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Item 2. Management’s Discussion and Analysis

2023-11-13 compared with 2023-08-11 · 152 added, 139 removed, 483 unchanged (38% of the section changed)

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Period Ended June 30, 2023

Period Ended September 30, 2023

The following discussion analyzes the consolidated financial condition of Community Bancorp.

and its wholly-owned subsidiary, Community National Bank, as of June 30, 2023 and December 31, 2022, and its consolidated results of operations for the three- and six-month interim periods and one year period presented.

and its wholly-owned subsidiary, Community National Bank, as of September 30, 2023 and December 31, 2022, and its consolidated results of operations for the three- and nine-month interim periods and one year period presented.

The Company is considered a “smaller reporting company” and a “non-accelerated filer” under the disclosure rules of the SEC.

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the impact of inflation and slowing economic growth on the Company’s customers and on its financial results and performance;

changes in the United States monetary and fiscal policies, including the interest rate policies of the FRB and its regulation of the money supply;

the effect of United States monetary and fiscal policies, including deficit spending and the interest rate policies of the FRB and its regulation of the money supply;

changes in applicable accounting policies, practices and standards;

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However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.

The Company’s consolidated assets at June 30, 2023, were $1.03 billion compared to $1.06 billion at December 31, 2022, a decrease of 2.3%.

Significant changes in the asset base were due to a decrease of $51.8 million, or 72.8%, in cash and cash equivalents, which was partially offset by an increase in loans of $32.4 million, or 4.3%.

The Company’s consolidated assets at September 30, 2023, were $1.08 billion compared to $1.06 billion at December 31, 2022, an increase of 2.6%.

Significant changes in the asset base were due to an increase in loans of $90.0 million, or 12.0%, which was partially offset by a decrease of $53.6 million, or 75.4%, in cash and cash equivalents and a decrease of $11.0 million, or 5.7% in investment securities.

This change in the asset base reflects the Company’s efforts to deploy cash into higher earning assets.

The increase in the loan portfolio was primarily attributable to an increase of $13.3 million in commercial & industrial loans, $27.9 million in CRE loans and $1.4 million in residential first lien loans, which was partially offset by a decrease of $6.9 million in municipal loans and $1.7 million in residential junior lien loans and $1.4 million in purchased loans.

Total deposits at June 30, 2023, were $851.2 million compared to $923.0 million at December 31, 2022, a decrease of $71.8 million, or 7.8%.

Year to date, demand and interest-bearing transaction accounts decreased in total by $41.3 million or 8.1%, followed by a decrease of $31.1 million, or 22.2% in money market funds and $5.0 million, or 2.9% in savings accounts.

This was offset minimally by an increase of $5.6 million, or 5.5% in time deposits.

An increase of $2.1 million, or 6.2%, in repurchase agreements is also noted since year end.

Although a decline in deposits in the first six months is a normal occurrence for the Company primarily due to normal seasonal outflows, the decline is augmented by the continued spend-down of Covid relief funds.

Pricing pressures, as depositors look for alternative products with higher interest rates in the current rate environment, resulted in deposit outflows as well.

The increase in the loan portfolio was primarily attributable to an increase of $13.2 million in commercial & industrial loans, $50.1 million in CRE loans, $24.1 million in municipal loans and $7.4 million in residential first lien loans, which was partially offset by a decrease of $2.7 million in residential junior lien loans and $1.6 million in purchased loans.

Total deposits at September 30, 2023, were $901.2 million compared to $923.0 million at December 31, 2022, a decrease of $21.8 million, or 2.4%.

Year to date, demand and interest-bearing transaction accounts decreased in total by $20.2 million or 4.0%, followed by a decrease of $11.7 million, or 6.8%, in savings accounts and $2.9 million, or 2.1%, in money market funds.

This was partially offset by an increase of $13.0 million, or 12.8%, in time deposits.

The Company has been offering some competitive interest rates for retail time deposits, accounting for the increase in these funds.

The decrease in deposit balances combined with the loan growth, has required the use of borrowed funds as a supplemental funding source.

Total interest income increased $2.6 million, or 30.1%, for the second quarter of 2023, and $5.1 million, or 30.6%, for the first six months of 2023, compared to the same periods in 2022.

The increase in the loan portfolio, coupled with increases in the fed funds rate throughout 2022 and into 2023, helped to support the year over year increase in interest income.

Total interest expense increased $2.2 million, or 292.6% for the second quarter of 2023, and $3.7 million, or 259.7%, for the first six months of 2023, compared to the same periods in 2022.

The recent increases in the fed funds rate have put more pressure on competitive deposit pricing, resulting in an increase in the Company’s money market and time deposit rates.

Total interest income increased $2.7 million, or 28.1%, for the third quarter of 2023, and $7.8 million, or 29.7%, for the first nine months of 2023, compared to the same periods in 2022.

The growth of the loan portfolio, coupled with increases in the fed funds rate throughout 2022 and into 2023, helped to support the year over year increase in interest income.

Total interest expense increased $2.6 million, or 245.4% for the third quarter of 2023, and $6.3 million, or 253.6%, for the first nine months of 2023, compared to the same periods in 2022.

The recent increases in the fed funds rate have increased borrowing costs and have put more pressure on competitive deposit pricing, resulting in an increase in the Company’s money market and time deposit rates.

Please refer to the interest rate sensitivity discussion in the Interest Rate Risk and Asset and Liability Management section for more information on the impact that the actions of the FRB’s FOMC in regulating interest rates, and changes in the yield curve, could have on net interest income.

The provision for credit losses for the three and six months ended June 30, 2023, was determined under ASU No.

The provision for credit losses for the three and nine months ended September 30, 2023, was determined under ASU No.

2016-13, Measurement of Credit Losses on Financial Instruments, commonly referenced as the Current Expected Credit Losses, or CECL, which the Company adopted effective January 1, 2023.

The provision for credit losses for the second quarter of 2023 was $281,142 compared to $337,500 for the same quarter in 2022 and for the first six months of 2023 was $567,668 compared to $1.2 million for the same period in 2022, a decrease of $632,332, or 52.7%.

The provision for credit losses for the third quarter of 2023 was $240,889 compared to $125,000 for the same quarter in 2022, an increase of $115,889, or 92.7%, and for the first nine months of 2023 was $808,557 compared to $1.3 million for the same period in 2022, a decrease of $516,443, or 39.0%.

This decrease to the provision year over year was driven primarily by a write-down on a non-performing CRE loan totaling $667,474 during the first quarter of 2022, which necessitated a substantial provision for that quarter.

Please refer to Note 5 of the unaudited consolidated financial statements as well as the ACL and provisions discussion in the Credit Risk section of this MD&A.

Consolidated net income for the second quarter of 2023 increased $175,187 to $3.2 million compared to $3.0 million for the same quarter of 2022, and for the first six months of 2023 increased $1.1 million to $6.5 million compared to $5.4 million in the same period of 2022.

Consolidated net income for the third quarter of 2023 decreased $247,997 to $3.4 million compared to $3.6 million for the same quarter of 2022, while an increase of $860,408 is noted for the first nine months of 2023 to $9.9 million compared to $9.0 million in the same period of 2022.

Year over year, a $7.8 million increase in interest income was partially offset by an increase of $6.3 million in interest expense and coupled with a decrease of $516,443 in the provision for credit losses between periods, resulted in an increase of $2.0 million in net interest income after provision for credit losses.

These changes, along with other significant changes in non-interest income and non-interest expense are discussed in the appropriate sections of this MD&A.

Equity capital increased to $80.5 million, with a book value per share of $14.44 as of June 30, 2023, compared to $75.2 million and a book value per share of $13.55 as of December 31, 2022.

Equity capital increased to $78.8 million, with a book value per share of $14.08 as of September 30, 2023, compared to $75.2 million and a book value per share of $13.55 as of December 31, 2022.

Equity capital increased between periods despite a cumulative effect charge to retained earnings of $549,113 upon the transition to CECL effective on January 1, 2023.

The increase in equity capital is partially related to the decrease in unrealized losses in the investment portfolio of $1.2 million, net of tax, reflected in the accumulated other comprehensive loss component of the shareholders’ equity portion of the balance sheet.

The increase in equity capital reflects year to date net income, but is partially offset by an increase in unrealized losses in the investment portfolio of $2.9 million, net of tax, reflected in the accumulated other comprehensive loss component of the shareholders’ equity portion of the balance sheet.

This position is considered by management as temporary and, unlike the charge to retained earnings in connection with the transition to CECL, does not impact the Company’s regulatory capital ratios.

The week of July 10, 2023 brought heavy rainfall to the state of Vermont which caused extensive flooding across much of the state leading to Governor Phil Scott declaring a state of emergency.

Preliminary figures from self-reporting data released by Vermont Emergency Management suggest that the impact was considerable, and that the total damage will be at least comparable, if not greater, than what was suffered in 2011 during Tropical Storm Irene.

The State Emergency Operations Center has received reports of damage to over 4,000 residential units and over 800 businesses.

Heavy rainfall in the month of July caused extensive flooding across much of the state of Vermont leading to Governor Phil Scott declaring a state of emergency.

While the impact was considerable, the impact to the Bank’s customers was manageable with many having flood insurance coverage and or qualifying for the various assistance programs offered at the state and federal level.

The portion of the Company’s service area most impacted was central Vermont, including one of the Bank’s branches which sustained extensive flooding.

The branch has been closed for restoration and repairs, anticipating reopening within a few weeks.

The impact to the Bank’s customers appears to be manageable with many having flood insurance coverage and or qualifying for the various assistance programs offered at the state and federal level.

On June 14, 2023, the Company's Board of Directors declared a quarterly cash dividend of $0.23 per common share, payable on August 1, 2023, to shareholders of record on July 15, 2023.

As of June 30, 2023, all the Company’s capital ratios, and those of our subsidiary Bank, were in excess of applicable regulatory requirements.

The branch was immediately closed for restoration and repairs although night depository and ATM services were restored soon thereafter, and the drive up was reopened with limited hours on October 25, 2023.

A full-service opening of the retail branch is anticipated by mid-November.

On September 21, 2023, the Company's Board of Directors declared a quarterly cash dividend of $0.23 per common share, payable on November 1, 2023, to shareholders of record on October 15, 2023.

As of September 30, 2023, all the Company’s capital ratios, and those of our subsidiary Bank, were in excess of applicable regulatory requirements.

While we believe that we have sufficient capital to withstand an economic downturn from any headwinds related to inflation or recessionary periods, should one occur, our equity capital and regulatory capital ratios could be adversely impacted, including as a result of credit losses and other adverse impacts of deteriorating economic conditions, or government monetary policy.

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These policies are described in the Company’s 2022 Annual Report on Form 10-K in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” and in Note 1 (Significant Accounting Policies) to the audited consolidated financial statements.

With the exception of the ACL policy, there were no material changes during the first six months of 2023 in the Company’s critical accounting policies.

With the exception of the ACL policy, there were no material changes during the first nine months of 2023 in the Company’s critical accounting policies.

ACL - Management believes that the calculation of the ACL is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements.

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RESULTS OF OPERATIONS

The Company’s net income for the second quarter of 2023 was $3.2 million or $0.58 per common share, compared to $3.0 million or $0.56 per common share for the same quarter of 2022.

Net income for the first six months of 2023 was $6.5 million or $1.19 per common share, compared to $5.4 million or $1.00 per common share for the same period of 2022.

Core earnings (NII) were $8.3 million for the second quarter of 2023 compared to $7.8 million for the same quarter of 2022, and $16.8 million for the first six months of 2023 compared to $15.4 million for the same period in 2022.

Interest and fees on loans, the major component of interest income, increased $2.4 million, or 31.3% for the second quarter of 2023 compared to the same quarter of 2022, and $4.3 million, or 28.3% for the first six months of 2023 compared to the same period in 2022.

Interest paid on deposits, which is the major component of total interest expense, increased $1.6 million, or 279.9% for the second quarter of 2023 compared to the same quarter of 2022, and increased $2.9 million, or 257.8%, year over year, driven primarily by the increases in the fed funds rate during 2022 and into the first six months of 2023.

The Company’s net income for the third quarter of 2023 was $3.4 million or $0.61 per common share, compared to $3.6 million or $0.66 per common share for the same quarter of 2022.

Net income for the first nine months of 2023 was $9.9 million or $1.80 per common share, compared to $9.0 million or $1.67 per common share for the same period of 2022.

Core earnings (NII) were $8.43 million for the third quarter of 2023 compared to $8.37 million for the same quarter of 2022, and $25.2 million for the first nine months of 2023 compared to $23.8 million for the same period in 2022.

Interest and fees on loans, the major component of interest income, increased $2.7 million, or 33.5%, for the third quarter of 2023 compared to the same quarter of 2022, and $7.0 million, or 30.1%, for the first nine months of 2023 compared to the same period in 2022.

Interest paid on deposits, which is the major component of total interest expense, increased $1.7 million, or 198.5%, for the third quarter of 2023 compared to the same quarter of 2022, and increased $4.6 million, or 232.6%, year over year, driven primarily by the increases in the fed funds rate during 2022 and into the first nine months of 2023.

Market pressures on deposit rates along with an increased use of wholesale funding is driving up the cost of funds and compressing the net interest margin.

Return on average assets, which is net income divided by average total assets, measures how effectively a corporation uses its assets to produce earnings.

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The following tables show these ratios annualized, as well as other equity ratios monitored by management, for the comparison periods presented.

Three Months Ended June 30,

Three Months Ended September 30,

Return on average assets

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Average equity to average assets

Six Months Ended June 30,

Nine Months Ended September 30,

Return on average assets

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therefore, to equalize tax-free and taxable income in the comparison, we divide the tax-free income by 79%, with the result that every tax-free dollar is equivalent to $1.27 in taxable income for the periods presented.

The Company’s tax-exempt interest income of $300,389 and $256,652 for the three months ended June 30, 2023 and 2022, respectively, and $592,343 and $492,695 for the six months ended June 30, 2023 and 2022, respectively, was derived from loans to local municipalities of $27.7 million and $32.4 million, and tax-exempt municipal investments of $11.4 million and $7.2 million at June 30, 2023 and 2022, respectively.

The Company’s tax-exempt interest income of $559,985 and $284,618 for the three months ended September 30, 2023 and 2022, respectively, and $1.2 million and $777,314 for the nine months ended September 30, 2023 and 2022, respectively, was derived from loans to local municipalities of $58.7 million and $40.2 million, and tax-exempt municipal investments of $10.6 million and $10.3 million at September 30, 2023 and 2022, respectively.

The following tables show the reconciliation between reported NII and tax equivalent NII for the comparison periods presented.

Three Months Ended June 30,

Three Months Ended September 30,

Net interest income as presented

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Net interest income, tax equivalent

Six Months Ended June 30,

Nine Months Ended September 30,

Net interest income as presented

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Net interest income, net interest spread, and net interest margin are also expressed on a tax equivalent basis.

Three Months Ended June 30,

Three Months Ended September 30,

Average Assets

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Net interest margin (4)

Included in net loans are non-accrual loans with average balances of $8,586,182 and $5,014,853 for the three months ended June 30, 2023 and 2022, respectively.

Loans are stated net of unearned discount and ACL, plus loans held-for-sale and include tax-exempt loans to local municipalities with average balances of $35,117,182 and $47,565,225 for the three months ended June 30, 2023 and 2022, respectively.

Included in other investments is the Company’s FHLBB Stock with average balances of $815,824 and $712,800 for the three months ended June 30, 2023 and 2022, respectively, with a dividend rate of approximately 3.72% and 2.09%, respectively, per quarter.

Included in net loans are non-accrual loans with average balances of $7,344,200 and $7,337,588 for the three months ended September 30, 2023 and 2022, respectively.

Loans are stated net of unearned discount and ACL, plus loans held-for-sale and include tax-exempt loans to local municipalities with average balances of $56,085,091 and $39,007,717 for the three months ended September 30, 2023 and 2022, respectively.

Included in other investments is the Company’s FHLBB Stock with average balances of $1,009,480 and $712,800 for the three months ended September 30, 2023 and 2022, respectively, with a dividend rate of approximately 8.04% and 3.72%, respectively, per quarter.

Net interest spread is the difference between the average yield on average interest-earning assets and the average rate paid on average interest-bearing liabilities.

Net interest margin is net interest income divided by average earning assets.

Six Months Ended June 30,

Nine Months Ended September 30,

Average Assets

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Net interest margin (4)

Included in net loans are non-accrual loans with average balances of $8,137,701 and $5,375,840 for the six months ended June 30, 2023 and 2022, respectively.

Loans are stated net of unearned discount and ACL, and include loans held-for-sale and tax-exempt loans to local municipalities with average balances of $35,147,221 and $48,289,600 for the six months ended June 30, 2023 and 2022, respectively.

Included in other investments is the Company’s FHLBB Stock with average balances of $764,860 and $713,521, respectively, with a dividend rate of approximately 6.67% and 2.4%, respectively, for the six months ended June 30, 2023 and 2022, respectively.

Included in net loans are non-accrual loans with average balances of $7,873,201 and $6,029,756 for the nine months ended September 30, 2023 and 2022, respectively.

Loans are stated net of unearned discount and ACL, and include loans held-for-sale and tax-exempt loans to local municipalities with average balances of $42,203,207 and $45,161,639 for the nine months ended September 30, 2023 and 2022, respectively.

Included in other investments is the Company’s FHLBB Stock with average balances of $847,296 and $713,278, respectively, with a dividend rate of approximately 8.5% and 3.38%, respectively, for the nine months ended September 30, 2023 and 2022, respectively.

Net interest spread is the difference between the average yield on average interest-earning assets and the average rate paid on average interest-bearing liabilities.

Net interest margin is net interest income divided by average earning assets.

The average volume of interest-earning assets for the three- and six-month periods ended June 30, 2023, increased 1.4% and 2.1%, respectively, compared to the same periods last year, and the average yield on interest-earning assets increased 105 bps and 101 bps, respectively.

The average volume of loans increased over the three- and six-month comparison periods of 2023 versus 2022 by 9.5% and 9.2%, respectively, and the average yield on loans increased 87 bps and 77 bps, respectively.

Loans accounted for 78.8% and 77.8%, respectively, of the average interest-earning asset portfolio for the three- and six- month periods ended June 30, 2023, compared to 73.0% and 72.7%, respectively, for the same periods last year.

Interest earned on the loan portfolio as a percentage of total interest income was 89.2% and 88.1%, respectively, for the three- and six-month periods in 2023 compared to 88.8% and 89.8%, respectively, for the same periods in 2022.

The average volume of the taxable investment portfolio (classified as AFS) decreased 1.9% and 2.0% during the three- and six-month periods ended June 30, 2023, compared to the same periods last year, while the average yield increased 47 bps and 57 bps, respectively, between periods.

There were no investment purchases during the first six months of 2023 accounting for the decrease in investments year over year.

The average volume of the tax-exempt investment portfolio (classified as AFS) for the three- and six-month periods ended June 30, 2023, increased $6.1 million and $7.7 million, respectively, and the tax equivalent yield increased 83 bps and 105 bps, respectively.

The Company began investing in these tax-exempt bonds during December 2021, and purchased several bonds during 2022, accounting for the increase in this portfolio.

The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing account at the FRBB, decreased 81.6% for the three-months ended June 30, 2023, compared to the same period in 2022, and 69.0% for the six-months ended June 30, 2023, compared to the same period in 2022.

The decrease in average volume year over year is attributable to the funding of investment and loan growth, and also to a decrease in customer deposit accounts.

The average yield on these funds increased 361 bps and 372 bps for the three- and six-month periods ended June 30, 2023, versus the same periods in 2022, directly related to the increases in the fed funds rate throughout 2022 and into 2023.

The average volume of interest-bearing liabilities for the three- and six-month periods ended June 30, 2023, increased 2.4% and 3.1%, respectively, compared to the same periods in 2022, and the average rate paid on interest-bearing liabilities increased 118 bps and 101 bps, respectively.

The average volume of interest-bearing transaction accounts increased 4.4% and 6.3%, respectively for the three- and six-month periods ended June 30, 2023, compared to the same periods of 2022, reflecting deposit growth during the third and fourth quarters of 2022.

The average volume of interest-earning assets for the three- and nine-month periods ended September 30, 2023, increased 5.1% and 2.8%, respectively, compared to the same periods last year, and the average yield on interest-earning assets increased 88 bps and 98 bps, respectively.

The average volume of loans increased over the three- and nine-month comparison periods of 2023 versus 2022 by 14.6% and 11.0%, respectively, and the average yield on loans increased 79 bps and 78 bps, respectively.

Loans accounted for 80.5% and 78.7%, respectively, of the average interest-earning asset portfolio for the three- and nine- month periods ended September 30, 2023, compared to 73.8% and 72.9%, respectively, for the same periods last year.

Interest earned on the loan portfolio as a percentage of total interest income was 90.3% and 88.9%, respectively, for the three- and nine-month periods in 2023 compared to 86.7% and 88.7%, respectively, for the same periods in 2022.

The average volume of the taxable investment portfolio (classified as AFS) decreased 3.6% and 2.5% during the three- and nine-month periods ended September 30, 2023, compared to the same periods last year, while the average yield increased 38 bps and 51 bps, respectively, between periods.

There were no purchases of taxable AFS investment securities during the first nine months of 2023, accounting for the decrease year over year.

The average volume of the tax-exempt investment portfolio (classified as AFS) for the three- and nine-month periods ended September 30, 2023, increased $2.2 million and $5.8 million, respectively, and the tax equivalent yield increased 26 bps and 63 bps, respectively.

The Company purchased several bonds during 2023, accounting for the increase in this portfolio.

The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing account at the FRBB, decreased 86.6% for the three-months ended September 30, 2023, compared to the same period in 2022, and 75.3% for the nine-months ended September 30, 2023, compared to the same period in 2022.

The decrease in average volume year over year is attributable to the funding of loan growth, and to a decrease in customer deposit accounts.

The average yield on these funds increased 237 bps and 332 bps for the three- and nine-month periods ended September 30, 2023, versus the same periods in 2022, directly related to the increases in the fed funds rate throughout 2022 and into 2023.

The average volume of interest-bearing liabilities for the three- and nine-month periods ended September 30, 2023 increased 6.5% and 4.2%, respectively, compared to the same periods in 2022, and the average rate paid on interest-bearing liabilities increased 129 bps and 111 bps, respectively.

The average volume of interest-bearing transaction accounts increased 4.5% and 5.7%, respectively for the three- and nine-month periods ended September 30, 2023, compared to the same periods of 2022, reflecting deposit growth year over year.

The average rate paid on these accounts increased 108 bps and 121 bps, respectively, between comparison periods.

Interest paid on these funds as a percentage of total interest expense accounts for 39.8% and 41.2% for the three- and six-month periods of 2023, respectively.

The average volume of money market accounts decreased 6.0% and 1.1%, respectively, for the three- and six-month periods ended June 30, 2023, compared to the same periods of 2022, while the average rate paid on these deposits increased 126 bps and 119 bps, respectively.

The average volume of savings accounts decreased 6.9% and 4.1%, respectively, for the three- and six-month periods ended June 30, 2023, compared to the same periods in 2022, while the average rate paid on these accounts increased two bps in both comparison periods.

The average volume of time deposits increased 0.4% and decreased 1.8%, respectively, for the three- and six-month periods ended June 30, 2023, compared to the same periods in 2022, and the average rate paid increased 113 bps and 78 bps, respectively.

As a result of the decrease in deposits, the Company has had to rely on borrowed funds during the first six months of 2023, particularly during the second quarter of 2023, accounting for the increase of $19.2 million for the three months ended June 30, 2023, and $9.8 million for the six months ended June 30, 2023, compared to the respective periods in 2022.

The average rate paid increased accordingly for the three- and six-month periods ended June 30, 2023, by 454 bps and 428 bps.

The average volume of repurchase agreements increased 22.4% and 23.8%, respectively, for the three- and six-month periods ended June 30, 2023, compared to the same periods in 2022 and the average rate paid increased 205 bps and 162 bps, respectively, between comparison periods.

In summary, between the three- and six-month periods ended June 30, 2023 and 2022, the average yield on interest-earning assets increased 105 bps and 101 bps, respectively, and the average rate paid on interest-bearing liabilities increased 118 and 101 bps, respectively.

Net interest spread decreased 13 bps for the three-month period ended June 30, 2023, versus 2022, with no change noted for the six-month period of 2023 versus 2022, while net interest margins increased 14 bps and 23 bps, respectively, between periods.

Interest paid on these funds accounted for 30.5% and 36.8% of total interest expense for the three- and nine-month periods of 2023, respectively.

The average volume of money market accounts decreased 1.7% and 1.3%, respectively, for the three- and nine-month periods ended September 30, 2023, compared to the same periods of 2022, while the average rate paid on these deposits increased 145 bps and 129 bps, respectively.

The average volume of savings accounts decreased 9.4% and 5.9%, respectively, for the three- and nine-month periods ended September 30, 2023, compared to the same periods in 2022, while the average rate paid on these accounts increased two bps in both comparison periods.

The average volume of time deposits increased 3.4% and decreased 0.1%, respectively, for the three- and nine-month periods ended September 30, 2023, compared to the same periods in 2022, and the average rate paid increased 151 bps and 103 bps, respectively.

As a result of the decrease in deposits, the Company has had to rely on borrowed funds to fund loan growth during the first nine months of 2023, particularly during the second and third quarters of 2023, accounting for the increase of $50.7 million for the three months ended September 30, 2023, and $23.6 million for the nine months ended September 30, 2023, compared to the respective periods in 2022.

The average rate paid on borrowed funds increased by 501 bps and 480 bps for the three- and nine-month periods ended September 30, 2023, respectively.

The average volume of repurchase agreements increased 2.0% and 15.8%, respectively, for the three- and nine-month periods ended September 30, 2023, compared to the same periods in 2022 and the average rate paid increased 181 bps and 168 bps, respectively, between comparison periods.

In summary, between the three- and nine-month periods ended September 30, 2023 and 2022, the average yield on interest-earning assets increased 88 bps and 98 bps, respectively, and the average rate paid on interest-bearing liabilities increased 129 and 111 bps, respectively.

Net interest spread decreased 41 bps and 13 bps, respectively, for the three- and nine-month period ended September 30, 2023, versus the same periods in 2022.

Net interest margins decreased 12 bps for the three-month comparison period while increasing 12 bps for the nine-month comparison period of 2023 versus 2022.

The following table summarizes the variances in interest income and interest expense on a fully tax-equivalent basis for the interim periods presented for 2023 and 2022 resulting from volume changes in daily average assets and daily average liabilities and fluctuations in average rates earned and paid.

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Average Interest-Earning Assets

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Income from sold loans

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Income from CFS Partners

Exchange income

VISA card commission

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Total non-interest income

Total non-interest income increased $204,135, or 12.5%, for the three months ended June 30, 2023, and $276,483, or 8.3% for the six months ended June 30, 2023, compared to the same periods in 2022, with significant changes noted in the following:

The decrease in income from sold loans is due primarily to a lower volume of loans sold into the secondary market during both comparison periods of 2023 versus 2022, as the rising interest rate environment has adversely affected residential mortgage lending activity.

An increase in CRE loan volume in 2023 resulted in a significant increase in documentation fees collected at origination as well as commercial rate lock fees collected, accounting for the increase in other income from loans for both comparison periods of 2023 versus 2022.

Income from CFS Partners increased between periods due primarily to the late rebound of market prices during the latter part of the first quarter of 2023.

Total non-interest income increased $179,988, or 11.8%, for the three months ended September 30, 2023, and $456,471, or 9.4% for the nine months ended September 30, 2023, compared to the same periods in 2022, with significant changes noted in the following:

The volume of loans sold into the secondary market increased during the third quarter of 2023, but not enough to make up for the lower volume during the first two quarters of 2023, thereby accounting for the increase in the three- month comparison periods and the decrease year over year in income from sold loans.

Although the volume was lower in the third quarter of 2023, an increase in year to date CRE loan volume in 2023 resulted in a significant increase in documentation fees collected at origination as well as commercial rate lock fees collected, accounting for the increase in other income from loans for both comparison periods of 2023 versus 2022.

Income from CFS Partners increased between periods due in part to a rebound of market prices during the latter part of the first quarter of 2023 and an increase in managed accounts.

CFS Partners has a small portion of its equity capital invested in the stock market, and as a result is sensitive to general stock market conditions.

The increase in VISA card commission is attributable to additional income from a renegotiated contract in June of 2023.

Included in other miscellaneous income for 2022 is a one-time credit totaling $23,400 associated with a renegotiated contract with the Company’s check printing vendor, accounting for the decrease for the six months ended June 30, 2023, versus 2022.

The Company has seen an increase in volume of Canadian funds purchased accounting for the increase in exchange income.

The increase in VISA card commission is attributable to additional income from a renegotiated contract in June of 2023, including a renewal incentive payment as well as an increase in the monthly commission beginning in July 2023.

Non-interest Expense

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Salaries and wages

2 unchanged sentences

Other expenses

Outsourcing expense

Service contracts - administrative

Telephone expense

Travel, entertainment and meals expense

1 unchanged sentence

Collection & non-accruing loan expense

State deposit tax

Other miscellaneous expenses

Total non-interest expense

Total non-interest expense increased $429,459, or 7.9% for the three months ended June 30, 2023, and $855,574, or 7.9%, for the six months ended June 30, 2023, compared to the same periods in 2022, with significant changes noted in the following:

Total non-interest expense increased $473,635, or 8.9% for the three months ended September 30, 2023, and $1,329,210, or 8.2%, for the nine months ended September 30, 2023, compared to the same periods in 2022, with significant changes noted in the following:

In addition to normal salary increases, the increase in salaries and wages year over year is attributable to new hires in the area of commercial lending and operations during the last quarter of 2022.

1 unchanged sentence

The increase in employee benefits is attributable to an increase in health insurance claims year over year under the Company’s self-insured health insurance plan.

The increase in outsourcing expense is attributable to normal increases in costs associated with these arrangements.

The increase in service contracts - administrative is due to a combination of an increase in transaction-based pricing for certain contracts and contractual inflationary adjustment factors that are higher than historical increase adjustments.

The increase in telephone expense is attributable to a new phone system with advanced technology.

The increase in travel, entertainment and meals expenses is attributable to an increase in travel expenses as more seminars and training sessions return to in-person attendance.

2 unchanged sentences

Collection & non-accruing loan expenses were lower year over year due to a decrease in expenses associated with properties in the Company’s non-accruing loan portfolio.

ATM fees are transaction-based and reflect increased customer activity year over year, as well as annual contractual price adjustments.

State deposit tax increased year over year due primarily to the increase in deposits.

The calculation is based on an average of month-end deposit totals over a 12-month period.

APPLICABLE INCOME TAXES

The provision for income taxes increased $87,525, or 12.9% for the second quarter of 2023 compared to the same quarter of 2022, and $341,649, or 28.4%, for the first six months of 2023 compared to the same period in 2022.

Tax credits related to limited partnership investments amounted to $80,529 and $96,237, respectively, for the second quarter of 2023 compared to the same quarter of 2022, and $161,058 and $192,474 for the first six months of 2023 and 2022.

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $67,128 and $67,092, respectively, for the second quarter of 2023 compared to the same quarter of 2022, and $134,256 and $134,184 for the first six months of 2023 and 2022, respectively.

The provision for income taxes decreased $105,046, or 12.7% for the third quarter of 2023 compared to the same quarter of 2022, as a result of the decrease in income before income taxes.

An increase of $236,603, or 11.7%, is noted for the first nine months of 2023 compared to the same period in 2022, which is consistent with the increase in income before income taxes.

Tax credits related to limited partnership investments amounted to $80,529 and $99,958, respectively, for the third quarter of 2023 compared to the same quarter of 2022, and $241,587 and $292,437 for the first nine months of 2023 and 2022.

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $67,128 and $67,353, respectively, for the third quarter of 2023 compared to the same quarter of 2022, and $201,384 and $201,537 for the first nine months of 2023 and 2022, respectively.

These investments provide tax benefits, including tax credits, and are designed to provide a targeted effective annual yield between 7% and 10%.

1 unchanged sentence

The following table reflects the composition of the Company's major categories of assets and liabilities as a percentage of total assets or liabilities and shareholders’ equity, as of the balance sheet dates:

June 30, 2023

September 30, 2023

December 31, 2022

7 unchanged sentences

Time deposits

Borrowed funds

Overnight borrowings

Long-term advances

2 unchanged sentences

AFS securities

(10,989,648 )

Demand deposits

1 unchanged sentence

Interest-bearing transaction accounts

(26,898,891 )

Money market funds

(31,082,039 )

Savings deposits

(11,663,545 )

Time deposits

Borrowed funds

Overnight borrowings

Long-term advances

The increase in the loan portfolio during the first six months of 2023 was attributable to increases of $27.9 million in CRE loans, $13.3 million in commercial & industrial and $1.4 million in residential 1 st lien loans, which was partially offset by decreases of $6.9 million in municipal loans, $1.4 million in purchased loans, and $1.7 million in residential junior lien loans.

The increase in the loan portfolio during the first nine months of 2023 was attributable to increases of $50.1 million in CRE loans, $13.2 million in commercial & industrial, $24.1 million in municipal loans and $7.4 million in residential 1 st lien loans, which was partially offset by decreases of $1.6 million in purchased loans, and $2.7 million in residential junior lien loans.

The Company has experienced strong loan activity among its commercial customers, but only minimal consumer loan activity.

There were no securities AFS purchased during the first six months of 2023.

The change in the securities AFS portfolio is attributable to maturities amounting to $1.2 million and principal payments on various securities totaling $6.6 million, which was partially offset by a decrease of $1.5 million in unrealized losses arising during the first six months of 2023, which is reflected in OCI.

The decrease in the securities AFS portfolio during the first nine months of 2023 is attributable to purchases of $4.0 million, which was offset by maturities amounting to $1.2 million and principal payments on various securities totaling $9.9 million and an increase of $3.6 million in unrealized losses arising during the first nine months of 2023, which is reflected in OCI.

In management’s view, the size of the securities AFS portfolio is appropriate and proportional to the overall asset base, as this portfolio serves an important role in the Company’s liquidity position.

The decrease in the demand deposit accounts was entirely made up of business DDAs.

The decrease in interest-bearing transaction accounts consists of a decrease of $10.9 million, or 8.86%, in consumer interest-bearing transaction accounts, a decrease of $17.0 million, or 42.1%, in municipal deposit accounts and a decrease of $8.6 million, or 10.1% in ICS deposit accounts.

The decrease in the demand deposit accounts reflected a $9.3 million, or 5.7%, decrease in business DDAs and a $1.6 million, or 3.1%, decrease in retail DDAs.

The decrease in interest-bearing transaction accounts consisted of a decrease of $5.9 million, or 4.86%, in consumer interest-bearing transaction accounts, a decrease of $6.4 million, or 16.0%, in municipal deposit accounts and a decrease of $5.4 million, or 6.3% in ICS deposit accounts.

These decreases were partially offset by a combined increase of $8.4 million, or 18.9%, in health savings accounts and the deposit account of the Company’s trust and asset management affiliate, CFSG.

The decrease in money market funds was driven by decreases of $16.8 million, or 56.9%, in ICS accounts, $8.3 million, or 8.2%, in retail money market funds, and $6.0 million, or 68.1%, in municipal deposits.

The decrease in money market funds was driven by decreases of $12.3 million, or 41.8%, in ICS accounts, $6.4 million, or 6.3%, in retail money market funds, which was partially offset by an increase of $3.0 million, or 33.6%, in municipal deposits.

The increase in time deposits is attributable to customer response to periodic certificate of deposit specials that have been offered.

As a result of the year to date decrease in aggregate deposits, the Company had to rely on borrowed funds and long-term advances as a supplemental funding source, accounting for the significant increase in these funds.

CERTAIN TIME DEPOSITS

Increments of maturity of time CDs of $250,000 or more outstanding at June 30, 2023, are summarized as follows:

As a result of the year to date decrease in aggregate deposits, the Company had to rely on borrowed funds, including long-term advances, as a supplemental funding source, accounting for the significant increase in these funds.

UNINSURED DEPOSITS

The estimated balances of uninsured time deposits at September 30, 2023 were made up of time CDs of $18,313,231 and retirement accounts of $2,993,028.

Increments of maturity of these time deposits are summarized as follows:

3 months or less

2 unchanged sentences

Over 12 months

Estimated deposits in excess of the FDIC insurance level amounted to $319,620,273 at September 30, 2023 and $331,530,619 at December 31, 2022.

Interest Rate Risk and Asset and Liability Management - Management actively monitors and manages the Company’s interest rate risk exposure and attempts to structure the balance sheet to maximize net interest income while controlling its exposure to interest rate risk.

22 unchanged sentences

The current rising rate environment has had a positive impact on the Company’s NII, however market expectations for higher deposit rates and increased borrowing costs are applying increasing pressure to the spread between interest income and interest expense.

The following table summarizes the estimated impact on the Company's NII over a twelve-month period, assuming a gradual parallel shift of the yield curve beginning June 30, 2023:

The following table summarizes the estimated impact on the Company's NII over a twelve-month period, assuming a gradual parallel shift of the yield curve beginning September 30, 2023:

Percent Change in NII

4 unchanged sentences

As the market rates continue to increase, the impact of a falling rate environment is more pronounced, and the possibility more plausible than during the last several years of near zero short-term rates.

As of June 30, 2023, the Company had outstanding $12,887,000 in principal amount of Junior Subordinated Debentures due December 15, 2037, which previously bore a quarterly floating rate of interest equal to the 3-month London Interbank Offered Rate (LIBOR), plus 2.85%.

As of September 30, 2023, the Company had outstanding $12,887,000 in principal amount of Junior Subordinated Debentures due December 15, 2037, which previously bore a quarterly floating rate of interest equal to the 3-month London Interbank Offered Rate (LIBOR), plus 2.85%.

As previously announced, 3-month LIBOR for U.S.

dollar denominated deposits was phased out as of June 30, 2023.

The Indenture governing the terms of the Company’s Debentures contains detailed fallback provisions in the event 3-month LIBOR is not available, empowering the Trustee to obtain substitute quotations from other leading banks.

However, under the federal Adjustable Interest Rate (LIBOR) Act enacted in March 2022 (the “LIBOR Act”), fallback provisions like those in the Company’s Indenture are deemed “ineffective” and were replaced as a matter of law, as of the first London banking day after June 30, 2023 (the “LIBOR Replacement Date”), without need to amend contract documents, with a benchmark interest rate identified in regulations promulgated by the Federal Reserve.

In accordance with the federal Adjustable Interest Rate (LIBOR) Act enacted in March 2022 (the “LIBOR Act”), the interest rate provisions under the Company’s debenture documents were replaced as a matter of law, as of the first London banking day after June 30, 2023 (the “LIBOR Replacement Date”) with a benchmark interest rate identified in regulations promulgated by the FRB.

As required under the LIBOR Act, the Federal Reserve-identified benchmark rates specified in the final regulations for various tenors of LIBOR are based on the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York and each includes an appropriate “tenor spread adjustment” to reflect historical spreads between LIBOR and SOFR.

In accordance with the LIBOR Act and its implementing regulations, as of the LIBOR Replacement Date, the Company’s Junior Subordinated Debentures bear interest at a quarterly floating rate equal to 3-month CME SOFR, as adjusted by a spread adjustment of 0.26161 percent, plus 2.85%.

Aside from the Debentures, the Company does not have any other exposures to the phase out of LIBOR.

7 unchanged sentences

Loans are reviewed periodically by an independent loan review firm to help ensure accuracy of the Company's internal risk ratings and compliance with various internal policies, procedures and regulatory guidance.

Residential mortgage loans represented 29.7% of the Company’s loan balances at June 30, 2023, compared to 31.1% at December 31, 2022.

Residential mortgage loans represented 28.3% of the Company’s loan balances at September 30, 2023, compared to 31.1% at December 31, 2022.

The Company maintains a residential mortgage loan portfolio of traditional mortgage products and does not offer higher risk loan products, such as option adjustable-rate mortgage products, high loan-to-value products, interest only mortgages, subprime loans and products with deeply discounted teaser rates.

1 unchanged sentence

A 90% loan-to-value residential mortgage product without PMI is only available to borrowers with excellent credit and low debt-to-income ratios and has not been widely originated.

As of June 30, 2023, junior lien home equity products made up 13.8% of the residential mortgage portfolio with maximum loan-to-value ratios (including prior liens) of 80%.

As of September 30, 2023, junior lien home equity products made up 13.1% of the residential mortgage portfolio with maximum loan-to-value ratios (including prior liens) of 80%.

The Company also originates some home equity loans greater than 80% under an insured loan program with stringent underwriting criteria.

Consistent with the strategic focus on commercial lending, the commercial & industrial and CRE loan portfolios have seen solid growth over recent years.

Commercial & industrial, purchased, CRE and municipal loans collectively comprised 69.8% of the Company’s loan portfolio at June 30, 2023, compared to 68.4% at December 31, 2022.

The largest components of the CRE portfolio were $105.2 million in owner-occupied CRE and $149.8 million in non-owner occupied CRE at June 30, 2023.

Commercial & industrial, purchased, CRE and municipal loans collectively comprised 71.3% of the Company’s loan portfolio at September 30, 2023, compared to 68.4% at December 31, 2022.

The largest components of the CRE portfolio were $115.0 million in owner-occupied CRE and $161.8 million in non-owner occupied CRE at September 30, 2023.

Risk in the Company’s commercial & industrial and CRE loan portfolios is mitigated in part by government guarantees issued by federal agencies such as the SBA and RD.

At June 30, 2023, the Company had $26.2 million in guaranteed loans with guaranteed balances of $17.0 million, compared to $27.0 million in guaranteed loans with guaranteed balances of $18.3 million at December 31, 2022.

PPP loans with outstanding balances of $106,910 at June 30, 2023, and $199,664 at December 31, 2022, are included in these totals, all of which carry a 100% guarantee through the SBA, subject to borrower eligibility requirements.

At September 30, 2023, the Company had $25.1 million in guaranteed loans with guaranteed balances of $16.8 million, compared to $27.0 million in guaranteed loans with guaranteed balances of $18.3 million at December 31, 2022.

PPP loans with outstanding balances of $95,529 at September 30, 2023, and $199,664 at December 31, 2022, are included in these totals, all of which carry a 100% guarantee through the SBA, subject to borrower eligibility requirements.

The Company works actively with customers early in the delinquency process to help them to avoid default and foreclosure.

9 unchanged sentences

Three Months Ended

Provision for loan losses

September 30,

Provision for credit losses on loans

Provision for credit losses on OBS credit exposure

Provision for credit losses

Six Months Ended

Provision for loan losses

Nine Months Ended

September 30,

Provision for credit losses on loans

Provision for credit losses on OBS credit exposure

Provision for credit losses

The increase in the provision for credit losses for the three months ended September 30, 2023, was due to a reduction of the provision in the third quarter of 2022, which was the result of an increase in recoveries during that quarter, as well as loan growth that exceeded budget in 2023.

The decrease of $516,443 year over year was driven in part by a write-down totaling $667,474, on a single non-performing loan, in March of 2022.

ACL and provisions – As stated in Note 2 of the accompanying notes to the Company’s unaudited interim consolidated financial statements, effective January 1, 2023, the Company was required to recognize credit losses under the guidance of ASU No.

2 unchanged sentences

The new guidance, which is referred to as the current expected credit loss, or CECL model, requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses over the life of the loans.

The adjustment from the adoption of CECL amounted to $549,113, net of tax and was recorded as an adjustment to retained earnings and affects calculation of regulatory capital ratios.

Changes in forecasts used in the model could produce different results, quarter to quarter.

The adjustment from the adoption of CECL amounted to $549,113, net of tax and was recorded as an adjustment to retained earnings, which affects calculation of regulatory capital ratios.

Changes in forecasts used in the CECL model could produce different results, quarter to quarter.

The Company’s board of directors has approved an ACL policy that provides guidance in maintaining an adequate methodology for establishing, estimating and maintaining allowances for credit losses under ASC 326.

The policy creates a measurement model to establish a proper ACL based on current expected credit losses rather than incurred losses.

The Company maintains an ACL at a level that management believes is appropriate to absorb losses inherent in the loan portfolio as of the measurement date (See Note 5 to the accompanying unaudited interim consolidated financial statements).

The Company maintains an ACL at a level that management believes is appropriate to absorb losses inherent in the loan portfolio as of the measurement date (See Note 5 of the accompanying unaudited interim consolidated financial statements).

Although the Company, in establishing the ACL, considers the inherent losses in individual loans and pools of loans, the ACL is a general reserve available to absorb all credit losses in the loan portfolio.

2 unchanged sentences

The following table summarizes the Company’s credit risk ratios for the balance sheet dates presented:

September 30,

ACL to total loans outstanding

9 unchanged sentences

Non-accruing loans

The provision for credit losses for the three months ended June 30, 2023, was $281,142 compared to $337,500 for the same period in 2023, and $567,668 for first six months ended June 30, 2023, compared to $1.2 million for the same period in 2022.

The $632,332 year over year decrease was driven in part by a write-down totaling $667,474, on a single non-performing loan, in March of 2022.

The second quarter ACL analysis indicates that the reserve balance of $9.3 million at June 30, 2023, is sufficient to cover expected credit losses that are probable and estimable as of the measurement date.

Included in the ACL calculation for June 30, 2023, is a decrease to the qualitative factor adjustment for delinquencies and nonperforming loans.

The third quarter ACL analysis indicates that the reserve balance of $9.5 million at September 30, 2023, is sufficient to cover expected credit losses that are probable and estimable as of the measurement date.

Included in the ACL calculation for September 30, 2023, is a decrease to the qualitative factor adjustment for collateral within the CRE pool of loans.

Management feels that the economic forecasts adequately quantify the risk in this area.

3 unchanged sentences

Net charge-offs during the periods presented to average loans outstanding were as follows:

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Commercial & industrial

40 unchanged sentences

The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

During the first six months of 2023, the Company did not engage in any activity that created any additional types of off-balance sheet risk.

During the first nine months of 2023, the Company did not engage in any activity that created any additional types of off-balance sheet risk.

With the adoption of ASU 2016-13 (CECL), the Company is required to establish an allowance for expected credit losses on OBS credit exposures.

3 unchanged sentences

The allowance for credit losses for OBS credit exposures is presented in the "Accrued interest and other liabilities" line of the consolidated balance sheets.

There was a decrease of $17,872 to the allowance for credit losses for OBS credit exposures during the six months ended June 30, 2023.

There was a decrease of $40,992 to the allowance for credit losses for OBS credit exposures during the nine months ended September 30, 2023.

LIQUIDITY AND CAPITAL RESOURCES

3 unchanged sentences

The Company’s principal sources of funds are deposits, amortization and prepayment of loans and securities, maturities of investment securities, sales of loans available-for-sale, and earnings and funds provided from operations.

These sources are supplemented by short-term and long-term borrowings as needed.

Maintaining a relatively stable funding base, which is achieved by diversifying funding sources, competitively pricing deposit products, and extending the contractual maturity of liabilities, reduces the Company’s exposure to rollover risk on deposits and limits reliance on volatile short-term borrowed funds.

3 unchanged sentences

One-way deposits acquired through the CDARS program provide an alternative funding source when needed.

At June 30, 2023, and December 31, 2022, the Company had no one-way CDARS outstanding.

At September 30, 2023, and December 31, 2022, the Company had no one-way CDARS outstanding.

In addition, two-way (reciprocal) CDARS deposits, as well as reciprocal ICS money market and demand deposits, enhance the Company’s ability to retain larger deposit balances by allowing the Company to provide FDIC deposit insurance to its customers in excess of account coverage limits through the exchange of deposits with other participating FDIC-insured financial institutions.

At June 30, 2023 and December 31, 2022, the Company reported $2.5 million and $2.8 million, respectively, in reciprocal CDARS deposits.

The balance in ICS reciprocal money market deposits was $12.7 million at June 30, 2023, compared to $29.5 million at December 31, 2022, and the balance in ICS reciprocal demand deposits as of those dates was $76.7 million and $85.3 million, respectively.

On June 30, 2023 and December 31, 2022, borrowing capacity of $108.1 million and $112.3 million, respectively, was available through the FHLBB, secured by the Company's qualifying loan portfolio (generally, residential mortgage and commercial loans), reduced by outstanding advances and by collateral pledges securing FHLBB letters of credit collateralizing public unit deposits of $24.6 million and $52.4 million, respectively.

At September 30, 2023 and December 31, 2022, the Company reported $2.4 million and $2.8 million, respectively, in reciprocal CDARS deposits.

The balance in ICS reciprocal money market deposits was $17.1 million at September 30, 2023, compared to $29.5 million at December 31, 2022, and the balance in ICS reciprocal demand deposits as of those dates was $79.9 million and $85.3 million, respectively.

On September 30, 2023 and December 31, 2022, borrowing capacity of $107.9 million and $112.3 million, respectively, was available through the FHLBB, secured by the Company's qualifying loan portfolio (generally, residential mortgage and commercial loans), reduced by outstanding advances and by collateral pledges securing FHLBB letters of credit collateralizing public unit deposits of $23.1 million and $52.4 million, respectively.

The following table reflects the Company’s outstanding advances with FHLBB as of the dates indicated:

September 30,

FHLBB Advances (1)

6 unchanged sentences

JNE advances must support small business in New England that create and/or retain jobs, or otherwise contribute to overall economic development activities.

The Company also has an unsecured Federal Funds credit line with the FHLBB with an available balance of $500,000 and no outstanding advances during any of the respective comparison periods.

The Company also has an unsecured Federal Funds credit line with the FHLBB with an available balance of $500,000 with no outstanding advances during either of the respective comparison periods.

Interest is chargeable at a rate determined daily, approximately 25 bps higher than the rate paid on federal funds sold.

The Company has a BIC arrangement with the FRBB secured by eligible commercial & industrial loans, CRE loans and home equity loans, resulting in an available credit line of $53.7 million and $56.1 million, respectively, at June 30, 2023 and December 31, 2022.

The Company has a BIC arrangement with the FRBB secured by eligible commercial & industrial loans, CRE loans and home equity loans, resulting in an available credit line of $59.9 million and $56.1 million, respectively, at September 30, 2023 and December 31, 2022.

Credit advances under this FRBB lending program are overnight advances with interest chargeable at the primary credit rate (generally referred to as the discount rate), currently 500 bps.

The Company had no outstanding advances through this facility at June 30, 2023 or December 31, 2022.

As of June 30, 2023, the Company had additional potential borrowing capacity, subject to pledging of required collateral consisting of eligible U.S.

The Company had no outstanding advances through this facility at September 30, 2023 or December 31, 2022.

As of September 30, 2023, the Company had additional potential borrowing capacity, subject to pledging of required collateral consisting of eligible U.S.

Agency and U.S.

1 unchanged sentence

The Company’s advances under the BTFP were as follows:

September 30,

FRBB Advances

2 unchanged sentences

FRB BTFP term advance, 4.91%, due May 17, 2024

FRB BTFP term advance, 5.45%, due August 05, 2024

Total BTFP Advances

As of June 30, 2023, the Company had an unsecured line of credit with one correspondent bank of $12.5 million, compared to unsecured lines of credit with two correspondent banks with aggregate available borrowing capacity totaling $20.5 million as of December 31, 2022.

As of September 30, 2023, the Company had an unsecured line of credit with one correspondent bank of $12.5 million, compared to unsecured lines of credit with two correspondent banks with aggregate available borrowing capacity totaling $20.5 million as of December 31, 2022.

The Company had no outstanding advances against these credit lines as of the balance sheet dates presented.

Management believes that the combination of high levels of potentially liquid assets, unencumbered securities, cash flows from operations, and additional borrowing capacity are sufficient to meet the Company’s liquidity and capital needs.

The following table illustrates the changes in shareholders' equity from December 31, 2022 to June 30, 2023:

The following table illustrates the changes in shareholders' equity from December 31, 2022 to September 30, 2023:

Balance at December 31, 2022 (book value $13.55 per common share)

4 unchanged sentences

Change in AOCI on AFS securities, net of tax

Balance at June 30, 2023 (book value $14.44 per common share)

Balance at September 30, 2023 (book value $14.08 per common share)

The primary objective of the Company’s capital planning process is to balance appropriately the retention of capital to support operations and future growth, with the goal of providing shareholders with an attractive return on their investment.

2 unchanged sentences

Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

As of June 30, 2023, the Bank was considered well capitalized under the standard regulatory capital framework for Prompt Corrective Action and the Company exceeded currently applicable consolidated regulatory guidelines for capital adequacy.

As of September 30, 2023, the Bank was considered well capitalized under the standard regulatory capital framework for Prompt Corrective Action and the Company exceeded currently applicable consolidated regulatory guidelines for capital adequacy.

While we believe that the Company has sufficient capital to withstand an extended economic downturn, our regulatory capital ratios could be adversely impacted by future credit losses and other operational impacts of deteriorating economic conditions and inflation.

The following table shows the Company’s actual capital ratios and those of its subsidiary, as well as currently applicable regulatory capital requirements, as of the dates indicated.

The calculations as of June 30, 2023 reflect adoption of ASU 2016-13 (CECL), including the beginning period cumulative effect adjustment of $549,113, which reduced retained earnings.

The calculations as of September 30, 2023 reflect adoption of ASU 2016-13 (CECL), including the beginning period cumulative effect adjustment of $549,113, which reduced retained earnings.

Adequacy Purposes

4 unchanged sentences

(Dollars in Thousands)

June 30, 2023

September 30, 2023

Common equity tier 1 capital

18 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