			113,829
U.S. government guaranteed mortgage-backed securities			6,381				—				(1,371	)			5,010
Total mortgage-backed securities			146,740				—				(27,901	)			118,839
Total securities available-for-sale			166,804				—				(31,715	)			135,089
Securities held-to-maturity:
Debt securities:
U.S. Treasury securities			9,999				—				(466	)			9,533
U.S. government guaranteed obligations			1,088				5				—				1,093
Total debt securities			11,087				5				(466	)			10,626
Mortgage-backed securities:
Government-sponsored mortgage-backed securities			206,545				14				(39,710	)			166,849
Total mortgage-backed securities			206,545				14				(39,710	)			166,849
Total securities held-to-maturity			217,632				19				(40,176	)			177,475
Total		$	384,436			$	19			$	(71,891	)		$	312,564

 

9 

 

 

		December 31, 2023
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(Dollars in thousands)
Securities available-for-sale:
Debt securities:
Government-sponsored enterprise obligations		$	14,924			$	—			$	(2,898	)		$	12,026
State and municipal bonds			135				—				—				135
Corporate bonds			8,000				—				(1,038	)			6,962
Total debt securities			23,059				—				(3,936	)			19,123
Mortgage-backed securities:
Government-sponsored mortgage-backed securities			136,533				—				(23,976	)			112,557
U.S. government guaranteed mortgage-backed securities			6,689				—				(1,254	)			5,435
Total mortgage-backed securities			143,222				—				(25,230	)			117,992
Total securities available-for-sale			166,281				—				(29,166	)			137,115
Securities held-to-maturity:
Debt securities:
U.S. Treasury securities			9,995				—				(545	)			9,450
Total debt securities			9,995				—				(545	)			9,450
Mortgage-backed securities:
Government-sponsored mortgage-backed securities			213,375				107				(35,240	)			178,242
Total mortgage-backed securities			213,375				107				(35,240	)			178,242
Total securities held-to-maturity			223,370				107				(35,785	)			187,692
Total		$	389,651			$	107			$	(64,951	)		$	324,807

 

The following table summarizes the unrealized gains recognized on marketable equity securities for the periods indicated:

 

		Six Months Ended June 30,
		2024				2023
		(Dollars in thousands)
Net gains recognized during the period on marketable equity securities		$	12			$	—
Unrealized gains recognized during the period on marketable equity securities still held at end of period		$	12			$	—

 

 

The corporate bonds are investments in subordinated debt of two federally-insured banks, the majority of which is callable after five years of origination. The Company reviewed the financial strength of these bonds and concluded that the amortized cost remains supported by the expected future cash flows and there were no credit impairments on the bonds at June 30, 2024. All securities are performing at June 30, 2024.

 

At June 30, 2024, U.S. Treasury securities with a fair value of $9.5 million, government-sponsored enterprise obligations with a fair value of $11.7 million and mortgage-backed securities with a fair value of $161.0 million were pledged to secure public deposits and for other purposes as required or permitted by law. The securities collateralizing public deposits are subject to fluctuations in fair value. We monitor the fair value of the collateral on a periodic basis, and pledge additional collateral if necessary based on changes in fair value of collateral or the balances of such deposits.

 

10 

 

 

The amortized cost and fair value of securities available-for-sale and held-to-maturity at June 30, 2024, by final maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations.

 

		Available-for-Sale								Held-to-Maturity
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(Dollars in thousands)
Debt securities:
Due in one year or less		$	135			$	135			$	4,997			$	4,915
Due after one year through five years			—				—				5,002				4,618
Due after five years through ten years			19,929				16,115				—				—
Due after ten years			—				—				1,088				1,093
Total debt securities			20,064				16,250				11,087				10,626
Mortgage-backed securities:
Due after one year through five years			923				881				—				—
Due after five years through ten years			797				724				—				—
Due after ten years			145,020				117,234				206,545				166,849
Total mortgage-backed securities			146,740				118,839				206,545				166,849
Total securities		$	166,804			$	135,089			$	217,632			$	177,475

 

There were no sales of securities available-for-sale for the three and six months ended June 30, 2024 and 2023.

 

Allowance for Credit Losses – Securities Available-for-Sale

 

The Company measures expected credit losses on debt securities available-for-sale based upon the gain or loss position of the security. For debt securities available-for-sale in an unrealized loss position which the Company does not intend to sell, and it is not more likely than not that the Company will be required to sell the security before recovery of the Company’s amortized cost, the Company evaluates qualitative criteria to determine any expected loss. This includes among other items the financial health of, and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security. The Company also evaluates quantitative criteria including determining whether there has been an adverse change in expected future cash flows of the security. Securities available-for-sale which are guaranteed by government agencies do not currently have an allowance for credit loss as the Company determined these securities are either backed by the full faith and credit of the U.S. government and/or there is an unconditional commitment to make interest payments and to return the principal investment in full to investors when a debt security reaches maturity. In assessing the Company’s investments in government-sponsored and U.S. government guaranteed mortgage-backed securities and government-sponsored enterprise obligations, the contractual cash flows of these investments are guaranteed by the respective government-sponsored enterprise; Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), Federal Farm Credit Bank (“FFCB”), or Federal Home Loan Bank (“FHLB”). Accordingly, it is expected that the securities would not be settled at a price less than the par value of the Company’s investments. The Company will evaluate this position no less than annually, however, certain items which may cause the Company to change this methodology include legislative changes that remove a government-sponsored enterprise’s ability to draw funds from the U.S. government, or legislative changes to housing policy that reduce or eliminate the U.S. government’s implicit guarantee on such securities. Accrued interest receivable on securities available-for-sale guaranteed by government agencies totaled $363,000 at June 30, 2024 and $333,000 at December 31, 2023, and is excluded from the estimate of credit losses. If the Company does not expect to recover the entire amortized cost basis of the security, an allowance for credit losses would be recorded, with a related charge to earnings. If the Company intends to sell the security or it is more likely than not that the Company will be required to sell the debt security before recovery of its amortized cost basis, the Company recognizes the entire difference between the amortized cost basis of the security and its fair value in earnings. Any impairment that has not been recorded through an allowance for credit loss is recognized in other comprehensive income. Accrued interest receivable on debt securities available-for-sale not guaranteed by government agencies totaled $124,000 at June 30, 2024 and $178,000 at December 31, 2023, and is excluded from the estimate of credit losses. There were no allowances for credit losses established on debt securities available-for-sale during the three and six months ended June 30, 2024.

 

11 

 

 

At June 30, 2024, there was one available-for-sale corporate bond that was rated below investment grade by one or more ratings agencies, while at December 31, 2023, there were two available-for-sale corporate bonds that were rated below investment grade by one or more ratings agencies. At June 30, 2024, the Company reviewed the financial strength of the one available-for-sale corporate bond below investment grade and concluded that the amortized cost remains supported by the expected future cash flows of the security.

 

Allowance for Credit Losses – Securities Held-to-Maturity

 

The Company measures expected credit losses on debt securities held-to-maturity on a collective basis by security type and risk rating where available. The reserve for each pool is calculated based on a Probability of Default/Loss Given Default basis taking into consideration the expected life of each security. Held-to-maturity securities which are issued by the United States Treasury or are guaranteed by government agencies do not currently have an allowance for credit loss as the Company determined these securities are either backed by the full faith and credit of the U.S. government and/or there is an unconditional commitment to make interest payments and to return the principal investment in full to investors when a debt security reaches maturity. In assessing the Company’s investments in government-sponsored and U.S. government guaranteed mortgage-backed securities and government-sponsored enterprise obligations, the contractual cash flows of these investments are guaranteed by the respective government-sponsored enterprise; FHLMC, FNMA, FFCB, or FHLB. Accordingly, it is expected that the securities would not be settled at a price less than the par value of the Company’s investments. The Company will evaluate this position no less than annually, however, certain items which may cause the Company to change this methodology include legislative changes that remove a government-sponsored enterprise’s ability to draw funds from the U.S. government, or legislative changes to housing policy that reduce or eliminate the U.S. government’s implicit guarantee on such securities. Any expected credit losses on securities held-to-maturity would be presented as an allowance for credit loss. Accrued interest receivable on securities held-to-maturity totaled $450,000 at June 30, 2024 and $454,000 at December 31, 2023, and is excluded from the estimate of credit losses. There were no allowances for credit losses established on securities held-to-maturity securities during the three and six months ended June 30, 2024.

 

At June 30, 2024 and December 31, 2023, management attributed the unrealized losses to increases in current market yields compared to the yields at the time the investments were purchased by the Company and not due to credit quality.

 

The following tables summarize the gross unrealized losses and fair value of the Company’s securities available-for-sale and held-to-maturity, segregated by the duration of their continuous unrealized loss positions at June 30, 2024 and December 31, 2023:

 

		June 30, 2024
		Less Than Twelve Months																Over Twelve Months
		Number of Securities				Fair Value				Gross Unrealized Loss				Depreciation from Amortized Cost Basis (%)				Number of Securities				Fair Value				Gross Unrealized Loss				Depreciation from Amortized Cost Basis (%)
		(Dollars in thousands)
Securities available-for-sale:
Government-sponsored mortgage-backed securities			2			$	8,953			$	85				0.9	%			70			$	104,876			$	26,445				20.1	%
U.S. government guaranteed mortgage-backed securities			—				—				—				—				9				5,010				1,371				21.5
Government-sponsored enterprise obligations			—				—				—				—				3				11,798				3,131				21.0
Corporate bonds			—				—				—				—				2				4,317				683				13.7
Total securities available-for-sale			2				8,953				85								84				126,001				31,630
Securities held-to-maturity:
U.S. Treasury securities			—				—				—				—	%			2				9,533				466				4.7	%
Government-sponsored mortgage-backed securities			4				10,287				115				1.1				37				154,911				39,595				20.4
Total securities held-to-maturity			4				10,287				115								39				164,444				40,061
Total securities			6			$	19,240			$	200								123			$	290,445			$	71,691

 

12 

 

 

		December 31, 2023
		Less Than Twelve Months																Over Twelve Months
		Number of Securities				Fair Value				Gross Unrealized Loss				Depreciation from Amortized Cost Basis (%)				Number of Securities				Fair Value				Gross Unrealized Loss				Depreciation from Amortized Cost Basis (%)
		(Dollars in thousands)
Securities available-for-sale:
Government-sponsored mortgage-backed securities			—			$	—			$	—				—	%			70			$	112,557			$	23,976				17.6	%
U.S. government guaranteed mortgage-backed securities			—				—				—				—				9				5,435				1,254				18.7
Government-sponsored enterprise obligations			—				—				—				—				3				12,026				2,898				19.4
Corporate bonds			—				—				—				—				3				6,962				1,038				13.0
Total securities available-for-sale			—				—				—								85				136,980				29,166
Securities held-to-maturity:
U.S. Treasury securities			—				—				—				—	%			2				9,450				545				5.5	%
Government-sponsored mortgage-backed securities			4				7,097				56				0.8				36				164,395				35,184				17.6
Total securities held-to-maturity			4				7,097				56								38				173,845				35,729
Total securities			4			$	7,097			$	56								123			$	310,825			$	64,895

 

The Company expects to recover its amortized cost basis on all securities in its available-for-sale and held-to-maturity portfolios. Furthermore, the Company does not intend to sell, nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of June 30, 2024, prior to this anticipated recovery. The decline in fair value on its available-for-sale and held-to-maturity portfolios is largely due to changes in interest rates and other market conditions and not due to credit quality issues. The issuers continue to make timely principal and interest payments on the securities and the fair value is expected to recover as the securities approach maturity. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.

 

The following description provides the number of investment positions in an unrealized loss position:

 

At June 30, 2024, the Company reported unrealized losses on the securities available-for-sale portfolio of $31.7 million, or 19.0% of the amortized cost basis of the securities available-for-sale, compared to unrealized losses of $29.2 million, or 17.5% of the amortized cost basis of the securities available-for-sale at December 31, 2023. At June 30, 2024, there were 86 securities available-for-sale in which the fair value was less than the amortized cost, compared to 85 securities available-for-sale at December 31, 2023.

 

At June 30, 2024, the Company reported unrealized losses on the securities held-to-maturity portfolio of $40.2 million, or 18.5%, of the amortized cost basis of the securities held-to-maturity portfolio, compared to $35.7 million, or 16.0% of the amortized cost basis of the securities held-to-maturity at December 31, 2023. At June 30, 2024, there 43 securities held-to-maturity in which the fair value was less than the amortized cost, compared to 42 securities held-to-maturity at December 31, 2023.

 

 

5.

LOANS AND ALLOWANCE FOR CREDIT LOSSES

 

The following table presents the summary of the loan portfolio by the major classification of the loan at the periods indicated:

 

		June 30,				December 31,
		2024				2023
		(Dollars in thousands)
Commercial real estate:
Non-owner occupied		$	864,603			$	881,643
Owner-occupied			191,936				198,108
Total commercial real estate			1,056,539				1,079,751
Residential real estate:
Residential one-to-four family			631,997				612,315
Home equity			113,970				109,839
Total residential real estate			745,967				722,154
Commercial and industrial			216,300				217,447
Consumer			4,715				5,472
Total gross loans			2,023,521				2,024,824
Plus: Unearned premiums and deferred loan fees and costs, net			2,705				2,493
Less: Allowance for credit losses			(19,444	)			(20,267	)
Net loans		$	2,006,782			$	2,007,050

 

Lending activities primarily consist of commercial real estate loans, commercial and industrial loans, residential real estate loans, and to a lesser degree, consumer loans.

 

Loans Pledged as Collateral.

 

The carrying value of loans pledged to secure advances from the FHLB were $944.8 million and $941.2 million at June 30, 2024 and December 31, 2023, respectively. The outstanding balance of FHLB advances was $128.3 million and $40.6 million at June 30, 2024 and December 31, 2023, respectively.

 

The carrying value of loans pledged to secure advances from the Federal Reserve Bank (“FRB”) were $412.9 million at June 30, 2024. There were no loans pledged to the Federal Reserve Bank to secure advances at December 31, 2023. There were no funds borrowed from the FRB backed by loans outstanding at June 30, 2024 or December 31, 2023.

 

Loans Serviced for Others.

 

The Company has transferred a portion of its originated commercial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in our accompanying consolidated balance sheets. We continue to service the loans on behalf of the participating lenders. We share with participating lenders, on a pro-rata basis, any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. At June 30, 2024 and December 31, 2023, the Company was servicing commercial loans participated out to various other institutions totaling $58.8 million and $65.0 million, respectively.

 

Residential real estate mortgages are originated by the Company both for its portfolio and for sale into the secondary market. The Company may sell its loans to institutional investors such as the FHLMC. Under loan sale and servicing agreements with the investor, the Company generally continues to service the residential real estate mortgages. The Company pays the investor an agreed upon rate on the loan, which is less than the interest rate received from the borrower. The Company retains the difference as a fee for servicing the residential real estate mortgages. The Company capitalizes mortgage servicing rights at their fair value upon sale of the related loans, amortizes the asset over the estimated life of the serviced loan, and periodically assesses the asset for impairment. The significant assumptions used by a third party to estimate the fair value of capitalized servicing rights at June 30, 2024, include weighted average prepayment speed for the portfolio using the Public Securities Association Standard Prepayment Model (104 PSA), average internal rate of return (10.01%), weighted average servicing fee (0.25%), and average cost to service loans ($83.18 per loan). The estimated fair value of capitalized servicing rights may vary significantly in subsequent periods primarily due to changing market interest rates, and their effect on prepayment speeds and discount rates. There were no sales of residential real estate mortgages to the secondary market during the three and six months ended June 30, 2024.

 

14 

 

 

At June 30, 2024 and December 31, 2023, the Company was servicing residential mortgage loans owned by investors totaling $70.0 million and $72.7 million, respectively. Servicing fee income of $88,000 and $97,000 was recorded for the six months ended June 30, 2024 and 2023, respectively, and is included in service charges and fees on the consolidated statements of net income.

 

A summary of the activity in the balances of mortgage servicing rights follows:

 

		Three Months Ended								Six Months Ended
		June 30, 2024				June 30, 2023				June 30, 2024				June 30, 2023
		(Dollars in thousands)
Balance at the beginning of period:		$	400			$	515			$	422			$	550
Amortization			(23	)			(35	)			(45	)			(70	)
Balance at the end of period		$	377			$	480			$	377			$	480
Fair value at the end of period		$	689			$	759			$	689			$	759

 

Loans are recorded at the principal amount outstanding, adjusted for charge-offs, unearned premiums and deferred loan fees and costs. Interest on loans is calculated using the effective yield method on daily balances of the principal amount outstanding and is credited to income on the accrual basis to the extent it is deemed collectable. Our general policy is to discontinue the accrual of interest when principal or interest payments are delinquent 90 days or more based on the contractual terms of the loan, or earlier if there are concerns regarding the collectability of the loan. Any unpaid amounts previously accrued on these loans are reversed from income. Subsequent cash receipts are applied to the outstanding principal balance or to interest income if, in the judgment of management, collection of the principal balance is not in question. Loans are returned to accrual status when they become current as to both principal and interest and perform in accordance with contractual terms for a period of at least six months, reducing the concern as to the collectability of principal and interest. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income over the estimated average lives of the related loans.

 

Allowance for Credit Losses.

 

The allowance for credit losses is an estimate of expected losses inherent within the Company’s existing loans held for investment portfolio. The allowance for credit losses for loans held for investment, as reported in our consolidated balance sheet, is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. Accrued interest receivable on loans held for investment was $7.7 million at June 30, 2024 and $7.5 million at December 31, 2023 and is excluded from the estimate of credit losses.

 

The loan loss estimation process involves procedures to appropriately consider the unique characteristics of loan portfolio segments, which consist of commercial real estate loans, residential real estate loans, commercial and industrial loans, and consumer loans. These segments are further disaggregated into loan classes, the level at which credit risk is monitored. For each of these pools, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data. The quantitative component of the ACL on loans is model-based and utilizes a forward-looking macroeconomic forecast. The Company uses a discounted cash flow method, incorporating probability of default and loss given default forecasted based on statistically derived economic variable loss drivers, to estimate expected credit losses. This process includes estimates which involve modeling loss projections attributable to existing loan balances, and considering historical experience, current conditions, and future expectations for pools of loans over a reasonable and supportable forecast period. The historical information either experienced by the Company or by a selection of peer banks, when appropriate, is derived from a combination of recessionary and non-recessionary performance periods for which data is available.

 

15 

 

 

Commercial real estate loans. Loans in this segment include owner-occupied and non-owner occupied commercial real estate, multi-family dwellings, and income producing investment properties, as well as commercial construction loans for commercial development projects throughout New England. Typically, commercial real estate loans are secured by office buildings, apartment buildings, industrial properties, warehouses, retail facilities, hotels, assisted living facilities, and educational facilities. Collateral values are established by independent third-party appraisals and evaluations. Primary repayment sources for commercial real estate loans include operating income and cash flow generated by the real estate, sale of the real estate and, funds from any liquidation of the collateral. Under its lending guidelines, the Company generally requires a corporate or personal guarantee from individuals that hold material ownership in the borrowing entity. The underlying cash flows generated by the properties or operations can be adversely impacted by a downturn in the economy due to increased vacancy rates or diminished cash flows, which in turn, would have an effect on the credit quality in this segment. Management obtains financial information annually and continually monitors the cash flows of these loans.

 

Residential real estate loans. This portfolio segment consists of first mortgages secured by one-to-four family residential properties and home equity loans and home equity lines secured by first or second mortgage on one-to-four family owner-occupied properties. First mortgages may be underwritten to a maximum loan-to-value of 97% for owner-occupied homes, 90% for second homes and 85% for investment properties. Mortgages with loan-to-values greater than 80% require private mortgage insurance. We do not grant subprime loans. Home equity loans and lines are underwritten to a maximum combined loan-to-value of 85% of the appraised value of the property. Underwriting approval is dependent on review of the borrower’s ability to repay principal and interest on a monthly basis, credit history, financial resources and the value of the collateral. Residential real estate loans are originated either for sale to investors or retained in the Company’s loan portfolio. Decisions about whether to sell or retain residential real estate loans are made based on the interest rate, pricing for loans in the secondary market, and the Company’s liquidity and capital needs. The overall health of the economy, including unemployment rates and housing pricing, will have an effect on the credit quality in this segment.

 

Commercial and industrial loans. The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results and cash flows consistent with those projected at loan origination. Collateral frequently consists of a first lien position on business assets including, but not limited to, accounts receivable, inventory, and equipment. The primary repayment source is operating cash flow, followed by liquidation of assets. Under its lending guidelines, the Company generally requires a corporate or personal guarantee from individuals that hold material ownership in the borrowing entity. A weakened economy and resultant decreased consumer spending will have an effect on the credit quality in this segment.

 

Consumer loans. Loans in this segment are both secured and unsecured and repayment is dependent on the credit quality of the individual borrower.

 

Discounted Cash Flow Method (“DCF”)

 

In estimating the component of the allowance for credit losses for loans that share similar risk characteristics with other loans, such loans are segregated into loan classes. Loans are designated into loan classes based on loans pooled by product types and similar risk characteristics or areas of risk concentration. In determining the allowance for credit losses, we derive an estimated credit loss assumption from a model that categorizes loan pools based on loan type and purpose. This model calculates an expected loss percentage for each loan class by considering the probability of default, using life-of-loan analysis periods for all loan segments, and the historical severity of loss, based on the aggregate net lifetime losses incurred per loan class. The default and severity factors used to calculate the allowance for credit losses for loans that share similar risk characteristics with other loans are adjusted for differences between the historical period used to calculate historical default and loss severity rates and expected conditions over the remaining lives of the loans in the portfolio related to: (1) lending policies and procedures; (2) international, national, regional and local economic business conditions and developments that affect the collectability of the portfolio; (3) the nature and volume of the loan portfolio including the terms of the loans; (4) the experience, ability, and depth of the lending management and other relevant staff; (5) the volume and severity of past due and adversely classified loans and the volume of nonaccrual loans; (6) the quality of our loan review system and (7) the value of underlying collateral for collateralized loans. Additional factors include the existence and effect of any concentrations of credit, and changes in the level of such concentrations and the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio. Such factors are used to adjust the historical probabilities of default and severity of loss so that they reflect management expectation of future conditions based on a reasonable and supportable forecast. The Company uses regression analysis of historical internal and peer data to determine which variables are best suited to be economic variables utilized when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the economic variables.

 

16 

 

 

For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over four quarters on a straight-line basis. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.

 

Individually evaluated financial assets

 

For a loan that does not share risk characteristics with other loans, expected credit loss is measured based on net realizable value, that is, the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the amortized cost basis of the loan. For these loans, we recognize expected credit loss equal to the amount by which the net realizable value of the loan is less than the amortized cost basis of the loan (which is net of previous charge-offs and deferred loan fees and costs), except when the loan is collateral dependent, that is, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In these cases, expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral.

 

Allowance for credit losses on off-balance sheet credit exposures, including unfunded loan commitments

 

The Company maintains a separate allowance for credit losses from off-balance-sheet credit exposures, including unfunded loan commitments, which is included in other liabilities on the balance sheet. Management estimates the amount of expected losses by calculating a commitment usage factor over the contractual period for exposures that are not unconditionally cancellable by the Company and applying the loss factors used in the ACL methodology to the results of the usage calculation to estimate the liability for credit losses related to unfunded commitments for each loan type. No credit loss estimate is reported for outstanding off-balance-sheet credit exposures that are unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as credit loss expense. Categories of off-balance sheet credit exposures correspond to the loan portfolio segments described above. Management evaluates the need for a reserve on unfunded loan commitments in a manner consistent with loans held for investment.

 

17 

 

 

An analysis of changes in the allowance for credit losses by segment for the three and six months ended June 30, 2024 and June 30, 2023 is as follows:

 

		Commercial Real Estate				Residential Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		(Dollars in thousands)
Balance at March 31, 2024		$	14,771			$	2,481			$	2,508			$	124			$	—			$	19,884
Provision for (reversal of) credit losses			(440	)			(38	)			28				20				—				(430	)
Charge-offs			—				—				—				(50	)			—				(50	)
Recoveries			—				1				16				23				—				40
Balance at June 30, 2024		$	14,331			$	2,444			$	2,552			$	117			$	—			$	19,444
Balance at March 31, 2023		$	15,425			$	1,877			$	1,676			$	53			$	—			$	19,031
Provision for (reversal of) credit losses			327				456				(207	)			15				—				591
Charge-offs			—				—				—				(36	)			—				(36	)
Recoveries			—				23				18				20				—				61
Balance at June 30, 2023		$	15,752			$	2,356			$	1,487			$	52			$	—			$	19,647
Allowance for credit losses for off-balance sheet exposures
Balance at March 31, 2024		$	264			$	184			$	49			$	—			$	—			$	497
Provision for (reversal of) credit losses			97				41				(2	)			—				—				136
Balance at June 30, 2024		$	361			$	225			$	47			$	—			$	—			$	633
Balance at March 31, 2023		$	518			$	205			$	39			$	—			$	—			$	762
Reversal of credit losses			(123	)			(42	)			(6	)			—				—				(171	)
Balance at June 30, 2023		$	395			$	163			$	33			$	—			$	—			$	591

 

 

		Commercial Real Estate				Residential Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		(Dollars in thousands)
Balance at December 31, 2023		$	15,141			$	2,548			$	2,537			$	41			$	—			$	20,267
Provision for (reversal of) for credit losses			(838	)			(109	)			(66	)			133				—				(880	)
Charge-offs			—				(7	)			(1	)			(109	)			—				(117	)
Recoveries			28				12				82				52				—				174
Balance at June 30, 2024		$	14,331			$	2,444			$	2,552			$	117			$	—			$	19,444
Balance at December 31, 2022		$	12,199			$	4,312			$	3,160			$	245			$	15			$	19,931
Cumulative effect change in accounting principle			3,989				(2,518	)			(75	)			(199	)			(15	)			1,182
Adjusted beginning balance			16,188				1,794				3,085				46				—				21,113
Provision (reversal) for credit losses			(22	)			539				(204	)			46				—				359
Charge-offs			(414	)			—				(1,413	)			(71	)			—				(1,898	)
Recoveries			—				23				19				31								73
Balance at June 30, 2023		$	15,752			$	2,356			$	1,487			$	52			$	—			$	19,647

18 

 

 

		Commercial Real Estate				Residential Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		(Dollars in thousands)
Allowance for credit losses for off-balance sheet exposures
Balance at December 31, 2023		$	375			$	163			$	59			$	—			$	—			$	597
Provision (reversal) for credit losses			(14	)			62				(12	)			—				—				36
Balance at June 30, 2024		$	361			$	225			$	47			$	—			$	—			$	633
Balance at December 31, 2022		$	—			$	—			$	—			$	—			$	—			$	—
Cumulative effect of change in accounting principle			611				267				40				—				—				918
Reversal of credit losses			(216	)			(104	)			(7	)			—				—				(327	)
Balance at June 30, 2023		$	395			$	163			$	33			$	—			$	—			$	591

 

The reversal of credit losses of $430,000 during the three months ended June 30, 2024 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 for unfunded commitments of $136,000 for the three months ended June 30, 2024 was primarily due to the impact of increased unfunded loan commitments. Total unfunded loan commitments increased $11.9 million, or 7.9%, to $161.8 million at June 30, 2024 from $149.9 million at March 31, 2024. The provision for credit losses of $591,000 during the three months ended June 30, 2023 was primarily due to changes in the economic environment and related adjustments to the quantitative components of the CECL methodology. The reversal of credit losses for unfunded commitments of $171,000 for the three months ended June 30, 2023 was primarily related to the impact of lower unfunded loan commitments, with off-balance sheet unfunded commitment exposures decreasing $16.6 million for the three months ended June 30, 2023.

 

The reversal of credit losses of $880,000 during the six months ended June 30, 2024 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 for unfunded commitments of $36,000 for the six months ended June 30, 2024 was primarily related to the changes in the balances of unfunded loan commitments. The provision for credit losses of $359,000 during the six months ended June 30, 2023 was primarily due to changes in the economic environment and related adjustments to the quantitative components of the CECL methodology. The reversal of credit losses for unfunded commitments of $327,000 for the six months ended June 30, 2023 was primarily related to the impact of lower unfunded loan commitments, with off-balance sheet unfunded commitment exposures decreasing $29.5 million for the six months ended June 30, 2023.

 

The provision for or reversal of 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. Management continues to monitor macroeconomic variables related to increasing interest rates, inflation and the concerns of an economic downturn, and believes it is appropriately reserved for the current economic environment and supportable forecast period.

 

19 

 

 

Past Due and Nonaccrual Loans.

 

The following tables present an age analysis of past due loans as of the dates indicated:

 

		30 – 59 Days Past Due				60 – 89 Days Past Due				90 Days or  More Past Due				Total Past Due Loans				Total Current Loans				Total Loans				Nonaccrual Loans
		(Dollars in thousands)
June 30, 2024
Commercial real estate:
Non-owner occupied		$	—			$	—			$	646			$	646			$	863,957			$	864,603			$	840
Owner-occupied			267				22				149				438				191,498				191,936				171
Total:			267				22				795				1,084				1,055,455				1,056,539				1,011
Residential real estate:
Residential one-to-four family			2,224				394				1,129				3,747				628,250				631,997				4,291
Home equity			122				70				348				540				113,430				113,970				347
Total:			2,346				464				1,477				4,287				741,680				745,967				4,638
Commercial and industrial			—				164				8				172				216,128				216,300				189
Consumer			6				1				—				7				4,708				4,715				7
Total loans		$	2,619			$	651			$	2,280			$	5,550			$	2,017,971			$	2,023,521			$	5,845

 

 

		30 – 59 Days Past Due				60 – 89 Days Past Due				90 Days or  More Past Due				Total Past Due Loans				Total Current Loans				Total Loans				Nonaccrual Loans
		(Dollars in thousands)
December 31, 2023
Commercial real estate:
Non-owner occupied		$	—			$	647			$	236			$	883			$	880,760			$	881,643			$	1,107
Owner-occupied			272				—				167				439				197,669				198,108				240
Total:			272				647				403				1,322				1,078,429				1,079,751				1,347
Residential real estate:
Residential one-to-four family			2,354				934				881				4,169				608,146				612,315				4,739
Home equity			263				112				102				477				109,362				109,839				109
Total:			2,617				1,046				983				4,646				717,508				722,154				4,848
Commercial and industrial			20				—				8				28				217,419				217,447				218
Consumer			3				—				—				3				5,469				5,472				8
Total loans		$	2,912			$	1,693			$	1,394			$	5,999			$	2,018,825			$	2,024,824			$	6,421

 

At June 30, 2024 and December 31, 2023, total past due loans totaled $5.6 million, or 0.27% of total loans, and $6.0 million, or 0.30% of total loans, respectively.

 

Nonaccrual Loans.

 

Accrual of interest on loans is generally discontinued when contractual payment of principal or interest becomes past due 90 days or, if in management's judgment, reasonable doubt exists as to the full timely collection of interest. Exceptions may be made if the loan has matured and is in the process of renewal or is well-secured and in the process of collection. When a loan is placed on nonaccrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current interest income. Interest payments on nonaccrual loans are generally applied to principal. If collection of the principal is reasonably assured, interest payments are recognized as income on the cash basis. Loans are generally returned to accrual status when principal and interest payments are current, full collectability of principal and interest is reasonably assured and a consistent record of at least six consecutive months of performance has been achieved.

 

20

 

 

The following table is a summary of the Company’s nonaccrual loans by major categories at June 30, 2024 and December 31, 2023:

 

		As of June 30, 2024												For the Three Months Ended June 30, 2024				For the Six Months Ended June 30, 2024
		Nonaccrual Loans with Allowance for Credit Loss				Nonaccrual Loans Without Allowance for Credit Loss				Total Nonaccrual Loans				Accrued Interest Receivable Reversed from Income
		(Dollars in thousands)
Commercial real estate:
Non-owner occupied		$	—			$	840			$	840			$	21			$	42
Owner-occupied			—				171				171				3				6
Total			—				1,011				1,011				24				48
Residential real estate:
Residential			—				4,291				4,291				52				103
Home equity			—				347				347				13				16
Total							4,638				4,638				65				119
Commercial and industrial			—				189				189				39				78
Consumer			—				7				7				—				—
Total loans		$	—			$	5,845			$	5,845			$	128			$	245

 

 

		As of December 31, 2023												For the Three Months Ended June 30, 2023				For the Six Months Ended June 30, 2023
		Nonaccrual Loans with Allowance for Credit Loss				Nonaccrual Loans Without Allowance for Credit Loss				Total   Nonaccrual Loans				Accrued Interest Receivable Reversed from Income
		(Dollars in thousands)
Commercial real estate:
Non-owner occupied		$	—			$	1,107			$	1,107			$	22			$	40
Owner-occupied			—				240				240				5				10
Total			—				1,347				1,347				27				50
Residential real estate:
Residential			—				4,739				4,739				40				80
Home equity			—				109				109				3				6
Total							4,848				4,848				43				86
Commercial and industrial			—				218				218				35				86
Consumer			—				8				8				—				—
Total loans		$	—			$	6,421			$	6,421			$	105			$	222

 

At June 30, 2024 and December 31, 2023, nonaccrual loans totaled $5.8 million, or 0.29% of total loans and $6.4 million, or 0.32% of total loans, respectively. The Company did not recognize any interest income on nonaccrual loans for the three and six months ended June 30, 2024 and 2023. At June 30, 2024 and December 31, 2023, there were no commitments to lend additional funds to any borrower on nonaccrual status. At June 30, 2024 and December 31, 2023, there were no loans 90 or more days past due and still accruing interest. There was no other real estate owned (“OREO”) at June 30, 2024 or December 31, 2023.

 

21

 

 

Individually Evaluated Collateral Dependent Loans.

 

Loans that do not share similar risk characteristics with loans that are pooled into portfolio segments are individually evaluated. A loan is considered collateral dependent when, based on current information and events, the borrower is experiencing financial difficulty and repayment, both principal and interest, is expected to be provided substantially through the operation or sale of the collateral. Loans that are rated Substandard, have a loan-to-value above 85% or have demonstrated a specific weakness (e.g. slow payment history, industry weakness, or other clear credit deterioration) may be considered for individual evaluation if they are determined not to share similar risk characteristics within the segment. Individually evaluated assets will be measured primarily using the collateral dependent financial asset practical expedient, although the discounted cash flow method may be used when management deems it more appropriate or collateral values cannot be supported. For individually evaluated assets, an ACL is determined separately for each financial asset. At June 30, 2024, the Company had $801,000 in individually evaluated commercial loans, collateralized by business assets, and $14.5 million in individually evaluated real estate loans, collateralized by real estate property.

 

The following table summarizes the Company’s individually evaluated collateral dependent loans by class as of the dates indicated:

 

		As of June 30, 2024
		Recorded Investment				Related Allowance
		(Dollars in thousands)
With no related allowance recorded:
Commercial real estate:
Non-owner occupied		$	8,273			$	—
Owner-occupied			1,490				—
Total			9,793				—
Residential real estate:
Residential one-to-four family			4,388				—
Home equity			348				—
Total			4,736
Commercial and industrial			292				—
Consumer			—				—
Loans with no related allowance recorded		$	14,791			$	—
With an allowance recorded:
Commercial real estate:
Non-owner occupied		$	—			$	—
Owner-occupied
Total
Residential real estate:
Residential one-to-four family			—				—
Home equity			—				—
Total
Commercial and industrial			509				171
Consumer			—				—
Loans with an allowance recorded		$	509			$	171
Total individually evaluated loans		$	15,300			$	171

22

 

 

 

		As of December 31, 2023
		Recorded Investment				Related Allowance
		(Dollars in thousands)
With no related allowance recorded:
Commercial real estate:
Non-owner occupied		$	8,879			$	—
Owner-occupied			1,769				—
Total			10,648				—
Residential real estate:
Residential one-to-four family			5,163				—
Home equity			109				—
Total			5,272				—
Commercial and industrial			13,273				—
Consumer			8				—
Loans with no related allowance recorded		$	29,201			$	—
With an allowance recorded:
Commercial real estate:		$	—			$	—
Non-owner occupied
Owner-occupied
Total
Residential real estate:
Residential one-to-four family			—				—
Home equity			—				—
Total
Commercial and industrial			517				179
Consumer			—				—
Loans with an allowance recorded		$	517			$	179
Total individually evaluated loans		$	29,718			$	179

 

Modified Loans to Borrowers Experiencing Financial Difficulty.

 

The Company will modify the contractual terms of loans to a borrower experiencing financial difficulties as a way to mitigate loss and comply with regulations regarding bankruptcy and discharge situations. Loans are designated as modified when, as part of an agreement to modify the original contractual terms of the loan as a result of financial difficulties of the borrower, the Company grants the borrower a concession on the terms that would not otherwise be considered. Typically, such concessions may consist of a reduction in interest rate to a below market rate, taking into account the credit quality of the note, extension of additional credit based on receipt of adequate collateral, or a deferment or reduction of payments (principal or interest) which materially alters the Company's position or significantly extends the note's maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan's origination.

 

There were no loan modifications granted based on borrower financial difficulty during the six months ended June 30, 2024 and for the year ended December 31, 2023. During the six months ended June 30, 2024 and 2023, no modified loans defaulted (defined as 30 days or more past due) within 12 months of restructuring. There were no charge-offs on modified loans during the six months ended June 30, 2024 or 2023.

 

23

 

 

Credit Quality Information.

 

The Company monitors the credit quality of its loan portfolio by using internal risk ratings that are based on regulatory guidance. The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company utilizes an eight-grade internal loan rating system for commercial real estate and commercial and industrial loans.

 

The grades assigned and definitions are as follows: loans graded excellent, above average, good are classified as “Pass” for grading purposes (risk ratings 1-4). All loans risk rated Special Mention (5), Substandard (6), Doubtful (7) and Loss (8) are listed on the Company’s criticized report and are reviewed not less than on a quarterly basis to assess the level of risk and to ensure that appropriate actions are being taken to minimize potential loss exposure. In addition, the Company closely monitors classified loans, defined as Substandard, Doubtful, and Loss for signs of deterioration to mitigate the growth in nonaccrual loans, including performing additional due diligence, updating valuations and requiring additional financial reporting from the borrower. Loans identified as containing a loss are partially charged-off or fully charged-off. Performing residential real estate, home equity and consumer loans are grouped with “Pass” rated loans. Nonperforming residential real estate, home equity and consumer loans are risk rated as “Substandard” and individually evaluated.

 

Loans rated 1 – 4: Loans rated 1-4 are classified as “Pass” and have quality metrics to support that the loan will be repaid according to the terms established and are not subject to adverse criticism as defined in regulatory guidance. Pass loans exhibit characteristics that represent acceptable risk and are not considered problem loans.

 

Loans rated 5: Loans rated 5 are classified as “Special Mention” and have potential weaknesses that deserve management’s close attention. Special mention loans are currently performing but with potential weaknesses including adverse trends in borrower’s operations, credit quality, financial strength, or possible collateral deficiency. Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. Special Mention loans do not sufficiently expose the Company to warrant adverse classification.

 

Loans rated 6: Loans rated 6 are classified as “Substandard” and have an identified definitive weakness which may make full collection of contractual cash flows questionable and/or jeopardize the liquidation of the debt.

 

Loans rated 7: Loans rated 7 are classified as “Doubtful” and have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation of the loan highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.

 

Loans rated 8: Loans rated 8 are classified a “Loss” and are considered uncollectible and are charged to the allowance for credit losses. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be affected in the future.

 

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate loans over $2 million and commercial and industrial loans over $1 million. On an ongoing basis, Management utilizes delinquency reports, interim customer financials, the criticized loan report and other loan reports to monitor credit quality and adjust risk ratings accordingly. In addition, at least on an annual basis, the Company contracts with an independent third-party to review the internal credit ratings assigned to loans in the commercial loan portfolio on a pre-determined schedule, based on the type, size, rating, and overall risk of the loan. During the course of its review, the third party examines a sample of loans, including new loans, existing relationships over certain dollar amounts and classified assets.

 

24

 

 

The following tables summarize the amortized cost basis by aggregate Pass and criticized categories of Special Mention and Substandard within the Company’s internal risk rating system by year of origination as of June 30, 2024 and December 31, 2023. The tables also summarize gross charge-offs, by year of origination for the six months ended June 30, 2024 and the year ended December 31, 2023.

 

		Term Loan Origination by Year																								Revolving Loans
		Year-to-Date June 30, 2024				2023				2022				2021				2020				Prior				Revolving Loans				Revolving Loans Converted to Term Loans				Total
		(Dollars in thousands)
Commercial Real Estate:
Pass (Rated 1- 4)		$	10,446			$	43,506			$	172,773			$	232,133			$	110,031			$	392,374			$	80,008			$	—			$	1,041,271
Special Mention (Rated 5)			—				—				—				—				—				3,245				258				—				3,503
Substandard (Rated 6)			—				—				—				—				8,386				3,379				—				—				11,765
Total commercial real estate loans		$	10,446			$	43,506			$	172,773			$	232,133			$	118,417			$	398,998			$	80,266			$	—			$	1,056,539
Current period gross charge-offs		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Payment Performance:
Performing		$	10,446			$	43,506			$	172,773			$	232,133			$	118,417			$	397,987			$	80,266			$	—			$	1,055,528
Nonperforming			—				—				—				—				—				1,011				—				—				1,011
Residential One-to-Four Family:
Pass		$	37,345			$	61,100			$	91,232			$	92,582			$	122,225			$	217,984			$	4,349			$	—			$	626,817
Substandard			—				—				622				256				858				3,444				—				—				5,180
Total residential one-to-four family		$	37,345			$	61,100			$	91,854			$	92,838			$	123,083			$	221,428			$	4,349			$	—			$	631,997
Current period gross charge-offs		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Payment Performance:
Performing		$	37,345			$	61,100			$	91,232			$	92,582			$	122,225			$	218,873			$	4,349			$	—			$	627,706
Nonperforming			—				—				622				256				858				2,555				—				—				4,291
Home Equity:
Pass		$	4,646			$	9,467			$	10,254			$	6,305			$	6,670			$	11,452			$	62,344			$	2,485			$	113,623
Substandard			—				—				—				—				—				—				337				10				347
Total home equity loans		$	4,646			$	9,467			$	10,254			$	6,305			$	6,670			$	11,452			$	62,681			$	2,495			$	113,970
Current period gross charge-offs		$	—			$	—			$	—			$	—			$	—			$	7			$	—			$	—			$	7
Payment Performance:
Performing		$	4,646			$	9,467			$	10,254			$	6,305			$	6,670			$	11,452			$	62,344			$	2,485			$	113,623
Nonperforming			—				—				—				—				—				—				337				10				347

25

 

		Term Loans Originated by Year																								Revolving Loans
		Year-to-Date June 30, 2024				2023				2022				2021				2020				Prior				Revolving Loans				Revolving Loans Converted to Term Loans				Total
		(Dollars in thousands)
Commercial and Industrial:
Pass (Rated 1- 4)		$	7,455			$	23,151			$	32,148			$	29,425			$	16,967			$	24,813			$	66,382			$	67			$	200,408
Special Mention (Rated 5)			—				6,150				81				32				—				1,933				2,932				—				11,128
Substandard (Rated 6)			—				—				141				—				478				63				4,082				—				4,764
Total commercial and industrial loans		$	7,455			$	29,301			$	32,370			$	29,457			$	17,445			$	26,809			$	73,396			$	67			$	216,300
Current period gross charge-offs		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	1			$	1
Payment Performance:
Performing		$	7,455			$	29,301			$	32,370			$	29,457			$	17,445			$	26,803			$	73,213			$	67			$	216,111
Nonperforming			—				—				—				—				—				6				183				—				189
Consumer:
Pass		$	365			$	1,705			$	1,093			$	381			$	110			$	277			$	777			$	—			$	4,708
Substandard			—				—				—				—				—				6				1				—				7
Total consumer loans		$	365			$	1,705			$	1,093			$	381			$	110			$	283			$	778			$	—			$	4,715
Current period gross charge-offs		$	43			$	—			$	—			$	—			$	—			$	—			$	—			$	66			$	109
Payment Performance:
Performing		$	365			$	1,705			$	1,093			$	381			$	110			$	277			$	777			$	—			$	4,708
Nonperforming			—				—				—				—				—				6				1				—				7

26

 

		Term Loan Origination by Year																								Revolving Loans
		2023				2022				2021				2020				2019				Prior				Revolving Loans				Revolving Loans Converted to Term Loans				Total
		(Dollars in thousands)
Commercial Real Estate:
Pass (Rated 1- 4)		$	42,764			$	175,829			$	228,739			$	113,631			$	91,353			$	320,806			$	81,483			$	9,289			$	1,063,894
Special Mention (Rated 5)			—				—				—				180				915				3,237				164				—				4,496
Substandard (Rated 6)			—				—				—				8,013				—				3,348				—				—				11,361
Total commercial real estate loans		$	42,764			$	175,829			$	228,739			$	121,824			$	92,268			$	327,391			$	81,647			$	9,289			$	1,079,751
Current period gross charge-offs		$	—			$	—			$	—			$	—			$	—			$	764			$	—			$	—			$	764
Payment Performance:
Performing		$	42,764			$	175,829			$	228,739			$	121,824			$	92,268			$	326,044			$	81,647			$	9,289			$	1,078,404
Nonperforming			—				—				—				—				—				1,347				—				—				1,347
Residential One-to-Four Family:
Pass		$	59,257			$	88,213			$	94,290			$	125,917			$	54,263			$	174,688			$	10,401			$	—			$	607,029
Substandard			—				447				495				445				—				3,899				—				—				5,286
Total residential one-to-four family		$	59,257			$	88,660			$	94,785			$	126,362			$	54,263			$	178,587			$	10,401			$	—			$	612,315
Current period gross charge-offs		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Payment Performance:
Performing		$	59,257			$	88,213			$	94,290			$	125,540			$	54,263			$	175,612			$	10,401			$	—			$	607,576
Nonperforming			—				447				495				822				—				2,975				—				—				4,739
Home Equity:
Pass		$	9,937			$	10,885			$	6,861			$	7,108			$	5,234			$	7,261			$	60,115			$	2,329			$	109,730
Substandard			—				—				—				—				—				7				90				12				109
Total home equity loans		$	9,937			$	10,885			$	6,861			$	7,108			$	5,234			$	7,268			$	60,205			$	2,341			$	109,839
Current period gross charge-offs		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Payment Performance:
Performing		$	9,937			$	10,885			$	6,861			$	7,108			$	5,234			$	7,261			$	60,115			$	2,329			$	109,730
Nonperforming			—				—				—				—				—				7				90				12				109

27

 

		Term Loans Originated by Year																								Revolving Loans
		2023				2022				2021				2020				2019				Prior				Revolving Loans				Revolving Loans Converted to Term Loans				Total
		(Dollars in thousands)
Commercial and Industrial:
Pass (Rated 1- 4)		$	31,108			$	35,705			$	26,553			$	19,780			$	19,765			$	8,825			$	57,393			$	69			$	199,198
Special Mention (Rated 5)			—				101				—				—				8				498				707				—				1,314
Substandard (Rated 6)			—				—				1,408				8,156				—				85				7,286				—				16,935
Total commercial and industrial loans		$	31,108			$	35,806			$	27,961			$	27,936			$	19,773			$	9,408			$	65,386			$	69			$	217,447
Current period gross charge-offs		$	—			$	147			$	—			$	—			$	—			$	221			$	—			$	1,193			$	1,561
Payment Performance:
Performing		$	31,108			$	35,806			$	27,961			$	27,936			$	19,773			$	9,401			$	65,175			$	69			$	217,229
Nonperforming			—				—				—				—				—				7				211				—				218
Consumer:
Pass		$	2,168			$	1,381			$	524			$	241			$	68			$	270			$	812			$	—			$	5,464
Substandard			—				—				—				—				—				8				—				—				8
Total consumer loans		$	2,168			$	1,381			$	524			$	241			$	68			$	278			$	812			$	—			$	5,472
Current period gross charge-offs		$	—			$	—			$	—			$	—			$	—			$	—			$	3			$	182			$	185
Payment Performance:
Performing		$	2,168			$	1,381			$	524			$	241			$	68			$	271			$	811			$	—			$	5,464
Nonperforming			—				—				—				—				—				7				1				—				8

 

28

 

 

The following table summarizes information about total loans rated Special Mention, Substandard, Doubtful or Loss, at June 30, 2024 and December 31, 2023. The table below includes consumer loans that are Special Mention and Substandard accruing that are classified as performing based on payment activity.

 

		June 30, 2024				December 31, 2023
		(Dollar in thousands)
Criticized loans:
Special Mention		$	14,631			$	5,810
Substandard			22,063				33,699
Total criticized loans		$	36,694			$	39,509
Total criticized loans as a percentage of total loans			1.8	%			1.9	%

 

 

6.

GOODWILL AND OTHER INTANGIBLES

 

Goodwill

 

At June 30, 2024 and December 31, 2023, the carrying value of the Company’s goodwill was $12.5 million. Goodwill is measured as the excess of the cost of a business combination over the sum of the amounts assigned to identifiable intangible assets acquired less liabilities assumed. Goodwill is not amortized but rather assessed for impairment annually or more frequently if circumstances warrant. Management has the option of first assessing qualitative factors, such as events and circumstances, to determine whether it is more likely than not, meaning a likelihood of more than 50%, the value of a reporting unit is less than its carrying amount. If, after considering all relevant events and circumstances, management determines it is not more likely than not the fair value of a reporting unit is less than its carrying amount, then performing an impairment test is unnecessary. At June 30, 2024 and December 31, 2023, the Company’s goodwill was related to the acquisition of Chicopee Savings Bank in October 2016. For the three and six months ended June 30, 2024, management determined that it was not more likely than not the fair value of the reporting unit was less than its carrying amount. If management had determined otherwise, a fair value analysis would have been completed to determine the impairment and necessary write-down of goodwill. For the year ended December 31, 2023, the carrying value of the Company’s equity exceeded its market capitalization for a period in 2023 due to events affecting the banking industry, specifically three large bank failures and the continued impact of higher interest rates, resulting in declines in bank stock prices. Therefore, the Company completed a fair value analysis to assess potential impairment and any necessary write-down of the carrying value of goodwill. Management used valuation multiples from recent comparable whole bank merger and acquisition transactions to determine the estimated fair value of the Company. Based on the results of this analysis, management determined that the fair value of the Company exceeded the carrying value of the reporting unit, and as a result, goodwill was not impaired at December 31, 2023.

 

Core Deposit Intangibles

 

In connection with the acquisition of Chicopee, the Bank recorded a core deposit intangible of $4.5 million, which is amortized over twelve years using the straight-line method. Amortization expense was $94,000 and $188,000 for the three and six months ended June 30, 2024 and 2023, respectively. At June 30, 2024, future amortization of the core deposit intangible totaled $375,000 for each of the next four years and $125,000 thereafter.

 

7.

SHARE-BASED COMPENSATION

 

Restricted Stock Awards.

 

In May 2021, the Company’s shareholders approved the 2021 Omnibus Incentive Plan, a share-based compensation plan (the “2021 Omnibus Plan”). Under the 2021 Omnibus Plan, up to 700,000 shares of the Company’s common stock were reserved for grants of stock awards, including stock options and restricted stock, which may be granted to any officer, key employee or non-employee director of the Company. Any shares that are not issued because vesting requirements are not met will be available for future issuance under the 2021 Omnibus Plan.

 

On an annual basis, the Compensation Committee (the “Committee”) approves long-term incentive awards out of the 2021 Omnibus Plan, whereby shares will be granted to eligible participants of the Company that are nominated by the Chief Executive Officer and approved by the Committee, with vesting over a three-year term for employees and a one-year term for directors. Annual employee grants provide for a periodic award that is both performance and time-based and is designed to recognize the executive’s responsibilities, reward performance and leadership and as a retention tool. The objective of the award is to align compensation for the named executive officers and directors over a multi-year period directly with the interests of our shareholders by motivating and rewarding creation and preservation of long-term financial strength, shareholder value and relative shareholder return.

 

29

 

 

In May 2021, 122,362 shares were granted under the 2021 Long-Term Incentive Plan (the “2021 Incentive Plan”). Of the 122,362 shares, 61,181 shares were time-based, vesting ratably over a three-year period. The remaining 61,181 shares granted are performance-based and are subject to the achievement of the 2021 Incentive Plan performance metrics, with 50% of the performance-based shares vesting for each performance metric. The primary performance metrics for the 2021 Incentive Plan grants are return on equity and earnings per share. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period for return on equity metrics and for a three-year cumulative performance period for earnings per share, but will be distributed at the end of the three-year period as earned.

 

The threshold, target and stretch metrics under the 2021 Incentive Plan are as follows:

 

		Return on Equity Metrics
Performance Period Ending		Threshold				Target				Stretch
December 31, 2021			5.63%				6.25%				7.50%
December 31, 2022			5.85%				6.50%				7.80%
December 31, 2023			6.08%				6.75%				8.10%

 

		Earnings Per Share Metrics
Performance Period Ending		Threshold				Target				Stretch
Three-year Cumulative Diluted Earnings Per Share			$1.58				$1.97				$2.36

 

As of December 31, 2023, the three-year performance period for the 2021 Long-Tern Incentive Plan (the “2021 LTI Plan”) ended. The 2021 LTI Plan included a “catch-up” provision allowing unearned performance-based shares from the 2021 and 2022 performance periods to be earned at the end of the three-year period based on the final year performance. Of the 50,205 performance-based shares granted in 2021 based on achieving target, 69,376 performance-based shares were eligible for vesting during the first quarter of 2024 based on achieving stretch.

 

In March 2022, 137,151 shares were granted under the 2022 Long-Term Incentive Plan (the “2022 Incentive Plan”). Of the 137,151 shares, 77,463 shares were time-based, with 17,775 vesting in one year and 59,688 vesting ratably over a three-year period. The remaining 59,688 shares granted are performance-based and are subject to the achievement of the 2022 Incentive Plan performance metrics, with 50% of the performance-based shares vesting for each performance metric. The primary performance metrics for the 2022 Incentive Plan grants are return on equity and earnings per share. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period for return on equity metrics and for a three-year cumulative performance period for earnings per share, but will be distributed at the end of the three-year period as earned.

 

30

 

 

The threshold, target and stretch metrics under the 2022 Incentive Plan are as follows:

 

		Return on Equity Metrics
Performance Period Ending		Threshold				Target				Stretch
December 31, 2022			7.79%				8.20%				8.61%
December 31, 2023			7.93%				8.35%				8.77%
December 31, 2024			8.03%				8.45%				8.87%

 

 

		Earnings Per Share Metrics
Performance Period Ending		Threshold				Target				Stretch
Three-year Cumulative Diluted Earnings Per Share			$2.35				$2.61				$2.85

 

In March 2023, 139,196 shares were granted under the 2023 Long-Term Incentive Plan (the “2023 Incentive Plan”). Of the 139,196 shares, 78,697 shares were time-based, with 18,198 vesting in one year and 60,499 vesting ratably over a three-year period. The remaining 60,499 shares granted are performance-based and are subject to the achievement of the 2023 Incentive Plan performance metrics, with 50% of the performance-based shares vesting for each performance metric. The primary performance metrics for the 2023 Incentive Plan grants are return on equity and earnings per share. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period for return on equity metrics and for a three-year cumulative performance period for earnings per share, but will be distributed at the end of the three-year period as earned.

 

The threshold, target and stretch metrics under the 2023 Incentive Plan are as follows:

 

		Return on Equity Metrics
Performance Period Ending		Threshold				Target				Stretch
December 31, 2023			8.00%				8.45%				8.85%
December 31, 2024			8.75%				9.25%				9.75%
December 31, 2025			9.00%				9.50%				10.00%

 

		Earnings Per Share Metrics
Performance Period Ending		Threshold				Target				Stretch
Three-year Cumulative Diluted Earnings Per Share			$2.39				$2.65				$2.89

 

In March 2024, 167,878 shares were granted under the 2024 Long-Term Incentive Plan (the “2024 Incentive Plan”). Of the 167,878 shares, 94,667 shares were time-based, with 21,456 vesting in one year and 73,211 vesting ratably over a three-year period. The remaining 73,211 shares granted are performance-based and are subject to the achievement of the 2024 Incentive Plan performance metrics, with 50% of the performance-based shares vesting for each performance metric. The primary performance metrics for the 2024 Incentive Plan grants are return on equity and earnings per share. Performance shares will be earned based upon how the Company performs relative to threshold, target and stretch absolute goals (i.e. Company-specific, not relative to a peer index) on an annual performance period for return on equity metrics and for a three-year cumulative performance period for earnings per share, but will be distributed at the end of the three-year period as earned.

 

31

 

 

The threshold, target and stretch metrics under the 2024 Incentive Plan are as follows:

 

		Return on Equity Metrics
Performance Period Ending		Threshold				Target				Stretch
December 31, 2024			5.05%				5.61%				6.17%
December 31, 2025			6.18%				6.86%				7.55%
December 31, 2026			7.30%				8.11%				8.92%

 

		Earnings Per Share Metrics
Performance Period Ending		Threshold				Target				Stretch
Three-year Cumulative Diluted Earnings Per Share			$2.25				$2.50				$2.75

 

At June 30, 2024, there were 123,587 remaining shares available to grant under the 2021 Plan.

 

A summary of the status of unvested restricted stock awards at June 30, 2024 and 2023 is presented below:

 

		Shares				Weighted Average Grant Date Fair Value ($)
Balance at December 31, 2023			220,635				9.29
Shares granted			187,049				8.38
Shares forfeited			(2,384	)			8.39
Shares vested			(69,376	)			8.34
Balance at June 30, 2024			335,924				8.98

 

		Shares				Weighted Average Grant Date Fair Value ($)
Balance at December 31, 2022			206,092				8.85
Shares granted			158,957				9.79
Shares vested			(66,817	)			9.07
Balance at June 30, 2023			298,232				9.30

 

The Company recorded total expense for restricted stock awards of $823,000 and $829,000 for the six months ended June 30, 2024 and 2023, respectively.

 

8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

 

On a long-term basis, the Company intends to continue to increase its core deposits to fund loan growth. The Company also uses FHLB borrowings as part of the Company's overall strategy to manage interest rate risk and liquidity risk. FHLB advances are secured by a blanket security agreement which requires the Company to maintain certain qualifying assets as collateral, principally certain residential real estate loans and commercial real estate loans and securities, not otherwise pledged. The maximum amount that the FHLB will advance to member institutions, including the Company, fluctuates from time to time in accordance with the policies of the FHLB. As an FHLB member, the Company is required to own capital stock of the FHLB, calculated periodically based primarily on its level of borrowings from the FHLB. Advances are made under several different credit programs with different lending standards, interest rates and range of maturities. The Company’s relationship with the FHLB is an integral component of the Company’s asset-liability management program.

 

32

 

 

At June 30, 2024, FHLB advances, consisting of short-term and long-term advances, totaled $128.3 million, with a weighted average rate of 4.95%. At December 31, 2023, FHLB advances totaled $40.6 million, with an average weighted rate of 4.99%. At June 30, 2024, the Company pledged $944.8 million of eligible collateral to support its borrowing capacity at the FHLB. At June 30, 2024, the Company had an immediate availability to borrow an additional $437.4 million from the FHLB, based on qualified collateral pledged. The Company also has a standing available overnight Ideal Way line of credit with the FHLB of $9.5 million. Interest on this line of credit is payable at a rate determined and reset by the FHLB on a daily basis. The outstanding principal is due daily but the portion not repaid will be automatically renewed. At June 30, 2024 and December 31, 2023, the Company did not have an outstanding balance under the Ideal Way line of credit.

 

Other borrowings, held as collateral for customer swap arrangements, totaled $6.6 million with a weighted average rate of 5.33%, at June 30, 2024 and $6.1 million, with a weighted average rate of 5.33%, at December 31, 2023, respectively.

 

As a member of the Federal Reserve Bank of Boston (“FRB”), the Company may also borrow from the Federal Reserve Bank Discount Window (the “Discount Window”). At June 30, 2024, the Company pledged $412.9 million of eligible collateral to support its borrowing capacity at the FRB. At June 30, 2024 and December 31, 2023, the Company did not have an outstanding balance under the Discount Window. At June 30, 2024, the Company had an immediate availability to borrow $403.8 million from the Discount Window.

 

The Company utilized the Bank Term Funding Program (“BTFP”), which was created in March 2023 to enhance banking system liquidity by allowing institutions to pledge certain securities at par value and borrow at a rate of ten basis points over the one-year overnight index swap rate. The BTFP was available to federally insured depository institutions in the U.S., with advances having a term of up to one year with no prepayment penalties. The BTFP ceased extending new advances in March 2024. At December 31, 2023, the outstanding balance under the BTFP was $90.0 million. There was no outstanding balance at June 30, 2024.

 

The following table sets forth certain information regarding advances from the FHLB, and other borrowed funds for the periods indicated:

 

		June 30, 2024								December 31, 2023
		Outstanding Balance				Weighted Average Rate				Outstanding Balance				Weighted Average Rate
		(Dollars in thousands)
FHLB advances:
Short-term advances(1)		$	—				—	%		$	10,000				5.56	%
Long-term advances			128,277				4.95				30,646				4.81
Total FHLB advances			128,277				4.95				40,646				4.99
BTFP advances			—				—				90,000				4.71
Other borrowings			6,570				5.33				6,100				5.33
Total		$	134,847				4.97	%		$	136,746				4.82	%

 

(1)	Short-term advances are defined as having maturities of less than 12 months.

 

9. SUBORDINATED DEBT

 

On April 20, 2021, 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. At June 30, 2024, $19.7 million aggregate principle amount of the Notes was outstanding.

 

Unless earlier redeemed, the Notes mature on May 1, 2031. 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 System (the “Federal Reserve”). The Notes were designed to qualify as Tier 2 capital under the Federal Reserve’s capital adequacy regulations.

 

33

 

 

The Notes are presented net of issuance costs of $269,000 as of June 30, 2024, which are being amortized into interest expense over the life of the Notes. Amortization of issuance costs into interest expense was $19,000 for the six months ended June 30, 2024 and 2023, respectively.

 

10. DERIVATIVES AND HEDGING ACTIVITIES

 

Risk Management Objective of Using Derivatives.

 

The Company is exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of our assets and liabilities and the use of derivative financial instruments. Specifically, we entered into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally related to certain variable rate loan assets and variable rate borrowings.

 

Fair Value Hedges of Interest Rate Risk.

 

The Company is exposed to changes in the fair value of certain pools of fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. The Company's interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.

 

As of June 30, 2024 and December 31, 2023, the following amounts were recorded on the balance sheet related to cumulative basis adjustment of fair value hedges:

 

Item in the Balance Sheet in which the Hedged Item is Included		Carrying Amount of Hedged Assets/(Liabilities)								Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of Hedged Assets/(Liabilities)
		At June 30, 2024				At December 31, 2023				At June 30, 2024				At December 31, 2023
		(Dollars in thousands)
Loans		$	199,457			$	199,393			$	(543	)		$	(607	)
Total		$	199,457			$	199,393			$	(543	)		$	(607	)

 

These amounts include the amortized cost basis of closed portfolios of fixed rate residential loans used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At June 30, 2024, the amortized cost basis of the closed portfolios used in these hedging relationships was $446.5 million; the cumulative basis adjustments associated with these hedging relationships was approximately $543,000; and the notional amount of the designated hedged items were $200 million. At December 31, 2023, the amortized cost basis of the closed portfolios used in these hedging relationships was $461.2 million; the cumulative basis adjustments associated with these hedging relationships was approximately $607,000; and the notional amount of the designated hedged items were $200 million. The notional amounts of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the potential loss exposure. At June 30, 2024, the Company’s fair value hedges had a remaining maturity of 0.3 years, and an average fixed rate of 4.43%.

 

34

 

 

Non-hedging Derivatives.

 

Derivatives not designated as hedges are not speculative, but rather result from a service the Company provides to certain customers. The Company executes loan-level derivative products such as interest-rate swap agreements with commercial banking customers to aid them in managing their interest-rate risk by converting floating-rate loan payments to fixed-rate loan payments. The Company concurrently enters into offsetting swaps with a third-party financial institution, effectively minimizing the Company’s net risk exposure resulting from such transactions. The third-party financial institution exchanges the customer's fixed-rate loan payments for floating-rate loan payments. As the interest-rate swap agreements associated with this program do not meet hedge accounting requirements, changes in the fair value are recognized directly in earnings.

 

Fair Values of Derivative Instruments on the Balance Sheet.

 

The table below presents the fair value of our derivative financial instruments designated as hedging and non-hedging instruments as well as our classification on the balance sheet as of June 30, 2024 and December 31, 2023.

 

June 30, 2024		Asset Derivatives						Liability Derivatives
		Balance Sheet Location		Fair Value				Balance Sheet Location		Fair Value
		(Dollars in thousands)
Hedging Derivatives
Interest rate swaps - fair value hedges				$	572					$	—
Derivatives not designated as hedging instruments:
Interest rate swap – with customer counterparties					—						5,922
Interest rate swap – with dealer counterparties					5,922						—
Total derivatives		Other Assets		$	6,494			Other Liabilities		$	5,922

 

 

December 31, 2023		Asset Derivatives						Liability Derivatives
		Balance Sheet Location		Fair Value				Balance Sheet Location		Fair Value
		(Dollars in thousands)
Hedging Derivatives
Interest rate swaps - fair value hedges				$	651					$	—
Derivatives not designated as hedging instruments:
Interest rate swap – with customer counterparties					—						5,239
Interest rate swap – with dealer counterparties					5,239						—
Total derivatives		Other Assets		$	5,890			Other Liabilities		$	5,239

 

Effect of Derivative Instruments in the Consolidated Statements of Net Income.

 

The table below presents the effect of the Company’s derivative financial instruments on the statements of net income as of June 30, 2024 and June 30, 2023.

 

35

 

 

		Location and Amount of Gain (Loss) Recognized in Income on   Fair Value Hedging Relationships
		Three Months Ended June 30, 2024				Three Months Ended June 30, 2023				Six Months Ended June 30, 2024				Six Months Ended June 30, 2023
		(Dollars in thousands)
Balance Sheet location		Interest Income				Interest Income				Interest Income				Interest Income
Total amounts of income line items presented in the statements of net income in which the effects of fair value hedges are recorded		$	447			$	220			$	890			$	220
Gain (loss) on fair value hedging relationships
Interest rate contracts:
Hedged items		$	(3	)		$	(1,659	)		$	(9	)		$	(1,659	)
Derivatives designated as hedging instruments			450				1,879				899				1,879

 

There were no gains or losses recognized in accumulated other comprehensive income during the six months ended June 30, 2024 and 2023, respectively.

 

Credit-risk-related Contingent Features

 

By using derivative financial instruments, we expose ourselves to credit risk. Credit risk is the risk of failure by the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative is negative, we owe the counterparty and, therefore, it does not possess credit risk. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that we believe to be creditworthy and by limiting the amount of exposure to each counterparty.

 

We have agreements with our derivative counterparties that contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. We also have agreements with certain of our derivative counterparties that contain a provision where if we fail to maintain our status as well capitalized, then the counterparty could terminate the derivative positions and we would be required to settle our obligations under the agreements. Certain of our agreements with our derivative counterparties contain provisions where if a formal administrative action by a federal or state regulatory agency occurs that materially changes our creditworthiness in an adverse manner, we may be required to fully collateralize our obligations under the derivative instrument.

 

At June 30, 2024, we had minimum collateral posting thresholds with certain of our derivative counterparties. As of June 30, 2024, we were not required to post collateral under these agreements because we did not have any derivatives in a liability position with those counterparties.

 

11. FAIR VALUE OF ASSETS AND LIABILITIES

 

Determination of Fair Value.

 

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for our various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

 

36

 

 

Methods and assumptions for valuing our financial instruments are set forth below. Estimated fair values are calculated based on the value without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications or estimated transaction cost.

 

Securities. The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. All other securities are measured at fair value in Level 2 and are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. These securities include government-sponsored enterprise obligations, state and municipal obligations, corporate bonds, residential mortgage-backed securities guaranteed and sponsored by the U.S. government or an agency thereof. Fair value measurements are obtained from a third-party pricing service and are not adjusted by management.

 

Interest rate swaps. The valuation of our interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. We have determined that the majority of the inputs used to value our interest rate derivatives fall within Level 2 of the fair value hierarchy.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis.

 

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

		June 30, 2024
		Level 1				Level 2				Level 3				Total
Assets:		(Dollars in thousands)
Available-for-sale securities		$	—			$	135,089			$	—			$	135,089
Marketable equity securities			233				—				—				233
Interest rate swaps			—				6,494				—				6,494
Total assets		$	233			$	141,583			$	—			$	141,816
Liabilities:
Interest rate swaps		$	—			$	5,922			$	—			$	5,922

 

 

		December 31, 2023
		Level 1				Level 2				Level 3				Total
Assets:		(Dollars in thousands)
Available-for-sale securities		$	—			$	137,115			$	—			$	137,115
Marketable equity securities			196				—				—				196
Interest rate swaps			—				5,890				—				5,890
Total assets		$	196			$	143,005			$	—			$	143,201
Liabilities:
Interest rate swaps		$	—			$	5,239			$	—			$	5,239

 

There were no transfers to or from Level 1 and 2 for assets measured at fair value on a recurring basis at June 30, 2024 and December 31, 2023.

 

37

 

 

Assets Measured at Fair Value on a Non-recurring Basis.

 

We may also be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. There were no collateral dependent loans measured at fair value on a nonrecurring basis as of June 30, 2024. The following table summarizes the fair value hierarchy used to determine the carrying values of the related assets as of December 31, 2023:

 

														Six Months Ended
		At December 31, 2023												June 30, 2023
														Total
		Level 1				Level 2				Level 3				Losses
		(Dollars in thousands)												(Dollars in thousands)
Collateral dependent loans		$	—			$	—			$	1,100			$	1,828

 

The amount of impaired loans represents the carrying value, net of the related write-down or valuation allowance of collateral dependent loans for which adjustments are based on the estimated fair value of the underlying collateral.  The fair value of collateral dependent loans with specific allocations of the allowance for loan losses is generally based on real estate appraisals performed by independent licensed or certified appraisers.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  Management will discount appraisals as deemed necessary based on the date of the appraisal and new information deemed relevant to the valuation.  Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

 

Summary of Fair Values of Financial Instruments.

 

The estimated fair values of our financial instruments are as follows:

 

		June 30, 2024
		Carrying Value				Fair Value
						Level 1				Level 2				Level 3				Total
		(Dollars in thousands)
Assets:
Cash and cash equivalents		$	53,458			$	53,458			$	—			$	—			$	53,458
Securities held-to-maturity			217,632				9,533				167,942				—				177,475
Securities available-for-sale			135,089				—				135,089				—				135,089
Marketable equity securities			233				233				—				—				233
FHLB and other restricted stock			7,143				—				—				7,143				7,143
Loans - net			2,006,782				—				—				1,845,800				1,845,800
Accrued interest receivable			8,737				—				—				8,737				8,737
Mortgage servicing rights			377				—				689				—				689
Derivative asset			6,494				—				6,494				—				6,494
Liabilities:
Deposits			2,171,809				—				—				2,169,900				2,169,900
Short-term borrowings			6,570				—				6,570				—				6,570
Long-term debt			128,277				—				128,444				—				128,444
Subordinated debt			19,731				—				16,135				—				16,135
Accrued interest payable			1,023				—				—				1,023				1,023
Derivative liabilities			5,922				—				5,922				—				5,922

38

 

		December 31, 2023
		Carrying Value				Fair Value
						Level 1				Level 2				Level 3				Total
		(Dollars in thousands)
Assets:
Cash and cash equivalents		$	28,840			$	28,840			$	—			$	—			$	28,840
Securities held-to-maturity			223,370				9,450				178,242				—				187,692
Securities available-for-sale			137,115				—				137,115				—				137,115
Marketable equity securities			196				196				—				—				196
FHLB and other restricted stock			3,707				—				—				3,707				3,707
Loans - net			2,007,050				—				—				1,841,913				1,841,913
Accrued interest receivable			8,528				—				—				8,528				8,528
Mortgage servicing rights			422				—				724				—				724
Derivative asset			5,890				—				5,890				—				5,890
Liabilities:
Deposits			2,143,744				—				—				2,140,930				2,140,930
Short-term borrowings			16,100				—				16,100				—				16,100
Long-term debt			120,646				—				120,460				—				120,460
Subordinated debt			19,712				—				17,938				—				17,938
Accrued interest payable			3,310				—				—				3,310				3,310
Derivative liabilities			5,239				—				5,239				—				5,239

 

12. RECENT ACCOUNTING PRONOUNCEMENTS

 

In December 2023, the Financial Accounting Standards Board issued ASU 2023-09, Income Taxes—Improvements to Income Tax Disclosures (Topic 740), which requires entities to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. On an annual basis, entities must disclose: (1) the amount of income taxes paid, net of refunds, disaggregated by federal, state, and foreign; and (2) the amount of income taxes paid, net of refunds, disaggregated by individual jurisdictions in which income taxes paid, net of refunds received, for amounts equal to or greater than 5% of total income taxes paid. Further, the amendments also require entities to disclose: (1) income or loss from continued operations before income tax expense (or benefit) disaggregated between domestic and foreign sources; and (2) income or loss from continued operations disaggregated by federal, state, and foreign sources. This ASU, as amended, is effective for the Company in fiscal years beginning after December 15, 2024 and is not expected to have a material impact on the Company’s consolidated financial statements.

 

 

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

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, 2024 in the context of this strategy.

 

●

Net income was $3.5 million, or $0.17 per diluted share, for the three months ended June 30, 2024, compared to net income of $2.8 million, or $0.13 per diluted share, for the three months ended June 30, 2023. For the six months ended June 30, 2024, net income was $6.5 million, or $0.31 per diluted share, compared to $8.1 million, or $0.37 per diluted share, for the six months ended June 30, 2023.

 

●

Net interest income, our primary driver of revenues, decreased $2.4 million, or 14.1%, to $14.5 million, for the three months ended June 30, 2024, from $16.8 million for the three months ended June 30, 2023. The decrease in net interest income was due to an increase in interest expense of $4.4 million, or 54.9%, partially offset by an increase in interest and dividend income of $2.0 million, or 8.0%. During the six months ended June 30, 2024, net interest income decreased $5.5 million, or 15.7%, to $29.8 million, compared to $35.4 million for the six months ended June 30, 2023. The decrease in net interest income was due to an increase in interest expense of $10.5 million, or 80.1%, partially offset by an increase in interest and dividend income of $5.0 million, or 10.2%. The increase in interest expense for the three and six months ended June 30, 2024 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.

 

●

During the three months ended June, 30, 2024, the Company recorded a reversal for credit losses of $294,000, compared to a provision for credit losses of $420,000, during the three months ended June 30, 2023. During the six months ended June, 30, 2024, the Company recorded a reversal of credit losses of $844,000, compared to a provision for credit losses of $32,000 during the six months ended June 30, 2023. The decrease in the provision for credit losses during the three and six months ended June 30, 2024 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. Management continues to monitor macroeconomic variables related to increasing interest rates, inflation and the concerns of an economic downturn, and believes it is appropriately reserved for the current economic environment.

 

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.

 

There have been no material changes to our critical accounting policies during the three months ended June 30, 2024. 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 2023 Annual Report.

 

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2024 AND DECEMBER 31, 2023

 

At June 30, 2024, total assets were $2.6 billion, an increase of $21.5 million, or 0.8%, from December 31, 2023. The increase in total assets was primarily due to an increase in cash and cash equivalents of $24.6 million, or 85.4%, partially offset by a decrease in investment securities of $7.7 million, or 2.1%, and a decrease in total loans of $1.1 million, or 0.1%.

 

Investment Securities

 

At June 30, 2024, the investment securities portfolio totaled $353.0 million, or 13.6% of total assets, compared to $360.7 million, or 14.1%, of total assets, at December 31, 2023. At June 30, 2024, the Company’s available-for-sale (“AFS”) securities portfolio, recorded at fair market value, decreased $2.0 million, or 1.5%, from $137.1 million at December 31, 2023 to $135.1 million. The held-to-maturity (“HTM”) securities portfolio, recorded at amortized cost, decreased $5.8 million, or 2.6%, from $223.4 million at December 31, 2023 to $217.6 million at June 30, 2024.

 

At June 30, 2024, the Company reported unrealized losses on the AFS securities portfolio of $31.7 million, or 19.0% of the amortized cost basis of the AFS securities portfolio, compared to unrealized losses of $29.2 million, or 17.5% of the amortized cost basis of the AFS securities at December 31, 2023. At June 30, 2024, the Company reported unrealized losses on the HTM securities portfolio of $40.2 million, or 18.5%, of the amortized cost basis of the HTM securities portfolio, compared to $35.7 million, or 16.0% of the amortized cost basis of the HTM securities portfolio at December 31, 2023.

 

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 $4.3 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, 2024 and December 31, 2023, the Company did not record any credit 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.

 

Total Loans

 

At June 30, 2024, total loans decreased $1.1 million, or 0.1%, from December 31, 2023, to $2.0 billion. Commercial real estate loans decreased $23.2 million, or 2.1%, commercial and industrial loans decreased $1.1 million, or 0.5%, while residential real estate loans, including home equity loans, increased $23.8 million, or 3.3%. 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 $245,000 and $222,000 for the six months ended June 30, 2024 and 2023, respectively.

 

Total delinquency was $5.6 million, or 0.27% of total loans, at June 30, 2024, compared to $6.0 million, or 0.30% of total loans at December 31, 2023. At June 30, 2024, nonperforming loans totaled $5.8 million, or 0.29% of total loans, compared to $6.4 million, or 0.32% of total loans, at December 31, 2023. Total nonperforming assets totaled $5.8 million, or 0.23% of total assets, at June 30, 2024, compared to $6.4 million, or 0.25% of total assets, at December 31, 2023. At June 30, 2024 and December 31, 2023, there were no loans 90 or more days past due and still accruing interest. At June 30, 2024 and December 31, 2023, the Company did not have any OREO.

 

At June 30, 2024, the allowance for credit losses as a percentage of total loans was 0.96%, compared to 1.00% at December 31, 2023. At June 30, 2024, the allowance for credit losses as a percentage of nonperforming loans was 332.7%, compared to 315.6% at December 31, 2023.

 

Total classified loans, defined as special mention and substandard loans, decreased $2.8 million, or 7.1%, from $39.5 million, or 1.9% of total loans, at December 31, 2023 to $36.7 million, or 1.8%, of total loans at June 30, 2024. Our philosophy toward managing our loan portfolios is predicated upon careful monitoring, which stresses early detection in problem loans and an immediate response to delinquent and default situations. We seek to make arrangements to resolve any delinquent or default situation over the shortest possible time frame to minimize loss to the Company. We continue to maintain diversity among property types and within our geographic footprint. 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 is listed in Note 5 of the accompanying unaudited consolidated financial statements.

 

The Company’s commercial real estate loans are considered to be relatively diversified by borrower, industry and concentrated in the New England geographical area. A significant portion of the loan portfolio consists of commercial real estate loans, primarily made in Massachusetts, and to a lesser degree, Connecticut, and secured by real estate or other collateral in the market. Although these loans are made to a diversified pool of unrelated borrowers across numerous businesses, adverse developments in the local real estate market could have an adverse impact on this portfolio of loans and the Company’s income and financial position. While our basic market area is in Massachusetts, the Company has made loans outside that market area where the applicant is an existing customer, and the nature and quality of such loans was consistent with the Company's lending policies.

 

We continuously monitor the asset quality of our loan portfolio. For the commercial portfolio, we monitor credit quality using a risk rating scale, which assigns a risk-grade to each borrower based on a number of quantitative and qualitative factors associated with a commercial loan transaction. Management utilizes a loan risk rating methodology based on an 8-point scale. Pass grades are 0-4 and non-pass categories, which align with regulatory guidelines, include: special mention (5), substandard (6), doubtful (7) and loss (8). Risk rating assignment is determined by analyzing key factors, which may include: industry and market conditions, position within the industry, earnings trends, operating cash flow, debt capacity, guarantor strength, management, financial reporting, collateral and other considerations.

 

CRE Concentrations

 

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (“Agencies”) issued guidance in 2006 which addresses institutions with increased concentrations of commercial real estate (“CRE”) loans. The guidance does not establish specific CRE lending limits; rather, it promotes sound risk management practices and appropriate levels of capital that will enable institutions to continue to pursue CRE lending in a safe and sound manner. In developing this guidance, the Agencies recognized that different types of CRE lending present different levels of risk, and that consideration should be given to the lower risk profiles and historically superior performance of certain types of CRE, such as well-structured multifamily housing finance, when compared to others, such as speculative office space construction.

 

Institutions are encouraged to segment their CRE portfolios to acknowledge these distinctions for risk management purposes. The guidance focuses on those CRE loans for which the cash flow from the real estate is the primary source of repayment rather than loans to a borrower for which real estate collateral is taken as a secondary source of repayment or through an abundance of caution. Thus, for the purposes of the guidance, CRE loans include those loans with risk profiles sensitive to the condition of the general CRE market (for example, market demand, changes in capitalization rates, vacancy rates, or rents). CRE loans are land development and construction loans (including 1- to 4-family residential and commercial construction loans) and other land loans. CRE loans also include loans secured by multifamily property, and nonfarm nonresidential property where the primary source of repayment is derived from rental income associated with the property (that is, loans for which 50 percent or more of the source of repayment comes from third party, nonaffiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Excluded from the scope of this Guidance are loans secured by nonfarm nonresidential properties where the primary source of repayment is the cashflow from the ongoing operations and activities conducted by the party, or affiliate of the party, who owns the property.

 

As part of their ongoing supervisory monitoring processes, the Agencies use certain criteria to identify institutions that are potentially exposed to significant CRE concentration risk. An institution that has experienced rapid growth in CRE lending, has notable exposure to a specific type of CRE, or is approaching or exceeds the following supervisory criteria may be identified for further supervisory analysis of the level and nature of its CRE concentration risk:

 

1. Total reported loans for construction, land development, and other land represent 100 percent or more of the institution’s total risk-based capital; or

 

2. Total commercial real estate loans as defined in this guidance represent 300 percent or more of the institution’s total risk-based capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50 percent or more during the prior 36 months.

 

The Agencies use the criteria as a preliminary step to identify institutions that may have CRE concentration risk. Because regulatory reports capture a broad range of CRE loans with varying risk characteristics, the supervisory monitoring criteria do not constitute limits on an institution’s lending activity but rather serve as high-level indicators to identify institutions potentially exposed to CRE concentration risk.

 

The Company holds a concentration in commercial real estate loans. As of June 30, 2024, construction, land development and other land loans represented 34.1% of consolidated bank risk-based capital. During the prior 36 months, the Company has experienced an increase in its commercial real estate portfolio of 33.3%.

 

The management team has extensive experience in underwriting commercial real estate loans and has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio. The Board of Directors has established internal maximum limits on CRE as an asset class overall as well as sub limits within CRE by property class, to better manage and control the exposure to property classes during periods of changing economic conditions. The Board of Directors also has minimum targets for regulatory capital ratios that are in excess of well capitalized ratios.

 

Our risk management process begins with a robust underwriting program. The underwriting and risk rating of all loans is completed by the Company’s Credit Department that is independent of the originating lender(s).

 

At June 30, 2024 and December 31, 2023, non-owner and owner occupied commercial real estate loans, totaled $1.1 billion, or 52.2%, of total gross loans, and $1.1 billion, or 53.3%, of total gross loans, respectively.

 

The table below breaks down the commercial real estate portfolio outstanding balance by non-owner and owner-occupied and by concentration as of June 30, 2024:

 

Property Type		Non-Owner Occupied				Owner Occupied				Total				% of CRE Portfolio				% of Total Loans				% of Total Bank Risk-Based Capital (1)
		(Dollars in thousands)
Adult Care/Assisted Living		$	32,027			$	—			$	32,027				3.0	%			1.6	%			11.8	%
Apartment			177,792				—				177,792				16.8	%			8.8	%			65.4	%
Auto Sales			2,495				34,282				36,777				3.5	%			1.8	%			13.5	%
Residential one-to-four family			32,547				1,016				33,563				3.2	%			1.7	%			12.4	%
College			11,957				11,307				23,264				2.2	%			1.1	%			8.6	%
Hotel			43,897				—				43,897				4.2	%			2.2	%			16.2	%
Industrial and Warehouse			126,859				59,896				186,755				17.7	%			9.2	%			68.7	%
Mixed Use			18,543				4,897				23,440				2.2	%			1.2	%			8.6	%
Office Portfolio			196,598				36,711				233,309				22.1	%			11.5	%			85.9	%
Retail			104,035				8,748				112,783				10.7	%			5.6	%			41.5	%
Self-Storage			18,036				374				18,410				1.7	%			0.9	%			6.8	%
Shopping Center			51,520				—				51,520				4.9	%			2.5	%			19.0	%
Student Housing			24,310				—				24,310				2.3	%			1.2	%			8.9	%
Other			23,987				34,705				58,692				5.5	%			2.9	%			21.5	%
Total commercial real estate		$	864,603			$	191,936			$	1,056,539				100.0	%			52.2	%			388.8	%
% of Total Bank Risk-Based Capital (1)			318.2	%			70.6	%
% of Total CRE loans			81.8	%			18.2	%

 

(1)

Due to loan classifications, the percentage of Total Bank Risk-Based Capital may differ from the call report.

 

The table below breaks down the commercial real estate portfolio outstanding balance by non-owner and owner-occupied and by concentration as of December 31, 2023:

 

Property Type		Non-Owner Occupied				Owner Occupied				Total				% of CRE Portfolio				% of Total Loans				% of Total Bank Risk-Based Capital (1)
		(Dollars in thousands)
Adult Care/Assisted Living			32,404				—				32,404				3.0	%			1.6	%			11.9	%
Apartment			172,623				—				172,623				16.0	%			8.5	%			63.6	%
Auto Sales			2,548				35,244				37,792				3.5	%			1.9	%			13.9	%
Residential one-to-four family			34,876				1,039				35,915				3.3	%			1.8	%			13.2	%
College			12,642				11,584				24,226				2.2	%			1.2	%			8.9	%
Hotel			44,629				—				44,629				4.1	%			2.2	%			16.4	%
Industrial and Warehouse			123,643				62,337				185,980				17.2	%			9.2	%			68.5	%
Mixed Use			19,697				4,765				24,462				2.3	%			1.2	%			9.0	%
Office Portfolio			198,453				37,644				236,097				21.9	%			11.7	%			87.0	%
Retail			106,109				9,187				115,296				10.7	%			5.7	%			42.5	%
Self-Storage			31,552				441				31,993				3.0	%			1.6	%			11.8	%
Shopping Center			51,071				—				51,071				4.7	%			2.5	%			18.8	%
Student Housing			24,484				—				24,484				2.3	%			1.2	%			9.0	%
Other			26,912				35,867				62,779				5.8	%			3.0	%			23.2	%
Total commercial real estate		$	881,643			$	198,108			$	1,079,751				100.0	%			53.3	%			397.8	%
% of Total Bank Risk-Based Capital (1)			324.8	%			73.0	%
% of Total CRE loans			84.1	%			15.9	%

 

(1)

Due to loan classifications, the percentage of Total Bank Risk-Based Capital may differ from the call report.

 

At June 30, 2024, of the $1.1 billion in commercial real estate loans, $864.6 million, or 42.7% of total gross loans, were categorized as non-owner occupied and represented 318.2% of total bank risk-based capital.

 

The following table further breaks down the non-owner occupied commercial real estate portfolio balances by concentration, collateral location and weighted average loan-to-value (“LTV”) as of June 30, 2024:

 

Property Type		MA				CT				NH				RI				Other				Total				% of Total Bank Risk-Based Capital (1)				Weighted Average LTV(2)
		(Dollars in thousands)
Office Portfolio			77,821				64,659				40,841				—				13,277				196,598				72.3	%			64.9	%
Apartment			95,439				35,262				4,998				42,093				—				177,792				65.4	%			55.8	%
Industrial and Warehouse			72,185				37,039				—				13,076				4,559				126,859				46.7	%			59.8	%
Retail			34,103				50,044				2,608				6,292				10,988				104,035				38.3	%			60.0	%
Shopping Center			28,107				11,594				11,819				—				—				51,520				19.0	%			51.4	%
Hotel			21,165				22,732				—				—				—				43,897				16.2	%			52.5	%
Residential real estate			31,155				1,262				—				—				130				32,547				12.0	%			57.8	%
Adult Care/Assisted Living			15,392				16,635				—				—				—				32,027				11.8	%			55.0	%
Student Housing			3,761				15,452				—				—				5,097				24,310				9.0	%			68.9	%
Other			18,002				5,985				—				—				—				23,987				8.8	%			50.5	%
Mixed Use			16,982				626				—				935				—				18,543				6.8	%			54.8	%
Self-Storage			17,246				—				790				—				—				18,036				6.6	%			62.3	%
College			11,957				—				—				—				—				11,957				4.4	%			45.4	%
Auto Sales			2,495				—				—				—				—				2,495				0.9	%			47.4	%
Total Non-Owner CRE		$	445,810			$	261,290			$	61,056			$	62,396			$	34,051			$	864,603				318.2	%			58.7	%

 

(1)

Due to loan classifications, the percentage of Total Bank Risk-Based Capital may differ from the call report.

(2)

Weighted average LTV is based on the original appraisal and the current loan exposure.

 

At December 31, 2023, of the $1.1 billion in commercial real estate loans, $881.7 million, or 43.5% of loans, was categorized as non-owner occupied and represented 324.8% of total risk-based capital.

 

The following table further breaks down the non-owner occupied commercial real estate portfolio balances by concentration, collateral location and weighted average LTV as of December 31, 2023.

 

Property Type		MA				CT				NH				RI				Other				Total				% of Total Bank Risk-Based Capital (1)				Weighted Average LTV (2)
		(Dollars in thousands)
Office Portfolio		$	79,864			$	65,685			$	41,404			$	—			$	11,500			$	198,453				73.1	%			62.1	%
Apartment			88,616				34,712				5,050				44,244				—				172,622				63.6	%			50.7	%
Industrial and Warehouse			74,626				35,728				—				13,290				—				123,644				45.6	%			56.4	%
Retail			35,129				50,829				2,657				6,363				11,131				106,109				39.1	%			59.4	%
Shopping Center			28,571				11,846				10,654				—				—				51,071				18.8	%			51.1	%
Hotel			21,519				23,110				—				—				—				44,629				16.4	%			53.4	%
Residential real estate			33,021				1,723				—				—				132				34,876				12.8	%			57.1	%
Adult Care/Assisted Living			15,700				16,704				—				—				—				32,404				11.9	%			55.4	%
Self-Storage			12,911				—				—				18,640				—				31,551				11.6	%			50.0	%
Other			20,329				6,411				—				—				173				26,913				9.9	%			46.3	%
Student Housing			3,803				15,570				—				—				5,110				24,483				9.0	%			69.4	%
Mixed Use			17,782				971				—				945				—				19,698				7.3	%			56.1	%
College			12,642				—				—				—				—				12,642				4.7	%			45.6	%
Auto Sales			2,548				—				—				—				—				2,548				0.9	%			48.5	%
Total Non-Owner CRE		$	447,061			$	263,289			$	59,765			$	83,482			$	28,046			$	881,643				324.8	%			56.1	%

 

(1)

Due to loan classifications, the percentage of Total Bank Risk-Based Capital may differ from the call report.

(2)

Weighted average LTV is based on the original appraisal and the current loan exposure.

 

The Company also underwrites and originates owner-occupied commercial real estate loans. These loans are typically term loans made to support properties that rely upon the operations of the business occupying the property for repayment. The Agencies specifically excluded owner-occupied commercial real estate from their concentration guidance, as the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party, or affiliate of the party, who owns the property.

 

The table below depicts a well-diversified portfolio of owner-occupied commercial real estate portfolio as of June 30, 2024:

 

Property Type		MA				CT				NH				Other				Total				% of Total Bank Risk-Based Capital (1)				Weighted Average LTV (2)
		(Dollars in thousands)
Owner Occupied CRE
Auto Sales		$	27,536			$	6,746			$	—			$	—			$	34,282				12.6	%			60.8	%
Residential one-to-four family			749				—				267				—				1,016				0.4	%			51.6	%
College			11,307				—				—				—				11,307				4.2	%			68.5	%
Industrial and Warehouse			51,370				7,944				—				582				59,896				22.0	%			54.9	%
Mixed Use			4,380				517				—				—				4,897				1.8	%			57.3	%
Office Portfolio			32,421				4,290				—				—				36,711				13.5	%			60.9	%
Retail			6,668				2,080				—				—				8,748				3.2	%			52.5	%
Self-Storage			360				14				—				—				374				0.1	%			20.6	%
Other			31,098				2,938				669				—				34,705				12.8	%			42.9	%
Total Owner Occupied CRE		$	165,889			$	24,529			$	936			$	582			$	191,936				70.6	%			56.5	%

 

(1)

Due to loan classifications, the percentage of Total Bank Risk-Based Capital may differ from the call report.

(2)

Weighted average LTV is based on the original appraisal and the current loan exposure.

 

The table below depicts a well-diversified portfolio of owner-occupied commercial real estate as of December 31, 2023:

 

Property Type		MA				CT				NH				Other				Total				% of Total Bank Risk-Based Capital (1)				Weighted Average LTV(2)
		(Dollars in thousands)
Owner Occupied CRE
Auto Sales		$	28,345			$	6,899			$	—			$	—			$	35,244				13.0	%			64.3	%
Residential one-to-four family			767				—				272				—				1,039				0.4	%			52.8	%
College			11,584				—				—				—				11,584				4.3	%			69.9	%
Industrial and Warehouse			52,653				9,086				—				598				62,337				23.0	%			55.5	%
Mixed Use			4,238				527				—				—				4,765				1.8	%			55.5	%
Office Portfolio			31,423				4,398				—				1,823				37,644				13.9	%			60.8	%
Retail			7,076				2,111				—				—				9,187				3.4	%			53.6	%
Self-Storage			389				52				—				—				441				0.2	%			20.2	%
Other			32,089				3,093				685				—				35,867				13.0	%			49.0	%
Total Owner Occupied CRE		$	168,564			$	26,166			$	957			$	2,421			$	198,108				73.0	%			57.6	%

 

(1)

Due to loan classifications, the percentage of Total Bank Risk-Based Capital may differ from the call report.

(2)

Weighted average LTV is based on the original appraisal and the current loan exposure.

 

Commercial Real Estate Office Exposure

 

Our total office-related commercial real estate loans (which is comprised of loans within our commercial real estate portfolio that are secured by office space, medical office space, and mixed-use where rental income is primarily from office space) totaled $233.3 million, or 85.9% of total bank risk-based capital and $236.1 million, or 87.0% of total bank risk-based capital, as of June 30, 2024 and December 31, 2023, respectively.

 

The table below breaks the office-related commercial real estate loans by collateral type for the periods noted:

 

June 30, 2024		Non-Owner Occupied				Owner Occupied				Total				% of Office Portfolio				% of Total Bank Risk-Based Capital (1)
		(Dollars in thousands)
Collateral Type:
Office		$	80,809			$	13,805			$	94,614				40.6	%			34.8	%
Office - Medical			101,894				20,795				122,689				52.6	%			45.1	%
Office - Retail			3,929				—				3,929				1.7	%			1.5	%
Office - Mixed			3,499				2,111				5,610				2.4	%			2.1	%
Office - Warehouse			6,467				—				6,467				2.7	%			2.4	%
Total Office Portfolio		$	196,598			$	36,711			$	233,309				100.0	%			85.9	%

 

December 31, 2023		Non-Owner Occupied				Owner Occupied				Total				% of Office Portfolio				% of Total Bank Risk-Based Capital (1)
		(Dollars in thousands)
Collateral Type:
Office		$	82,948			$	12,367			$	95,315				40.4	%			35.1	%
Office - Medical			103,189				21,268				124,457				52.7	%			45.9	%
Office - Retail			3,987				—				3,987				1.7	%			1.5	%
Office - Mixed			3,568				2,186				5,754				2.4	%			2.1	%
Office - Warehouse			4,761				1,823				6,584				2.8	%			2.4	%
Total Office Portfolio		$	198,453			$	37,644			$	236,097				100.0	%			87.0	%

 

(1)

Due to loan classifications, the percentage of Total Bank Risk-Based Capital may differ from the call report.

 

Office-related CRE loans are primarily concentrated in Massachusetts, where approximately 47.3% at June 30, 2024 and 47.1%, at December 31, 2023, of the total balance of office-related CRE loans are located. The Company does not have office CRE loans secured by real estate in greater Boston or New York.

 

June 30, 2024		Non-Owner Occupied				Owner Occupied				Total				% of Office Portfolio				% of Total Bank Risk-Based Capital (1)
		(Dollars in thousands)
By State:
Massachusetts		$	77,821			$	32,421			$	110,242				47.3	%			40.6	%
Connecticut			64,659				4,290				68,949				29.6	%			25.4	%
New Hampshire			40,841				—				40,841				17.5	%			15.0	%
Other			13,277				—				13,277				5.6	%			4.9	%
Total Office Portfolio		$	196,598			$	36,711			$	233,309				100.0	%			85.9	%

 

December 31, 2023		Non-Owner Occupied				Owner Occupied				Total				% of Office Portfolio				% of Total Bank Risk-Based Capital (1)
		(Dollars in thousands)
By State:
Massachusetts		$	79,864			$	31,423			$	111,287				47.1	%			41.0	%
Connecticut			65,685				4,398				70,083				29.7	%			25.8	%
New Hampshire			41,404				—				41,404				17.5	%			15.3	%
Other			11,500				1,823				13,323				5.7	%			4.9	%
Total Office Portfolio		$	198,453			$	37,644			$	236,097				100.0	%			87.0	%

 

(1)

Due to loan classifications, the percentage of Total Bank Risk-Based Capital may differ from the call report.

 

The following table sets forth the office-related CRE loans for non-owner occupied and owner-occupied CRE and their credit quality indicators as of the dates indicated:

 

June 30, 2024		Non-Owner Occupied				Owner Occupied				Total				% of Office Portfolio				% of Total Bank Risk-Based Capital (1)
		(Dollars in thousands)
By Risk Rating:
Pass		$	196,325			$	35,196			$	231,521				99.2	%			85.2	%
Special Mention			80				1,085				1,165				0.5	%			0.5	%
Substandard			193				430				623				0.3	%			0.2	%
Total Office Portfolio		$	196,598			$	36,711			$	233,309				100.0	%			85.9	%

 

December 31, 2023		Non-Owner Occupied				Owner Occupied				Total				% of Office Portfolio				% of Total Bank Risk-Based   Capital (1)
		(Dollars in thousands)
By Risk Rating:
Pass		$	197,911			$	36,876			$	234,787				99.4	%			86.5	%
Special Mention			83				329				412				0.2	%			0.2	%
Substandard			459				439				898				0.4	%			0.3	%
Total Office Portfolio		$	198,453			$	37,644			$	236,097				100.0	%			87.0	%

 

(1)

Due to loan classifications, the percentage of Total Bank Risk-Based Capital may differ from the call report.

 

 

Given prevailing market conditions such as rising interest rates, reduced occupancy as a result of the increase in hybrid work arrangements post-COVID, and lower commercial real estate valuations, we carefully monitor these loans for signs of deterioration in credit quality and other risks. Such heightened monitoring includes incremental risk management strategies undertaken by management, including more frequent portfolio reviews, ongoing monitoring of market conditions, and additional portfolio analysis, which may include monitoring concentration limitations, including concentrations by loan type, property type, geographic area and with participants, where applicable, and risk diversification, tracking aggregated policy and underwriting exceptions and stress testing the loan portfolios.

 

Deposits

 

Total deposits increased $28.1 million, or 1.3%, from $2.1 billion at December 31, 2023 to $2.2 billion at June 30, 2024. Core deposits, which the Company defines as all deposits except time deposits, decreased $32.3 million, or 2.1%, from $1.5 billion, or 71.5% of total deposits, at December 31, 2023, to $1.5 billion, or 69.1% of total deposits, at June 30, 2024. Non-interest-bearing deposits decreased $26.3 million, or 4.5%, to $553.3 million, money market accounts decreased $22.9 million, or 3.6%, to $611.5 million, savings accounts decreased $1.2 million, or 0.7%, to $186.2 million and interest-bearing checking accounts increased $18.1 million, or 13.8%, to $149.1 million. Time deposits increased $60.3 million, or 9.9%, from $611.4 million at December 31, 2023 to $671.7 million at June 30, 2024. Brokered time deposits, which are included in time deposits, totaled $1.7 million at June 30, 2024 and December 31, 2023.

 

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

 

		June 30, 2024				March 31, 2024				December 31, 2023
Core Deposits:		(Dollars in thousands)
Demand accounts		$	553,329			$	559,928			$	579,595
Interest-bearing accounts			149,100				125,377				131,031
Savings accounts			186,171				190,732				187,405
Money market accounts			611,501				624,474				634,361
Total Core Deposits		$	1,500,101			$	1,500,511			$	1,532,392
Time Deposits:			671,708				643,236				611,352
Total Deposits:		$	2,171,809			$	2,143,747			$	2,143,744

 

During the six months ended June 30, 2024, the Company continued to experience an unfavorable shift in deposit mix from low cost core deposits to high cost time deposits as customers continue to migrate to higher deposit rates. 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 on retaining a long-term customer relationship base by competing for and retaining deposits in our local market. At June 30, 2024, the Bank’s uninsured deposits represented 26.4% of total deposits, compared to 26.8% at December 31, 2023.

 

Borrowings

 

At June 30, 2024, total borrowings decreased $1.9 million, or 1.2%, from $156.5 million at December 31, 2023 to $154.6 million. Short-term borrowings decreased $9.5 million, or 59.2%, to $6.6 million, compared to $16.1 million at December 31, 2023. Long-term borrowings increased $7.7 million, or 6.3%, from $120.6 million at December 31, 2023 to $128.3 million at June 30, 2024.

 

The Company utilized the Bank Term Funding Program (“BTFP”), which was created in March 2023 to enhance banking system liquidity by allowing institutions to pledge certain securities at par value and borrow at a rate of ten basis points over the one-year overnight index swap rate. The BTFP was available to federally insured depository institutions in the U.S., with advances having a term of up to one year with no prepayment penalties. The BTFP ceased extending new advances in March 2024. At December 31, 2023, the Company’s outstanding balance under the BTFP was $90.0 million. There were no outstanding balance under the BTFP at June 30, 2024.

 

At June 30, 2024 and December 31, 2023, borrowings also consisted of $19.7 million in fixed-to-floating rate subordinated notes. As of June 30, 2024, the Company had $437.4 million of additional borrowing capacity at the Federal Home Loan Bank, $403.8 million of additional borrowing capacity under the Federal Reserve Bank Discount Window and $25.0 million of other unsecured lines of credit with correspondent banks.

The Company’s liquidity position remains strong with solid core deposit relationships, cash, unencumbered securities, a diversified deposit base and access to diversified borrowing sources. At June 30, 2024, the Company had $1.1 billion in immediate available liquidity, compared to $574.4 million in uninsured deposits, or 26.4% of total deposits, representing a coverage ratio of 186%. Uninsured deposits are eligible for FDIC pass-through insurance if the customer opens an IntraFi Insured Cash Sweep (“ICS”) account or a reciprocal time deposit through the Certificate of Deposit Account Registry System (“CDARS”). IntraFi allows for up to $250.0 million per customer of pass-through FDIC insurance, which would more than cover each of the Bank’s deposit customers if such customer desired to have such pass-through insurance.

 

Capital

 

At June 30, 2024, shareholders’ equity was $236.5 million, or 9.1% of total assets, compared to $237.4 million, or 9.3% of total assets, at December 31, 2023. The decrease was primarily attributable to an increase in accumulated other comprehensive loss of $1.9 million, cash dividends paid of $3.0 million, repurchase of shares at a cost of $3.6 million, partially offset by net income of $6.5 million. At June 30, 2024, total shares outstanding were 21,357,849.

 

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 regulators and internal Company targets. Total Risk-Based Capital Ratio was 14.7% at June 30, 2024 and December 31, 2023.  The Bank’s Tier 1 Leverage Ratio to adjusted average assets was 9.78% at June 30, 2024 and 9.62% at December 31, 2023.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2024 AND JUNE 30, 2023

 

General.

 

The Company reported net income of $3.5 million, or $0.17 per diluted share, for the three months ended June 30, 2024, compared to net income of $2.8 million, or $0.13 per diluted share, for the three months ended June 30, 2023. Net interest income decreased $2.4 million, or 14.1%, non-interest income increased $2.2 million, non-interest expense decreased $237,000, or 1.6%, and provision for credit losses decreased $714,000, during the same period. Return on average assets and return on average equity were 0.55% and 6.03%, respectively, for the three months ended June 30, 2024, compared to 0.43% and 4.72%, respectively, for the three months ended June 30, 2023.

 

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, 2024 and 2023, 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.

		Three Months Ended June 30,
		2024												2023
		Average Balance				Interest				Average Yield/ Cost(8)				Average Balance				Interest				Average Yield/ Cost(8)
		(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans(1)(2)		$	2,017,127			$	24,454				4.88	%		$	2,006,909			$	22,572				4.51	%
Securities(2)			354,850				2,141				2.43				374,513				2,094				2.24
Other investments - at cost			14,328				148				4.15				13,329				146				4.39
Short-term investments(3)			14,328				173				4.86				10,326				119				4.62
Total interest-earning assets			2,400,633				26,916				4.51				2,405,077				24,931				4.16
Total non-interest-earning assets			156,701												154,490
Total assets		$	2,557,334											$	2,559,567
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Interest-bearing checking accounts		$	131,449			$	253				0.77	%		$	143,547			$	248				0.69	%
Savings accounts			185,690				51				0.11				208,983				56				0.11
Money market accounts			622,062				2,930				1.89				701,116				2,330				1.33
Time deposit accounts			650,054				7,101				4.39				502,062				3,435				2.74
Total interest-bearing deposits			1,589,255				10,335				2.62				1,555,708				6,069				1.56
Short-term borrowings and long-term debt			160,484				1,997				5.00				155,826				1,894				4.88
Interest-bearing liabilities			1,749,739				12,332				2.83				1,711,534				7,963				1.87
Non-interest-bearing deposits			548,781												591,437
Other non-interest-bearing liabilities			24,453												21,832
Total non-interest-bearing liabilities			573,234												613,269
Total liabilities			2,322,973												2,324,803
Total equity			234,361												234,764
Total liabilities and equity		$	2,557,334											$	2,559,567
Less: Tax-equivalent adjustment(2)							(114	)											(122	)
Net interest and dividend income						$	14,470											$	16,846
Net interest rate spread(4)											1.66	%											2.27	%
Net interest rate spread, on a tax equivalent basis(5)											1.67	%											2.29	%
Net interest margin(6)											2.42	%											2.81	%
Net interest margin, on a tax equivalent basis(7)											2.44	%											2.83	%
Ratio of average interest-earning assets to average interest-bearing liabilities											137.20	%											140.52

 

(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.

 

		Three Months Ended June 30, 2024 compared to Three Months Ended June 30, 2023
		Increase (Decrease) Due to
		Volume				Rate				Net
Interest-earning assets		(In thousands)
Loans (1)		$	84			$	1,798			$	1,882
Securities (1)			(112	)			159				47
Other investments - at cost			11				(9	)			2
Short-term investments			46				8				54
Total interest-earning assets			29				1,956				1,985
Interest-bearing liabilities
Interest-bearing checking accounts			(21	)			26				5
Savings accounts			(6	)			1				(5	)
Money market accounts			(265	)			865				600
Time deposit accounts			1,005				2,661				3,666
Short-term borrowings and long-term debt			54				49				103
Total interest-bearing liabilities			767				3,602				4,369
Change in net interest and dividend income (1)		$	(738	)		$	(1,646	)		$	(2,384	)

 

(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, our primary driver of revenues, decreased $2.4 million, or 14.1%, to $14.5 million, for the three months ended June 30, 2024, from $16.8 million for the three months ended June 30, 2023. The decrease in net interest income was due to an increase in interest expense of $4.4 million, or 54.9%, partially offset by an increase in interest and dividend income of $2.0 million, or 8.0%. Interest expense on deposits increased $4.3 million, or 70.3%, and interest expense on borrowings increased $103,000, or 5.4%. 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.

 

The net interest margin was 2.42% for the three months ended June 30, 2024, compared to 2.81% for the three months ended June 30, 2023. The net interest margin, on a tax-equivalent basis, was 2.44% for the three months ended June 30, 2024, compared to 2.83% for the three 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 deposits to high cost time deposits, which was partially offset by an increase in the average yield on interest-earning assets.

 

The average yield on interest-earning assets, without the impact of tax-equivalent adjustments, was 4.49% for the three months ended June 30, 2024, compared to 4.14% for the three months ended June 30, 2023. The average loan yield, without the impact of tax-equivalent adjustments, was 4.85% for the three months ended June 30, 2024, compared to 4.49% for the three months ended June 30, 2023. During the three months ended June 30, 2024, average interest-earning assets decreased $4.4 million, or 0.2% to $2.4 billion, primarily due to a decrease in average securities of $19.7 million, or 5.3%, partially offset by an increase in average loans of $10.2 million, or 0.5%, an increase in short-term investments, consisting of cash and cash equivalents, of $4.0 million, or 38.8%, and an increase in average other investments of $1.0 million, or 7.5%.

 

The average cost of total funds, including non-interest bearing accounts and borrowings, increased 77 basis points from 1.39% for the three months ended June 30, 2023 to 2.16% for the three months ended June 30, 2024. The average cost of core deposits, which the Company defines as all deposits except time deposits, increased 23 basis points to 0.87% for the three months ended June 30, 2024, from 0.64% for the three months ended June 30, 2023. The average cost of time deposits increased 165 basis points from 2.74% for the three months ended June 30, 2023 to 4.39% for the three months ended June 30, 2024. The average cost of borrowings, including subordinated debt, increased 12 basis points from 4.88% for the three months ended June 30, 2023 to 5.00% for the three months ended June 30, 2024. Average demand deposits, an interest-free source of funds, decreased $42.7 million, or 7.2%, from $591.4 million, or 27.6% of total average deposits, for the three months ended June 30, 2023, to $548.8 million, or 25.7% of total average deposits, for the three months ended June 30, 2024.

 

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, 2024, the Company recorded a reversal of credit losses of $294,000, compared to a provision for credit losses of $420,000, during the three months ended June 30, 2023. The decrease 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. Management continues to monitor macroeconomic variables related to increasing interest rates, inflation and the concerns of an economic downturn, and believes it is appropriately reserved for the current economic environment.

 

The Company recorded net charge-offs of $10,000 for the three months ended June 30, 2024, as compared to net recoveries of $25,000 for the three months ended June 30, 2023.

 

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.

 

Non-interest Income.

 

Non-interest income increased $2.2 million, or 140.8%, to $3.8 million for the three months ended June 30, 2024, from $1.6 million for the three months ended June 30, 2023. During the three months ended June 30, 2024, service charges and fees on deposits increased $100,000, or 4.5%, income from bank-owned life insurance (“BOLI”) increased $8,000, or 1.6%, from $494,000 for the three months ended June 30, 2023 to $502,000 for the three months ended June 30, 2024. During the three months ended June 30, 2024, the Company reported an unrealized gain on marketable equity securities of $4,000. The Company did not have comparable gains or losses during the same period in 2023. During the three months ended June 30, 2024, the Company reported a gain of $987,000 on non-marketable equity investments and did not have comparable gains or losses during the same period in 2023. During the three months ended June 30, 2023, the Company recorded a non-recurring final termination expense of $1.1 million related to the defined benefit pension plan (the “DB Plan”) termination.

Non-interest Expense.

 

For the three months ended June 30, 2024, non-interest expense decreased $237,000, or 1.6%, to $14.3 million from $14.6 million, for the three months ended June 30, 2023. The decrease in non-interest expense was due to a decrease in professional fees of $222,000, or 27.6%, a decrease in salaries and benefits of $188,000, or 2.3%, a decrease in other non-interest expense of $75,000, or 5.1%, and a decrease in furniture and equipment expense of $9,000, or 1.8%. These decreases were partially offset by an increase in debit card and ATM processing fees of $115,000, or 21.8%, an increase in data processing expense of $54,000, or 6.8%, an increase in software expense of $40,000, or 7.6%, an increase in FDIC insurance expense of $33,000, or 11.4%, and an increase in occupancy expense of $15,000, or 1.2%.

 

For the three months ended June 30, 2024, the efficiency ratio was 78.2%, compared to 78.9% for the three months ended June 30, 2023. For the three months ended June 30, 2024, the adjusted efficiency ratio, a non-GAAP financial measure, was 82.7% compared to 74.3% for the three months ended June 30, 2023. The adjusted efficiency ratio increase was driven by lower revenues, defined as the sum of net interest income and non-interest income, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. 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, 2024 was $771,000, or an effective tax rate of 18.0%, compared to $704,000, or an effective tax rate of 20.3%, for the three months ended June 30, 2023.

 

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2024 AND JUNE 30, 2023

 

General.

 

For the six months ended June 30, 2024, the Company reported net income of $6.5 million, or $0.31 per diluted share, compared to $8.1 million, or $0.37 per diluted share, for the six months ended June 30, 2023. Return on average assets and return on average equity were 0.51% and 5.53% for the six months ended June 30, 2024, respectively, compared to 0.64% and 6.98% for the six months ended June 30, 2023, 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, 2024 and 2023, 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.

		Six Months Ended June 30,
		2024												2023
		Average  Balance				Interest				Average Yield/ Cost(8)				Average Balance				Interest				Average Yield/ Cost(8)
		(Dollars in thousands)
ASSETS:
Interest-earning assets
Loans(1)(2)		$	2,019,420			$	48,805				4.86	%		$	2,000,055			$	44,018				4.44	%
Securities(2)			357,171				4,255				2.40				378,421				4,243				2.26
Other investments - at cost			13,411				284				4.26				12,717				252				4.00
Short-term investments(3)			11,857				286				4.85				8,130				173				4.29
Total interest-earning assets			2,401,859				53,630				4.49				2,399,323				48,686				4.09
Total non-interest-earning assets			155,555												153,520
Total assets		$	2,557,414											$	2,552,843
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Interest-bearing checking accounts		$	133,504				488				0.74			$	141,662				511				0.73
Savings accounts			185,907				90				0.10				213,863				101				0.10
Money market accounts			624,164				5,517				1.78				739,182				4,325				1.18
Time deposit accounts			638,970				13,533				4.26				465,184				5,235				2.27
Total interest-bearing deposits			1,582,545				19,628				2.49				1,559,891				10,172				1.32
Short-term borrowings and long-term debt			160,643				3,962				4.96				121,285				2,925				4.86
Interest-bearing liabilities			1,743,188				23,590				2.72				1,681,176				13,097				1.57
Non-interest-bearing deposits			553,246												615,168
Other non-interest-bearing liabilities			25,672												23,572
Total non-interest-bearing liabilities			578,918												638,740
Total liabilities			2,322,106												2,319,916
Total equity			235,308												232,927
Total liabilities and equity		$	2,557,414											$	2,552,843
Less: Tax-equivalent adjustment(2)							(224	)											(239	)
Net interest and dividend income						$	29,816											$	35,350
Net interest rate spread(4)											1.75	%											2.50	%
Net interest rate spread, on a tax equivalent basis(5)											1.77	%											2.52	%
Net interest margin(6)											2.50	%											2.97	%
Net interest margin, on a tax equivalent basis(7)											2.52	%											2.99	%
Ratio of average interest-earning assets to average interest-bearing liabilities											137.79	%											142.72	%

 

(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.

 

		Six Months Ended June 30, 2024 compared to Six Months Ended June 30, 2023
		Increase (Decrease) Due to
		Volume				Rate				Net
Interest-earning assets		(In thousands)
Loans (1)		$	498			$	4,289			$	4,787
Securities (1)			(234	)			246				12
Other investments - at cost			15				17				32
Short-term investments			80				33				113
Total interest-earning assets			359				4,585				4,944
Interest-bearing liabilities
Interest-bearing checking accounts			(29	)			6				(23	)
Savings accounts			(12	)			1				(11	)
Money market accounts			(673	)			1,865				1,192
Time deposit accounts			1,970				6,328				8,298
Short-term borrowings and long-term debt			954				83				1,037
Total interest-bearing liabilities			2,210				8,283				10,493
Change in net interest and dividend income		$	(1,851	)		$	(3,698	)		$	(5,549	)

 

 

(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, 2024, net interest income, our primary driver of revenues, decreased $5.5 million, or 15.7%, to $29.8 million, compared to $35.4 million for the six months ended June 30, 2023. The decrease in net interest income was due to an increase in interest expense of $10.5 million, or 80.1%, partially offset by an increase in interest and dividend income of $5.0 million, or 10.2%. The $10.5 million, or 80.1%, increase in interest expense was primarily due to an increase in interest expense on deposits of $9.5 million, or 93.0%.

 

The net interest margin for the six months ended June 30, 2024 was 2.50%, compared to 2.97% during the six months ended June 30, 2023. The net interest margin, on a tax-equivalent basis, was 2.52% for the six months ended June 30, 2024, compared to 2.99% 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 by an increase in the average yield on interest-earning assets.

 

The average yield on interest-earning assets, without the impact of tax-equivalent adjustments, was 4.47% for the six months ended June 30, 2024, compared to 4.07% for the six months ended June 30, 2023. The average loan yield, without the impact of tax-equivalent adjustments, was 4.84% for the six months ended June 30, 2024, compared to 4.41% for the six months ended June 30, 2023. During the six months ended June 30, 2024, average interest-earning assets increased $2.5 million, or 0.1%, to $2.4 billion, from the same period in 2023. The increase was primarily due to an increase in average loans of $19.4 million, or 1.0%, and an increase in average short-term investments, consisting of cash and cash equivalents, of $3.7 million, or 45.8%, partially offset by a decrease in average securities of $21.3 million, or 5.6%.

 

 

The average cost of total funds, including non-interest bearing accounts and borrowings, increased 92 basis points from 1.15% for the six months ended June 30, 2023 to 2.07% for the six months ended June 30, 2024. The average cost of core deposits, which the Company defines as all deposits except time deposits, increased 24 basis points to 0.82% for the six months ended June 30, 2024, from 0.58% for the six months ended June 30, 2023. The average cost of time deposits increased 199 basis points from 2.27% for the six months ended June 30, 2023 to 4.26% for the six months ended June 30, 2024. The average cost of borrowings, including subordinated debt, increased 10 basis points from 4.86% for the six months ended June 30, 2023 to 4.96% for the six months ended June 30, 2024. Average demand deposits, an interest-free source of funds, decreased $61.9 million, or 10.1%, from $615.2 million, or 28.3% of total average deposits, for the six months ended June 30, 2023, to $553.2 million, or 25.9% of total average deposits, for the six months ended June 30, 2024.

 

Provision for (Reversal of) Credit Losses.

 

During the six months ended June 30, 2024, the Company recorded a reversal of credit losses of $844,000, compared to a provision for credit losses of $32,000 during the six months ended June 30, 2023. The decrease was primarily due to changes in the loan mix as well as 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. Management continues to monitor macroeconomic variables related to increasing interest rates, inflation and the concerns of an economic downturn, and believes it is appropriately reserved for the current economic environment.

 

The Company recorded net recoveries of $57,000 for the six months ended June 30, 2024, as compared to net charge-offs of $1.8 million for the six months ended June 30, 2023.

 

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.

 

Non-interest Income.

 

For the six months ended June 30, 2024, non-interest income increased $1.9 million, or 42.4%, from $4.6 million during the six months ended June 30, 2023 to $6.5 million. During the same period, service charges and fees on deposits increased $132,000, or 3.0%, and income from BOLI increased $21,000, or 2.2%. During the six months ended June 30, 2024, the Company reported a gain of $987,000 on non-marketable equity investments, compared to a gain of $352,000, during the six months ended June 30, 2023. During the six months ended June 30, 2024, the Company reported a loss on the disposal of premises and equipment of $6,000 and did not have a comparable gain or loss during the six months ended June 30, 2023. In addition, during the six months ended June 30, 2024, the Company reported unrealized gains on marketable equity securities of $12,000, and did not have comparable gains or losses during the six months ended June 30, 2023. Gains and losses from the investment portfolio vary from quarter to quarter based on market conditions, as well as the related yield curve and valuation changes. During the six months ended June 30, 2023, the Company recorded a $1.1 million final termination expense related to the DB Plan termination. The Company did not have comparable income or expense during the six months ended June 30, 2024.

 

Non-interest Expense.

 

For the six months ended June 30, 2024, non-interest expense decreased $351,000, or 1.2%, to $29.1 million, compared to $29.4 million for the six months ended June 30, 2023. The decrease in non-interest expense was primarily due to a decrease in professional fees of $410,000, or 26.3%, a decrease in salaries and employee benefits of $375,000, or 2.3%, a decrease in other non-interest expense of $173,000, or 6.1%, a decrease in advertising expense of $68,000, or 9.0%, and a decrease in furniture and equipment expense of $11,000, or 1.1%. These decreases were partially offset by an increase in software related expense of $225,000, or 21.7%, an increase in debit card and ATM processing fees of $177,000, or 17.4%, an increase in data processing expense of $163,000, or 10.6%, an increase in FDIC insurance expense of $91,000, or 14.2%, and an increase in occupancy expense of $30,000, or 1.2%. 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, 2024, the efficiency ratio was 80.1%, compared to 73.8% for the six months ended June 30, 2023. For the six months ended June 30, 2024, the adjusted efficiency ratio, a non-GAAP financial measure, was 82.4%, compared to 72.3% for the six months ended June 30, 2023. The increase in the efficiency ratio and the adjusted efficiency ratio was driven by lower revenues, defined as the sum of net interest income and non-interest income, during the six months ended June 30, 2024, compared to the six months ended June 30, 2023. 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, 2024 was $1.6 million, representing an effective tax rate of 19.8%, compared to $2.4 million, representing an effective tax rate of 22.7%, for six months ended June 30, 2023, due to lower projected pre-tax income for the twelve months ended December 31, 2024.

 

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.

		At June 30, 2024				At June 30, 2023
		(Dollars in thousands)
Book Value per Share (GAAP)		$	11.07			$	10.60
Non-GAAP adjustments:
Goodwill			(0.58	)			(0.57	)
Core deposit intangible			(0.08	)			(0.09	)
Tangible Book Value per Share (non-GAAP)		$	10.41			$	9.94

 

		Three Months Ended								Six Months Ended
		June 30, 2024				June 30, 2023				June 30, 2024				June 30, 2023
		(Dollars in thousands)
Loan income (no tax adjustment)		$	24,340			$	22,450			$	48,581			$	43,779
Tax-equivalent adjustment (1)			114				122				224				239
Loan income (tax-equivalent basis)		$	24,454			$	22,572			$	48,805			$	44,018
Net interest income (no tax adjustment)		$	14,470			$	16,846			$	29,816			$	35,350
Tax-equivalent adjustment (1)			114				122				224				239
Net interest income (tax-equivalent basis)		$	14,584			$	16,968			$	30,040			$	35,589
Average interest-earning assets		$	2,400,633			$	2,405,077			$	2,401,859			$	2,399,323
Interest rate spread (no tax adjustment)			1.66	%			2.27	%			1.75	%			2.50	%
Net interest margin (no tax adjustment)			2.42	%			2.81	%			2.50	%			2.97	%
Net interest margin (tax-equivalent)			2.44	%			2.83	%			2.52	%			2.99	%
(1) The tax equivalent adjustment is based upon a 21% tax rate.

 

 

		Three Months Ended								Six Months Ended
		June 30, 2024				June 30, 2023				June 30, 2024				June 30, 2023
		(Dollars in thousands)
Efficiency Ratio:
Non-interest Expense (GAAP)		$	14,314			$	14,551			$	29,096			$	29,447
Net Interest Income (GAAP)		$	14,470			$	16,846			$	29,816			$	35,350
Non-interest Income (GAAP)		$	3,834			$	1,592			$	6,508			$	4,571
Non-GAAP adjustments:
Loss on disposal of premises and equipment, net			—				—				6				—
Unrealized gain on marketable equity securities			(4	)			—				(12	)			—
Loss on defined benefit plan termination			—				1,143				—				1,143
Gain on non-marketable equity investments			(987	)			—				(987	)			(352	)
Non-interest Income for Adjusted Efficiency Ratio (non-GAAP)		$	2,843			$	2,735			$	5,515			$	5,362
Total Revenue for Adjusted Efficiency Ratio (non-GAAP)		$	17,313			$	19,581			$	35,331			$	40,712
Efficiency Ratio (GAAP)			78.20	%			78.92	%			80.10	%			73.76	%
Adjusted Efficiency Ratio (Non-interest Expense (GAAP)/Total Revenue for Adjusted Efficiency Ratio (non-GAAP))			82.68	%			74.31	%			82.35	%			72.33	%

 

Liquidity and Capital Resources.

 

Liquidity Management

 

The term “liquidity” refers to our ability to generate adequate amounts of cash flows to meet all present and future funding requirements at reasonable costs. The Company’s primary source of liquidity is deposits, primarily core deposits. While our preferred funding strategy is to attract and retain low cost deposits, our ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of wholesale funding, such as FHLB term advances, other borrowings and brokered deposits, cash flows from our investment securities portfolios, loan sales, loan repayments and earnings. Although the Company currently does not have the intent and has the ability to hold investment securities, the Company may also sell securities available-for-sale in response to short-term or long-term liquidity needs.

 

The Company’s liquidity positions are monitored daily by management. The Asset Liability Committee (“ALCO”) establishes guidelines to ensure maintenance of prudent levels of liquidity. The Company has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. Management employs a stress testing methodology to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of “business as usual” cash flows to ensure a strong liquidity position. Included in the calculation are assumptions of some significant deposit run-off as well as funds needed for loan funding and investment purchases. The Company does not anticipate engaging in any activities, either currently or over the long-term, for which adequate funding would not be available and which would therefore result in significant pressure on liquidity. However, an economic recession could negatively impact the Company’s liquidity. The Company relies heavily on the FHLB as a source of funds, particularly with its overnight line of credit. In past economic recessions, some FHLB branches have suspended dividends, cut dividend payments, and suspended the purchase of excess FHLB stock that members hold in an effort to conserve capital. FHLB has stated that it expects to be able to continue to pay dividends, redeem excess capital stock, and provide competitively priced advances in the future.

 

At June 30, 2024 and December 31, 2023, outstanding borrowings from the FHLB were $128.3 million and $40.6 million, respectively. At June 30, 2024, we had $437.4 million in available borrowing capacity with the FHLB, which includes our Ideal Way Line of Credit. We have the ability to increase our borrowing capacity with the FHLB by pledging additional investment securities or additional loans.

 

 

At June 30, 2024, we had available borrowing capacity of $403.8 million with the Federal Reserve Bank Discount Window (“FRB Discount Window”) at an interest rate determined and reset on a daily basis. Borrowings from the FRB Discount Window are secured by certain commercial and industrial loans and securities from the Company’s investment portfolio, not otherwise pledged. As of June 30, 2024 and December 31, 2023, there were no advances outstanding under either of these lines.

 

The Company’s liquidity position remains strong with solid core deposit relationships, cash, unencumbered securities, a diversified deposit base and access to diversified borrowing sources. At June 30, 2024, the Company had $1.1 billion in immediately available liquidity, compared to $574.4 million in uninsured deposits, or 26.4% of total deposits, representing a coverage ratio of 186%. Uninsured deposits of the Bank’s customers are eligible for FDIC pass-through insurance if the customer opens an IntraFi Insured Cash Sweep (“ICS”) account or a reciprocal time deposit through the Certificate of Deposit Account Registry System (“CDARS”). IntraFi allows for up to $250.0 million per customer of pass-through FDIC insurance, which would more than cover each of the Bank’s deposit customers if such customer desired to have such pass-through insurance.

 

On March 12, 2023, the Federal Reserve Bank made available the Bank Term Funding Program (“BTFP”) to enhance banking system liquidity by allowing institutions to pledge certain securities at par value and borrow at a rate of ten basis points over the one-year overnight index swap rate. The BTFP was available to federally insured depository institutions in the U.S., with advances having a term of up to one year with no prepayment penalties. The BTFP ceased extending new advances in March 2024. At December 31, 2023, the outstanding balance under the BTFP was $90.0 million. There was no outstanding balance at June 30, 2024.

 

In addition, the Company also maintains unsecured lines of credits totaling $25.0 with two correspondent banks. Interest rates on these lines are determined and reset on a daily basis by each respective bank. At June 30, 2024 and December 31, 2023, there were no borrowings outstanding under 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.

 

The Company has 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 and are obligated under leases for certain of our branches and equipment.

 

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, 2024, the Company had approximately $156.3 million in loan commitments and letters of credit to borrowers and approximately $337.2 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, 2024, time deposit accounts scheduled to mature within one year totaled $654.5 million, or 97.4% of the time deposit portfolio. 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.

 

 

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, 2024 were estimated to be $8.3 million, with $5.0 million expected to be paid within one year and the remaining $3.3 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 fourteen years, some of which include options to extend the leases for additional five-year terms up to ten years. Undiscounted lease liabilities totaled $9.5 million as of June 30, 2024. Principal payments expected to be made on our lease liabilities during the twelve months ended June 30, 2024 were $1.4 million. The remaining lease liability payments totaled $8.1 million and are expected to be made after June 30, 2025.

 

In addition, the Company completed an offering of $20 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, 2024, $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 2024, 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, 2024, we exceeded each of the applicable regulatory capital requirements. As of June 30, 2024, 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.

 

The Company’s and Bank’s regulatory capital ratios as of June 30, 2024 and December 31, 2023 are presented in the table below.

 

		Actual								Minimum For Capital Adequacy Purpose								Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in thousands)
June 30, 2024
Total Capital (to Risk Weighted Assets):
Consolidated		$	286,096				14.70	%		$	155,687				8.00	%			N/A				N/A
Bank			271,755				13.98				155,481				8.00			$	194,351				10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated			246,459				12.66				116,765				6.00				N/A				N/A
Bank			251,849				12.96				116,611				6.00				155,481				8.00
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated			246,459				12.66				87,574				4.50				N/A				N/A
Bank			251,849				12.96				87,458				4.50				126,328				6.50
Tier 1 Leverage Ratio (to Adjusted Average Assets):
Consolidated			246,459				9.56				103,110				4.00				N/A				N/A
Bank			251,849				9.78				103,004				4.00				128,755				5.00

 

 

		Actual								Minimum For Capital Adequacy Purpose								Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in thousands)
December 31, 2023
Total Capital (to Risk Weighted Assets):
Consolidated		$	285,760				14.67	%		$	155,873				8.00	%			N/A				N/A
Bank			271,420				13.94				155,711				8.00			$	194,639				10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated			245,363				12.59				116,905				6.00				N/A				N/A
Bank			250,734				12.88				116,783				6.00				155,711				8.00
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated			245,363				12.59				87,679				4.50				N/A				N/A
Bank			250,734				12.88				87,587				4.50				126,515				6.50
Tier 1 Leverage Ratio (to Adjusted Average Assets):
Consolidated			245,363				9.40				104,400				4.00				N/A				N/A
Bank			250,734				9.62				104,290				4.00				130,363				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.

 

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes in our assessment of our sensitivity to market risk since our presentation in our 2023 Annual Report. Please refer to Item 7A of the 2023 Annual Report for additional information.

 

ITEM 4: CONTROLS AND PROCEDURES

 

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.

 

 

PART II – OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS.

 

Except as set forth in Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2023, the Company was not involved in any material pending legal proceedings as a plaintiff or as a defendant, other than routine legal proceedings occurring in the ordinary course of business. We believe that all such claims and actions currently pending against us, if any, are either adequately covered by insurance or would not have a material adverse effect on us if decided in a manner unfavorable to us.

 

ITEM 1A.

RISK FACTORS.

 

For a summary of risk factors relevant to our operations, see Part 1, Item 1A, “Risk Factors” in our 2023 Annual Report. There are no additional material changes in the risk factors relevant to our operations since December 31, 2023.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

The following table sets forth information with respect to purchases made by us of our common stock during the three months ended June 30, 2024.

 

Period			Total Number of Shares Purchased				Average Price Paid per Share ($)				Total Number of Shares Purchased as Part of Publicly Announced Programs				Maximum Number of Shares that May Yet Be Purchased Under the 2024 Plan(1)(2)
April 1 - 30, 2024				16,933				6.22				16,933				189,667
May 1 - 31, 2024				167,973				6.68				167,973				21,694
June 1 - 30, 2024				84,935				6.60				84,935				936,759
Total				269,841				6.62				269,841				936,759

 

(1)

On July 26, 2022, the Board of Directors authorized a stock repurchase plan under which the Company was authorized to purchase up to 1,100,000 shares of common stock, or 5%, of its outstanding common stock, as of the date the 2022 Plan was adopted. The 2022 Plan was completed on June 6, 2024.

 

(2)

On May 21, 2024, the Board of Directors authorized an additional stock repurchase plan under which the Company may purchase up to 1,000,000 shares of common stock, or 4.6%, of its outstanding common stock, as of the date the 2024 Plan was adopted. The 2024 Plan commenced upon the completion of the 2022 Plan.

 

There were no sales by us of unregistered securities during the three months ended June 30, 2024.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4.

MINE SAFETY DISCLOSURE.

 

Not applicable.

 

ITEM 5.

OTHER INFORMATION.

 

During the quarter ended June 30, 2024, no director or officer of the Company adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements.

 

 

ITEM 6.

EXHIBITS.

 

Exhibit   Number		Exhibit Description
3.2		Restated Articles of Organization of Western New England Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of the Form 8-K filed with the SEC on October 26, 2016).
3.3		Amended and Restated Bylaws of Western New England Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of the Form 8-K filed with the SEC on February 2, 2017).
4.1		Form of Stock Certificate of Western New England Bancorp, Inc. (f/k/a Westfield Financial, Inc.) (incorporated by reference to Exhibit 4.1 of the Registration Statement No. 333-137024 on Form S-1 filed with the Securities and Exchange Commission on August 31, 2006).
31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101**		Financial statements from the quarterly report on Form 10-Q of Western New England Bancorp, Inc. for the quarter ended June 30, 2024, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Net Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

*

Filed herewith.

**

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 9, 2024.

 

Western New England Bancorp, Inc.

 

By:

/s/ James C. Hagan

	James C. Hagan
	President and Chief Executive Officer

 

By:

/s/ Guida R. Sajdak

	Guida R. Sajdak
	Executive Vice President and Chief Financial Officer