What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-11 compared with 2021-03-11 · 395 added, 467 removed, 379 unchanged (69% of the section changed)

14 unchanged sentences

connection with our overall growth strategy, we seek to:

the Company’s commercial loan portfolio and related commercial deposits by targeting

businesses in our primary market area of Hampden County and Hampshire County in western

Massachusetts and Hartford and Tolland Counties in northern Connecticut to increase the

net interest margin and loan income;

the commercial portfolio by growing the residential real estate portfolio to diversify

the loan portfolio and deepen customer relationships;

on expanding our retail banking deposit franchise and increase the number of households

served within our designated market area;

in people, systems and technology to grow revenue, improve efficiency and enhance the

overall customer experience;

revenues, increase tangible book value, continue to pay competitive dividends to shareholders

and utilize the Company’s stock repurchase plan to leverage our capital and enhance

franchise value;

the Company’s commercial loan portfolio and related commercial deposits by targeting businesses in our primary market area

of Hampden County and Hampshire County in western Massachusetts and Hartford and Tolland Counties in northern Connecticut to increase

the net interest margin and loan income;

the commercial portfolio by growing the residential real estate portfolio to diversify the loan portfolio and deepen customer

relationships;

on expanding our retail banking deposit franchise and increase the number of households served within our designated market area;

in people, systems and technology to grow revenue, improve efficiency and enhance the overall customer experience;

revenues, increase tangible book value, continue to pay competitive dividends to shareholders and utilize the Company’s

stock repurchase plan to leverage our capital and enhance franchise value;

growth through acquisitions.

We may pursue expansion opportunities in existing or adjacent

strategic locations with companies that add complementary products to our existing business

and at terms that add value to our existing shareholders.

We may pursue expansion opportunities in existing or adjacent strategic locations with companies

that add complementary products to our existing business and at terms that add value to our existing shareholders.

should read the following financial results for the year ended December 31, 2021 in the context of this strategy.

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The results for the

twelve months ended December 31, 2020 showed an increase in interest and dividend income and a decrease in interest expense, which

were both offset by an increase in interest expense and an increase in the provision for loan losses.

The provision for loan losses

was $7.8 million for the year ended December 31, 2020, compared to $2.7 million for the year ended December 31, 2019.

allowance for loan losses was $21.2 million, or 1.10% of total loans, at December 31, 2020 and $14.1 million, or 0.79%, at December

Excluding PPP loans, the allowance for loan losses as a percentage of total loans was 1.20% at December 31, 2020.

December 31, 2020, the allowance for loan losses as a percentage of non-performing loans was 269.8%, compared to 142.7% at December

The twelve months ended 2020 was impacted by a higher provision for loan losses resulting from the COVID-19 pandemic

mandated shutdowns and economic disruption that caused elevated unemployment levels and deterioration in household, business,

economic and market conditions.

twelve months ended December 31, 2021 showed a decrease in interest expense, a credit for loan losses, and an increase in non-interest

income, which were all partially offset by a decrease in interest income and an increase in non-interest expense.

The provision

for loan losses was a credit of $925,000 for the year ended December 31, 2021, compared to a provision for loan losses of $7.8

million for the year ended December 31, 2020.

The allowance for loan losses was $19.8 million, or 1.06% of total loans,

at December 31, 2021 and $21.2 million, or 1.10%, at December 31, 2020.

Excluding PPP loans, the allowance for loan losses as

a percentage of total loans was 1.08% and 1.20% at December 31, 2021 and 2020, respectively.

At December 31, 2021, the allowance

for loan losses as a percentage of nonperforming loans was 398.6%, compared to 269.8% at December 31, 2020.

The twelve months

ended 2020 was impacted by a higher provision for loan losses resulting from the COVID-19 pandemic mandated shutdowns and economic

disruption that caused elevated unemployment levels and deterioration in household, business, economic and market conditions.

interest income increased $8.7 million, or 13.6%, to $73.2 million for the twelve months ended December 31, 2021, compared to

$64.4 million for the twelve months ended December 31, 2020.

The increase in net interest income was due to an increase of $759,000,

or 0.9%, in interest and dividend income and a decrease of $5.7 million, or 23.6%, in interest expense.

For the twelve months

ended December 31, 2020, interest and dividend income included $4.8 million in interest income and origination fees from PPP loans.

During the twelve months ended December 31, 2020, the Company recorded $976,000 in positive purchase accounting adjustments and

$193,000 in interest income and late charges from the full payoff of a $3.5 million credit-marked substandard classified loan,

compared to $16,000 in positive purchase accounting adjustments during the twelve months ended December 31, 2019.

recorded prepayment penalties of $409,000 and $496,000 during the twelve months ended December 31, 2020 and 2019, respectively.

Excluding the items mentioned above, net interest income increased $544,000, or 0.9%, from the same period in 2019.

in interest expense of $5.7 million, or 23.6%, was due to a $3.7 million, or 21.5%, decrease in interest expense on deposits and

a decrease in interest expense on FHLB advances of $2.0 million, or 28.6%.

The increase in net interest income was due to a decrease in interest

expense of $11.8 million, or 63.8%, partially offset by a decrease in interest and dividend income of $3.0 million, or 3.7%.

the twelve months ended December 31, 2021, interest and dividend income included $6.8 million in PPP income, compared to $4.8

million during the twelve months ended December 31, 2020.

During the twelve months ended December 31, 2020, the Company recorded

$976,000 in positive purchase accounting adjustments and $193,000 in interest income and late charges from the full payoff of

a $3.5 million credit-marked substandard classified loan, compared to $55,000 in positive purchase accounting adjustments during

the twelve months ended December 31, 2021.

The Company recorded prepayment penalties of $181,000 and $409,000 during the twelve

months ended December 31, 2021 and 2020, respectively.

Excluding the items mentioned above, net interest income increased $8.3

million, or 14.3%, from the same period in 2020.

The decrease in interest expense of $11.8 million, or 63.8%, was due to a decrease

in interest expense on deposits of $8.0 million, or 59.2%, and a decrease in interest expense on borrowings of $3.8 million, or

consolidated results of operations depend primarily on net interest and dividend income.

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Non-interest income includes service fees and

charges, income on bank-owned life insurance, and gains (losses) on securities.

Non-interest expense includes salaries and employee

benefits, occupancy expenses, data processing, advertising expense, FDIC insurance assessment, professional fees and other general

and administrative expenses.

charges, income on bank-owned life insurance, gains on sales of mortgages, gains on non-marketable equity investments and gains

(losses) on securities.

Non-interest expense includes salaries and employee benefits, occupancy expenses, data processing, advertising

expense, FDIC insurance assessment, professional fees and other general and administrative expenses.

DEVELOPMENTS:

CORONAVIRUS PANDEMIC RESPONSE AND ACTIONS.

in the first quarter of 2020, we responded to the ongoing COVID-19 pandemic while prioritizing the health and safety of our community.

On March 23, 2020, the Governor of Massachusetts issued an emergency order requiring all businesses and organizations that do

not provide COVID-19 “essential services” to close their physical workplaces and facilities to workers, customers

and the public from March 24, 2020 until April 7, 2020, which was subsequently extended to May 18, 2020.

As a consequence of the

order, we closed our branches and started the transition to working remotely.

Our drive-up windows and ATMs remained open while

we continued to service our customers through scheduled appointments and online channels.

On June 29, 2020, we re-opened our branch

lobbies to customers under Massachusetts recommended social distancing, safety and sanitation guidelines, while still offering

appointments and online channel transactions as a means of promoting social distancing where possible.

Governor implemented a four-phase reopening plan for the Company’s market area.

State and local governments closely monitored

key public health data as the situation evolved.

On July 8, 2020, Massachusetts entered the first step of Phase 3 of the re-opening

however, on August 7, 2020, Massachusetts’ Governor Baker, indefinitely postponed the second step of Phase 3 of the

reopening plan.

On September 29, 2020, Governor Baker announced that effective October 5, 2020, the Commonwealth of Massachusetts

would transition to the second step of Phase 3 only in lower-risk communities.

Lower-risk communities are defined as cities or

towns that have not been a “red” community in any of the last three Department of Public Health weekly reports.

the final phase of the reopening plan, the “new normal,” businesses will not be allowed to resume normal operations

until an effective treatment or vaccine is discovered.

November 27, 2020, as public health data demonstrated an increase in case numbers within our market area, we made the decision

to once again close our branch lobbies and conduct business through scheduled appointments, online channels, drive-throughs and

On December 22, 2020, Governor Baker announced a series of new COVID-19 restrictions on businesses and gatherings.

The restrictions

began on December 26, 2020, and on January 21, 2021, Governor Baker extended restrictions through February 8, 2021.

limits for most industries (including restaurants, theaters, personal services, casinos, officer buildings, places of worship,

retail, libraries, fitness centers, etc.) were reduced to 25% and the number of people allowed to gather outside was limited to

25 and indoor gathering were limited to 10 people.

Company continues to monitor COVID-19’s impact on its business and customers, however, the extent to which COVID-19 will

impact its results and operations will depend on future developments, which are highly uncertain and cannot be predicted with

confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate

its impact, and the direct and indirect economic effects of the pandemic and containment measures.

business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions.

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As of December 31, 2021, the Company

received funding approval from the SBA for 1,386 applications totaling $223.1 million, with $7.1 million of processing fees.

October 8, 2020, the SBA and Treasury released a simplified PPP loan forgiveness application for loans with balances of $50,000

or less, and on December 27, 2020, the SBA announced that the simplified PPP loan forgiveness amount had been increased to $150,000.

Since April 6, 2020, the Company has originated 1,113 PPP loans with balances of $150,000 or less totaling $43.4 million.

Company started processing PPP loan forgiveness requests in October 2020.

As of December 31, 2020, the Company processed 273 loan

forgiveness applications totaling $55.8 million.

Total PPP loans decreased $55.8 million, or 25.0%, from $223.1 million at September

30, 2020 to $167.3 million at December 31, 2020.

part of the $900 billion COVID-19 relief bill that was signed into law on December 27, 2020, the SBA and Treasury announced a

new $284.5 billion PPP, and started accepting applications from the Company on January 19, 2021.

The closing date for the new

PPP is March 31, 2021.

The Company looks forward to building on new small business relationships enabled by the new PPP with a

keen focus on cross-selling opportunities and increasing profitability.

received funding approval from the SBA for 2,146 applications totaling $302.2 million.

of December 31, 2021, the Company processed 1,982 PPP loan forgiveness applications totaling $276.9 million.

Total PPP loans decreased

$141.9 million, or 84.9%, from $167.3 million at December 31, 2020 to $25.3 million at December 31, 2021.

PPP loans are forgiven, the Company is accelerating the recognition of PPP loan origination fees that were being amortized over

the original lives of the loans.

The majority of the PPP loan portfolio has been repaid through forgiveness and earnings were

favorably impacted by the additional PPP origination fee income during the year ended December 31, 2021.

During the twelve months

ended December 31, 2021, the Company recognized $6.8 million in PPP loan origination fee income and PPP interest income (“PPP

income”), compared to $4.8 million during the twelve months ended December 31, 2020.

As of December 31, 2021, the Company

had $781,000 in remaining deferred PPP loan processing fees.

Modifications/Troubled Debt Restructurings .

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of the existing deferral period.

As of June 30, 2020, the deferred loan payment modifications totaled $261.0 million (525 loans),

for which principal and interest payments were deferred, and represented 15% of the total loan portfolio, excluding PPP loans.

As of December 31, 2020, deferred loan payment modifications declined to $76.9 million (47 loans), or 4.4% of total loans, excluding

PPP loans, in outstanding loans that continue to be modified under the CARES Act.

As of December 31, 2021, of the $42.5 million in remaining modifications granted under the CARES

Act, eight loans in the amount of $33.5 million, or 78.8%, of the remaining modifications, were granted to the hotel industry,

and one loan in the amount of $9.0 million was granted to an assisted living facility.

Of the $42.5 million in remaining outstanding

modifications, $33.5 million, or 78.8%, have resumed interest only payments.

table below breaks out the remaining modifications granted under the CARES Act at December 31, 2021:

Act Modifications

Segment (1)(2)

($ in millions)

Commercial real estate

Commercial and industrial

Residential real estate

table below breaks out the status of the remaining modifications granted under the CARES Act as of December 31, 2020:

Under 1 st Modification

Granted Subsequent Modification

Remaining CARES Act Modifications

Segment (1)(2)

CARES Act Modifications

Loan Segment (1)(2)

Total Loan Segment Balance at December 31, 2021

% of Total Loans

Modification Balance

# of Loans Modified

% of Loan Segment

($ in millions)

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Residential real estate

PPP loans and deferred fees

PPP loans of $25.3 million and the related deferred fees.

(2) Residential

includes home equity loans and lines of credit.

following table provides some insight into the composition of the Bank’s loan portfolio and remaining loan modifications,

excluding PPP loans, as of December 31, 2020:

Commercial Real

Bank Risk-Based

Retail/Shopping

Residential non-owner

Adult care/Assisted living

College/school

Gas station/convenience store

commercial real estate loans

and Industrial Loans

Bank Risk-Based

Manufacturing

Wholesale trade

Specialty trade

Heavy and civil engineering construction

Educational services

Transportation and warehouse

Healthcare and social assistance

commercial and industrial loans

and Consumer Loans

Bank Risk-Based

Residential real estate

residential and consumer loans

Bank Risk-Based

Commercial real estate

Commercial and industrial

Residential real estate

PPP loans of $167.3 million as of December 31, 2020.

balances as of December 31, 2020 (Commercial real estate loans $64.0 million;

and industrial loans $9.3 million;

and Residential loans $3.6 million).

consists of multiple industries.

the Bank’s loan portfolio contains impacted sectors and the commercial real estate and residential real estate sectors represent

more than 100% of the Bank’s total risk-based capital, the concentration limits remain acceptable.

The Company monitors

lending exposure by industry classification to determine potential risk associated with industry concentrations, if any, that

could lead to additional credit loss exposure.

As stated above, as a result of the COVID-19 pandemic, the Company identified sectors

that have been materially impacted including, but not limited to:

hospitality, transportation, retail, and restaurants and food

These sectors potentially carry a higher level of credit risk, as many of these borrowers have incurred a significant

negative impact to their businesses resulting from the governmental stay-at-home orders as well as travel limitations.

remaining modifications balance includes $32.9 million, which resumed regular payments

in January of 2022.

for Loan Losses.

determining the allowance for loan losses, the Company considers quantitative loss factors and a number of qualitative factors,

such as underwriting policies, current economic conditions, delinquency statistics, the adequacy of the underlying collateral

and the financial strength of the borrower.

Beginning at the end of March 2020, a record number of Americans filed for unemployment

The global pandemic could cause the Company to experience higher credit losses in its lending portfolio, reduced demand

for our products and services and other negative impacts on our financial position, results of operations and prospects.

December 31, 2021, the Company’s delinquency and nonperforming assets have not been materially impacted by the COVID-19

pandemic, and therefore, have not resulted in material credit losses within the lending portfolio.

COVID-19 pandemic materially impacted the Company’s determination of the allowance for loan losses for the twelve months

ended December 31, 2020.

In determining the allowance for loan losses, the Company considers quantitative loss factors and a number

of qualitative factors, such as underwriting policies, current economic conditions, delinquency statistics, the adequacy of the

underlying collateral and the financial strength of the borrower.

Beginning at the end of March 2020, a record number of Americans

filed for unemployment benefits.

The global pandemic could cause the Company to experience higher credit losses in its lending

portfolio, reduced demand for our products and services and other negative impacts on our financial position, results of operations

and prospects.

appropriately reserve for the impact of the COVID-19 pandemic on the Company’s loan portfolio, the Bank added a new qualitative

factor category to the allowance calculation - “Economic Impact of COVID-19” at March 31, 2020.

The allocation of

additional reserves for the twelve months ended December 31, 2020 was based upon an analysis of the Company’s loan portfolio

that included identifying borrowers sensitive to the shutdown (i.e.

accommodation and food service, recreation, construction,

manufacturing, and wholesale & retail trade) as well as a general allocation for the negative economic outlook as described

The Company’s provision for loan losses was $7.8 million for the twelve months ended December 31, 2020.

provision, $2.3 million was related to asset quality changes, $2.5 million was related to the inclusion of the acquired loan portfolio

into the general reserves, and $2.3 million was related to the addition of the COVID-19 factor to the allowance.

The total increase

was based on management’s evaluation of certain qualitative factors included in the determination of the allowance, primarily

a result of the abrupt slowdown in commercial economic activity resulting from actions announced by the State of Massachusetts

to close all non-essential businesses in the state as well as the dramatic rise in the unemployment rate.

Local unemployment rates

continue to trail the national averages due to the slower reopening plan for Massachusetts relative to other states.

Loans demonstrating

cash flow declines and borrowers sensitive to the prolonged shutdown were identified and contributed to an overall increase in

reserves for the twelve months ended December 31, 2020.

addition, on an ongoing basis, the Company has continually evaluated the loan portfolio acquired on October 24, 2016 from Chicopee.

The acquired portfolio was initially recorded at fair value without a related allowance for loan losses.

ended December 31, 2021 and 2020.

The Company recorded a credit for loan losses of $925,000 for the twelve months ended December

31, 2021, compared to a provision for loan losses of $7.8 million for the twelve months ended December 31, 2020.

on an ongoing basis, the Company has continually evaluated the loan portfolio acquired on October 24, 2016 from Chicopee.

acquired portfolio was initially recorded at fair value without a related allowance for loan losses.

Subsequent to acquisition,

there have been no indications that there has been any subsequent deterioration to the acquired portfolio.

Due to the ongoing

impacts and extended nature of the pandemic, during the three months ended September 30, 2020, the Company determined that it

was prudent to provide an allowance for loan losses related to the acquired portfolio, which increased the provision by $2.5 million.

The Company is continuing to monitor COVID-19’s impact on its business and its customers, however, the extent to which COVID-19

will impact its results and operations will depend on future developments, which are highly uncertain and cannot be predicted

with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate

its impact and the direct and indirect economic effects of the pandemic and containment measures.

upon an analysis of the portfolio to identify potentially impacted industries from the COVID-19 pandemic, including the downgrade

of several lending relationships, specifically within the hotel portfolio, we allocated a total provision for loan losses of $7.8

million for the twelve months ended December 31, 2020.

Of the total provision, $2.3 million was related to asset quality changes,

$2.5 million was related to the inclusion of the acquired loan portfolio into the general reserves, and $2.3 million was related

to COVID-19 factors.

Our allowance as a percentage of total loans, excluding PPP loans, was 1.20% at December 31, 2020 and 0.79%

at December 31, 2019.

mentioned above, due to the ongoing pandemic, the Company evaluated the loan portfolio acquired on October 24, 2016 from Chicopee

for COVID-19 sensitive industries.

The acquired portfolio was initially recorded at fair value without a related allowance for

During the three months ended September 30, 2020, the Company provided an allowance for loan losses related to the

acquired portfolio, which increased the provision by $2.5 million for the twelve months ended December 31, 2020.

during the twelve months ended December 31, 2020, special mention loans increased $66.2 million to $92.1 million at December 31,

2020, from $25.9 million at December 31, 2019.

During the twelve months ended December 31, 2020, we downgraded six relationships

totaling $46.6 million in the hotel industry.

The hotel industry has experienced disruption as a direct result of the negative

economic impacts of the COVID-19 pandemic.

During the three months

ended September 30, 2020, the Company determined that it was prudent to provide an allowance for loan losses related to the acquired

portfolio, which increased the provision by $2.5 million during 2020.

The Company is continuing to monitor COVID-19’s impact

on its business and its customers, however, the extent to which COVID-19 will impact its results and operations will depend on

future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration

of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects

of the pandemic and containment measures.

Accounting Policies.

accounting policies are disclosed in Note 1 to our consolidated financial statements.

Given our current business strategy and

asset/liability structure, the more critical policies are the allowance for loan losses and provision for loan losses, accounting

for non-performing loans and the ability to realize on our net deferred tax assets.

In addition to the informational disclosure

in the notes to the consolidated financial statements, our policy on each of these accounting policies is described in detail

in the applicable sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Senior management has discussed the development and selection of these accounting policies and the related disclosures with

the Audit Committee of our Board of Directors.

process of evaluating the loan portfolio, classifying loans and determining the allowance and provision is described in detail

in Part I under “Business – Lending Activities - Allowance for Loan Losses.” This evaluation is inherently

subjective as it requires material estimates that may be susceptible to significant change.

Our methodology for assessing the

allocation of the allowance consists of two key components, which are a specific allowance for impaired loans and a general allowance

for the remainder of the portfolio.

Measurement of impairment can be based on present value of expected future cash flows discounted

at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if

the loan is collateral dependent.

The allocation of the allowance is also reviewed by management based upon our evaluation of

then-existing economic and business conditions affecting our key lending areas and other conditions, such as new loan products,

credit quality trends (including trends in non-performing loans expected to result from existing conditions), collateral values,

loan volumes and concentrations, specific industry conditions within portfolio segments that existed as of the balance sheet date

Our accounting policies are disclosed in Note 1 to

our consolidated financial statements.

Given our current business strategy and asset/liability structure, the more critical policy is

the allowance for loan losses and provision for loan losses.

In addition to the informational disclosure in the notes to the consolidated

financial statements, our policy on this accounting policy is described in detail in the applicable sections of “Management’s

Discussion and Analysis of Financial Condition and Results of Operations.” Senior management has discussed the development and

selection of this accounting policy and the related disclosures with the Audit Committee of our Board of Directors.

The process of evaluating the loan portfolio, classifying

loans and determining the allowance and provision is described in detail in Part I under “Business – Lending Activities

- Allowance for Loan Losses.” This evaluation is inherently subjective as it requires material estimates that may be susceptible

to significant change.

Our methodology for assessing the allocation of the allowance consists of two key components, which are a specific

allowance for impaired loans and a general allowance for the remainder of the portfolio.

Measurement of impairment can be based on present

value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or

the fair value of the collateral, if the loan is collateral dependent.

The allocation of the allowance is also reviewed by management

based upon our evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such

as new loan products, credit quality trends (including trends in nonperforming loans expected to result from existing conditions), collateral

values, loan volumes and concentrations, specific industry conditions within portfolio segments that existed as of the balance sheet date

and the impact that such conditions were believed to have had on the collectability of the loan portfolio.

Beginning in March 2020, the Bank added a new qualitative

factor category to the allowance calculation – “Economic Impact of COVID-19”.

The allocation of additional reserves

for the COVID-19 qualitative factor during the year was based upon continued analysis of the loan portfolio that included identifying

borrowers sensitive to the shutdown (i.e.

accommodation and food service, recreation, construction, manufacturing, and wholesale &

retail trade) as well as a general allocation for the negative economic outlook given the record number of unemployment benefits claims

during the period.

In addition, on an ongoing basis, the Company has continually evaluated the loan portfolio acquired on October 24,

2016 from Chicopee Bancorp, Inc.

(“Chicopee”).

The acquired portfolio was initially recorded at fair value without a related

allowance for loan losses.

Due to the ongoing impacts and extended nature of the pandemic, during the year ended December 31, 2020, the

Company determined that it was prudent to provide an allowance for loan losses related to the acquired portfolio.

Although management

believes it has established and maintained the allowance for loan losses at adequate levels, if management’s assumptions

and judgments prove to be incorrect due to continued deterioration in economic, real estate and other conditions, and the allowance

for loan losses is not adequate to absorb inherent losses, our earnings and capital could be significantly and adversely affected.

general policy regarding recognition of interest on loans is to discontinue the accrual of interest when principal or interest

payments are delinquent 90 days or more, or earlier if collection of principal or interest is doubtful.

Any unpaid amounts previously

accrued on these loans are reversed from income.

Subsequent cash receipts are applied to the outstanding principal balance or

to interest income if, in the judgment of management, collection of the principal balance is not in question.

Loans are returned

to accrual status when they become current as to both principal and interest and when subsequent performance reduces the concern

as to the collectability of principal and interest.

Loan fees and certain direct loan origination costs are deferred, and the

net fee or cost is recognized as an adjustment to interest income over the estimated average lives of the related loans.

must make certain estimates in determining income tax expense for financial statement purposes.

These estimates occur in the calculation

of the deferred tax assets and liabilities, which arise from the temporary differences between the tax basis and financial statement

basis of our assets and liabilities.

The carrying value of our net deferred tax asset is based on our historic taxable income

as well as our belief that it is more likely than not that we will generate sufficient future taxable income to realize these

deferred tax assets.

Judgments regarding future taxable income may change due to changes in market conditions, changes in tax

laws or other factors which could result in a change in the assessment of the realization of the net deferred tax asset.

believes it has established and maintained the allowance for loan losses at adequate levels, if management’s assumptions and judgments

prove to be incorrect due to continued deterioration in economic, real estate and other conditions, and the allowance for loan losses

is not adequate to absorb inherent losses, our earnings and capital could be significantly and adversely affected.

There were no changes

to the Company’s allowance for loan losses methodology during the year ended December 31, 2021.

of Net Interest Income.

3 unchanged sentences

of average interest-earning assets is referred to as net interest margin.

The Company reports net interest margin on a tax-equivalent

basis throughout this entire annual report.

For more information regarding the Company’s use

of Non-GAAP financial measures see “Explanation of Use of Non-GAAP Financial Measurements.”

Balance Sheet.

6 unchanged sentences

interest from non-accruing loans.

the Years Ended December 31,

in thousands)

Interest-earning

Securities(2)

investments - at cost

investments(3)

For the Years Ended December 31,

(Dollars in thousands)

Interest-earning assets

non-interest-earning assets

Interest-bearing

checking accounts

market accounts

interest-bearing deposits

borrowings and long-term debt

Interest-bearing

Non-interest-bearing

non-interest-bearing liabilities

Securities(2)

Other investments - at cost

Short-term investments(3)

Total interest-earning assets

Total non-interest-earning assets

LIABILITIES AND EQUITY:

Interest-bearing liabilities

Interest-bearing checking accounts

Savings accounts

Money market accounts

Time deposits

Total interest-bearing deposits

Short-term borrowings and long-term debt

Interest-bearing liabilities

Non-interest-bearing deposits

Other non-interest-bearing liabilities

Total non-interest-bearing liabilities

Total liabilities

Total liabilities and equity

Tax-equivalent adjustment(2)

interest and dividend income

rate spread, on a tax-equivalent basis (4)

margin, on a tax-equivalent basis (5)

of average interest-earning assets to average interest-bearing liabilities

including non-accrual loans, are net of deferred loan origination costs, and unadvanced

funds and allowance for loan losses.

(2) Securities

income, loan income and net interest income are presented on a tax-equivalent basis using

a tax rate of 21% for 2020 and 2019 and 2018.

The tax-equivalent adjustment is deducted

from tax-equivalent net interest and dividend income to agree to the amount reported

in the consolidated statements of net income.

Net interest and dividend income

Net interest rate spread(4)

Net interest rate spread, on a tax-equivalent basis(5)

Net interest margin(6)

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

Ratio of average interest-earning

assets to average interest-bearing liabilities

including nonaccrual loans, are net of deferred loan origination costs and unadvanced

and securities income are presented on a tax-equivalent basis using a tax rate of 21%

for 2021, 2020 and 2019.

The tax-equivalent adjustment is deducted from tax-equivalent

net interest and dividend income to agree to the amount reported on the consolidated

statements of net income.

(3) Short-term

investments include federal funds sold.

interest rate spread represents the difference between the weighted average yield on

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

interest rate spread, on a tax-equivalent basis, represents the difference between the

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

See “Explanation of Use of Non-GAAP Financial Measurements”.

tax-equivalent weighted average yield on interest-earning assets and the tax-equivalent

weighted average cost of interest-bearing liabilities.

See “Explanation of Use

of Non-GAAP Financial Measurements”.

interest margin represents net interest and dividend income as a percentage of average

interest-earning assets.

interest margin, on a tax-equivalent basis, represents tax-equivalent net interest and

2 unchanged sentences

of Use of Non-GAAP Financial Measurements”.

loans, time deposits and borrowings are recorded at fair value at the time of acquisition.

The fair value marks on the loans, time deposits and borrowings acquired accrete and

amortize into net interest income over time.

For the twelve months ended December 31,

2021, 2020 and 2019, the loan accretion income and interest expense reduction on time

deposits and borrowings increased net interest income $55,000, $976,000 and $18,000,

respectively.

Excluding these items, net interest margin, on a tax-equivalent basis,

for the twelve months ended December 31, 2021, 2020 and 2019 was 3.16%, 2.91%, and 2.93%

respectively.

following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing

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and the changes due to rate.

Ended December 31, 2020 Compared to Year Ended

December 31, 2019

Ended December 31, 2019 Compared to Year Ended

December 31, 2018

(Decrease) Due to

Interest-earning

securities (1)

investments - at cost

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Increase (Decrease) Due to

Interest-earning assets

Interest-bearing

checking accounts

market accounts

borrowing and long-term debt

(In thousands)

Investment securities (1)

Other investments - at cost

Short-term investments

Total interest-earning assets

Interest-bearing liabilities

in net interest and dividend income

Securities and loan income and net interest income are presented on a tax-equivalent basis using a tax rate of 21% for 2020, 2019

The tax-equivalent adjustment is deducted from tax-equivalent net interest income to agree to the amount reported in

the consolidated statements of net income.

Interest-bearing checking accounts

Savings accounts

Money market accounts

Time deposits

Short-term borrowing and long-term debt

Total interest-bearing liabilities

Change in net interest and dividend income

(1) Securities

and loan income and net interest income are presented on a tax-equivalent basis using a tax rate of 21% for 2021, 2020 and 2019.

The tax-equivalent adjustment is deducted from tax-equivalent net interest income to agree to the amount reported in the consolidated

statements of net income.

of Use of Non-GAAP Financial Measurements.

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A reconciliation from GAAP to non-GAAP is provided below.

Months Ended December 31,

in thousands)

(no tax adjustment)

Tax-equivalent

adjustment (1)

(tax-equivalent basis)

(no tax adjustment)

Tax-equivalent

adjustment (1)

(tax-equivalent basis)

interest income (no tax adjustment)

Tax-equivalent

adjustment (1)

interest income (tax-equivalent basis)

rate spread (no tax adjustment)

interest margin (no tax adjustment)

Twelve Months Ended December 31,

(Dollars in thousands)

Average Yield

Loans (no tax adjustment)

Tax-equivalent adjustment (1)

Loans (tax-equivalent basis)

Securities (no tax adjustment)

Tax-equivalent adjustment (1)

Securities (tax-equivalent basis)

Net interest income (no tax adjustment)

Tax-equivalent adjustment (1)

Net interest income (tax-equivalent basis)

Interest rate spread (no tax adjustment)

Net interest margin (no tax adjustment)

tax equivalent adjustment is based upon a 21% tax rate for 2021, 2020 and 2019.

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proceeds, and the immediate liquidity needs of the Company.

The increase in cash and cash equivalents at December 31, 2020 is

primarily due to an increase in deposits during 2020.

December 31, 2020, the investment portfolio of $213.8 million, or 9.0% of total assets, decreased $20.6 million, or 9.9%, compared

to $234.4 million, or 10.7% of total assets, at December 31, 2019.

Available-for-sale securities comprised the majority of the

fair value of the portfolio and represented 94.4% and 97.1% of total investments at December 31, 2020 and 2019, respectively.

The increase in cash and cash equivalents at both December 31, 2021

and 2020 is primarily due to an increase in deposits during both periods.

December 31, 2021, the investment portfolio of $428.5 million, or 16.9% of total assets, increased $214.7 million, compared to

$213.8 million, or 9.0% of total assets, at December 31, 2020.

Held-to-maturity securities, which are recorded at amortized cost,

comprised the majority of the portfolio and represented 51.9% of total investments at December 31, 2021.

The Company did not hold

any held-to-maturity securities in 2020.

The Company allocated some of its excess liquidity to the investment portfolio as an

alternative to cash and cash equivalents.

This shift from overnight investments to held-to-maturity securities assisted the Company

with managing the yield on interest-earning assets in the low interest rate environment that we experienced in 2021 while providing

ongoing cash flows from payments and pay downs.

The primary objective of the investment portfolio is to provide liquidity and

maximize income while preserving the safety of principal.

Available-for-sale securities, which are carried at fair value, totaled

$194.4 million, or 45.4% of investments, at December 31, 2021, compared to $201.9 million, or 94.4% of investments, at December

The marketable equity securities portfolio totaled $11.9 million and $12.0 million at December 31, 2021 and 2020.

At December 31,

2020 and 2019, all securities were carried at fair market value.

Bank is required to purchase FHLB stock at par value in association with advances from the FHLB.

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The Company’s investment in

FHLB capital stock amounted to $4.7 million and $14.1 million at December 31, 2020 and December 31, 2019, respectively.

FHLB capital stock amounted to $2.2 million at both December 31, 2021 and December 31, 2020, respectively.

December 31, 2021 and 2020, the Company held $423,000 of Atlantic Community Bankers Bank stock.

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The stock is evaluated for impairment based on an estimate of the ultimate recovery to the par value.

loans of $1.9 billion represented 81.5%, of total assets, at December 31, 2020, compared to 81.2% of total assets, at December

Total loans increased $151.3 million, or 8.5%, primarily due to an increase in commercial and industrial loans of $130.2

million, or 52.3%.

Excluding PPP loans of $167.3 million, commercial and industrial loans decreased $37.1 million, or 14.9%, from

December 31, 2019.

As compared to December 31, 2019, commercial real estate loans increased $17.0 million, or 2.1%, and residential

real estate loans, which include home equity loans, increased $8.4 million, or 1.2%.

The decrease in commercial and industrial

loans of $37.1 million, or 14.9%, was due to pay downs on existing revolving lines of credit of approximately $36.4 million, or

42.5%, from December 31, 2019 to December 31, 2020.

Commercial line utilization decreased from 33% at December 31, 2019 to 16.8%

at December 31, 2020.

In order to reduce interest rate risk, the Company currently services $38.1 million in residential loans

sold to the secondary market.

loans were $1.9 billion as of December 31, 2021, a decrease of $62.7 million, or 3.3%, from December 31, 2020, primarily due to

a decrease in PPP loans of $141.9 million, or 84.9%.

Excluding PPP loans, total loans increased $79.3 million, or 4.5%, driven

by an increase in commercial real estate loans of $146.0 million, or 17.5%, partially offset by a decrease in commercial and industrial

loans of $10.5 million, or 4.9%.

Residential real estate loans, which include home equity loans, decreased $56.5 million, or 8.0%,

as we continue to sell low coupon, fixed rate residential loans to the secondary market in order to diversify our loan mix and

reduce our interest rate risk.

In accordance with the Company’s asset/liability management strategy, during the twelve months

ended December 31, 2021, the Company sold $59.7 million of fixed rate, low coupon residential real estate loans to the secondary

There were no loans sold during 2020.

As of December 31, 2021, the Company serviced $88.2 million in loans sold to the

secondary market, compared to $38.1 million at December 31, 2020.

Servicing rights will likely continue to be retained on all

loans written and sold to the secondary market.

Life Insurance ("BOLI").

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The cash surrender value

of BOLI was $72.9 million and $71.1 million at December 31, 2020 and 2019, respectively.

December 31, 2020, total deposits were $2.0 billion, an increase of $360.3 million, or 21.5%, from December 31, 2019, primarily

due to an increase in core deposits of $422.6 million, or 41.2%.

Core deposits, which the Company defines as all deposits except

time deposits, increased from $1.0 billion, or 61.1% of total deposits, at December 31, 2019, to $1.4 billion, or 71.0% of total

deposits, at December 31, 2020.

Non-interest-bearing deposits increased $148.5 million, or 37.7%, to $541.8 million, interest-bearing

checking accounts increased $24.8 million, or 35.3%, to $94.9 million, savings accounts increased $44.0 million, or 34.8%, to

$170.3 million, and money market accounts increased $205.4 million, or 47.2%, to $640.8 million.

The increase in core deposits

of $422.6 million, or 41.2%, can be attributed to the government stimulus for individuals, lower consumer spending over the last

several months, PPP loan proceeds deposited into borrower checking accounts, as well as the three new branches in 2020.

Time deposits

decreased $62.3 million, or 9.5%, from $652.6 million at December 31, 2019 to $590.3 million at December 31, 2020.

Brokered deposits,

which are included within time deposits, were $55.3 million at December 31, 2020 and $21.5 million at December 31, 2019.

December 31, 2020, FHLB advances decreased $182.7 million, or 75.9%, from $240.5 million at December 31, 2019, to $57.9 million.

The increase in low cost deposits provided the opportunity to repay approximately $132.7 million, or 55.2%, of high cost maturing

FHLB advances.

In addition, during the three months ended December 31, 2020, the Company extinguished $50.0 million of FHLB advances

that had a weighted average rate of 2.05%.

The extinguishment of debt resulted in a prepayment penalty charge of $987,000 recognized

in non-interest expense during the three months ended December 31, 2020.

The earn-back on the expenses related to the extinguishment

is less than 12 months.

At December 31, 2020, the $57.9 million in outstanding FHLB advances carried a weighted average rate of

Of the $57.9 million in outstanding FHLB advances, $42.3 million, or 73.3%, are scheduled to mature by December 31, 2021,

and carry a weighted average rate of 1.45%.

The remaining balance of $15.6 million has a remaining maturity of 2.1 years and a

weighted average rate of 0.40%.

The increase in low cost deposits provided funding for the PPP loan portfolio.

The Company has

access to the Paycheck Protection Program Liquidity Fund through March 31, 2021 to fund the PPP loan portfolio, if necessary.

Shareholder’s

of BOLI was $72.9 million at both December 31, 2021 and 2020, respectively.

December 31, 2021, total deposits were $2.3 billion, an increase of $213.5 million, 10.5%, from December 31, 2020, primarily due

to an increase in core deposits of $401.8 million, or 27.7%.

Core deposits, which the Company defines as all deposits except time

deposits, increased from $1.4 billion, or 71.0% of total deposits, at December 31, 2020, to $1.8 billion, or 82.1% of total deposits,

at December 31, 2021.

Non-interest-bearing deposits increased $99.5 million, or 18.4%, to $641.3 million, interest-bearing checking

accounts increased $50.8 million, or 53.5%, to $145.7 million, savings accounts increased $41.6 million, or 23.6%, to $217.6 million,

and money market accounts increased $209.5 million, or 32.7%, to $850.3 million.

The increase in core deposits can be attributed

to the government stimulus, lower consumer spending, PPP loan proceeds deposited into borrower checking accounts, as well as the

three new branches opened in 2020.

We anticipate that some of the deposit growth from PPP will be temporary as customers look

to make capital improvements and diversify investments as risk from the COVID-19 pandemic eases over time.

December 31, 2021, total borrowings decreased $35.6 million, or 61.5%, from $57.9 million at December 31, 2020, to $22.3 million.

FHLB advances decreased $55.2 million, or 95.4%, to $2.7 million and subordinated debt issued during the three months ended June

30, 2021 totaled $20.0 million at December 31, 2021.

Shareholders’

December 31, 2021, shareholders’ equity was $223.7 million, or 8.8% of total assets, compared to $226.6 million, or 9.6%

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The decrease in shareholders’ equity reflects $23.1 million for the repurchase of

the Company’s common stock, the payment of regular cash dividends of $5.0 million and a decrease in accumulated other comprehensive

the Company’s common stock, the payment of regular cash dividends of $4.7 million and an increase in accumulated other comprehensive

loss of $1.0 million, partially offset by net income of $23.7 million.

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Loans serviced for others and

investment assets under management are not carried as assets on the Company’s consolidated balance sheet, and as such, total

assets under management is not a financial measurement recognized under GAAP, however, management believes its disclosure provides

information useful in understanding the trends in total assets under management.

investment assets under management are not carried as assets on the Company's consolidated balance sheet, and as such, total assets

under management is not a financial measurement recognized under GAAP, however, management believes its disclosure provides information

useful in understanding the trends in total assets under management.

Company provides a wide range of investment advisory and wealth management services.

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