WESTERN NEW ENGLAND BANCORP, INC. : MANAGEMENT REPORT AND ANALYSIS OF THE FINANCIAL SITUATION AND OPERATING RESULTS. (Form 10-Q)

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Insight.

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, 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.



As part of our overall growth strategy, we seek to:

? Develop the Company’s commercial loan portfolio and related commercial deposits by

targeting businesses in our core market of Hampden County and Hampshire

county in the west Massachusetts and Hartford and Tolland northern counties

Connecticut increase net interest margin and loan income;

? Complete the commercial portfolio by developing residential real estate

portfolio to diversify the loan portfolio and deepen client relationships;

? Focus on expanding our retail banking deposit franchise and increasing the number

households served in our designated market area;

? Invest in people, systems and technology to increase revenue and improve efficiency

and improve the overall customer experience;

? Grow revenue, increase book value and tangible book value per share, continue

pay competitive dividends to shareholders and use Company stock

buyout plan to leverage our capital and increase franchise value; and

? Consider growth through acquisitions. We may seek expansion opportunities in

existing or adjacent strategic locations with businesses adding

products to our existing business and on terms that add value to our

   shareholders.



You should read the following financial results for the three months ended March 31, 2022 as part of this strategy.

? The net income was $5.3 millionor $0.24 per diluted share, for the three months

finished March 31, 2022compared to $5.8 millionor $0.24 per diluted share, for

   the same period in 2021.



? Provision for loan losses decreased $500,000a loan provision

losses of $75,000 for the three months ended March 31, 2021 to a credit for

loan losses of $425,000 for the three months ended March 31, 2022. The company

recorded net allocations of $54,000 for the three months ended March 31, 2022,

compared to the net imputations of $5,000 for the three months ended March, 31st,

2021. The decrease in the provision compared to the comparative periods reflects

management’s current assessment of the impact of the COVID-19 pandemic on

   Bank's loan portfolio.



? Net interest income increased $672,000i.e. 3.7%, to $18.7 millionfor the

three months completed March 31, 2022from $18.0 million for three months

finished March 31, 2021. The increase in net interest income is explained by a decrease

in charge of the interests of $762,000i.e. 38.0%, primary due to a $742,000i.e. 42.8%,

   decrease in interest expense on deposits.




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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 March 31, 2022. 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
2021 Annual Report.


RECENT DEVELOPMENTS: RESPONSE AND ACTIONS TO THE CORONAVIRUS PANDEMIC.



The Company continues to monitor COVID-19's impact on its business and
customers, however, the extent to which COVID-19 will continue to impact its
results and operations will depend on future developments, which are highly
uncertain and cannot be predicted with confidence, including the scope, severity
and duration of the pandemic, the actions taken to contain the pandemic or
mitigate its impact, and the direct and indirect economic effects of the
pandemic and containment measures.



Our business is dependent upon the willingness and ability of our employees and
customers to conduct banking and other financial transactions. The COVID-19
global public health crisis and the resulting "stay-at-home" orders resulted in
widespread volatility, severe disruptions in the U.S. economy at large, and for
small businesses in particular, deterioration in household, business, economic
and market conditions.



Paycheck Protection Program.



As a Preferred Lender with the Small Business Administration ("SBA"), the
Company was in a position to react quickly to the PPP component of the March 27,
2020 $2.2 trillion fiscal stimulus bill known as the Coronavirus Aid, Relief and
Economic Security Act (the "CARES Act") launched by the U.S. Department of the
Treasury and the SBA. An eligible business was able to apply for a PPP loan up
to the lesser of: (1) 2.5 times its average monthly "payroll costs," or (2)
$10.0 million. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan
term to maturity, subsequently extended to a five-year loan term maturity for
loans granted on or after June 5, 2020 and (c) principal and interest payments
deferred from six months to ten months from the date of disbursement. The SBA
will guarantee 100% of the PPP loans made to eligible borrowers. The entire
principal amount of the borrower's PPP loan, including any accrued interest, is
eligible to be reduced by the loan forgiveness amount under the PPP so long as
employee and compensation levels of the business are maintained and 60% of the
loan proceeds are used for payroll expenses, with the remaining 40% of the loan
proceeds used for other qualifying expenses. As of March 31, 2022, the Company
received funding approval from the SBA for 2,146 applications totaling $302.2
million. As of March 31, 2022, the Company processed 2,093 PPP loan forgiveness
applications totaling $296.1 million. Total PPP loans decreased $19.3 million,
or 76.3%, from $25.3 million at December 31, 2021 to $6.1 million at March
31,
2022.



During the three months ended March 31, 2022, the Company recognized $562,000 in
PPP income, compared to $2.4 million during the three months ended March 31,
2021. As of March 31, 2022, the Company had $255,000 in remaining deferred
PPP
loan processing fees.



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The table below breaks out the PPP income recognized for the periods noted:



                                                                   For the Three Months Ended
                                                                            September 30,
                               March 31, 2022       December 31, 2021           2021            June 30, 2021       March 31, 2021
                                                                        ($ in thousands)
PPP origination fee income    $            526     $               868    
$         1,556     $         1,240     $          1,999
PPP interest income                         36                     105                 201                 387                  412
Total PPP Income              $            562     $               973     $         1,757     $         1,627     $          2,411



Distressed loan modifications/restructurings.



The banking regulatory agencies, through an Interagency Statement dated April 7,
2020, have encouraged financial institutions to work "prudently" with borrowers
who request loan modifications or deferrals as a result of the economic impacts
of COVID-19. Pursuant to Section 4013 of the CARES Act, loans less than 30 days
past due as of December 31, 2019 will be considered current for COVID-19
modifications. Financial institutions can then suspend the requirements under
U.S. GAAP for loan modifications related to COVID-19 that would otherwise be
categorized as a TDR, and suspend any determination of a loan modified as a
result of COVID-19 as being a TDR, including the requirement to determine
impairment for accounting under U.S. GAAP. The Company has adopted this policy
election to address COVID-19 loan modification requests that have been received
from the earlier of either January 1, 2022 or the 60th day after the end of
the
COVID-19 national emergency.



The Company implemented a modification deferral program under the CARES Act,
which allowed residential, commercial and consumer borrowers who were adversely
affected by the COVID-19 pandemic, to defer loan payments for a set period of
time. As of March 31, 2022, the Company had two remaining commercial real estate
loans, with an outstanding principal balance of $12.1 million, under CARES Act
modification. The two borrowers were granted a principal deferral under the
Company's modification deferral program, but continue to make their interest and
real estate tax payments. There were no outstanding deferrals related to
residential and consumer loans under CARES modification as of March 31, 2022.



Allowance for Loan Losses.



In determining the allowance for loan losses, the Company considers quantitative
loss factors and a number of qualitative factors, such as underwriting policies,
current economic conditions, delinquency statistics, the adequacy of the
underlying collateral and the financial strength of the borrower. The ongoing
COVID-19 pandemic could cause us to experience higher credit losses in our
lending portfolio, reduce demand for our products and services and other
negative impacts on our financial position, results of operations and prospects.
As of March 31, 2022, the Company's delinquency and nonperforming assets have
not been materially impacted by the COVID-19 pandemic, and therefore, have not
resulted in material credit losses within the lending portfolio.



The Company is continuing to monitor COVID-19's impact on its business and its
customers, however, the extent to which COVID-19 will further impact its results
and operations will depend on future developments, which are highly uncertain
and cannot be predicted with confidence, including the scope, severity and
duration of the pandemic, the actions taken to contain the pandemic or mitigate
its impact and the direct and indirect economic effects of the pandemic and
containment measures.



COMPARISON OF THE FINANCIAL SITUATION AT MARCH 31, 2022 AND DECEMBER 31, 2021



At March 31, 2022, total assets were $2.6 billion, an increase of $17.0 million,
or 0.7%, from December 31, 2021. During the three months ended March 31, 2022,
cash and cash equivalents decreased $40.6 million, or 39.2%, to $62.9 million,
investment securities decreased $5.4 million, or 1.3%, to $423.1 million and
total loans, excluding PPP loans, increased $80.8 million, or 4.4%, to $1.9
billion.



At March 31, 2022, the Company's available-for-sale securities portfolio
decreased $20.4 million, or 10.5%, from $194.4 million at December 31, 2021 to
$173.9 million at March 31, 2022. The held-to-maturity securities portfolio,
recorded at amortized cost, increased $15.3 million, or 6.9%, from $222.3
million at December 31, 2021 to $237.6 million at March 31, 2022. The Company
allocated a portion of its excess liquidity to the investment portfolio as an
alternative to cash and cash equivalents. This shift from overnight investments
to held-to-maturity securities will assist the Company with managing the yield
on interest-earning assets in the low interest rate environment that we are
experiencing while providing ongoing cash flows from payments and pay downs. The
primary objective of the investment portfolio is to provide liquidity and
maximize income while preserving the safety of principal.



                                       33





At March 31, 2022, total loans were $1.9 billion, an increase of $61.6 million,
or 3.3%, from December 31, 2021. Excluding PPP loans, total loans increased
$80.8 million, or 4.4%, driven by an increase in commercial real estate loans of
$59.5 million, or 6.1%, partially offset by a decrease in total commercial and
industrial loans of $10.7 million, or 4.7%. Excluding a decrease of $19.3
million in PPP loans from December 31, 2021, commercial and industrial loans
increased $8.6 million, or 4.2%, at March 31, 2022. Residential real estate
loans, which include home equity loans, increased $12.4 million, or 1.9%. In
accordance with the Company's asset/liability management strategy, during the
three months ended March 31, 2022, the Company sold $277,000 of fixed rate, low
coupon residential real estate loans to the secondary market. As of March 31,
2022, the Company serviced $85.5 million in loans sold to the secondary market,
compared to $88.2 million at December 31, 2021. Servicing rights will continue
to be retained on all loans written and sold to the secondary market.



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 $60,000 and $80,000 for the three months ended March 31,
2022
and 2021, respectively.



At March 31, 2022, nonperforming loans totaled $4.0 million, or 0.21% of total
loans, compared to $5.0 million, or 0.27% of total loans, at December 31, 2021.
At March 31, 2022, there were no loans 90 or more days past due and still
accruing interest. Nonperforming assets to total assets, was 0.16% at March 31,
2022, compared to 0.20% at December 31, 2021. The allowance for loan losses as a
percentage of total loans, was 1.00% at March 31, 2022, compared to 1.06% at
December 31, 2021. At March 31, 2022, the allowance for loan losses as a
percentage of nonperforming loans was 484.2%, compared to 398.6%, at December
31, 2021. A summary of our past due and nonaccrual loans by class are listed in
Note 5 of the accompanying unaudited consolidated financial statements.



At March 31, 2022, total deposits were $2.3 billion, an increase of $21.3
million, or 0.9%, from December 31, 2021, primarily due to an increase in core
deposits of $44.2 million, or 2.4%. Core deposits, which the Company defines as
all deposits except time deposits, increased to $1.9 billion and were 83.4% and
82.2% of total deposits at March 31, 2022 and December 31, 2021, respectively.
Non-interest-bearing deposits decreased $11.1 million, or 1.7%, to $630.2
million, interest-bearing checking accounts decreased $6.4 million, or 4.4%, to
$139.3 million, savings accounts increased $7.0 million, or 3.2%, to $224.6
million, and money market accounts increased $54.7 million, or 6.4%, to $905.1
million. Time deposits decreased $23.0 million, or 5.7%, from $402.0 million at
December 31, 2021 to $379.0 million at March 31, 2022. The Company did not have
any brokered deposits at March 31, 2022 or December 31, 2021.



At March 31, 2022, total borrowings decreased $1.0 million, or 4.5%, from $22.3
million at December 31, 2021, to $21.3 million. FHLB advances decreased $1.0
million, or 36.5%, to $1.7 million and subordinated debt outstanding totaled
$19.6 million at March 31, 2022 and at December 31, 2021.



At March 31, 2022, shareholders' equity was $219.1 million, or 8.6% of total
assets, compared to $223.7 million, or 8.8% of total assets, at December 31,
2021. The decrease in shareholders' equity reflects $1.2 million for the
repurchase of the Company's common stock, the payment of regular cash dividends
of $1.3 million and an increase in accumulated other comprehensive loss of $8.4
million, partially offset by net income of $5.3 million. Total shares
outstanding as of March 31, 2022 were 22,742,189.



The Company's book value per share was $9.63 at March 31, 2022 compared to $9.87
at December 31, 2021, while tangible book value per share, a non-GAAP financial
measurement, decreased $0.24, or 2.6%, from $9.21 at December 31, 2021 to $8.97
at March 31, 2022. AOCI reduced the tangible book value per common share
by $0.37 as of March 31, 2022, primarily due to the impact of higher interest
rates on the fair value of available-for-sale securities.  As of March 31, 2022,
the Company's and the Bank's regulatory capital ratios continued to exceed the
levels required to be considered "well-capitalized" under federal banking
regulations. See "Explanation of Use of Non-GAAP Financial Measurements" for
more information regarding our uses of non-GAAP financial measurements.



                                       34





The Company's regulatory capital ratios remain in compliance with regulatory
"well capitalized" requirements and internal target minimal levels. At March 31,
2022, the Company's Tier 1 leverage, common equity tier 1 capital, and total
risk-based capital ratios were 8.9%, 11.9%, and 14.0%, respectively, and the
Bank's Tier 1 leverage, common equity tier 1 capital, and total risk-based
capital ratios were 9.1%, 12.1%, and 13.1%, respectively, compared with
regulatory "well capitalized" minimums of 5.00%, 6.5%, and 10.00%, respectively.



COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND
MARCH 31, 2021


General.



Net income was $5.3 million, or $0.24 per diluted share, for the three months
ended March 31, 2022, compared to $5.8 million, or $0.24 per diluted share, for
the same period in 2021. Net interest income was $18.7 million and $18.0 million
for the three months ended March 31, 2022 and 2021, respectively.



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 March 31, 2022 and 2021, 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.



                                       35




                                                          Three Months Ended March 31,
                                            2022                                                2021
                         Average                       Average Yield/        Average                       Average Yield/
                         Balance        Interest            Cost             Balance        Interest            Cost
                                                             (Dollars in thousands)
ASSETS:
Interest-earning
assets
Loans(1)(2)            $ 1,894,870     $    18,067                3.87 %   $ 1,923,477     $    19,220                4.05 %
Securities(2)              423,437           1,950                1.87         227,330             854                1.52
Other investments -
at cost                     10,595              25                0.96           9,663              35                1.47
Short-term
investments(3)              57,030              21                0.15          95,004              24                0.10
Total
interest-earning
assets                   2,385,932          20,063                3.41       2,255,474          20,133                3.62
Total
non-interest-earning
assets                     143,635                                             144,588
Total assets           $ 2,529,567                                         $ 2,400,062

LIABILITIES AND
EQUITY:
Interest-bearing
liabilities
Interest-bearing
checking accounts      $   132,192              95                0.29 %   $    90,503     $       105                0.47 %
Savings accounts           218,448              36                0.07         187,217              37                0.08
Money market
accounts                   878,393             521                0.24         675,662             653                0.39
Time deposits              389,063             340                0.35         567,102             939                0.67
Total
interest-bearing
deposits                 1,618,096             992                0.25       1,520,484           1,734                0.46
Short-term
borrowings and
long-term debt              21,975             253                4.67          52,670             273                2.10
Interest-bearing
liabilities              1,640,071           1,245                0.31       1,573,154           2,007                0.52

Not bearing interest

deposits                   633,082                                         

561 581

Other

not bearing interest

liabilities                 32,857                                         

38,360

Total

not bearing interest

liabilities                665,939                                             599,941

Total liabilities        2,306,010                                           2,173,095
Total equity               223,557                                             226,967
Total liabilities
and equity             $ 2,529,567                                         $ 2,400,062
Less: Tax-equivalent
adjustment(2)                                 (120 )                                              (100 )
Net interest and
dividend income                        $    18,698                                         $    18,026
Net interest rate
spread(4)                                                         3.08 %                                              3.08 %
Net interest rate
spread, on a tax
equivalent basis(5)                                               3.10 %                                              3.10 %
Net interest
margin(6)                                                         3.18 %                                              3.24 %
Net interest margin,
on a tax equivalent
basis(7)                                                          3.20 %                                              3.26 %
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities                                                     145.48 %                                            143.37 %







(1) Loans, including outstanding loans, are net of deferred loan origination fees

and non-advanced funds.

(2) Income from loans and securities is presented on an equivalent basis

     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) The net interest rate spread represents the difference between the interest rate

     average yield on interest-earning assets and the weighted average cost of
     interest-bearing liabilities.

(5) The net interest rate difference, on a tax equivalent basis, represents

     difference between the tax-equivalent weighted average yield on
     interest-earning assets and the tax-equivalent weighted average cost of
     interest-bearing liabilities.

(6) Net interest margin represents net interest and dividend income

percentage of average interest-earning assets.

(7) Net interest margin, on a tax equivalent basis, represents

interest and dividend income as a percentage of average interest income

     assets. See "Explanation of Use of Non-GAAP Financial Measurements".




                                       36





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 March

31 2022 over three months

                                                                     Ended March 31, 2021
                                                      Increase (Decrease) Due to
                                                    Volume                   Rate                     Net
Interest-earning assets                                                 (In thousands)
Loans (1)                                        $        (286 )         $        (867 )         $      (1,153 )
Securities (1)                                             737                     359                   1,096
Other investments - at cost                                  3                     (13 )                   (10 )
Short-term investments                                     (10 )                     7                      (3 )
Total interest-earning assets                              444                    (514 )                   (70 )

Interest-bearing liabilities
Interest-bearing checking accounts                          48             
       (58 )                   (10 )
Savings accounts                                             6                      (7 )                    (1 )
Money market accounts                                      196                    (328 )                  (132 )
Time deposits                                             (295 )                  (304 )                  (599 )
Short-term borrowing and long-time debt                   (159 )                   139                     (20 )
Total interest-bearing liabilities                        (204 )                  (558 )                  (762 )
Change in net interest and dividend income (1)   $         648           $ 
        44           $         692







(1) Securities, loan income and the 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.




Net interest income increased $672,000, or 3.7%, to $18.7 million for the three
months ended March 31, 2022, from $18.0 million for the three months ended March
31, 2021. The increase in net interest income was due to a decrease in interest
expense of $762,000, or 38.0%, primary due to a $742,000, or 42.8%, decrease in
interest expense on deposits. Excluding PPP income, interest income increased
$1.8 million, or 10.0%, from the three months ended March 31, 2021 to the three
months ended March 31, 2022 primarily due to higher investment and loan income.



Net interest income for the three months ended March 31, 2022 included PPP
income of $562,000, compared to $2.4 million for the three months ended March
31, 2021. During the three months ended March 31, 2022 interest income included
$39,000 in positive purchase accounting adjustments, compared to $45,000 in
negative purchase accounting adjustments during the three months ended March 31,
2021. Net interest income as adjusted for the preceding items increased $2.4
million, or 15.6%, from $15.7 million during the three months ended March 31,
2021, to $18.1 million during the three months ended March 31, 2022.



The net interest margin was 3.18% for the three months ended March 31, 2022,
compared to 3.24%, for the three months ended March 31, 2021. The net interest
margin, on a tax-equivalent basis, was 3.20% for the three months ended March
31, 2022, compared to 3.26% for the three months ended March 31, 2021. Excluding
the adjustments discussed above, the net interest margin increased six basis
points from 3.04% for the three months ended March 31, 2021 to 3.10% for the
three months ended March 31, 2022. The Company's net interest margin was
positively impacted by higher average balances for loans and securities and a
decrease in lower yielding interest-earning assets.



                                       37





The loan yield decreased 19 basis points from 4.03% for the three months ended
March 31, 2021 to 3.84% for the three months ended March 31, 2022. Excluding PPP
loans and purchase accounting adjustments, the average loan yield decreased 13
basis points from 3.87% for the three months ended March 31, 2021 to 3.74% for
the three months ended March 31, 2022. The average yield on interest-earning
assets decreased 21 basis points from 3.60% for the three months ended March 31,
2021 to 3.39% for the three months ended March 31, 2022.



During the three months ended March 31, 2022, average interest-earning assets
increased $130.5 million, or 5.8%, to $2.4 billion compared to the three months
ended March 31, 2021. The increase was primarily due to an increase in average
securities of $197.0 million, or 83.1%. Excluding the $151 million decrease in
average PPP loans, average loans increased $122.9 million, or 7.0%, from the
three months ended March 31, 2021 to the three months ended March 31, 2022.
Total average loans, excluding average PPP loans, were 78.8% of total average
interest-earning assets for the three months ended March 31, 2022, compared to
77.9% for the three months ended March 31, 2021.



During the three months ended March 31, 2022, the average cost of funds,
including non-interest bearing demand accounts and borrowings, decreased 16
basis points, from 0.38% for the three months ended March 31, 2021 to 0.22% for
the three months ended March 31, 2022. The average cost of core deposits,
including non-interest bearing demand deposits, decreased 7 basis points from
0.21% for the three months ended March 31, 2021 to 0.14% for the three months
ended March 31, 2022. The average cost of time deposits decreased 32 basis
points from 0.67% for the three months ended March 31, 2021 to 0.35% for the
three months ended March 31, 2022, while the average cost of borrowings
increased from 2.10% for the three months ended March 31, 2021 to 4.67% for the
three months ended March 31, 2022. Average demand deposits, an interest-free
source of funds, increased $71.5 million, or 12.7%, from $561.6 million, or
27.0% of total average deposits, for the three months ended March 31, 2021 to
$633.1 million, or 28.1%, of total average deposits, for the three months ended
March 31, 2022.



Provision for Loan Losses.



The provision for loan losses is reviewed by management based upon our
evaluation of then-existing 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 within portfolio segments that existed as of the balance
sheet date and the impact that such conditions were believed to have had on the
collectability of the loan portfolio.



The provision for loan losses decreased $500,000, from a provision for loan
losses of $75,000 for the three months ended March 31, 2021 to a credit for loan
losses of $425,000 for the three months ended March 31, 2022. The Company
recorded net charge-offs of $54,000 for the three months ended March 31, 2022,
as compared to net charge-offs of $5,000 for the three months ended March 31,
2021. The decrease in the provision versus comparative periods reflected
management's current assessment of the impact of the COVID-19 pandemic on the
Bank's loan portfolio. Management continues to assess the exposure of the
Company's loan portfolio to the COVID-19 pandemic, economic trends and their
potential effect on asset quality. As of March 31, 2022, 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
loan 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 decreased $656,000, or 21.8%, to $2.3 million for the three
months ended March 31, 2022, from $3.0 million for the three months ended March
31, 2021. The three months ended March 31, 2021, included a gain on
non-marketable equity investments of $546,000. Service charges and fees on
deposits increased $291,000, or 15.5%, and income from bank-owned life insurance
increased $7,000, or 1.6%, from $441,000 for the three months ended March 31,
2021 to $448,000, for the three months ended March 31, 2022. Income from
mortgage banking activities decreased $225,000, or 99.1%, and other income
decreased $54,000. During the three months ended March 31, 2022, unrealized
losses on marketable equity securities were $276,000, compared to unrealized
losses of $89,000 during the three months ended March 31, 2021. During the three
months ended March 31, 2022, the Company reported realized losses on the sale of
securities of $4,000, compared to realized losses of $62,000 during the three
months ended March 31, 2021.



                                       38





Non-Interest Expense.



For the three months ended March 31, 2022, non-interest expense increased $1.1
million, or 8.5%, to $14.5 million from $13.3 million, for the three months
ended March 31, 2021. Salaries and employee benefits expense increased $638,000,
or 8.4%, to $8.2 million, primarily due to annual merit increases and benefit
costs. Other non-interest expense increased $280,000, or 13.7%, occupancy
expense increased $74,000, or 5.7%, furniture and equipment increased $53,000,
or 10.8%, professional fees increased $33,000, or 6.1%, advertising expenses
increased $61,000, or 18.0%, and data processing related expenses increased
$2,000, or 0.3%. FDIC insurance expense decreased $12,000, or 4.0%. The
efficiency ratio was 68.7% for the three months ended March 31, 2022, compared
to 63.4% for the three months ended March 31, 2021. The adjusted efficiency
ratio, a non-GAAP financial measure, was 67.8% for the three months ended March
31, 2022, compared to 64.6% for the three months ended March 31, 2021. 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 ended March 31, 2022 was $1.7 million,
or an effective tax rate of 24.2%, compared to $1.8 million, or an effective tax
rate of 24.1%, for the three months ended March 31, 2021.



Explanation of the use of non-GAAP financial measures.



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.



                                       39




                                                                           Three Months Ended
                                           March 31, 2022                   December 31, 2021                  March 31, 2021
                                                                         (Dollars in thousands)
                                                    Average Yield                     Average Yield                     Average Yield
Loans (no tax adjustment)          $    17,947              3.84 %   $    18,089              3.88 %   $    19,120              4.03 %
Tax-equivalent adjustment (1)              120                               108                               100
  Loans (tax-equivalent basis)     $    18,067              3.87 %   $    18,197              3.90 %   $    19,220              4.05 %

Securities (no tax adjustment)     $     1,950              1.87 %   $     1,763                       $       854              1.52 %
Tax-equivalent adjustment (1)                -                                 1                                 -
  Securities (tax-equivalent
basis)                             $     1,950              1.87 %   $     1,764              1.74 %   $       854              1.52 %

Net interest income (no tax
adjustment)                        $    18,698                       $    18,582                       $    18,026
Tax-equivalent adjustment (1)              120                             
 109                               100
  Net interest income
(tax-equivalent basis)             $    18,818                       $    18,691                       $    18,126

Interest rate spread (no tax
adjustment)                               3.08 %                            2.97 %                            3.08 %
  Net interest margin (no tax
adjustment)                               3.18 %                            3.08 %                            3.24 %
Net interest margin
(tax-equivalent)                          3.20 %                            3.10 %                            3.26 %


Net interest income (no tax
adjustment)                        $    18,698                       $    18,582                       $    18,026
Less:
  Purchase accounting
adjustments                                 39                               (31 )                             (45 )
  Prepayment penalties and fees             21                                21                                35
  PPP fee income                           562                               973                             2,411
Adjusted net interest income
(non-GAAP)                         $    18,076                       $    17,619                       $    15,625

Average interest-earning assets    $ 2,385,932                       $ 2,394,397                       $ 2,255,474
Average interest-earnings asset,
excluding average PPP loans        $ 2,370,852                       $ 2,352,858                       $ 2,088,910

Adjusted net interest margin,
excluding purchase accounting
adjustments, PPP fee income,
prepayment penalties and average
PPP loans (non-GAAP)                      3.10 %                            2.97 %                            3.04 %

Book Value per Share (GAAP)        $      9.63                       $      9.87                       $      9.07
Non-GAAP adjustments:
Goodwill                                 (0.55 )                           (0.55 )                           (0.51 )
Core deposit intangible                  (0.11 )                           (0.11 )                           (0.12 )
Tangible Book Value per Share
(non-GAAP)                         $      8.97                       $      9.21                       $      8.44

Income Before Income Taxes
(GAAP)                             $     7,015                       $     8,215                       $     7,628
(Credit) provision for loan
losses                                    (425 )                             300                                75
Income Before Taxes and
Provision (non-GAAP)               $     6,590                       $     8,515                       $     7,703





                                       40




                                                               Three Months Ended
                                                   March 31,      December 31,      March 31,
                                                     2022             2021            2021
                                                             (Dollars in thousands)

Efficiency Ratio:
Non-interest Expense (GAAP)                      $    14,456     $     13,923     $    13,327

Net Interest Income (GAAP)                       $    18,698     $     18,582     $    18,026

Non-interest Income (GAAP)                       $     2,348     $      3,856     $     3,004
Non-GAAP adjustments:
Bank-owned life insurance death benefit                    -             (555 )             -
Loss on securities, net                                    4                -              62
Unrealized loss on marketable equity
securities                                               276               96              89
Gain on non-marketable equity investments                  -             (352 )          (546 )
Non-interest Income for Adjusted Efficiency
Ratio (non-GAAP)                                 $     2,628     $      3,045     $     2,609
Total Revenue for Adjusted Efficiency Ratio
(non-GAAP)                                       $    21,326     $     21,627     $    20,635

Efficiency Ratio (GAAP)                                68.69 %          62.05 %         63.37 %
Adjusted Efficiency Ratio (Non-interest
Expense (GAAP)/Total Revenue for Adjusted
Efficiency Ratio (non-GAAP))                           67.79 %          64.38 %         64.58 %





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

Cash 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 also can
borrow funds from the FHLB based on eligible collateral of loans and securities.
Our material cash commitments include funding loan originations, fulfilling
contractual obligations with third-party service providers, maintaining
operating leases for certain of our Bank properties and satisfying repayment of
our long-term debt obligations.



Primary Sources of Liquidity



At March 31, 2022 and December 31, 2021, outstanding borrowings from the FHLB
were $1.7 million and $2.7 million, respectively. At March 31, 2022, we had
$464.1 million in available borrowing capacity with the FHLB. We have the
ability to increase our borrowing capacity with the FHLB by pledging investment
securities or additional loans.



In addition, we have available lines of credit of $15.0 million and $50.0
million with other correspondent banks. Interest rates on these lines are
determined and reset on a daily basis by each respective bank. At March 31, 2022
and December 31, 2021, 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 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.



                                       41





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.
During the three months ended March 31, 2022 and 2021, we originated $149.4
million and $108.3 million in loans, respectively. We purchased securities
totaling $20.6 million for the three months ended March 31, 2022 and $79.8
million for the three months ended March 31, 2021. At March 31, 2022, the
Company had approximately $206.8 million in loan commitments and letters of
credit to borrowers and approximately $320.8 million in available home equity
and other unadvanced lines of credit.



Deposit in flows and out flows are affected by the level of interest rates, the
products and interest rates offered by competitors and by other factors. At
March 31, 2022, time deposit accounts scheduled to mature within one year
totaled $330.7 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.



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 March 31,
2022 were estimated to be $13.1 million, with $4.5 million expected to be paid
within one year and the remaining $8.6 million to be paid within the next five
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
seventeen years, some of which include options to extend the leases for
additional five-year terms up to fifteen years. Lease liabilities totaled $10.1
million as of March 31, 2022. Principal payments expected to be made on our
lease liabilities during the twelve months ended March 31, 2023 are $1.4
million. The remaining lease liability payments totaled $8.7 million and are
expected to be made after March 31, 2023.



In addition, the Company completed an offering of $20 million in aggregate
principal amount of its 4.875% fixed-to-floating rate subordinated 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. 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
2022, 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 March 31, 2022, we exceeded each of the applicable regulatory capital
requirements. As of March 31, 2022, 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.



                                       42





                                                    Minimum For Capital Adequacy
                            Actual                             Purpose                   Minimum To Be Well Capitalized
                     Amount         Ratio           Amount                Ratio            Amount              Ratio
                                                          (Dollars in thousands)
March 31, 2022
Total Capital
(to Risk
Weighted
Assets):
Consolidated       $  264,483          13.97 %   $    151,486                   8.00 %           N/A                 N/A
Bank                  247,643          13.09          151,340                   8.00     $   189,175               10.00 %
Tier 1 Capital
(to Risk
Weighted
Assets):
Consolidated          225,532          11.91          113,614                   6.00             N/A                 N/A
Bank                  228,335          12.07          113,505                   6.00         151,340                8.00
Common Equity
Tier 1 Capital
(to Risk
Weighted Assets)
Consolidated          225,532          11.91           85,211                   4.50             N/A                 N/A
Bank                  228,335          12.07           85,129                   4.50         122,964                6.50
Tier 1 Leverage
Ratio (to
Adjusted Average
Assets):
Consolidated          225,532           8.94          100,931                   4.00             N/A                 N/A
Bank                  228,335           9.07          100,720                   4.00         125,900                5.00

December 31,
2021
Total Capital
(to Risk
Weighted
Assets):
Consolidated       $  261,093          14.27 %   $    146,347                   8.00 %           N/A                 N/A
Bank                  243,788          13.35          146,135                   8.00     $   182,669               10.00 %
Tier 1 Capital
(to Risk
Weighted
Assets):
Consolidated          221,673          12.12          109,761                   6.00             N/A                 N/A
Bank                  224,001          12.26          109,601                   6.00         146,135                8.00
Common Equity
Tier 1 Capital
(to Risk
Weighted
Assets):
Consolidated          221,673          12.12           82,320                   4.50             N/A                 N/A
Bank                  224,001          12.26           82,201                   4.50         118,735                6.50
Tier 1 Leverage
Ratio (to
Adjusted Average
Assets):
Consolidated          221,673           8.75          101,320                   4.00             N/A                 N/A
Bank                  224,001           8.86          101,101                   4.00         126,377                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.

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