WESTERN NEW ENGLAND BANCORP, INC. 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
Counties in western
? 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 ended
? Net income was
ended
diluted share, for the three months ended
? During the three months ended
of credit losses of
charge-offs of
compared to net charge-offs of
2022. The charge-offs for the three months ended
one commercial loan relationship acquired on
represented the nonaccretable credit mark that was required to be grossed-up to
the loan's amortized cost basis with a corresponding increase to the allowance
for credit losses under the Current Expected Credit Loss ("CECL")
implementation. There was no impact to earnings as a result of the charge-off.
35
? Net interest income decreased
months ended
total interest expense of
in interest expense on deposits of
interest expense on borrowings of
interest and dividend income increased$3.7 million , or 18.5%. CRITICAL ACCOUNTING POLICIES. Our consolidated financial statements are prepared in accordance withU.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. OnJanuary 1, 2023 , the Company adopted Accounting Standards Update (ASU) 2016-13 Financial Instruments - Credit Losses (Topic326): Measurement of Credit Losses on Financial Instruments, which requires the recognition of the allowance for credit losses be estimated using the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities that are determined to have impairment related to credit losses. There have been no additional material changes to our critical accounting policies during the three months endedMarch 31, 2023 . For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the accompanying unaudited consolidated financial statements and Note 1 of the consolidated financial statements included in
our 2022 Annual Report.
COMPARISON OF FINANCIAL CONDITION AT
AtMarch 31, 2023 , total assets were$2.6 billion , an increase of$8.9 million , or 0.4%, fromDecember 31, 2022 . During the three months endedMarch 31, 2023 , cash and cash equivalents decreased$7.1 million , or 23.4%, to$23.2 million , investment securities decreased$3.7 million , or 1.0%, to$379.7 million and total loans increased$15.1 million , or 0.8%, to$2.0 billion . AtMarch 31, 2023 , the available-for-sale and held-to-maturity securities portfolio represented 14.6% of total assets, compared to 14.8% atDecember 31, 2022 . AtMarch 31, 2023 , the Company's available-for-sale securities portfolio, recorded at fair market value, decreased$624,000 , or 0.4%, from$147.0 million atDecember 31, 2022 to$146.4 million . The held-to-maturity securities portfolio, recorded at amortized cost, decreased$3.2 million , or 1.4%, from$230.2 million atDecember 31, 2022 to$227.0 million atMarch 31, 2023 . The marketable equity securities portfolio increased$72,000 , or 1.2%, from$6.2 million atDecember 31, 2022 to$6.3 million atMarch 31, 2023 . 36 AtMarch 31, 2023 , the Company reported unrealized losses on the available-for-sale securities portfolio of$29.5 million , or 16.8% of the amortized cost basis of the available-for-sale securities portfolio, compared to unrealized losses of$32.2 million , or 18.0% of the amortized cost basis of the available-for-sale securities atDecember 31, 2022 . AtMarch 31, 2023 , the Company reported unrealized losses on the held-to-maturity securities portfolio of$36.0 million , or 15.8%, of the amortized cost basis of all held-to-maturity securities, compared to$39.2 million , or 17.0% of the amortized cost basis of all held-to-maturity securities atDecember 31, 2022 . The securities in which the Company may invest are limited by regulation. Federally chartered savings banks have authority to invest in various types of assets, includingU.S. Treasury obligations, securities of various government-sponsored enterprises, mortgage-backed securities, certain certificates of deposit of insured financial institutions, repurchase agreements, overnight and short-term loans to other banks, corporate debt instruments and marketable equity securities. The securities, with the exception of$7.5 million in corporate bonds, are issued bythe 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. AtMarch 31, 2023 andDecember 31, 2022 , the Company did not record any impairment charges on its securities portfolio and attributed the unrealized losses primarily due to fluctuations in general interest rates or changes in expected prepayments and not due to credit quality. The primary objective of the Company's investment portfolio is to provide liquidity and to secure municipal deposit accounts while preserving the safety of principal. The Company expects to strategically redeploy available cash flows from the securities portfolio to fund loan growth and deposit outflows. Total gross loans increased$15.1 million , or 0.8%, to$2.0 billion fromDecember 31, 2022 toMarch 31, 2023 . Commercial real estate loans increased$10.3 million , or 1.0%, residential real estate loans, including home equity loans, increased$5.8 million , or 0.8%, while commercial and industrial loans, including PPP loans, decreased$1.7 million , or 0.8%. 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$5,000 and$60,000 for the three months endedMarch 31, 2023 and 2022, respectively. AtMarch 31, 2023 , nonperforming loans totaled$5.8 million , or 0.29% of total loans, compared to$5.7 million , or 0.29% of total loans, atDecember 31, 2022 . AtMarch 31, 2023 , there were no loans 90 or more days past due and still accruing interest. Nonperforming assets to total assets, was 0.23% atMarch 31, 2023 , compared to 0.22% atDecember 31, 2022 . The allowance for credit losses as a percentage of total loans was 0.95% atMarch 31, 2023 , compared to 1.00% atDecember 31, 2022 . AtMarch 31, 2023 , the allowance for credit losses as a percentage of nonperforming loans was 328.5%, compared to 350.0% atDecember 31, 2022 . A summary of our past due and nonaccrual loans by class are listed in Note 5 of the accompanying unaudited consolidated financial statements. Total deposits decreased$72.3 million , or 3.2%, fromDecember 31, 2022 to$2.2 billion atMarch 31, 2023 . Core deposits, which the Company defines as all deposits except time deposits, decreased$118.4 million , or 6.5%, from$1.8 billion , or 81.5% of total deposits, atDecember 31, 2022 , to$1.7 billion , or 78.8% of total deposits, atMarch 31, 2023 . Non-interest-bearing deposits decreased$19.9 million , or 3.1%, to$625.7 million , interest-bearing checking accounts decreased$15.0 million , or 10.1%, to$133.7 million , savings accounts decreased$3.6 million , or 1.6%, to$218.8 million , and money market accounts decreased$79.9 million , or 10.0%, to$721.2 million . Time deposits increased$46.0 million , or 11.2%, from$411.7 million atDecember 31, 2022 to$457.7 million atMarch 31, 2023 . Total deposits decreased$15.3 million , or 0.7%, fromDecember 31, 2022 to$2.2 billion atFebruary 28, 2023 . Total deposits decreased$57.0 million , or 2.6%, fromFebruary 28, 2023 to$2.2 billion atMarch 31, 2023 . Of the$57.0 million , 58% of the deposit decrease was due to the reduction of a single deposit relationship that was seeking a higher rate and moved the funds to a treasury investment outside the bank. During the first quarter of 2023, the Company experienced a higher level of competition not only from local competitors but also from money market funds andTreasury notes that were offering higher returns. In addition, the Company also saw an unfavorable shift in deposit mix from low-cost core deposits to high-cost time deposits as customers migrated to higher yields. 37
The table below is a summary of our deposit balances for the periods noted:
September
March 31, 2022 June 30, 2022 30, 2022 2022 2023 2023 March 31, 2023
(Dollars in thousands)
Core
deposits $ 1,899,141 $ 1,951,564 $ 1,944,476 $ 1,817,753 $ 1,784,606 $ 1,786,179 $ 1,699,402
Time
deposits 379,023 350,408 343,278 411,690 421,246 427,922 457,726
Total
Deposits $ 2,278,164 $ 2,301,972 $ 2,287,754 $ 2,229,443 $ 2,205,852 $ 2,214,101 $ 2,157,128
Change
from
prior
period:
Dollars
($) $ 23,808 $ (14,218 ) $ (58,311 ) $ (23,591 ) $ 8,249 $ (56,973 )
Percent
(%) 1.0 % (0.6 )% (2.5 )% (1.1 )% 0.4 % (2.6 )%
The Company continues to focus on the maintenance, development, and expansion of
its core deposit base to meet funding requirements and liquidity needs, with an
emphasis to retain a long-term customer relationship base and to efficiently
compete for and retain deposits in our local market. At March 31, 2023 , the
banks uninsured deposits represented 28.6% of total deposits, compared to 30.8%
at December 31, 2022 and the average account size was approximately $22,000 . The
Company's deposit base was approximately 65% retail, 25% business, 5% municipal
and 4% non-profit.
At March 31, 2023 , short-term borrowings increased $57.6 million , or 139.4%, to
$99.0 million , compared to $41.4 million at December 31, 2022 . Long-term
borrowings with the FHLB increased $30.0 million from $1.2 million at December
31, 2022 , to $31.2 million at March 31, 2023 . Subordinated debt of $19.7 million
remained unchanged at March 31, 2023 and December 31, 2022 .
At March 31, 2023 , shareholders' equity was $233.2 million , or 9.1% of total
assets, compared to $228.1 million , or 8.9% of total assets, at December 31,
2022 . The increase was primarily attributable to net income of $5.3 million and
a decrease in accumulated other comprehensive loss of $1.9 million reflecting
the after-tax increase in the fair value of the available-for-sale securities
portfolio primarily due to changes in market interest rates. These increases
were partially offset by cash dividends paid of $1.5 million . At March 31, 2023 ,
the unrealized losses are not realized in our consolidated statements of net
income since the Company has both the intent and ability to hold these
available-for-sale securities until maturity or the price recovers. At March 31,
2023 , total shares outstanding were 22,209,347.
The Company's regulatory capital ratios continue to be strong and in excess of
regulatory minimum requirements to be considered well-capitalized as defined by
the regulators as well as internal targets. The Bank's tangible common equity to
tangible assets ratio ("TCE"), a non-GAAP financial measure, was 8.78% at March
31, 2023 , compared to 8.52% at December 31, 2022 . Fluctuations in the TCE ratio
were driven by the changes in the unrealized loss on available-for-sale
securities. TCE 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.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
General. Net income was$5.3 million , or$0.24 per diluted share, for the three months endedMarch 31, 2023 , consistent with net income of$5.3 million , or$0.24 per diluted share, for the three months endedMarch 31, 2022 . Net interest income, our primary driver of revenues, was$18.5 million for the three months endedMarch 31, 2023 compared to$18.7 million for the three months endedMarch 31, 2022 . 38
Net Interest and Dividend Income.
The following tables set forth the information relating to our average balance and net interest income for the three months endedMarch 31, 2023 and 2022, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing annualized interest income by the average balance of interest-earning assets and annualized interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets. Three Months Ended March 31, 2023 2022 Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost (Dollars in thousands) ASSETS: Interest-earning assets Loans(1)(2)$ 1,993,124 $ 21,449 4.36 %$ 1,894,870 $ 18,067 3.87 % Securities(2) 382,373 2,149 2.28 423,437 1,950 1.87
Other investments - at cost 12,098 106 3.55 10,595 25 0.96 Short-term investments(3) 5,909 54 3.71 57,030 21 0.15 Total interest-earning assets 2,393,504 23,758 4.03 2,385,932 20,063 3.41 Total non-interest-earning assets 152,539 143,635 Total assets$ 2,546,043 $ 2,529,567 LIABILITIES AND EQUITY: Interest-bearing liabilities Interest-bearing checking accounts$ 139,755 $ 263 0.76 %$ 132,192 $ 95 0.29 % Savings accounts 218,797 45 0.08 218,448 36 0.07 Money market accounts 777,673 1,995 1.04 878,393 521 0.24 Time deposits 427,895 1,800 1.71 389,063 340 0.35 Total interest-bearing deposits 1,564,120 4,103 1.06 1,618,096 992 0.25 Short-term borrowings and long-term debt 86,360 1,031 4.84 21,975 253 4.67 Interest-bearing liabilities 1,650,480 5,134 1.26 1,640,071 1,245 0.31 Non-interest-bearing deposits 639,162 633,082 Other non-interest-bearing liabilities 25,331
32,857
Total non-interest-bearing liabilities 664,493 665,939 Total liabilities 2,314,973 2,306,010 Total equity 231,070 223,557 Total liabilities and equity$ 2,546,043 $ 2,529,567 Less: Tax-equivalent adjustment(2) (120 ) (120 ) Net interest and dividend income$ 18,504 $ 18,698 Net interest rate spread(4) 2.74 %
3.08 %
Net interest rate spread,
on a tax equivalent
basis(5) 2.76 % 3.10 %
Net interest margin(6) 3.14 % 3.18 %
Net interest margin, on a
tax equivalent basis(7) 3.16 % 3.20 %
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 145.02 % 145.48 %
(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".
39
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
Months Ended
Increase (Decrease) Due to
Volume Rate Net
Interest-earning assets (In thousands)
Loans (1) $ 937 $ 2,445 $ 3,382
Securities (1) (189 ) 388 199Other investments - at cost 4 77 81 Short-term investments (19 ) 52 33 Total interest-earning assets 733 2,962 3,695 Interest-bearing liabilities Interest-bearing checking accounts 5
163 168
Savings accounts - 9 9
Money market accounts (60 ) 1,534 1,474
Time deposits 34 1,426 1,460Short-term borrowing and long-time debt 741 37 778 Total interest-bearing liabilities 720 3,169 3,889
Change in net interest and dividend income (1)
$ (207 ) $ (194 )
(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".
Tax-equivalent net interest income decreased $194,000 , or 1.0%, to $18.5 million
for the three months ended March 31, 2023 , from $18.7 million for the three
months ended March 31, 2022 . The decrease in tax-equivalent net interest income
was due to an increase in total interest expense of $3.9 million , or 312.4%,
primarily due to an increase in interest expense on deposits of $3.1 million , or
313.6%, and an increase in interest expense on borrowings of $778,000 , or
307.5%. During the same period, interest and dividend income increased $3.7
million , or 18.5%. Excluding PPP income of $15,000 and $562,000 during the three
months ended March 31, 2023 and March 31, 2022 , respectively, net interest
income increased $353,000 , or 1.9%. During the three months ended March 31,
2023 , interest income included $62,000 in negative purchase accounting
adjustments, compared to $39,000 in positive purchase accounting adjustments
during the three months ended March 31, 2022 . Excluding the adjustments above,
net interest income increased $454,000 , or 2.5%, from $18.1 million during the
three months ended March 31, 2022 , to $18.6 million during the three months
ended March 31, 2023 .
The net interest margin was 3.14% for the three months ended March 31, 2023 ,
compared to 3.18%, for the three months ended March 31, 2022 . The net interest
margin, on a tax-equivalent basis, was 3.16% for the three months ended March
31, 2023 , compared to 3.20% for the three months ended March 31, 2022 . Excluding
the adjustments discussed above and prepayment penalties and fees, the net
interest margin increased five basis points from 3.10% for the three months
ended March 31, 2022 to 3.15% for the three months ended March 31, 2023 . The
Company's net interest margin, during the three months ended March 31, 2023 , was
negatively impacted by higher deposit costs as well as a shift in the deposit
mix from low-cost deposits to high-cost deposits.
40
The average yield on interest-earning assets increased 62 basis points from 3.39% for the three months endedMarch 31, 2022 to 4.01% for the three months endedMarch 31, 2023 . During the three months endedMarch 31, 2023 , the average cost of funds, including non-interest-bearing demand accounts and borrowings, increased 69 basis points, from 0.22% for the three months endedMarch 31, 2022 to 0.91% for the three months endedMarch 31, 2023 . The average cost of core deposits, which include non-interest-bearing demand accounts, increased 37 basis points, from 0.16% for the three months endedMarch 31, 2022 to 0.53% for the three months endedMarch 31, 2023 . The average cost of time deposits increased 136 basis points from 0.35% for the three months endedMarch 31, 2022 to 1.71% for the three months endedMarch 31, 2023 . The average cost of borrowings, including subordinated debt, increased 17 basis points from 4.67% for the three months endedMarch 31, 2022 to 4.84% for the three months endedMarch 31, 2023 . For the three months endedMarch 31, 2023 , average demand deposits, an interest-free source of funds, increased$6.1 million , or 1.0%, to$639.2 million , or 29.0% of total average deposits, from$633.1 million , or 28.1% of total average deposits for the three months endedMarch 31, 2022 . During the three months endedMarch 31, 2023 , average interest-earning assets increased$7.6 million , or 0.3%, to$2.4 billion compared to the three months endedMarch 31, 2022 , primarily due to an increase in average loans of$98.3 million , or 5.2%, and an increase in average other investments of$1.5 million , or 14.2%, offset by a decrease in average short-term investments, consisting of cash and cash equivalents, of$51.1 million , or 89.6%, and a decrease in average securities of$41.1 million , or 9.7%.
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 endedMarch 31, 2023 , the Company recorded a reversal of credit losses of$388,000 , compared to a reversal of credit losses of$425,000 during the three months endedMarch 31, 2022 . The Company recorded net charge-offs of$1.9 million for the three months endedMarch 31, 2023 , as compared to net charge-offs of$54,000 for the three months endedMarch 31, 2022 . As ofMarch 31, 2023 , the Company's delinquencies and nonperforming assets had not been materially impacted by the COVID-19 pandemic. Although we believe that we have established and maintained the allowance for credit losses at adequate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment. If the COVID-19 pandemic has an adverse effect on the ability of our borrowers to satisfy their obligations to us, the demand for our loans or our other products and services, other aspects of our business operations, or on financial markets, real estate markets, or economic growth, this could, depending on the extent of the loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations could be materially and adversely affected. Non-Interest Income. Non-interest income increased$631,000 , or 26.9%, to$3.0 million for the three months endedMarch 31, 2023 , from$2.3 million for the three months endedMarch 31, 2022 . During the three months endedMarch 31, 2023 , service charges and fees increased$13,000 , or 0.6%, and income from bank-owned life insurance decreased$8,000 , or 1.8%, from$448,000 for the three months endedMarch 31, 2022 to$440,000 for the three months endedMarch 31, 2023 . During the three months endedMarch 31, 2023 , the Company reported a gain on non-marketable equity investments of$352,000 and during the three months endedMarch 31, 2022 , the Company reported an unrealized loss on marketable equity securities of$276,000 . 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. 41 Non-Interest Expense. For the three months endedMarch 31, 2023 , non-interest expense increased$440,000 , or 3.0%, to$14.9 million , from$14.5 million for the three months endedMarch 31, 2022 . Salaries and employee benefits expense increased$192,000 , or 2.3%, professional fees increased$180,000 , or 31.2%,FDIC insurance expense increased$66,000 , or 23.1%, data processing expense increased$30,000 , or 4.1%, advertising expense increased$18,000 , or 4.5%, and other non-interest expense increased$26,000 , or 1.1%. These increases were partially offset by a decrease in furniture and equipment expense of$57,000 , or 10.5%, and a decrease in occupancy expense of$15,000 , or 1.1%. For the three months endedMarch 31, 2023 , the efficiency ratio was 69.3%, compared to 68.7% forMarch 31, 2022 . For the three months endedMarch 31, 2023 , the adjusted efficiency ratio, a non-GAAP financial measure, was 70.5% compared to 67.8% for the three months endedMarch 31, 2022 . The adjusted efficiency ratio is a non-GAAP measure. See "Explanation of Use of Non-GAAP Financial Measurements" for the related efficiency ratio calculation and a reconciliation of GAAP to non-GAAP financial measures. Income Taxes. Income tax expense for the three months endedMarch 31, 2023 was$1.7 million , or an effective tax rate of 24.0%, compared to$1.7 million , or an effective tax rate of 24.2%, for the three months endedMarch 31, 2022 . 42
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.
Three Months Ended
March 31, 2023 December 31, 2022 March 31, 2022
(Dollars in thousands)
Average Yield Average Yield Average Yield
Loans (no tax adjustment) $ 21,329 4.34 % $ 21,274 4.23 % $ 17,947 3.84 %
Tax-equivalent adjustment
(1) 120 129 120
Loans (tax-equivalent basis) $ 21,449 4.36 % $ 21,403 4.26 % $ 18,067 3.87 %
Securities (no tax
adjustment) $ 2,149 2.28 % $ 2,174 2.22 % $ 1,950 1.87 %
Tax-equivalent adjustment
(1) - 1 -
Securities (tax-equivalent
basis) $ 2,149 2.28 % $ 2,175 2.22 % $ 1,950 1.87 %
Net interest income (no tax
adjustment) $ 18,504 $ 20,854 $ 18,698
Tax-equivalent adjustment
(1) 120 130 120
Net interest income
(tax-equivalent basis) $ 18,624 $ 20,984 $ 18,818
Interest rate spread (no tax
adjustment) 2.74 % 3.24 % 3.08 %
Net interest margin (no tax
adjustment) 3.14 % 3.44 % 3.18 %
Net interest margin
(tax-equivalent) 3.16 % 3.47 % 3.20 %
Net interest income (no tax
adjustment) $ 18,504 $ 20,854 $ 18,698
Less:
Purchase accounting
adjustments (62 ) 87 39
Prepayment penalties and
fees - 134 21
PPP income 15 18 562
Adjusted net interest income
(non-GAAP) $ 18,551 $ 20,615 $ 18,076
Average interest-earning
assets $ 2,393,504 $ 2,401,676 $ 2,385,932
Average interest-earnings
asset, excluding average PPP
loans $ 2,391,305 $ 2,399,297 $ 2,370,852
Adjusted net interest
margin, excluding purchase
accounting adjustments, PPP
fee income, prepayment
penalties and average PPP
loans (non-GAAP) 3.15 % 3.41 % 3.10 %
Book Value per Share (GAAP) $ 10.50 $ 10.27 $ 9.63
Non-GAAP adjustments:
Goodwill (0.56 ) (0.56 ) (0.55 )
Core deposit intangible (0.10 ) (0.10 ) (0.11 )
Tangible Book Value per
Share (non-GAAP) $ 9.84 $ 9.61 $ 8.97
Income Before Income Taxes
(GAAP) $ 6,975 $ 12,354 $ 7,015
(Reversal of) provision for
credit losses (388 ) 150 (425 )
PPP income (15 ) (18 ) (562 )
Gain on defined benefit plan
curtailment - (2,807 ) -
Income Before Taxes,
Provision, PPP Income and
Defined Benefit Curtailment
(non-GAAP) $ 6,572 $ 9,679 $ 6,028
43
Three Months Ended
March 31, December 31, March 31,
2023 2022 2022
(Dollars in thousands)
Total Bank Equity (GAAP) $ 238,887 $ 233,882 $ 221,866
Non-GAAP adjustments:
Goodwill (12,487 ) (12,487 ) (12,487 )
Core deposit intangible net of associated
deferred tax liabilities (1,505 ) (1,573 ) (1,775 )
Tangible Capital (non-GAAP) $ 224,895 $ 219,822 $ 207,604
Tangible Capital (non-GAAP) $ 224,895 $ 219,822 $ 207,604
Unrealized losses on HTM securities net of tax (25,825 ) (28,194 ) (12,434 )
Adjusted Tangible Capital for Impact of
Unrealized Losses on HTM Securities Net of Tax
(non-GAAP) $ 199,070 $
191,628
Common Equity Tier (CET) 1 Capital$ 247,996 $ 244,864 $ 228,335 Unrealized losses on HTM securities net of tax (25,825 ) (28,194 ) (12,434 ) Unrealized losses on defined benefit plan net of tax (1,079 ) (1,079 ) (8,675 ) Adjusted CET 1 Capital for Impact of Net AFS Securities Losses (non-GAAP)$ 221,092 $
215,591
Total Assets for Leverage Ratio (non-GAAP)$ 2,560,973 $ 2,579,141 $ 2,518,001 Tier 1 Leverage Ratio 9.68 % 9.49 % 9.07 % Tangible Common Equity (non-GAAP) =Tangible Capital (non-GAAP)/Total Assets for Leverage Ratio (non-GAAP) 8.78 %
8.52 % 8.24 %
Adjusted Tangible Common Equity for AFS Impact (non-GAAP) = Adjusted CET 1 Capital for Impact of Net AFS Securities Losses (non-GAAP)/Total Assets for Leverage Ratio (non-GAAP) 8.63 %
8.36 % 8.23 %
Adjusted Tangible Common Equity for HTM Impact (non-GAAP) =Adjusted Tangible Capital for Impact of Unrealized Losses onHTM Securities Net of Tax (non-GAAP)/Total Assets for Leverage Ratio (non-GAAP) 7.77 % 7.43 % 7.75 % Efficiency Ratio: Non-interest Expense (GAAP)$ 14,896 $ 14,003 $ 14,456 Net Interest Income (GAAP)$ 18,504 $ 20,854 $ 18,698 Non-interest Income (GAAP)$ 2,979 $ 5,653 $ 2,348 Non-GAAP adjustments: Loss on securities, net - - 4 Unrealized (gain) loss on marketable equity securities - (19 ) 276 Gain on non-marketable equity investments (352 ) (70 ) - Gain on defined benefit plan curtailment - (2,807 ) - Non-interest Income for Adjusted Efficiency Ratio (non-GAAP)$ 2,627 $ 2,757 $ 2,628 Total Revenue for Adjusted Efficiency Ratio (non-GAAP)$ 21,131 $ 23,611 $ 21,326 44 Three Months Ended March 31, December 31, March 31, 2023 2022 2022 (Dollars in thousands) Efficiency Ratio (GAAP) 69.34 % 52.83 % 68.69 % Adjusted Efficiency Ratio (Non-interest Expense (GAAP)/Total Revenue for Adjusted Efficiency Ratio (non-GAAP)) 70.49 % 59.31 % 67.79 %
(1) The tax equivalent adjustment is based upon a 21% tax rate.
Liquidity and Capital Resources.
The term "liquidity" refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, deposit withdrawals and operating expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investment securities and funds provided by our operations. We can also borrow funds from the FHLB and theFederal Reserve Bank of Boston (the "FRB") based on eligible collateral of loans and securities. Our material cash commitments include funding loan originations, fulfilling contractual obligations with third-party service providers, maintaining operating leases for certain of our Bank properties and satisfying repayment of our long-term debt obligations. Primary Sources of Liquidity AtMarch 31, 2023 andDecember 31, 2022 , our outstanding borrowings from the FHLB were$124.7 million and$36.2 million , respectively. AtMarch 31, 2023 , we had$281.6 million in available borrowing capacity with the FHLB. Additionally, the Company can increase its borrowing capacity with the FHLB by pledging additional investment securities or additional loans. The Company also has a borrowing relationship with the FRB through its primary credit program offered through its discount window with a borrowing capacity up to$53.4 million . Additionally, the Company also has$71.5 million in available borrowing capacity with the FRB under the Bank Term Funding Program (the "BTFP"). AtMarch 31, 2023 , the Company did not have any outstanding balances under the FRB's discount window credit program or the BTFP. The Company has agreements with approved broker-dealers to participate in the brokered deposit market to support liquidity. AtMarch 31, 2023 , the Company did not have any brokered deposits outstanding. The Company also has available lines of credit of$15.0 million and$50.0 million with other correspondent banks. Interest rates on these lines are determined and reset on a daily basis by each respective bank. AtMarch 31, 2023 andDecember 31, 2022 , we did not have an outstanding balance under either of these lines of credit. In addition, we may enter into reverse repurchase agreements with approved broker-dealers. Reverse repurchase agreements are agreements that allow us to borrow money using our securities as collateral. We also have outstanding at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. We are also obligated under agreements with the FHLB to repay borrowed funds, under leases for certain of our branches and equipment and for our core processing agreement. Maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of securities and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds. The Company's primary activities are the origination of commercial real estate loans, commercial and industrial loans and residential real estate loans, as well as and the purchase of mortgage-backed and other investment securities. AtMarch 31, 2023 , the Company had approximately$143.6 million in loan commitments and letters of credit to borrowers and approximately$337.3 million in available home equity and other unadvanced lines of credit. 45 Deposit inflows and outflows are affected by the level of interest rates, the products and interest rates offered by competitors and by other factors. AtMarch 31, 2023 , time deposit accounts scheduled to mature within one year totaled$398.4 million . Based on the Company's deposit retention experience and current pricing strategy, we anticipate that a significant portion of these time deposits will remain on deposit. We monitor our liquidity position frequently and anticipate that it will have sufficient funds to meet our current funding commitments for the next 12 months and beyond.
At
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 ofMarch 31, 2023 were estimated to be$9.5 million , with$5.0 million expected to be paid within one year and the remaining$4.5 million to be paid within the next three years. Further, the Company has operating leases for certain of its banking offices and ATMs. Our leases have remaining lease terms of less than one year to sixteen years, some of which include options to extend the leases for additional five-year terms up to ten years. Undiscounted lease liabilities totaled$10.6 million as ofMarch 31, 2023 . Principal payments expected to be made on our lease liabilities during the twelve months endedMarch 31, 2024 were$1.4 million . The remaining lease liability payments totaled$9.2 million and are expected to be made afterMarch 31, 2024 . 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 onApril 20, 2021 . Unless earlier redeemed, the Notes mature onMay 1, 2031 . AtMarch 31, 2023 ,$19.7 million aggregate principle amount of the Notes was outstanding. The Notes will bear interest from the initial issue date to, but excluding,May 1, 2026 , or the earlier redemption date, at a fixed rate of 4.875% per annum, payable quarterly in arrears onMay 1 ,August 1 ,November 1 andFebruary 1 of each year, beginningAugust 1, 2021 , and from and includingMay 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 onMay 1 ,August 1 ,November 1 andFebruary 1 of each year. The Company may also redeem the Notes, in whole or in part, on or afterMay 1, 2026 , and at any time upon the occurrence of certain events, subject in each case to the approval of theBoard of Governors of theFederal Reserve . We do not anticipate any material capital expenditures during the calendar year 2023, except in pursuance of the Company's strategic initiatives. The Company does not have any balloon or other payments due on any long-term obligations or any off-balance sheet items other than the commitments and unused lines of credit noted above. AtMarch 31, 2023 , we exceeded each of the applicable regulatory capital requirements. As ofMarch 31, 2023 , the most recent notification from theOffice 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. 46
Our actual capital ratios of
Minimum To Be Well
Minimum For Capital Capitalized Under Prompt
Actual Adequacy Purpose Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
March 31, 2023
Total Capital (to Risk
Weighted Assets):
Consolidated $ 281,520 14.17 % $ 158,929 8.00 % N/A N/A
Bank 267,503 13.49 158,682 8.00 $ 198,352 10.00 %
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated 242,331 12.20 119,197 6.00 N/A N/A
Bank 247,996 12.50 119,011 6.00 158,682 8.00
Common Equity Tier 1 Capital
(to Risk Weighted Assets):
Consolidated 242,331 12.20 89,398 4.50 N/A N/A
Bank 247,996 12.50 89,258 4.50 128,929 6.50
Tier 1 Leverage Ratio (to
Adjusted Average Assets):
Consolidated 242,331 9.46 102,510 4.00 N/A N/A
Bank 247,996 9.68 102,439 4.00 128,049 5.00
Minimum To Be Well
Minimum For Capital Capitalized Under Prompt
Actual Adequacy Purpose Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
December 31, 2022
Total Capital (to Risk
Weighted Assets):
Consolidated $ 278,729 14.20 % $ 157,042 8.00 % N/A N/A
Bank 264,795 13.50 156,904 8.00 $ 196,131 10.00 %
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated 239,125 12.18 117,781 6.00 N/A N/A
Bank 244,864 12.48 117,678 6.00 156,904 8.00
Common Equity Tier 1 Capital
(to Risk Weighted Assets):
Consolidated 239,125 12.18 88,336 4.50 N/A N/A
Bank 244,864 12.48 88,259 4.50 127,485 6.50
Tier 1 Leverage Ratio (to
Adjusted Average Assets):
Consolidated 239,125 9.27 103,229 4.00 N/A N/A
Bank 244,864 9.49 103,166 4.00 128,957 5.00
We also have outstanding, at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows.
OFF-BALANCE SHEET ARRANGEMENTS.
The Company does not have any off-balance sheet arrangements, other than noted above under Material Cash Commitments, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
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