What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-05-10 compared with 2023-11-22 · 143 added, 239 removed, 126 unchanged (75% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of the financial condition and results of operations at and for the three and nine months ended September 30, 2023 is intended to assist in understanding the financial condition and results of operations of the MHC.

Management’s discussion and analysis of the financial condition and results of operations at and for the three months ended March 31, 2024 and 2023 is intended to assist in understanding the financial condition and results of operations of the Company.

The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

9 unchanged sentences

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

● general economic conditions, either nationally or in our market areas, that are worse than expected including as a result of employment levels and labor shortages, and the effects of inflation, a potential recession or slowed economic growth caused by supply chain disruptions or otherwise;

● inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments, including our mortgage servicing rights asset, or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;

● further weakening in the United States economy in general and the regional and local economies within the Company’s market area;

● the effects of inflationary pressures, labor market shortages and/or supply chain issues;

● the instability or volatility in financial markets and unfavorable general business conditions, globally, nationally or regionally, whether caused by geopolitical concerns, recent disruptions in the banking industry, or other factors;

● unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather, pandemics or other external events;

● changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments, including our mortgage servicing rights asset, or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;

● changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan and lease losses;

12 unchanged sentences

● a failure or breach of our operational or security systems or infrastructure, including cyberattacks;

● our ability to manage market risk, credit risk and operational risk;

● our ability to manage market risk, interest rate risk, credit risk and operational risk;

● our ability to enter new markets successfully and capitalize on growth opportunities;

● changes in consumer spending, borrowing and savings habits;

● changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the SEC or the Public Company Accounting Oversight Board;

● changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

● our ability to attract and retain key employees;

2 unchanged sentences

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in NB Bancorp, Inc.’s Prospectus dated October 12, 2023, as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on October 20, 2023.

Comparison of Financial Condition as of September 30, 2023 and December 31, 2022

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

Allowance for Credit Losses

The Company estimates the allowance for credit losses in accordance with the CECL methodology for loans measured at amortized cost.

The allowance for credit losses is established based upon the Company's current estimate of expected lifetime credit losses.

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

The Company estimates credit losses on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output.

Management's judgement is required for the selection and application of these factors which are derived from historical loss experience as well as assumptions surrounding expected future losses and economic forecasts.

Loans that no longer share similar risk characteristics with any pools of assets are subject to individual assessment and are removed from the collectively assessed pools to avoid double counting.

For the loans that are individually assessed, the Company uses either a discounted cash flow (“DCF”) approach or a fair value of collateral approach.

The latter approach is used for loans deemed to be collateral dependent or when foreclosure is probable.

Changes in these judgements and assumptions could be due to a number of circumstances which may have a direct impact on the provision for credit losses and may result in changes to the amount of allowance.

The allowance for credit losses is increased by the provision for credit losses and by recoveries of loans previously charged off.

Credit losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan.

We use the liability method of accounting for income taxes.

Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized.

We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets.

These judgments may require us to make projections of future taxable income and/or to carryback to taxable income in prior years.

The judgments and estimates we make in determining our deferred tax assets and liabilities, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change.

Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.

Securities Valuation

We classify our investments in debt securities as available-for-sale, which are carried at fair value.

We obtain our fair values from one or more third-party services.

This service’s fair value calculations are based on quoted market prices when such prices are available.

If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes.

Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations and cash flows.

For any debt security with a fair value less than its amortized cost basis, we will determine whether we have the intent to sell the debt security or whether it is more likely than not we will be required to sell the debt security before the recovery of its amortized cost basis.

If either condition is met, the Company will recognize a full impairment charge to earnings.

For all other debt securities that don't meet either condition and that have expected credit losses, the credit loss will be recognized in earnings.

Any non-credit related loss impairment related to all other factors will be recorded in other comprehensive income (loss).

Management also assesses the nature of the unrealized losses taking into consideration factors such as changes in risk-free interest rates, general credit spread changes, market supply and demand, creditworthiness of the issuer, and quality of the underlying collateral.

Comparison of Financial Condition as of March 31, 2024 and December 31, 2023

Total Assets.

Total assets increased $639.5 million, or 17.80%, to $4.23 billion as of September 30, 2023 from $3.59 billion as of December 31, 2022.

The increase was primarily the result of increases in net loans, offset, in part, by decreases in cash and cash equivalents and investment securities.

Total assets increased $116.6 million, or 2.6%, to $4.65 billion as of March 31, 2024 from $4.53 billion as of December 31, 2023.

The increase was primarily driven by increases in net loans, cash and cash equivalents and available-for-sale securities, offset, in part, by decreases in FHLB stock.

Cash and Cash Equivalents.

Cash and cash equivalents decreased $22.7 million, or 14.51%, to $133.8 million as of September 30, 2023 from $156.5 million as of December 31, 2022.

The decrease in cash and cash equivalents was due to the deployment of cash primarily into loans.

Cash and cash equivalents increased $42.4 million, or 15.6%, to $315.0 million as of March 31, 2024 from $272.6 million as of December 31, 2023.

The increase in cash and cash equivalents was due to deposit growth outpacing loan and investment growth.

Securities Available for Sale.

Securities available-for-sale decreased $48.5 million, or 19.77%, to $196.9 million as of September 30, 2023 from $245.5 million as of December 31, 2022 due to maturities.

No securities were sold during the nine months ended September 30, 2023.

Loans, net increased $692.8 million, or 23.17%, to $3.68 billion as of September 30, 2023 from $2.99 billion as of December 31, 2022.

During the period, we experienced increases in each of our loan portfolios.

One- to four-family residential real estate loans increased $110.0 million, or 11.79%, from December 31, 2022 to September 30, 2023;

our commercial real estate portfolio, including multi-family real estate loans, increased $273.4 million, or 27.02%, from December 31, 2022 to September 30, 2023;

and commercial and industrial loans increased $224.3 million, or 90.67%, from December 31, 2022 to September 30, 2023.

The increase in our loan portfolios reflects our strategy to grow the balance sheet by continuing to diversify into these higher-yielding loans to improve net margins and manage interest rate risk.

Federal Home Loan Bank Stock.

We held an investment in FHLB stock of $17.6 million and $13.2 million as of September 30, 2023 and December 31, 2022, respectively.

Securities available for sale increased $17.7 million, or 9.3%, to $207.2 million as of March 31, 2024 from $189.5 million as of December 31, 2023 due to purchases of U.S.

treasuries and government agency securities.

No securities were sold during the three months ended March 31, 2024.

Net loans increased $63.3 million, or 1.6%, to $3.92 billion as of March 31, 2024 from $3.86 billion as of December 31, 2023.

The primary driver of the increase from December 31, 2023 to March 31, 2024 was multi-family residential loans, which increased $111.1 million, or 52.9%;

and commercial real estate loans, which increased $25.5 million, or 2.2%;

offset partially by an $87.4 million, or 14.0%, decrease in construction and development loans, as $111.0 million of construction and development loans converted to multi-family loans during the quarter.

The increase in our loan portfolio reflects our strategy to prudently grow the balance sheet by continuing to diversify into these higher-yielding loans to improve net margins and manage interest rate risk.

Federal Home Loan Bank (“FHLB”) Stock.

The FHLB is a cooperative bank that provides services to its member financial institutions.

The primary reason for our membership in the FHLB is to gain access to a reliable source of wholesale funding and as a tool to manage interest rate risk.

We held an investment in FHLB stock of $4.4 million and $14.6 million as of March 31, 2024 and December 31, 2023, respectively.

The amount of stock we are required to purchase is in proportion to our FHLB borrowings and level of total assets.

Accordingly, the increase in the FHLB stock during the nine months ended September 30, 2023 is due to increased borrowings.

Accordingly, the decrease in the FHLB stock from December 31, 2023 to March 31, 2024 is due to decreased FHLB borrowings.

Prepaid Expenses and Other Assets.

Prepaid expenses and other assets consist primarily of right of use assets related to our long-term leases and derivatives with a positive fair value and other investments.

These assets increased $8.3 million, or 14.55%, to $65.5 million as of September 30, 2023 from $57.2 million as of December 31, 2022.

The increase resulted primarily from the one-time recognition of $3.5 million in eligible employee retention credits, which are refundable tax credits against certain employment taxes under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and booked as a receivable in March 2023.Additionally, the MHC had incurred approximately $1.8 million as of September 30, 2023 in conversion costs, which are included in prepaid expenses and other assets on the respective consolidated balance sheets.

There were no expenses incurred as of December 31, 2022

Deposits increased $549.9 million, or 19.02%, to $3.44 billion as of September 30, 2023 from $2.89 billion as of December 31, 2022.

Core deposits (which we define as all deposits including certificates of deposit, other than brokered deposits) increased $476.3 million, or 18.06%, to $3.11 billion as of September 30, 2023 from $2.64 billion as of December 31, 2022.

The increase was primarily a result of a $169.4 million, or 25.69%, increase in money market accounts to $828.9 million as of September 30, 2023 from $659.5 million as of December 31, 2022 and a $123.3 million, or 27.68%, increase in noninterest-bearing checking accounts during the period, offset, in part, by a decrease of $31.0 million, or 18.99%, in savings accounts and a decrease of $63.3 million or 15.48% in NOW accounts.

Certificates of deposit, including brokered deposits, increased $351.5 million, or 29.06%, to $1.56 billion as of September 30, 2023 from $1.21 billion as of December 31, 2022.

As of September 30, 2023 and December 31, 2022, we had approximately $323.6 million of $250.0 million of brokered deposits, respectively.

A significant amount of our deposit growth during the nine months ended September 30, 2023 occurred in March 2023.

We believe much of this growth resulted, in part, from the turmoil and liquidity uncertainty created in the banking industry by the high-profile failures of certain financial institutions around the country in March 2023.

Additionally, in December 2022, we opened a new branch office in Medford, Massachusetts, and as of September 30, 2023, this branch office accounted for approximately $90.3 million of new deposits.

Borrowings increased $52.6 million, or 17.93%, to $345.6 million as of September 30, 2023 from $293.1 million as of December 31, 2022.

The increase is related to the execution of short-term borrowings to support loan growth.

As of September 30, 2023, our borrowings consisted solely of FHLB advances.

Prepaid expenses and other assets consist primarily of right of use assets related to our long-term leases and derivatives with a positive fair value.

These assets increased $3.2 million, or 6.0%, to $56.3 million as of March 31, 2024 from $53.1 million as of December 31, 2023.

The increase resulted primarily from a $1.5 million increase in the fair value of derivatives as a result of market and interest rate factors, as well as, the one-time recognition of a $610,000 credit and debit card branding signing bonus, which was recorded as income but not yet received.

Deposits increased $384.7 million, or 11.4%, to $3.77 billion as of March 31, 2024 from $3.39 billion as of December 31, 2023.

Core deposits (which we define as all deposits including certificates of deposit, other than brokered deposits) increased $268.3 million, or 8.4%, to $3.47 billion as of March 31, 2024 from $3.20 billion as of December 31, 2023.

The increase in deposits was the result of growth in customer deposits, primarily certificates of deposit, which increased $150.2 million, or 11.4% from the prior quarter, along with money market accounts and noninterest-bearing demand deposit accounts, which increased $76.3 million, or 8.6%, and $51.3 million, or 9.7%, respectively, from December 31, 2023.

Additionally, brokered deposits increased $116.4 million, or 63.4%, from December 31, 2023, as a result of lower rates versus alternative funding sources and to support overall liquidity.

The Company had $315.5 million and $277.2 million in deposits from the cannabis industry as of March 31, 2024 and December 31, 2023, respectively.

FHLB Borrowings.

FHLB borrowings decreased $222.5 million, or 78.5%, to $60.8 million as of March 31, 2024 from $283.3 million as of December 31, 2023.

The decrease in FHLB borrowings was the result of growth in brokered deposits due to lower rates and overall deposit growth.

Accrued expenses and other liabilities.

Accrued expenses and other liabilities increased $13.0 million, or 24.75%, to $65.4 million as of September 30, 2023 from $52.4 million as of December 31, 2022.

The increase resulted from increases in interest accrued on brokered deposits and borrowings and the increase in allowance for credit losses reserve on unfunded commitments.

Total equity increased $21.6 million, or 6.29%, to $365.7 million as of September 30, 2023 from $344.1 million at December 31, 2022, due to net income of $23.4 million for the nine months ended September 30, 2023 offset, in part, by the implementation of the CECL credit loss standard which resulted in a $2.1 million decrease to equity.

Comparison of Operating Results for the Three Months Ended September 30, 2023 and September 30, 2022

Net income was $8.5 million for the quarter ended September 30, 2023, compared to net income of $7.1 million for the quarter ended September 30, 2022, an increase of approximately $1.4 million, or 19.35%.

The increase was primarily due to a $5.7 million increase in net interest income after credit loss provision, offset in part by an increase of $4.8 million, or 26.53%, in noninterest and operating expense.

Accrued expenses and other liabilities decreased $20.6 million, or 25.3%, to $60.8 million as of March 31, 2024 from $81.3 million as of December 31, 2023.

The decrease resulted from $15.8 million in IPO-related and other accrued expenses and $9.5 million in incentive bonuses being paid during the three months ended March 31, 2024;

offset in part by increased accruals for federal taxes of $1.4 million resulting from increased effective tax rates, increased fair value of derivative liabilities of $1.5 million resulting from market conditions and interest rate movements and increased accrued payroll of $1.1 million due to increased headcount.

Shareholders’ Equity.

Total shareholders’ equity decreased $24.1 million, or 3.2%, to $733.8 million as of March 31, 2024 from $758.0 million at December 31, 2023, due to the $32.8 million increase in the unallocated common shares held by the ESOP resulting from the purchase of shares on the open market to fund the ESOP as a result of the conversion;

offset partially by $8.7 million in net income the three months ended March 31, 2024.

Comparison of Operating Results for the Three Months Ended March 31, 2024 and March 31, 2023

Net income was $8.7 million for the quarter ended March 31, 2024, compared to net income of $8.8 million for the quarter ended March 31, 2023, a decrease of approximately $51,000, or 1.0%.

The decrease was primarily due to a $2.5 million, or 11.0%, increase in noninterest expense, a $2.4 million, or 40.3% decrease in non-interest income, a $2.3 million, or 113.8%, increase in the provision for credit losses and a $210,000, or 6.5%, increase in income tax expense, partially offset by a $7.4 million, or 23.8% increase in net interest income.

Interest and Dividend Income.

Interest and dividend income increased $27.8 million, or 88.37%, to $59.3 million for the quarter ended September 30, 2023 from $31.5 million for the quarter ended September 30, 2022, primarily due to a $27.1 million increase in interest and fees on loans.

The increase in interest and fees on loans was primarily due to an increase of $1.08 billion in the average balance of the loan portfolio to $3.62 billion for the quarter ended September 30, 2023 from $2.54 billion for the quarter ended September 30, 2022 and an increase of 158 basis points in the weighted average yield for the loan portfolio to 6.21% for 2023 from 4.63% for 2022, reflecting the increasing rate environment year to year as well as the growth of our consumer and commercial portfolios.

Average interest-earning assets increased $991.4 million, to $3.97 billion for the quarter ended September 30, 2023 from $2.98 billion for the quarter ended September 30, 2022.

The yield on interest-earning assets increased 174 basis points to 5.92% for the quarter ended September 30, 2023 from 4.18% for the quarter ended September 30, 2022.

Interest and dividend income increased $22.2 million, or 48.2%, to $68.2 million for the quarter ended March 31, 2024 from $46.0 million for the quarter ended March 31, 2023, primarily due to a $20.2 million, or 46.3% increase in interest and fees on loans.

The increase in interest and fees on loans was primarily due to an increase of $809.3 million in the average balance of the loan portfolio to $3.90 billion for the quarter ended March 31, 2024 from $3.09 billion for the quarter ended March 31, 2023 and an increase of 86 basis points in the weighted average yield for the loan portfolio to 6.60% for March 31, 2024 from 5.74% for March 31, 2023, reflecting the growth of our consumer and commercial portfolios.

Average interest-earning assets increased $886.1 million, to $4.31 billion for the quarter ended March 31, 2024 from $3.42 billion for the quarter ended March 31, 2023.

The yield on interest-earning assets increased 91 basis points to 6.36% for the quarter ended March 31, 2024 from 5.45% for the quarter ended March 31, 2023.

Interest Expense.

Total interest expense increased $23.0 million, or 735.65%, to $26.1 million for the quarter ended September 30, 2023 from $3.1 million for the quarter ended September 30, 2022.

Interest expense on deposit accounts increased $18.4 million, or 760.12%, to $20.8 million for the quarter ended September 30, 2023 from $2.4 million for the quarter ended September 30, 2022, due to an increase in the average balance of interest-bearing deposits of $632.1 million to $2.73 billion for the quarter ended September 30, 2023 from $2.10 billion for the quarter ended September 30, 2022 and an increase in the weighted average rate on interest-bearing deposits to 3.02% for the quarter ended September 30, 2023 from 0.46% for the quarter ended September 30, 2022.

Interest expense on FHLB advances increased $4.6 million, or 652.12%, to $5.3 million for the quarter ended September 30, 2023 from $708,000 for the quarter ended September 30, 2022.

The average balance of FHLB advances increased $274.7 million to $383.5 million for the quarter ended September 30, 2023 from $108.8 million for the quarter ended September 30, 2022.

The increase in the average balance was due to our strategy to utilize additional borrowings to support loan growth and for liquidity management.

Total interest expense increased $14.8 million, or 99.7%, to $29.6 million for the quarter ended March 31, 2024 from $14.8 million for the quarter ended March 31, 2023.

Interest expense on deposit accounts increased $15.9 million, or 129.5%, to $28.2 million for the quarter ended March 31, 2024 from $12.3 million for the quarter ended March 31, 2023, due to an increase in the weighted average rate on certificates of deposit of 192 basis points to 4.89% as of March 31, 2024 from 2.97% as of March 31, 2023, an increase in the weighted average rate on money market accounts of 207 basis points to 3.67% as of March 31, 2024 from 1.60% as of March 31, 2023 and an increase in the average balance of certificates of deposit of $346.7 million to $1.67 billion as of March 31, 2024 from $1.32 billion as of March 31, 2023.

Interest expense on FHLB borrowings decreased $1.2 million, or 46.4%, to $1.3 million for the quarter ended March 31, 2024 from $2.5 for the quarter ended March 31, 2023.

The average balance of FHLB advances decreased $101.3 million, or 50.6%, to $98.9 million for the quarter ended March 31, 2024 from $200.2 million for the quarter ended March 31, 2023.

The decrease in the average balance of FHLB advances was the result of growth in brokered deposits due to lower rates, as well as, overall deposit growth.

Net Interest Income.

Net interest income increased $4.8 million, or 16.97%, to $33.1 million for the quarter ended September 30, 2023 from $28.3 million for the quarter ended September 30, 2022, primarily due to a $991.4 million increase in the average balance of interest-earning assets during the quarter ended September 30, 2023 and increase in average yield on interest-earning assets to 5.92% from 4.18% for the third quarter of 2022.

Net interest income increased $7.4 million, or 23.8%, to $38.6 million for the quarter ended March 31, 2024 from $31.2 million for the quarter ended March 31, 2023, primarily due to a $886.1 million increase in the average balance of interest-earning assets to $4.31 billion as of March 31, 2024 from $3.42 billion as of March 31, 2023 and an increase in the weighted average yield on interest-earning assets of 91 basis points to 6.36% as of March 31, 2024 from 5.45% as of March 31, 2023.

These increases were offset partially by an increase in the weighted average rate on interest-bearing liabilities of 166 basis points to 3.88% as of March 31, 2024 from 2.22% as of March 31, 2023 and an increase in the average balance of interest-bearing liabilities of $362.5 million, or 13.4%, to $3.07 billion as of March 31, 2024 from $2.70 billion as of March 31, 2023.

Provision for Credit Losses.

Based on management’s analysis of the adequacy of allowance for credit losses, a provision of $2.0 million was recorded for the quarter ended September 30, 2023, compared to a provision of $2.9 million for the quarter ended September 30, 2022.

The decrease of $885,000, or 31.05%, in the provision was primarily due to the implementation of the CECL methodology and our analysis of the loan portfolio.

Based on management’s analysis of the adequacy of the allowance for credit losses, a provision of $4.4 million was recorded for the quarter ended March 31, 2024, of which only $3.9 million related to the provision for credit losses on loans, compared to a provision of $2.1 million for the quarter ended March 31, 2023.

The increase of $2.3 million, or 113.8%, in the provision was primarily due to the overall increase in the size of the loan portfolio and increases in the qualitative factors on loans collateralized by offices and purchased consumer loans, along with the provision for unfunded commitments.

Noninterest Income.

Noninterest income increased $907,000, or 40.56%, to $3.1 million for the quarter ended September 30, 2023 from $2.2 million for the quarter ended September 30, 2022.

The increase resulted primarily from increases in customer service fees, including cash management and money service fees related primarily to our cannabis business, and increase in the swap contract income, offset, in part, by decreases in cash surrender value of BOLI and mortgage banking income.

The table below sets forth our noninterest income for the quarters ended September 30, 2023 and 2022:

Quarter Ended

September 30,

(Dollars in thousands)

Noninterest income decreased $2.4 million, or 40.3%, to $3.5 million for the quarter ended March 31, 2024 from $5.9 million for the quarter ended March 31, 2023.

The decrease resulted primarily from one-time employee retention credit income during the quarter ended March 31, 2023;

offset partially by an increase in other income resulting from a one-time debit and credit card branding signing bonus of $610,000 during the quarter ended March 31, 2024.

The table below sets forth our noninterest income for the quarters ended March 31, 2024 and 2023:

Three Months Ended

Customer service fees

2 unchanged sentences

Swap contract income

Employee retention credit income

Total noninterest income

Noninterest Expense.

Noninterest expense increased $4.7 million, or 26.00%, to $22.7 million for the quarter ended September 30, 2023 from $18.0 million for the quarter ended September 30, 2022.

Salary and employee benefit expenses increased $2.6 million, or 21.91%.

The increase in salary and employee benefits resulted primarily from the hiring of additional employees consistent with our business strategy to grow the Bank, including the addition of 23 employees who became employed at Needham Bank in connection with our cannabis and money service business acquisition, as well normal salary increases.

Additionally, director and professional fees increased $623,000, or 63.18%, resulting primarily from increased professional services in connection with our loan operations.

The table below sets forth our noninterest expense for the quarters ended September 30, 2023 and 2022:

Quarter Ended

September 30,

(Dollars in thousands)

Noninterest expense increased $2.5 million, or 11.0%, to $25.6 million for the quarter ended March 31, 2024 from $23.0 million for the quarter ended March 31, 2023.

Salaries and employee benefit expenses increased $2.6 million, or 17.2%, resulted primarily from the hiring of additional employees consistent with our business strategy to grow the Bank, as well as, $588,000 in ESOP compensation expenses, $390,000 in pension expenses and normal annual salary increases during the quarter ended March 31, 2024.

The table below sets forth our noninterest expense for the quarters ended March 31, 2024 and 2023:

Three Months Ended

Salaries and employee benefits

7 unchanged sentences

Income Tax Expense.

Income tax expense increased $457,000, or 17.28%, to $3.1 million for the quarter ended September 30, 2023 from $2.6 million for the quarter ended September 30, 2022.

The effective tax rate was 26.81% and 27.16% for the quarter ended September 30, 2023 and 2022, respectively.

Income tax expense increased $210,000, or 6.5%, to $3.4 million for the quarter ended March 31, 2024 from $3.2 million for the quarter ended March 31, 2023.

The effective tax rate was 28.3% and 27.0% for the quarter ended March 31, 2024 and 2023, respectively.

Average Balances and Yields.

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated.

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated.

No tax-equivalent yield adjustments have been made, as the effects would be immaterial.

1 unchanged sentence

All average balances are daily average balances.

The yields set forth below include the effect of deferred fees, discounts, and

premiums that are amortized or accreted to interest income or interest expense;

The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense;

such fees, discounts and premiums were not material for the periods presented.

For the Quarters Ended September 30,

Yield/Rate (1)

(Dollars in thousands)

Interest-earning assets:

Other investments

Short-term investments

Total interest-earning assets

Non-interest-earning assets

Allowance for loan losses

Interest-bearing liabilities:

Savings accounts

Money market accounts

Certificates of deposit and individual retirement accounts

Total interest-bearing deposits

FHLB advances

Total interest-bearing liabilities

Non-interest-bearing deposits

Other non-interest-bearing liabilities

Total liabilities

Total liabilities and equity

Net interest income

Net interest rate spread (2)

Net interest-earning assets (3)

Net interest margin (4)

Average interest-earning assets to interest-bearing liabilities

For the Nine months Ended September 30,

Three Months Ended

March 31, 2024

March 31, 2023

Yield/Rate (1)

(Dollars in thousands)

Interest-earning assets:

14 unchanged sentences

Total liabilities

Total liabilities and equity

Shareholders' equity

Total liabilities and shareholders' equity

Net interest income

14 unchanged sentences

There were no out-of-period items or adjustments required to be excluded from the table below.

Nine months ended

Three Months Ended

September 30, 2023 vs.

Increase (Decrease) Due to

March 31, 2024 vs.

Increase (Decrease) Due to

11 unchanged sentences

Change in net interest income

Comparison of Operating Results for the nine months Ended September 30, 2023 and September 30, 2022

Net income was $23.4 million for the nine months ended September 30, 2023, compared to net income of $18.0 million for the nine months ended September 30, 2022, an increase of $5.4 million, or 29.98%.

The increase was primarily due to a $17.4 million increase in net interest income after provision for credit losses and an increase of $5.4 million in noninterest income, offset in part by a $15.2 million increase in noninterest expense and a $2.3 million increase in income tax expense for the nine months ended September 30, 2023 compared to the same period in 2022.

Interest and Dividend Income.

Interest and dividend income increased $75.8 million, or 93.76%, to $156.6 million for the nine months ended September 30, 2023 from $80.8 million for the nine months ended September 30, 2022, primarily due to a $74.4 million increase in interest and fees on loans.

The increase in interest and fees on loans was primarily due to an increase of $1.01 billion in the average balance of the loan portfolio to $3.36 billion for the nine months ended September 30, 2023 from $2.35 billion for nine months ended September 30, 2022 and an increase of 167 basis points in the weighted average yield for the loan portfolio to 5.99% for the 2023 period from 4.32% for the 2022 period, reflecting the increasing rate environment period to period as well as the growth of our consumer and commercial portfolios.

Average interest-earning assets increased $777.9 million, to $3.70 billion for the nine months ended September 30, 2023 from $2.92 billion for the nine months ended September 30, 2022.

The yield on interest-earning assets increased 196 basis points to 5.66% for the period ended September 30, 2023 from 3.70% for the period ended September 30, 2022.

Interest Expense.

Total interest expense increased $54.5 million, or 784.63%, to $61.4 million for the nine months ended September 30, 2023 from $6.9 million for the nine months ended September 30, 2022.

Interest expense on deposit accounts increased $44.3 million, or 711.25%, to $50.5 million for the nine months ended September 30, 2023 from $6.2 million for the nine months ended September 30, 2022, due to an increase in the average balance of interest-bearing deposits of $472.6 million to $2.63 billion for the period ended September 30, 2023 from $2.16 billion for the period ended September 30, 2022 and an increase in the weighted average rate on interest-bearing deposits to 2.57% for the period ended September 30, 2023 from 0.39% for the period ended September 30, 2022.

Interest expense on FHLB advances increased $10.2 million to $10.9 million for the period ended September 30, 2023 from $6.2 million for the period ended September 30, 2022.

The average balance of FHLB advances increased $235.7 million to $272.6 million for the nine months ended September 30, 2023 from $36.9 million for the nine months ended September 30, 2022.

The increase in the average balance was due to our strategy to utilize additional borrowings to support loan growth and liquidity.

Net Interest Income.

Net interest income increased $21.3 million, or 28.84%, to $95.2 million for the nine months ended September 30, 2023 from $73.9 million for the nine months ended September 30, 2022, primarily due to a $777.9 million increase in the average balance of interest-earning assets during the period ended September 30, 2023 and an increase in the net interest margin to 3.44% for the period ended September 30, 2023 from 3.38% for the period ended September 30, 2022, offset in part, by a decrease in the interest rate spread to 2.83% for the period ended September 30, 2023 from 3.28% for the period ended September 30, 2022.

The increase in the net interest margin was primarily due to the increase in the average balance of interest-earning assets and a 196 basis point increase in the average yield on interest-earning assets when comparing the 2023 period to the 2022 period, offset, in part, by an increase of $472.6 million in the average balances on interest-bearing liabilities and an increase of 218 basis points in the weighted average rate paid on interest-bearing liabilities to 2.57% for the period ended September 30, 2023 from 0.39% for the period ended September 30, 2022.

Provision for Credit Losses.

Based on management’s analysis of the adequacy of allowance for credit losses, a provision of $8.0 million was recorded for the period ended September 30, 2023 in accordance with the CECL standard, compared to a provision of $4.1 million for the period ended September 30, 2022 in accordance with the incurred loss methodology standard.

The $3.9 million, or 94.73%, increase in the provision was primarily due to the portfolio loan growth.

Noninterest Income.

Noninterest income increased $5.4 million, or 78.50%, to $12.3 million for the period ended September 30, 2023 from $6.9 million for the period ended September 30, 2022.

The increase resulted primarily from a one-time gain of $3.5 million in employee retention credit, a refundable tax credit against certain employment taxes under the CARES Act and a $1.9 million increase in customer service fees, resulting largely from cash management services fees during 2023 from our cannabis business which we acquired effective April 1, 2022, as well as an increase in income from bank-owned life insurance offset, in part by a decrease in the gain from bargain purchase of $1.1 million that was realized in April 2022 from our cannabis and money service business acquisition.

The table below sets forth our noninterest income for the nine months ended September 30, 2023 and 2022, respectively:

Nine months ended

September 30,

Gain from bargain purchase and assumption agreement

Customer service fees

Increase in cash surrender value of BOLI

Mortgage banking income

Swap contract income

Employee retention credit income

Total noninterest income

Noninterest Expense.

Noninterest expense increased $15.2 million, or 28.98%, to $67.5 million for the nine months ended September 30, 2023 from $52.4 million for the nine months ended September 30, 2022.

Salary and employee benefit expenses increased $8.8 million, or 24.84%.

Additionally, director and professional fees increased $1.4 million, or 38.32%.

This increase was mainly the result of increased professional services in connection with our loan operations.

Data processing expense increased $1.3 million or 31.00%, resulting from our strategy to upgrade and implement information technology systems, including cybersecurity and fraud prevention and detection platforms, as well as data expense related to increased deposit activity.

General and administrative expense increased $727,000, or 28.07%, primarily resulting from a general increase in the customer base as well as increases resulting from the addition of the Medford branch and the servicing of our cannabis business primarily from this branch location.

The table below sets forth our noninterest expense for the nine months ended September 30, 2023 and 2022:

Nine months ended

September 30,

Salaries and employee benefits

Director and professional service fees

Occupancy and equipment expenses

Data processing expenses

Marketing and charitable contribution expenses

FDIC and state insurance assessments

General and administrative expenses

Total noninterest expense

Income Tax Expense.

Income tax expense increased $2.3 million, or 36.02%, to $8.6 million for the nine months ended September 30, 2023 from $6.3 million for the nine months ended September 30, 2022.

The effective tax rate was 26.75% and 25.87% for the periods ended September 30, 2023 and 2022, respectively.

Management of Market Risk

Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates.

Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates.

Our Asset Liability Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors.

The Asset Liability Committee meets at least quarterly, is comprised of directors, executive officers and certain senior management, and reports to the full board of directors on at least a quarterly basis.

We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates.

We have implemented the following strategies to manage our interest rate risk:

● maintaining capital levels that exceed the thresholds for well-capitalized status under federal regulations;

● maintaining a prudent level of liquidity;

● growing our volume of core deposit accounts;

● utilizing our investment securities portfolio and interest rate swaps as part of our balance sheet asset and liability and interest rate risk management strategy to reduce the impact of movements in interest rates on net interest income and economic value of equity;

● managing our utilization of wholesale funding with borrowings from the FHLB and brokered deposits in a prudent manner;

● continuing to diversify our loan portfolio by adding more commercial-related loans and consumer loans, which typically have shorter maturities and/or balloon payments;

● continuing to price our one-to-four family residential real estate loan products in a way that encourages borrowers to select our adjustable-rate loans as opposed to longer-term, fixed-rate loans.

Shortening the average term of our interest-earning assets by increasing our investments in shorter-term assets, as well as originating loans with variable interest rates, helps to match the maturities and interest rates of our assets and liabilities better, thereby reducing the exposure of our net interest income to changes in market interest rates.

On occasion we have employed various financial risk methodologies that limit, or “hedge,” the adverse effects of rising or decreasing interest rates on our loan portfolios and short-term liabilities.

We also engage in hedging strategies with respect to arrangements where our customers swap floating interest rate obligations for fixed interest rate obligations, or vice versa.

Our hedging activity varies based on the level and volatility of interest rates and other changing market conditions.

Net Interest Income.

We analyze our sensitivity to changes in interest rates through a net interest income model.

Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings.

We estimate what our net interest income would be for a 12-month period.

We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by various basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.

A basis point equals one-hundredth of one percent, and 100 basis points equals one percent.

An increase in interest rates from 3% to 4% would mean, for example, a 100-basis point increase in the “Change in Interest Rates” column below.

The following table sets forth, as of September 30, 2023, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.

At September 30, 2023

Change in Interest Rates

Net Interest Income Year

Year 1 Change from

(basis points) (1)

(Dollars in thousands)

(1) Assumes an immediate uniform change in interest rates at all maturities.

The table above indicates that at September 30, 2023, we would have experienced a 2.4% decrease in net interest income in the event of an instantaneous parallel 200 basis point increase in market interest rates and a 0.7% decrease in net interest income in the event of an instantaneous 200 basis point decrease in market interest rates.

Economic Value of Equity .

We also compute amounts by which the net present value of our assets and liabilities (economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates.

This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value.

The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases instantaneously by 100, 200, 300 and 400 basis point increments or decreases instantaneously by 100 or 200 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.

The following table sets forth, as of September 30, 2023, the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve.

Estimated Increase

At September 30, 2023

(Decrease) in EVE

Change in Interest Rates (basis points) (1)

(Dollars in thousands)

(1) Assumes an immediate uniform change in interest rates at all maturities.

(2) EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

The table above indicates that at September 30, 2023, we would have experienced a 1.3% decrease in EVE in the event of an instantaneous parallel 200 basis point increase in market interest rates and a 5.0% decrease in EVE in the event of an instantaneous 200 basis point decrease in market interest rates.

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements.

Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates.

The net interest income and net economic value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities.

Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates, and actual results may differ.

Interest rate risk calculations also may not reflect the fair values of financial instruments.

For example, decreases in market interest rates can increase the fair values of our loans, mortgage servicing rights, deposits and borrowings.

Liquidity and Capital Resources

2 unchanged sentences

Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities.

We are also able to borrow from the FHLB.

As of September 30, 2023, we had outstanding advances of $345.6 million from the FHLB.

As of September 30, 2023, we had unused borrowing capacity of $465.8 million with the FHLB.

As of September 30, 2023 we also had a $45.3 million available line of credit with the Discount Window at the Federal Reserve Bank of Boston.

Additionally, as of September 30, 2023, we had $323.6 million of brokered deposits and pursuant to our internal liquidity policy, which

allows us to utilize brokered deposits up to 10.0% of our total assets, we had an additional capacity of up to approximately $99.6 million of brokered deposits.

We are also able to borrow from the FHLB and the Discount Window at the Federal Reserve Bank of Boston.

As of March 31, 2024, we had outstanding advances of $60.8 million from the FHLB.

As of March 31, 2024, we had unused borrowing capacity of $762.6 million with the FHLB and $45.0 million available with the Discount Window at the Federal Reserve Bank of Boston.

Additionally, as of March 31, 2024, we had $300.0 million of brokered deposits and pursuant to our internal liquidity policy, which allows us to utilize brokered deposits up to 10.0% of our total assets, we had an additional capacity of up to approximately $165.0 million of brokered deposits.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition.

3 unchanged sentences

cash flows from operating activities, investing activities, and financing activities.

For additional information, see the consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022.

At March 31, 2024, we had $73.7 million in commitments to originate loans outstanding.

In addition, we had $472.0 million in unused lines of credit to borrowers, $594.4 million in unadvanced construction loans and $7.3 million in letters of credit outstanding.

Non-brokered certificates of deposit due within one year of March 31, 2024 totaled $1.25 billion, or 33.1%, of total deposits.

If these deposits do not remain with us, we may be required to seek other sources of funds, including brokered deposits and FHLB advances.

Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the non-brokered certificates of deposit due on or before March 31, 2025, or on our other interest-bearing deposit accounts.

We believe, however, based on historical experience and current market interest rates that we will retain upon maturity a large portion of our certificates of deposit with maturities of one year or less as of March 31, 2024.

Our primary investing activity is originating loans.

During the three months ended March 31, 2024, we originated $67.6 million of loans.

Financing activities consist primarily of activity in deposit accounts and FHLB advances.

We experienced net increases in deposits of $384.7 million for the three months ended March 31, 2024.

At March 31, 2024 and December 31, 2023, the level of brokered time deposits was $300.0 million and $183.6 million, respectively.

Deposit flows are affected primarily by the overall level of interest rates and the interest rates and products offered by us and our competitors.

FHLB advances decreased by $222.5 million for the three months ended March 31, 2024.

For additional information, see the consolidated statements of cash flows for the three months ended March 31, 2024 and 2023 included as part of the consolidated financial statements appearing elsewhere in this Form 10-Q.

We are committed to maintaining a strong liquidity position.

We monitor our liquidity position on a daily basis.

We continuously monitor our liquidity position and adjustments are made to the balance between sources and uses of funds as deemed appropriate by management.

Liquidity risk management is an important element in our asset/liability management process.

We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management.

These scenarios are incorporated into our contingency funding planning process, which provides the basis for the identification of our liquidity needs.

We anticipate that we will have sufficient funds to meet our current funding commitments.

Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

As of September 30, 2023, Needham Bank exceeded all of its regulatory capital requirements, and was categorized as well-capitalized at that date.

In addition, based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

As of March 31, 2024, Needham Bank and NB Bancorp, Inc.

exceeded all of their regulatory capital requirements, and were categorized as well-capitalized at that date.

Management is not aware of any conditions or events since the most recent notification of well-capitalized status that would change our category.

See Note 10 of the notes to consolidated financial statements.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit.

While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon.

Such commitments are subject to the same credit policies and approval process accorded to loans we make.

As of September 30, 2023, the unfunded portion of construction loans, home equity lines of credit, commercial lines of credit and other lines of credit, along with letters of credit, totaled $1.03 billion.

Our allowance for credit losses on these unfunded commitments amounted to $1.8 million.

We anticipate that we will have sufficient funds available to meet our current lending commitments.

Time deposits that are scheduled to mature in less than one year from September 30, 2023 totaled $1.54 billion.

Management expects that a substantial portion of these time deposits will be retained.

However, if a substantial portion of these time deposits is not retained, we may utilize advances from the FHLB, brokered deposits or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Contractual Obligations.

In the ordinary course of our operations, we enter into certain contractual obligations.

Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

Impact of Inflation and Changing Prices

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

GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.

The primary impact of inflation on our operations is reflected in increased operating costs.

Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature.

As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation.

Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Quantitative and Qualitative Disclosures About Market Risk

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis