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Item 2. Management’s Discussion and Analysis

2025-05-09 compared with 2024-11-08 · 89 added, 278 removed, 238 unchanged (61% 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, 2024 and 2023 is intended to assist in understanding the financial condition and results of operations of the Company.

Management’s discussion and analysis of the financial condition and results of operations at and for the three months ended March 31, 2025 and 2024 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.

44 unchanged sentences

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.

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

The latter approaches are 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.

22 unchanged sentences

In addition to results presented in accordance with U.S.

GAAP, this quarterly report on Form 10-Q contains certain non-GAAP financial measures, including operating net income, operating noninterest expense, operating noninterest income, operating earnings per share, basic, operating earnings per share, diluted, operating return on average assets, operating return on average shareholders’ equity, operating efficiency ratio, tangible shareholders’ equity, tangible assets, tangible book value per share, and efficiency ratio.

The Company’s management believes that the supplemental non-GAAP information is utilized by regulators and market analysts to evaluate a Company’s financial condition and therefore, such information is useful to investors.

6 unchanged sentences

For the Three Months Ended

For the Nine Months Ended

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

March 31, 2025

March 31, 2024

Net income (GAAP)

1 unchanged sentence

Adjustments to net income:

Losses on sales of securities available for sale, net

Income tax expense on solar tax credit investment basis reduction

BOLI surrender tax and managed endowment contract penalty

Adjustment for adoption of ASU 2023-02

Defined benefit pension termination expense

Total adjustments to net income

Less net tax benefit associated with losses on sales of securities available for sale, net and reversal of previously taken

amortization of solar tax credit investments

Less net tax benefit associated with defined benefit pension termination expense

Non-GAAP adjustments, net of tax

4 unchanged sentences

Operating earnings per share, diluted (non-GAAP)

For the Three Months Ended

For the Nine Months Ended

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

Noninterest expense (GAAP)

1 unchanged sentence

Noninterest expense components:

Adjustment for adoption of ASU 2023-02

Defined benefit pension termination expense

Total impact of non-GAAP noninterest expense adjustments

Noninterest expense on an operating basis (non-GAAP)

For the Three Months Ended

For the Nine Months Ended

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

Noninterest income (GAAP)

Subtract (Add):

Noninterest income components:

Losses on sales of securities available for sale, net

Total impact of non-GAAP noninterest income adjustments

Noninterest income on an operating basis (non-GAAP)

For the Three Months Ended

For the Nine Months Ended

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

Operating net income (non-GAAP)

3 unchanged sentences

Operating return on average shareholders' equity (non-GAAP)

For the Three Months Ended

For the Nine Months Ended

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

Noninterest expense on an operating basis (non-GAAP)

Total revenue (net interest income plus total noninterest income) (non-GAAP)

Operating efficiency ratio (non-GAAP)

March 31, 2025

December 31, 2024

Total shareholders’ equity (GAAP)

7 unchanged sentences

Tangible book value per share (non-GAAP)

For the Three Months Ended

For the Nine Months Ended

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

Noninterest expense on an operating basis (non-GAAP)

Total revenue (net interest income plus total noninterest income) (non-GAAP)

Operating efficiency ratio (non-GAAP)

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

Comparison of Financial Condition as of March 31, 2025 and December 31, 2024

Total Assets.

Total assets increased $469.1 million, or 10.3%, to $5.00 billion as of September 30, 2024 from $4.53 billion as of December 31, 2023.

The increase was primarily driven by increases in net loans, BOLI, cash and cash equivalents and available-for-sale securities.

Total assets increased $84.4 million, or 1.6%, to $5.24 billion as of March 31, 2025 from $5.16 billion as of December 31, 2024.

The increase was primarily driven by increases in net loans, partially offset by decreases in cash and cash equivalents.

Cash and Cash Equivalents.

Cash and cash equivalents increased $44.5 million, or 16.3%, to $317.0 million as of September 30, 2024 from $272.6 million as of December 31, 2023.

The increase in cash and cash equivalents was due to deposit growth outpacing loan and investment growth, offset partially by paydowns of FHLB borrowings, purchases of BOLI policies and increases in prepaid and other assets.

Securities Available for Sale.

Securities available for sale increased $13.1 million, or 6.9%, to $202.5 million as of September 30, 2024 from $189.5 million as of December 31, 2023 due to purchases of U.S.

treasuries, government agency and corporate bond debt securities.

The Company sold $29.3 million in available-for-sale debt securities during the three and nine months ended September 30, 2024 with the proceeds reinvested into higher-yielding available-for-sale debt securities, which were restructured to mitigate portfolio risk and increase yield.

Net loans increased $354.4 million, or 9.2%, to $4.21 billion as of September 30, 2024 from $3.86 billion as of December 31, 2023.

Cash and cash equivalents decreased $50.4 million, or 13.9%, to $313.4 million as of March 31, 2025 from $363.9 million as of December 31, 2024.

The decrease in cash and cash equivalents was primarily due to loan originations and paydowns of FHLB borrowings.

Available-for-Sale Securities.

Available-for-sale securities increased $6.5 million, or 2.8%, to $234.7 million as of March 31, 2025 from $228.2 million as of December 31, 2024 primarily due to purchases of U.S.

treasuries and mortgage backed-securities.

No securities were sold during the three months ended March 31, 2025.

Net loans increased $131.8 million, or 3.1%, to $4.43 billion as of March 31, 2025 from $4.29 billion as of December 31, 2024.

The increase resulted primarily from increases in:

commercial real estate loans, which increased $110.1 million, or 9.4%;

commercial and industrial loans, which increased $75.0 million, or 15.3%;

multi-family residential loans, which increased $62.6 million, or 29.8%;

construction and development loans, which increased $62.5 million, or 10.7%;

consumer loans, which increased $29.6 million, or 14.4%;

and one-to-four family residential loans, which increased $26.5 million, or 2.4%.

commercial and industrial loans, which increased $49.6 million, or 8.9%;

commercial real estate loans, which increased $12.6 million, or 0.9%;

and consumer loans, which increased $7.8 million, or 3.2%.

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

The Company had approximately $458.0 million and $365.9 million in loans to borrowers in the cannabis industry at September 30, 2024 and December 31, 2023, respectively.

Of that total, $301.9 million and $207.7 million were direct loans to cannabis companies and were collateralized by real estate at September 30, 2024 and December 31, 2023, respectively.

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 $6.8 million and $14.6 million as of September 30, 2024 and December 31, 2023, respectively.

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

Accordingly, the decrease in the FHLB stock from December 31, 2023 to September 30, 2024 is due to the decrease in FHLB borrowings.

During the three and nine months ended September 30, 2024, the Company surrendered $46.7 million of existing BOLI policies that were earning an annualized yield of 3.08%.

Prior to the surrender of the policies, the Company purchased an additional $50.0 million of BOLI policies, which are currently yielding 4.81%.

As a result of the surrender of the BOLI policies, the Company incurred $1.6 million of income tax and penalty, which the Company expects to earn back in less than two years.

The insurance carriers have six months to pay out the proceeds from the surrendered policies, and as a result, the Company expects BOLI to be at higher balances and to continue earning income related to the increase in cash surrender value until the proceeds are received, which will further shorten the earn-back period on the income tax and penalty amount.

The Company had approximately $454.3 million and $459.6 million in loans to borrowers in the cannabis industry at March 31, 2025 and December 31, 2024, respectively.

Of that total, $320.3 million and $321.9 million were direct loans to cannabis companies and were collateralized by real estate at March 31, 2025 and December 31, 2024, respectively.

Prepaid Expenses and Other Assets.

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

These assets increased $21.4 million, or 40.4%, to $74.6 million as of September 30, 2024 from $53.1 million as of December 31, 2023.

The increase resulted primarily from an $18.9 million increase in income taxes receivables as a result of earned solar income tax credits and a $2.4 million increase in right of use assets resulting from a lease extension.

Deposits increased $655.5 million, or 19.4%, to $4.04 billion as of September 30, 2024 from $3.39 billion as of December 31, 2023.

Core deposits (which we define as all deposits including certificates of deposit, other than brokered deposits) increased $509.1 million, or 15.9%, to $3.71 billion as of September 30, 2024 from $3.20 billion as of December 31, 2023.

The increase in deposits was the result of growth in customer deposits, primarily certificates of deposit, which increased $360.1 million, or 27.4%, from December 31, 2023, along with money market accounts and noninterest-bearing demand deposit accounts, which increased $147.4 million, or 16.6%, and $32.4 million, or 6.1%, respectively, from December 31, 2023.

Additionally, brokered deposits increased $146.3 million, or 79.7%, from December 31, 2023, as a result of lower rates versus alternative funding sources and to support overall liquidity.

The Company had $302.3 million and $277.5 million in deposits from the cannabis industry as of September 30, 2024 and December 31, 2023, respectively.

These assets decreased $3.3 million, or 5.6%, to $56.2 million as of March 31, 2025 from $59.5 million as of December 31, 2024.

The decrease resulted primarily from a $3.1 million decrease in the value of interest rate swaps due to interest rate changes and a $1.5 million decrease in income tax receivables, offset partially by a $1.1 million increase in prepaid expenses due to new and renewed contracts.

Deposits increased $149.0 million, or 3.6%, to $4.33 billion as of March 31, 2025 from $4.18 billion as of December 31, 2024.

Core deposits (which we define as all deposits including certificates of deposit, other than brokered deposits) increased $149.5 million, or 3.9%, to $4.02 billion as of March 31, 2025 from $3.87 billion as of December 31, 2024.

The increase in deposits was the result of growth in customer deposits, primarily money market accounts, which increased $127.1 million, or 12.7%, and certificates of deposit, which increased $19.5 million, or 1.2%, from December 31, 2024.

The Company had $413.8 million and $395.2 million in deposits from the cannabis industry as of March 31, 2025 and December 31, 2024, respectively.

FHLB Borrowings.

FHLB borrowings decreased $167.0 million, or 58.9%, to $116.3 million as of September 30, 2024 from $283.3 million as of December 31, 2023.

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

FHLB borrowings decreased $30.0 million, or 24.8%, to $90.8 million as of March 31, 2025 from $120.8 million as of December 31, 2024.

The decrease in FHLB borrowings was the result of overall deposit growth.

Accrued expenses and other liabilities.

Accrued expenses and other liabilities decreased $11.8 million, or 14.5%, to $69.5 million as of September 30, 2024 from $81.3 million as of December 31, 2023.

The decrease resulted from $15.8 million in IPO-related and other accrued expenses, $5.6 million reduction in accrued incentive bonuses resulting from bonuses being paid partially offset by current period accruals, and a $2.6 million reduction in allowance for credit losses on unfunded commitments;

offset partially by a $5.6 million increase in deferred solar tax credit investments resulting from a future expected capital call, a $2.6 million increase in deferred tax liabilities related to a basis reduction on solar tax credits, a $2.5 million increase in lease liabilities resulting from a lease extension and a $1.7 million increase in accrued interest on brokered deposits resulting from increased utilization of brokered deposits.

Accrued expenses and other liabilities decreased $5.4 million, or 8.2%, to $60.3 million as of March 31, 2025 from $65.7 million as of December 31, 2024.

The decrease resulted primarily from $4.9 million in lower accrued bonuses due to payout of 2024 bonuses, $3.1 million in lower value of interest rate swaps due to changes in interest rates and a $1.9 million decline in accrued interest of brokered deposits due to maturities during the three months ended March 31, 2025;

offset partially by a $1.5 milion increase in accrued taxes, a $2.4 million increase in miscellaneous liabilities and accrued expenses.

Shareholders’ Equity.

Total shareholders’ equity decreased $10.5 million, or 1.4%, to $747.4 million as of September 30, 2024 from $758.0 million as of December 31, 2023, due to the $31.6 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 , along with the impact of the adoption of ASU 2023-02 of $10.2 million , offset partially by $26.5 million in net income during the nine months ended September 30, 2024.

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

Net income was $8.4 million for the quarter ended September 30, 2024, compared to net income of $8.5 million for the quarter ended September 30, 2023, a decrease of approximately $84,000, or 1.0%.

An increase of $7.8 million, or 23.4%, in net interest income was offset by a $3.9 million, or 125.6% increase in income tax expense, a $1.9 million, or 59.7% decrease in noninterest income and a $1.5 million, or 6.5%, increase in noninterest expense.

Operating net income, excluding one-time charges, amounted to $13.1 million, or $0.33 per diluted share for the quarter ended September 30, 2024 compared to net income of $8.5 million for the quarter ended September 30, 2023, an increase of $4.6 million, or 54.9%.

The material one-time charges were:

● Loss on the sale of available-for sale securities amounting to $1.9 million;

● Tax expense and a managed endowment contract penalty related to the surrender of BOLI policies of $1.6 million, and;

● Tax expense related to a basis write-down of solar income tax credits of $2.5 million, partially offset by;

● Reversal of previously recognized amortization related to solar income tax credit investments during the first six months of the year, amounting to $913 thousand.

Total shareholders’ equity decreased $25.6 million, or 3.3%, to $739.6 million as of March 31, 2025 from $765.2 million as of December 31, 2024, due to the $40.7 million decrease in additional paid-in capital resulting from the completion of the share repurchase program , partially offset by net income of $12.7 million and other comprehensive income of $1.7 million during the three months ended March 31, 2025.

Comparison of Operating Results for the Three Months Ended March 31, 2025 and March 31, 2024

Net income was $12.7 million for the quarter ended March 31, 2025, compared to net income of $8.7 million for the quarter ended March 31, 2024, an increase of approximately $4.0 million, or 45.4%.

An increase of $4.9 million, or 12.7%, in net interest income and a $3.3 million, or 73.9%, decrease in the provision for credit losses was partially offset by a $3.1 million, or 12.1%, increase in noninterest expense and a $1.5 million, or 42.9% increase in income tax expense.

Operating net income, excluding one-time charges, amounted to $13.7 million, or $0.35 per diluted share, for the quarter ended March 31, 2025 compared to net income of $9.0 million, or $0.23 per diluted share, for the quarter ended March 31, 2024, an increase of $4.7 million, or 52.5%.

The material one-time charges for the quarter ended March 31, 2025 were:

● Pension expense related to the final liquidation of the employee pension plan totaling $884,000 (net of tax) and;

● Tax expense and a modified endowment contract penalty related to the surrender of bank-owned life insurance (“BOLI”) policies of $154,000.

Interest and Dividend Income.

Interest and dividend income increased $16.4 million, or 27.5%, to $76.0 million for the quarter ended September 30, 2024 from $59.6 million for the quarter ended September 30, 2023, primarily due to a $13.8 million, or 24.4%, increase in interest and fees on loans and a $2.5 million, or 245.6%, increase in interest on short-term investments.

The increase in interest and fees on loans was primarily due to an increase of $564.7 million, or 15.6%, in the average balance of the loan portfolio to $4.19 billion for the quarter ended September 30, 2024 from $3.62 billion for the quarter ended September 30, 2023 and an increase of 49 basis points in the weighted average yield for the loan portfolio to 6.70% for the quarter ended September 30, 2024 from 6.21% for the quarter ended September 30, 2023, reflecting the growth of our commercial and consumer loan portfolios.

The increase in interest income on short-term investments was primarily due to an increase of $183.0 million, or 224.9%, in the average balance of short-term investments to $264.4 million for the quarter ended September 30, 2024 from $81.4 million for the quarter ended September 30, 2023.

Average interest-earning assets increased $738.9 million, to $4.69 billion for the quarter ended September 30, 2024 from $3.95 billion for the quarter ended September 30, 2023.

The yield on interest-earning assets increased 46 basis points to 6.45% for the quarter ended September 30, 2024 from 5.99% for the quarter ended September 30, 2023.

Interest and dividend income increased $8.7 million, or 12.7%, to $76.9 million for the quarter ended March 31, 2025 from $68.2 million for the quarter ended March 31, 2024, primarily due to a $7.4 million, or 11.6%, increase in interest and fees on loans and a $1.0 million, or 79.0%, increase in interest on securities.

The increase in interest and fees on loans was primarily due to an increase of $463.4 million, or 11.9%, in the average balance of the loan portfolio to $4.37 billion for the quarter ended March 31, 2025 from $3.90 billion for the quarter ended March 31, 2024, reflecting the growth of our commercial loan portfolio.

The increase in interest income on securities was primarily due to an increase of 137 basis points in the weighted average yield on our securities portfolio to 4.03% for the quarter ended March 31, 2025 from 2.66% for the quarter ended March 31, 2024 and the increase in the average balance of the securities portfolio of $37.1 million, or 19.2%, to $230.4 million for the quarter ended March 31, 2025 from $193.3 million for the quarter ended March 31, 2024.

Average interest-earning assets increased $591.6 million, to $4.89 billion for the quarter ended March 31, 2025 from $4.30 billion for the quarter ended March 31, 2024.

The yield on interest-earning assets was 6.38% for the quarters ended March 31, 2025 and 2024.

Interest Expense.

Total interest expense increased $8.6 million, or 32.8%, to $34.7 million for the quarter ended September 30, 2024 from $26.1 million for the quarter ended September 30, 2023.

Interest expense on deposit accounts increased $12.8 million, or 61.7%, to $33.6 million for the quarter ended September 30, 2024 from $20.8 million for the quarter ended September 30, 2023.

The increase was due to an increase in the average balance of certificates of deposit of $495.3 million to $1.94 billion for the quarter ended September 30, 2024 from $1.45 billion for the quarter ended September 30, 2023, an increase in the weighted average rate on certificates of deposit of 91 basis points to 5.02% for the quarter ended September 30, 2024 from 4.11% for the quarter ended September 30, 2023, and an increase in the weighted average rate on money market accounts of 129 basis points to 4.06% for the quarter ended September 30, 2024 from 2.77% for the quarter ended September 30, 2023.

Interest expense on FHLB borrowings decreased $4.3 million, or 80.0%, to $1.1 million for the quarter ended September 30, 2024 from $5.3 million for the quarter ended September 30, 2023.

The average balance of FHLB borrowings decreased $298.4 million, or 77.8%, to $85.2 million for the quarter ended September 30, 2024 from $383.5 million for the quarter ended September 30, 2023.

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

Total interest expense increased $3.8 million, or 12.7%, to $33.3 million for the quarter ended March 31, 2025 from $29.6 million for the quarter ended March 31, 2024.

Interest expense on deposit accounts increased $4.0 million, or 14.3%, to $32.2 million for the quarter ended March 31, 2025 from $28.2 million for the quarter ended March 31, 2024.

The increase was due to an increase in the average balance of certificates of deposit and individual retirement accounts of $309.8 million, or 18.6%, to $1.98 billion for the quarter ended March 31, 2025 from $1.67 billion for the quarter ended March 31, 2024 and an increase in the average balance of money market accounts of $220.3 million, 25.8%, to $1.07 billion for the quarter ended March 31, 2025 from $852.8 million for the quarter ended March 31, 2024, offset partially by a decrease in the weighted average rate on certificates of deposit and individual retirement accounts of 30 basis points to 4.59% for the quarter ended March 31, 2025 from 4.89% for the quarter ended March 31, 2024.

Net Interest Income.

Net interest income increased $7.8 million, or 23.4%, to $41.3 million for the quarter ended September 30, 2024 from $33.5 million for the quarter ended September 30, 2023, primarily due to an $738.9 million, or 18.7%, increase in the average balance of interest-earning assets to $4.69 billion for the quarter ended September 30, 2024 from $3.95 billion for the quarter ended September 30, 2023 and an increase in the weighted average yield on interest-earning assets of 46 basis points to 6.45% September 30, 2024 from 5.99% September 30, 2023.

These increases were offset partially by an increase in the weighted average rate on interest-bearing liabilities of 80 basis points to 4.13% for the quarter ended September 30, 2024 from 3.33% September 30, 2023 and an increase in the average balance of interest-bearing liabilities of $233.1 million, or 7.5%, to $3.34 billion September 30, 2024 from $3.11 billion September 30, 2023.

Net interest income increased $4.9 million, or 12.7%, to $43.5 million for the quarter ended March 31, 2025 from $38.6 million for the quarter ended March 31, 2024, primarily due to a $591.6 million, or 13.8%, increase in the average balance of interest-earning assets to $4.89 billion for the quarter ended March 31, 2025 from $4.30 billion for the quarter ended March 31, 2024 and a decrease in the weighted average rate on interest-bearing liabilities of 17 basis points from 3.80% for the quarter ended March 31, 2024 to 3.63% for the quarter ended March 31, 2025.

These increases were offset partially by a $601.7 million increase in the average balance of interest-bearing liabilities to $3.73 billion for the quarter ended March 31, 2025 from $3.13 billion for the quarter ended March 31, 2024.

Provision for Credit Losses.

Based on management’s analysis of the adequacy of the allowance for credit losses, a provision of $2.6 million was recorded for the quarter ended September 30, 2024, of which $5.0 million related to the provision for credit losses on loans, compared to a provision of $2.0 million for the quarter ended September 30, 2023.

The provision for credit losses on unfunded commitments decreased $2.4 million during the three months ended September 30, 2024 as a result of a reduction in qualitative factors on construction commitments, as well as, the reduction in the balance of unfunded commitments.

The increase of $3.0 million, or 154.3%, in the total provision for credit losses was primarily due to the overall increase in the size of the loan portfolio and increases in the qualitative factors on loans collateralized by purchased consumer loans.

Based on management’s analysis of the adequacy of the allowance for credit losses, a provision of $1.2 million was recorded for the quarter ended March 31, 2025, of which $947,000 related to the provision for credit losses on loans, compared to a provision of $4.4 million for the quarter ended March 31, 2024, which includes a $3.9 million provision for credit losses on loans.

The provision for credit losses on unfunded commitments decreased $328,000, or 60.9%, during the three months ended March 31, 2025 as a result of a reduction in qualitative factors on construction commitments.

The decrease of $3.3 million, or 73.9%, in the total provision for credit losses was primarily due to the decreases in the qualitative factors on loans collateralized by purchased consumer loans and updated prepayment speeds across all loan segments.

Noninterest Income.

Noninterest income decreased $1.9 million, or 59.7%, to $1.3 million for the quarter ended September 30, 2024 from $3.1 million for the quarter ended September 30, 2023.

The decrease resulted primarily from losses of sale on available-for-sale debt securities of $1.9 million during the three months ended September 30, 2024.

The table below sets forth our noninterest income for the quarters ended September 30, 2024 and 2023:

Noninterest income increased $360,000, or 10.3%, to $3.9 million for the quarter ended March 31, 2025 from $3.5 million for the quarter ended March 31, 2024.

The increase resulted primarily from increases in customer service fees of $678,000 due to higher loan and cash management fees and increases in the change in the cash surrender value of BOLI of $630,000 resulting from carrying a higher balance of BOLI during the three months ended March 31, 2025;

offset partially by decreases in other income of $615,000 resulting from the debit card branding signing bonus earned during the quarter ended March 31, 2024 and decreases in swap contract fees of $399,000, resulting from fewer swaps executed during the three months ended March 31, 2025.

The table below sets forth our noninterest income for the quarters ended March 31, 2025 and 2024:

Three Months Ended

September 30,

(Dollars in thousands)

Customer service fees

Loss on sale of available-for-sale securities, net

Increase in cash surrender value of BOLI

3 unchanged sentences

Noninterest Expense.

Noninterest expense increased $1.5 million, or 6.5%, to $24.6 million for the quarter ended September 30, 2024 from $23.1 million for the quarter ended September 30, 2023.

Salaries and employee benefit expenses increased $2.5 million, or 17.3%, resulting primarily from the hiring of additional employees consistent with our business strategy to grow the Bank, annual salary raises, $762,000 in ESOP compensation expenses and a $667,000 increase in long-term incentive plan expenses during the quarter ended September 30, 2024.

The increases in salaries and employee benefit expenses were offset partially by general and administrative expenses decreasing $1.3 million, or 91.7%, as a result of the adoption of ASU 2023-02, resulting in a $1.4 million decrease in solar income tax credit amortization during the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

The table below sets forth our noninterest expense for the quarters ended September 30, 2024 and 2023:

Noninterest expense increased $3.1 million, or 12.1%, to $28.7 million for the quarter ended March 31, 2025 from $25.6 million for the quarter ended March 31, 2024.

Salaries and employee benefit expenses increased $1.6 million, or 9.0%, resulting primarily from a $826,000 increase in pension expenses resulting from a one-time expense for final liquidation of the employee pension plan, a $596,000 and $340,000 increase in salaries expense and benefits expense, respectively, due to headcount increases related to the Company’s growth strategy, a $194,000 increase in ESOP expenses due to stock price appreciation and a $175,000 increase in FICA expenses related to bonus payouts, partially offset by a $592,000 decrease in long term incentive plan expenses during the quarter ended March 31, 2025.

Data Processing expenses increased $770,000 related to investments in management information and customer service systems during the quarter ended March 31, 2025.

FDIC and state assessment expenses increased $452,000 due to increases in the related assessment calculation resulting from the Bank’s growth.

The table below sets forth our noninterest expense for the quarters ended March 31, 2025 and 2024:

Three Months Ended

September 30,

(Dollars in thousands)

8 unchanged sentences

Income Tax Expense.

Income tax expense increased $3.9, or 125.6%, to $7.0 million for the quarter ended September 30, 2024 from $3.1 million for the quarter ended September 30, 2023.

The effective tax rate was 45.5% and 26.8% for the quarter ended September 30, 2024 and 2023, respectively.

The increase in the effective tax rate was a result of the $2.5 million tax effect of the basis reduction on solar income tax credits earned and the $1.6 million income tax and penalty on the surrender of BOLI policies during the three months ended September 30, 2024.

Excluding these one-time income tax expenses, the effective tax rate for the three months ended September 30, 2024 would have been 19.1%.

Income tax expense increased $1.5 million, or 42.9%, to $4.9 million for the quarter ended March 31, 2025 from $3.4 million for the quarter ended March 31, 2024.

The increase was due to the increase in pretax income of $5.4 million, or 44.7%.

The effective tax rate was 28.0% and 28.3% for the quarter ended March 31, 2025 and 2024, respectively.

Average Balances and Yields.

6 unchanged sentences

Three Months Ended

September 30, 2024

September 30, 2023

March 31, 2025

March 31, 2024

Yield/Rate (4)

37 unchanged sentences

Three Months Ended

September 30, 2024 vs.

March 31, 2025 vs.

Increase (Decrease) Due to

1 unchanged sentence

Interest-earning assets:

Short-term investments

Total interest-earning assets

Interest-bearing liabilities:

Savings accounts

Money market accounts

Certificates of deposit and individual retirement accounts

Total interest-bearing deposits

Federal Home Loan Bank advances

Total interest-bearing liabilities

Change in net interest income

Comparison of Operating Results for the Nine Months Ended September 30, 2024 and September 30, 2023

Net income was $26.5 million for the nine months ended September 30, 2024, compared to net income of $23.4 million the nine months ended September 30, 2023, an increase of approximately $3.1 million, or 13.2%.

The increase was primarily due to a $22.2 million, or 23.1%, increase in net interest income, partially offset by a $7.9 million, or 11.6%, increase in noninterest expense, a $4.4 million, or 36.0%, decrease in non-interest income, a $4.2 million, or 49.6%, increase in income tax expense and a $2.6 million, or 32.7%, increase in the provision for credit losses.

Operating net income, excluding one-time charges, amounted to $31.3 million, or $0.79 per diluted share for the nine months ended September 30, 2024 compared to net income of $23.4 million for the nine months ended September 30, 2023, an increase of $7.8 million, or 33.4%.

The material one-time charges were:

● Loss on the sale of available-for sale securities amounting to $1.9 million;

● Tax expense and a managed endowment contract penalty related to the surrender of bank-owned life insurance BOLI policies of $1.6 million, and;

● Tax expense related to a basis write-down of solar income tax credits of $2.5 million.

Interest and Dividend Income.

Interest and dividend income increased $57.5 million, or 36.4%, to $215.3 million for the nine months ended September 30, 2024 from $157.9 million for the nine months ended September 30, 2023, primarily due to a $49.3 million, or 32.7%, increase in interest and fees on loans, and a $7.8 million, or 382.0%, increase in interest on short-term investments.

The increase in interest and fees on loans was primarily due to an increase of $670.0 million, or 20.0%, in the average balance of the loan portfolio to $4.03 billion for the nine months ended September 30, 2024 from $3.36 billion for the nine months ended September 30, 2023 and an increase of 64 basis points in the weighted average yield for the loan portfolio to 6.63% for the nine months ended September 30, 2024 from 5.99% for the nine months ended September 30, 2023, reflecting the growth of our commercial and consumer loan portfolios.

The increase in interest on short-term investments was primarily due to an increase of $181.9 million, or 313.1%, in the average balance of short-term investments to $239.9 million for the nine months ended September 30, 2024 from $58.1 million for the nine months ended September 30, 2023.

Average interest-earning assets increased $822.4 million, or 22.4%, to $4.50 billion for the nine months ended September 30, 2024 from $3.67 billion for the nine months ended September 30, 2023.

The yield on interest-earning assets increased 66 basis points to 6.40% for the nine months ended September 30, 2024 from 5.74% for the nine months ended September 30, 2023.

Interest Expense.

Total interest expense increased $35.2 million, or 57.3%, to $96.6 million for the nine months ended September 30, 2024 from $61.4 million for the nine months ended September 30, 2023.

Interest expense on deposit accounts increased $42.9 million, or 84.8%, to $93.4 million for the nine months ended September 30, 2024 from $50.5 million for the nine months ended September 30, 2023.

The increase was due to an increase in the weighted average rate on certificates of deposit of 139 basis points to 4.98% for the nine months ended September 30, 2024 from 3.59% for the nine months ended September 30, 2023, an increase in the average balance of certificates of deposit of $451.5 million, or 33.1%, to $1.82 billion for the nine months ended September 30, 2024 from $1.36 billion for the nine months ended September 30, 2023, an increase in the weighted average rate on money market accounts of 154 basis points to 3.92% for the nine months ended September 30, 2024 from 2.38% for the nine months ended September 30, 2023 and an increase in the average balance of money market accounts of $95.0 million, or 12.5% to $855.0 million for the nine months ended September 30, 2024 from $760.0 million for the nine months ended September 30, 2023.

Interest expense on FHLB borrowings decreased $7.7 million, or 71.2%, to $3.2 million for the nine months ended September 30, 2024 from $10.9 million for the nine months ended September 30, 2023.

The average balance of FHLB advances decreased $190.6 million, or 69.9%, to $82.0 million for the nine months ended September 30, 2024 from $272.6 million for the nine months ended September 30, 2023.

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

Net Interest Income.

Net interest income increased $22.2 million, or 23.1%, to $118.7 million for the nine months ended September 30, 2024 from $96.4 million for the nine months ended September 30, 2023, primarily due to a $822.4 million, or 22.4%, increase in the average balance of interest-earning assets to $4.50 billion for the nine months ended September 30, 2024 from $3.67 billion for the nine months ended September 30, 2023 and an increase in the weighted average yield on interest-earning assets of 66 basis points to 6.40% for the nine months ended September 30, 2024 from 5.74% for the nine months ended September 30, 2023.

These increases were offset partially by an increase in the weighted average rate on interest-bearing liabilities of 121 basis points to 4.04% for the nine months ended September 30, 2024 from 2.83% for the nine months ended September 30, 2023 and an increase in the average balance of interest-bearing liabilities of $296.7 million, or 10.2%, to $3.20 billion for the nine months ended September 30, 2024 from $2.90 billion for the nine months ended September 30, 2023.

Provision for Credit Losses.

Based on management’s analysis of the adequacy of the allowance for credit losses, a provision of $10.7 million was recorded for the nine months ended September 30, 2024, of which $13.3 million related to the provision for credit losses on loans, compared to a provision of $8.1 million for the nine months ended September 30, 2023.

The provision for credit losses on unfunded commitments decreased $2.7 million during the nine months ended September 30, 2024 as a result of a reduction in qualitative factors on construction commitments, as well as, the reduction in the balance of unfunded commitments.

The increase of $2.6 million, or 32.7%, in the total provision for credit losses was primarily due to the overall increase in the size of the loan portfolio and increases in the qualitative factors on loans collateralized by purchased consumer loans.

Noninterest Income.

Noninterest income decreased $4.4 million, or 36.0%, to $7.8 million for the nine months ended September 30, 2024 from $12.1 million for the nine months ended September 30, 2023.

The decrease resulted primarily from one-time employee retention credit income of $3.5 million during the nine months ended September 30, 2023, losses of sale on available-for-sale debt securities of $1.9 million during the nine months ended September 30, 2024 and a $930,000 decrease in swap contract income resulting from lower swap transaction volume;

offset partially by an increase in other income resulting from a one-time debit and credit card branding signing bonus of $610,000 and increased customer service fees of $758,000 during the nine months ended September 30, 2024.

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

Nine Months Ended

September 30,

(Dollars in thousands)

Customer service fees

Loss on sale of available-for-sale securities, net

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 $7.9 million, or 11.6%, to $76.4 million for the nine months ended September 30, 2024 from $68.5 million for the nine months ended September 30, 2023.

Salaries and employee benefit expenses increased $7.5 million, or 17.0%, primarily from the hiring of additional employees consistent with our business strategy to grow the Bank, annual salary increases, a $2.0 million increase in ESOP compensation expenses, a $1.6 million increase in long term incentive plan expenses, a $627,000 increase in medical and dental benefits, a $477,000 in 401(k) match expenses and a $309,000 increase in federal payroll taxes;

offset partially by a $1.2 million decrease in pension expense during the nine months ended September 30, 2024.

Director and professional service fees increased $1.2 million, or 23.9%, during the nine months ended September 30, 2024, primarily the result of higher legal fees, lending services, appraisal fee and external audit costs.

Data processing expenses increased $1.1 million, or 20.0%, during the nine months ended September 30, 2024, primarily the result of higher electronic banking, information technology and system costs.

The above increases were partially offset by decreased FDIC and state insurance assessments of $1.0 million, or 36.5%, and general and administrative expenses of $783,000, or 18.45%, as a result of the adoption of ASU 2023-02, which resulted in a $1.2 million decrease in amortization of solar income tax credits during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

The table below sets forth our noninterest expense for the nine months ended September 30, 2024 and 2023:

Nine Months Ended

September 30,

(Dollars in thousands)

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 $4.2 million, or 49.6%, to $12.8 million for the nine months ended September 30, 2024 from $8.6 million for the nine months ended September 30, 2023.

The effective tax rate was 32.5% and 26.7% for the nine months ended September 30, 2024 and 2023, respectively.

Excluding these one-time income tax expenses, the effective tax rate for the nine months ended September 30, 2024 would have been 22.2%.

Average Balances and Yields.

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

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

Non-accrual loans were included in the computation of average balances.

All average balances are daily average balances.

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

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

Nine Months Ended

September 30, 2024

September 30, 2023

Yield/Rate (4)

Interest-earning assets:

Other investments

1 unchanged sentence

Total interest-earning assets

Non-interest-earning assets

Allowance for credit losses

Interest-bearing liabilities:

3 unchanged sentences

Total interest-bearing deposits

FHLB advances

Total interest-bearing liabilities

Non-interest-bearing deposits

Other non-interest-bearing liabilities

Total liabilities

Shareholders' equity

Total liabilities and shareholders' equity

Net interest income

Net interest rate spread (1)

Net interest-earning assets (2)

Net interest margin (3)

Average interest-earning assets to interest-bearing liabilities

(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

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

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

(4) Annualized.

(5) Other investments are comprised of FRB stock, FHLB stock and swap collateral accounts.

Short-term investments are comprised of cash and cash equivalents

Rate/Volume Analysis.

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated.

The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume).

The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate).

The total column represents the sum of the prior columns.

For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.

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

Nine Months Ended

September 30, 2024 vs.

Increase (Decrease) Due to

(In thousands)

Interest-earning assets:

Short-term investments

Total interest-earning assets

Interest-bearing liabilities:

Savings accounts

Money market accounts

Certificates of deposit and individual retirement accounts

Total interest-bearing deposits

Federal Home Loan Bank advances

6 unchanged sentences

We are also able to borrow from the FHLB and the Discount Window at the Federal Reserve Bank of Boston (“FRB”).

As of September 30, 2024, we had outstanding advances of $116.3 million from the FHLB.

As of September 30, 2024, we had unused borrowing capacity of $730.7 million with the FHLB and $36.6 million available with the FRB.

Subsequent to September 30, 2024, the Bank received approval from the FRB under its Borrower in Custody (“BIC”) program, which allowed us to pledge commercial real estate and multi-family loans to the FRB, which provided the Bank with additional borrowing capacity of $531.6 million.

Additionally, as of September 30, 2024, we had $329.9 million of brokered deposits and pursuant to our internal liquidity policy, which allows us to utilize brokered deposits up to 25.0% of our total assets, we had an additional capacity of up to approximately $920.7 million of brokered deposits.

As of March 31, 2025, we had outstanding advances of $90.8 million from the FHLB and an unused borrowing capacity of $754.3 million with the FHLB.

At March 31, 2025, the Bank had $651.2 million available from a line under the Borrower in Custody (“BIC”) program at the FRB.

Additionally, as of March 31, 2025, we had $309.2 million of brokered deposits and pursuant to our internal liquidity policy, which allows us to utilize brokered deposits up to 25.0% of our total assets, we had an additional capacity of up to approximately $1.00 billion 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.

At September 30, 2024, we had $75.8 million in commitments to originate loans outstanding.

At March 31, 2025, we had $49.1 million in commitments to originate loans outstanding.

In addition, we had $556.6 million in unused lines of credit to borrowers, $488.3 million in unadvanced construction loans and $6.3 million in letters of credit outstanding.

Non-brokered certificates of deposit due within one year of September 30, 2024 totaled $1.65 billion, or 40.9%, of total deposits.

Non-brokered certificates of deposit due within one year of March 31, 2025 totaled $1.54 billion, or 35.6%, of total deposits.

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

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 September 30, 2025, or on our other interest-bearing deposit accounts.

We believe, however, based on historical experience and current market interest rates that we will retain upon maturity a large portion of our certificates of deposit with maturities of one year or less as of September 30, 2024.

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, 2026, 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, 2025.

Our primary investing activity is originating loans.

During the nine months ended September 30, 2024, we originated $345.4 million of loans, net of repayments.

During the three months ended March 31, 2025, we originated $119.8 million of loans, net of repayments.

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

We experienced net increases in deposits of $655.5 million for the nine months ended September 30, 2024.

At September 30, 2024 and December 31, 2023, the level of brokered time deposits was $329.9 million and $183.6 million, respectively.

We experienced net increases in deposits of $149.0 million for the three months ended March 31, 2025.

At March 31, 2025 and December 31, 2024, the level of brokered time deposits was $309.2 million and $309.8 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 $167.0 million during the nine months ended September 30, 2024.

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

FHLB advances decreased $30.0 million during the three months ended March 31, 2025.

For additional information, see the consolidated statements of cash flows for the three months ended March 31, 2025 and 2024 included as part of the consolidated financial statements appearing elsewhere in this Form 10-Q.

We are committed to maintaining a strong liquidity position.

5 unchanged sentences

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 September 30, 2024, Needham Bank and NB Bancorp, Inc.

As of March 31, 2025, Needham Bank and NB Bancorp, Inc.

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

11 unchanged sentences

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