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Item 2. Management’s Discussion and Analysis

2024-05-15 compared with 2023-11-13 · 186 added, 251 removed, 384 unchanged (53% of the section changed)

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Period Ended September 30, 2023

Period Ended March 31, 2024

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

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.

and its wholly owned subsidiary, Community National Bank, as of March 31, 2024 and December 31, 2023, and its consolidated results of operations for the three-month interim period 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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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 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 $13.2 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.

The Company’s consolidated assets as of March 31, 2024, were $1.11 billion compared to $1.10 billion as of December 31, 2023, an increase of 0.7%.

Changes in the asset base included an increase in loans of $20.9 million, or 2.5%, which was partially offset by a decrease of $4.5 million, or 22.1%, in cash and cash equivalents and a decrease of $10.1 million, or 5.3% in investment securities.

These changes in the asset base reflect the Company’s efforts to deploy cash into higher earning assets.

The increase in the loan portfolio was primarily attributable to an increase of $7.2 million in commercial & industrial loans, $11.0 million in CRE loans, $2.5 million in municipal loans and $1.1 million in residential first lien loans, which was minimally offset by a decrease of $362 thousand in purchased loans and $338 thousand in consumer loans.

Total deposits as of March 31, 2024, were $883.8 million compared to $897.0 million as of December 31, 2023, a decrease of $13.2 million, or 1.5%.

Year to date, demand and interest-bearing transaction accounts decreased in total by $23.2 million or 4.6%, as well as a decrease of $1.3 million, or 1.1%, in money market funds and $852 thousand, or 0.6%, in savings accounts.

This was partially offset by an increase of $12.1 million, or 9.88%, in time deposits.

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

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

A decrease in deposit balances is typical in the first and second quarters of the calendar year with balances increasing through year end due in part to the timing of customers income tax obligations and the spend down of deposited funds by Vermont municipal customers prior to their June 30 fiscal year end.

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 $2.7 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.

Total interest income increased $2.1 million, or 19.4%, for the first three months of 2024, compared to the same period in 2023.

The growth of the loan portfolio originated at higher interest rates, as well as adjustable-rate loans repricing to current market rates, helped to support the year-over-year increase in interest income.

Total interest expense increased $2.3 million, or 100.4%, for the first three months of 2024, compared to the same period in 2023.

The increases in the fed funds rate throughout 2022 and into 2023 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 nine months ended September 30, 2023, was determined under ASU No.

The credit loss expense for the three months ended March 31, 2024 and 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 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 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.

The credit loss expense for the first three months of 2024 was $313,579 compared to $286,526 for the same period in 2023, an increase of $27,053, or 9.4%.

The current period credit loss expense considers a number of factors, including loan growth and changes in balances of the current portfolio, changes in forecasts, historical loss rate and qualitative factors.

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

Consolidated net income for the first three months of 2024 decreased $515,860 to $2.8 million compared to $3.3 million for the same period of 2023.

Year over year, the $2.3 million increase in interest expense, despite a $2.1 million increase in interest income, was the main factor contributing to the decrease in net income.

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 $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 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.

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 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.

Equity capital increased to $89.4 million, with a book value per share of $15.88 as of March 31, 2024, compared to $89.0 million and a book value per share of $15.87 as of December 31, 2023.

The moderate increase in equity capital between periods reflected the combined effect of first quarter net income of $2.8 million, offset in part by an increase in unrealized losses in the investment portfolio of $1.5 million, net of tax, reflected in accumulated other comprehensive loss, and dividends paid totaling $940 thousand.

The unrealized loss position in the investment portfolio is considered by management as temporary and does not impact the Company’s regulatory capital ratios.

On March 20, 2024, the Company's Board of Directors declared a quarterly cash dividend of $0.23 per common share, payable on May 1, 2024, to shareholders of record on April 15, 2024.

As of March 31, 2024, 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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The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities in the consolidated financial statements and related notes.

The SEC has defined a company’s critical accounting policies as those that are most important to the portrayal of the Company’s financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.

The SEC has defined a company’s critical accounting policies as those that are most important to the portrayal of the Company’s financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often because of the need to make estimates of matters that are inherently uncertain.

Because of the significance of these estimates and assumptions, there is a high likelihood that materially different amounts would be reported for the Company under different conditions or using different assumptions or estimates.

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These policies are described in the Company’s 2023 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 nine months of 2023 in the Company’s critical accounting policies.

There were no material changes during the first three months of 2024 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 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.

The Company’s net income for the first three months of 2024 was $2.8 million, or $0.51 per common share, compared to $3.3 million, or $0.61 per common share, for the same period in 2023.

Core earnings (NII) were $8.36 million for the first three months of 2024 compared to $8.52 million for the same period in 2023.

Interest and fees on loans, the major component of interest income, increased $2.3 million, or 24.6%, for the first three months of 2024 compared to the same period in 2023.

Interest paid on deposits, which is the major component of total interest expense, increased $1.2 million, or 67.0%, year over year, driven primarily by the increases in the fed funds rate during 2022 and into the third quarter of 2023.

A shift from lower yielding interest-bearing accounts and savings accounts to higher yielding money market and certificate of deposit accounts has contributed to the higher interest expense year over year.

Market pressures on deposit rates along with an increased use of wholesale funding are driving up the Company’s 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.

Return on average equity, which is net income divided by average shareholders' equity, measures how effectively a corporation uses its equity capital to produce earnings.

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

Three Months Ended September 30,

Return on average assets

Return on average equity

Dividend payout ratio (1)

Average equity to average assets

Nine Months Ended September 30,

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

Three Months Ended March 31,

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 $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 September 30,

Net interest income as presented

Effect of tax-exempt income

Net interest income, tax equivalent

Nine Months Ended September 30,

The Company’s tax-exempt interest income of $575,470 and $291,954 for the three months ended March 31, 2024 and 2023, respectively, was derived from loans to local municipalities of $56.9 million and $36.5 million, and tax-exempt municipal investments of $10.4 million and $11.6 million as of March 31, 2024 and 2023, respectively.

The following table shows the reconciliation between reported NII and tax equivalent NII for the comparison periods presented.

Three Months Ended March 31,

Net interest income as presented

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Net interest income, tax equivalent

The following tables present the daily average assets and the daily average liabilities, including the yields on interest-earning assets and interest-bearing liabilities for the respective comparison periods.

The following table presents the daily average assets and the daily average liabilities, including the yields on interest-earning assets and interest-bearing liabilities for the comparison period.

Interest income (excluding interest on non-accrual loans) is expressed on a tax equivalent basis, both in dollars and as a yield/rate for the comparison periods presented.

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

Three Months Ended September 30,

Three Months Ended March 31,

Average Assets

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1,041,365,834

$ 961,700,847

Cash and due from banks

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Time deposits

Borrowed funds

Repurchase agreements

Finance lease obligations

Junior subordinated debentures

Total interest-bearing liabilities

$ 776,627,172

$ 729,951,827

Noninterest bearing deposits

Other liabilities

Total liabilities

Shareholders' equity

Total liabilities and shareholders' equity

$ 1,071,985,898

$ 1,018,147,805

Net interest income

Net interest spread (3)

Net interest margin (4)

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.

Nine Months Ended September 30,

Average Assets

Loans, net (1)

$ 774,050,459

$ 697,118,020

Taxable investment securities

Tax-exempt investment securities

Sweep and interest-earning accounts

Other investments (2)

Total interest-earning assets

Cash and due from banks

Premises and equipment

$ 1,043,200,940

$ 1,011,146,277

Average Liabilities and Shareholders' Equity

Interest-bearing transaction accounts

$ 271,528,726

$ 256,909,959

Money market funds

Savings deposits

Time deposits

Borrowed funds

Repurchase agreements

Finance lease obligations

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Total liabilities

1,012,575,157

Shareholders' equity

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Net interest margin (4)

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.

Included in net loans are non-accrual loans with average balances of $6,524,051 and $8,220,394 for the three months ended March 31, 2024 and 2023, 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 $56,602,242 and $35,177,595 for the three months ended March 31, 2024 and 2023, respectively.

Included in other investments is the Company’s FHLBB Stock with average balances of $1,185,062 and $713,330, respectively, with a dividend rate of approximately 8.56% and 6.67%, respectively, for the three months ended March 31, 2024 and 2023, 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 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 average volume of interest-earning assets for the three-month period ended March 31, 2024 increased 7.2%, compared to the same period last year, and the average yield on interest-earning assets increased 50 bps.

The average volume of loans increased over the three-month comparison period of 2024 versus 2023 by 13.5%, and the average yield on loans increased 49 bps.

Loans accounted for 81.3% of the average interest-earning asset portfolio for the three-month period ended March 31, 2024, compared to 76.8% for the same period last year.

Interest earned on the loan portfolio as a percentage of total interest income was 90.8% for the three-month period in 2024 compared to 86.9% for the same period in 2023.

The average volume of the taxable investment portfolio (classified as AFS) decreased 3.5% during the three-month period ended March 31, 2024, compared to the same period last year, while the average yield increased 12 bps between periods.

There were no purchases of taxable AFS investment securities during the first three months of 2024, accounting for the decrease year over year.

The average volume of the tax-exempt investment portfolio (classified as AFS) for the three-month period ended March 31, 2024 decreased $1.1 million and the tax equivalent yield decreased 11 bps.

There were no tax-exempt bond purchases during the first three months of 2024, accounting for the decrease in this portfolio.

The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing account at the FRBB, decreased 78.8% for the three-months ended March 31, 2024, compared to the same period in 2023.

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 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 average yield on these funds increased 97 bps for the three-month period ended March 31, 2024, versus the same period in 2023, 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-month period ended March 31, 2024 increased 10.1%, compared to the same period in 2023, and the average rate paid on interest-bearing liabilities increased 98 bps.

The average volume of interest-bearing transaction accounts increased 2.9%, for the three-month period ended March 31, 2024, compared to the same period of 2023, reflecting deposit growth year over year.

The average rate paid on these accounts increased 51 bps between comparison periods.

Interest paid on these funds accounted for 30.4% of total interest expense for the three-month period of 2024 compared to 42.9% for the same period in 2023.

The average volume of money market accounts decreased 10.6% for the three-month period ended March 31, 2024, compared to the same period of 2023, while the average rate paid on these deposits increased 55 bps.

The average volume of savings accounts decreased 11.9% for the three-month period ended March 31, 2024, compared to the same period in 2023, while the average rate paid on these accounts increased one bp.

The average volume of time deposits increased 27.9% for the three-month period ended March 31, 2024, compared to the same period in 2023, and the average rate paid increased 190 bps.

The Company has utilized borrowed funds to fund loan growth and cover deposit outflows, particularly during the second and third quarters of 2023, and continuing into 2024, accounting for the $76.0 million increase for the three months ended March 31, 2024, compared to the same period in 2023.

The average rate paid on borrowed funds increased by 385 bps for the three-month period ended March 31, 2024.

The average volume of repurchase agreements decreased 7.5% for the three-month period ended March 31, 2024, compared to the same period in 2023 and the average rate paid increased 91 bps between comparison periods.

In summary, between the three-month periods ended March 31, 2024 and 2023, the average yield on interest-earning assets increased 50 bps, and the average rate paid on interest-bearing liabilities increased 98 bps.

Net interest spread decreased 48 bps for the three-month period ended March 31, 2024, versus the same period in 2023, while the net interest margin decreased 30 bps between periods.

The following table summarizes the variances in interest income and interest expense on a fully tax-equivalent basis for the interim periods presented for 2024 and 2023 resulting from volume changes in daily average assets and daily average liabilities and fluctuations in average rates earned and paid.

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31, 2024

Three Months Ended March 31, 2023

Three Months Ended March 31, 2022

Average Interest-Earning Assets

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Time deposits

Borrowed funds

Repurchase agreements

Borrowed funds

Finance lease obligations

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Three Months Ended

Nine Months Ended

September 30,

Income from sold loans

1 unchanged sentence

Income from CFS Partners

Exchange income

VISA card commission

Other miscellaneous income

Total non-interest income

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.

Total non-interest income decreased $124,870, or 7.1%, for the three months ended March 31, 2024, compared to the same period in 2023, with significant changes noted in the following:

Service fees include interchange income and overdraft fees;

the change in the comparison period is due to an increase in overdraft fees of $21,853.

Proceeds from sale of loans into the secondary market amounted to $690 thousand and $1.6 million, respectively for the first three months of 2024 and 2023, accounting for the decrease in income from sold loans between periods.

Although loan volume increased during the first three months of 2024, a complex CRE project closed during the first three months of 2023 generating approximately $126 thousand in documentation fees, accounting for the decrease in other income from loans for 2024 versus 2023.

Income from CFS Partners increased between periods due in part to an equity market rally during the first quarter of 2024 and successful retention 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 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.

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 year over year.

Other miscellaneous income is made up of many individual line items that in the aggregate represent less than 7% of total non-interest income.

Non-interest Expense

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

Salaries and wages

2 unchanged sentences

Other expenses

Outsourcing expense

Charged-off checks

Service contracts - administrative

Telephone expense

Travel, entertainment and meals expense

1 unchanged sentence

Collection & non-accruing loan expense

Electronic banking expense

Other miscellaneous expenses

Total non-interest expense

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.

Also contributing to the increase was a one-time salary adjustment in November of 2022 of $2,000 to all employees below vice president status that impacted the year over year comparison by $57,500.

Total non-interest expense increased $420,442, or 7.2% for the three months ended March 31, 2024, compared to the same period in 2023, with significant changes noted in the following:

I n addition to normal salary increases, the increase in salaries and wages year over year is attributable to new hires and promotions in the areas of operations and commercial lending during the latter part of 2023.

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 decrease in occupancy expense is partly due to the settlement of a flood insurance claim where the replacement value received exceeded the depreciated value of equipment resulting in a capital gain on equipment.

An increase in check fraud activity resulted in an increase in charged-off checks .

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

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.

The increase in audit fees reflects increased audit services due to additional audit requirements required by FDICIA due to the Company surpassing $1.0 billion asset size.

The Company increased the 2023 monthly accrual for FDIC insurance in anticipation of an increase in the assessment multiplier, as announced by the FDIC in late 2022.

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.

The increase in FDIC insurance is attributable in part to an increase in the assessment multiplier.

Collection & non-accruing loan expenses were higher year over year due to an increase in legal fees associated with a commercial property in the Company’s non-accruing loan portfolio.

The increase in electronic banking expense is attributable to an upgrade of the Company’s electronic banking platform.

APPLICABLE INCOME TAXES

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%.

The provision for income taxes decreased $222,225, or 25.6% for the first three months of 2024 compared to the same period in 2023, which is consistent with the decrease in income before income taxes but is also partially attributable to an increase in tax credits year over year.

Tax credits related to low-income housing limited partnership investments amounted to $174,612 and $80,529 for the first three months of 2024 and 2023, respectively.

The Company’s investment in two new limited partnerships were fully funded by year-end 2023 accounting for the increase in tax credits.

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $149,202 and $67,092 for the first three months of 2024 and 2023, respectively.

These investments provide tax benefits, including tax credits, and are designed to provide a targeted effective annual yield between 5% - 7%.

CHANGES IN FINANCIAL CONDITION

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:

September 30, 2023

March 31, 2024

December 31, 2023

8 unchanged sentences

Overnight borrowings

Short-term advances

Long-term advances

8 unchanged sentences

Savings deposits

(11,663,545 )

Time deposits

Overnight borrowings

Short-term advances

Long-term advances

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.

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 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 $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 the loan portfolio during the first three months of 2024 was attributable to increases of $11.0 million in CRE loans, $7.2 million in commercial & industrial loans, $2.5 million in municipal loans and $1.1 million in residential 1 st lien loans, which were minimally offset by decreases in aggregate totaling $830 thousand in purchased loans, residential Jr.

lien and consumer loans.

The Company has experienced strong loan activity among its commercial customers, but only minimal local-consumer loan activity during the first three months of 2024.

The decrease in the securities AFS portfolio during the first three months of 2024 is attributable to the combined effect of maturities amounting to $3.7 million and principal payments on MBS, ABS and CMO investments totaling $4.4 million and an increase of $1.9 million in unrealized losses arising during the first three months of 2024, which is reflected in OCI.

In management’s view, the size of the AFS securities 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 demand deposit accounts is attributable to a $15.5 million, or 10.1%, decrease in business DDAs.

The decrease in interest-bearing transaction accounts was due to a decrease of $13.8 million, or 34.3%, in municipal deposit accounts, and a decrease of $6.8 million, or 12.9% in the deposit account of the Company’s trust and asset management affiliate, CFSG.

These decreases were partially offset by an increase of $14.7 million, or 16.9%, in ICS reciprocal DDAs.

The moderate decrease in money market funds was driven by a decrease of $11.6 million, or 11.8%, in retail money market funds and offset by an increase in municipal deposits of $1.6 million, or 16.6%, and an increase in reciprocal ICS MMAs of $8.7 million, or 66.0%.

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, including long-term advances, as a supplemental funding source, accounting for the significant increase in these funds.

As a result of the year to date decrease in aggregate deposits, the Company utilized funding lines with the FHLBB and FRB, 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.

Estimated deposits in excess of the FDIC insurance level amounted to $152.1 million as of March 31, 2024 and $217.3 million at December 31, 2023.

The estimated balance of uninsured time deposits as of March 31, 2024 were made up of time CDs of $24.4 million and retirement accounts of $3.1 million.

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

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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.

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All rate scenarios are simulated assuming a parallel shift of the yield curve;

however further simulations are performed utilizing non-parallel changes in the yield curve.

however further simulations are performed utilizing non-parallel changes in the yield curve, including an inverted yield curve.

The results of this sensitivity analysis are compared to the ALCO policy limits which specify a maximum tolerance level for NII exposure over a 1-year horizon, assuming no balance sheet growth, given a 200 bp shift upward and a 100 bp shift downward in interest rates.

Under the Company’s interest rate sensitivity modeling, with the continued asset sensitive balance sheet, in a rising rate environment NII initially trends upward as the short-term asset base (cash and adjustable-rate loans) quickly cycle upward while the retail funding base (deposits) lags the market.

If rates paid on deposits must be increased more and/or more quickly than projected due to competitive pressures, the expected benefit to rising rates would be reduced.

If rates paid on deposits must be increased more and/or more quickly than projected due to competitive pressures, the expected benefit of rising rates would be reduced.

In a falling rate environment, NII is expected to trend slightly downward compared with the current rate environment scenario for the first year of the simulation as asset yield erosion is not fully offset by decreasing funding costs.

Thereafter, net interest income is projected to experience sustained downward pressure as funding costs reach their assumed floors and asset yields continue to reprice into the lower rate environment.

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 September 30, 2023:

Percent Change in NII

The prolonged inverted yield curve and increasing pressure on funding rates has resulted in a more liability sensitive balance sheet in the short term assuming that in a rising rate environment, relief on the deposit pricing may be delayed initially.

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 March 31, 2024:

Change in NII

The estimated amounts shown in the table above are within the ALCO Policy limits.

2 unchanged sentences

While assumptions used in the ALCO process, including the interest rate simulation analyses, are developed based upon current economic and local market conditions, and expected future conditions, the Company cannot provide any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

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 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.

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 factor of 0.26161, plus 2.85%.

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

The Company has not generally utilized LIBOR as an interest rate benchmark for its variable rate commercial, residential or other loans and has not utilized derivatives or other financial instruments tied to LIBOR for hedging or investment purposes.

Accordingly, the Company’s exposure to the phase out of LIBOR is limited to the effect on the interest rate paid on its Debentures.

As of March 31, 2024, the Company had outstanding $12,887,000 in principal amount of Junior Subordinated Debentures due December 15, 2037, which bear interest at a quarterly floating rate equal to 3-month CME SOFR, as adjusted by a spread adjustment factor of 0.26161, plus 2.85%.

Credit Risk - As a financial institution, one of the primary risks the Company manages is credit risk, the risk of loss stemming from borrowers’ failure to repay loans or inability to meet other contractual obligations.

4 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 28.3% of the Company’s loan balances at September 30, 2023, compared to 31.1% at December 31, 2022.

Residential mortgage loans represented 27.9% of the Company’s loan balances as of March 31, 2024, compared to 28.5% as of December 31, 2023.

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 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%.

As of March 31, 2024, 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 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.

The following tables show the estimated maturity of the Company’s loan portfolio as of March 31, 2024.

Fixed Rate Loans

Commercial & industrial

Commercial real estate

Residential real estate - 1st lien

Residential real estate - Jr lien

$ 242,364,875

Variable Rate Loans

Commercial & industrial

Commercial real estate

Residential real estate - 1st lien

Residential real estate - Jr lien

$ 159,079,533

$ 389,543,000

$ 623,987,486

The Company continues to experience solid growth in the commercial & industrial and CRE loan portfolios, which is consistent with its strategic focus on commercial lending.

The commercial lending portfolio consists of commercial & industrial, purchased, CRE and municipal loans, which collectively comprised 71.8% of the Company’s loan portfolio as of March 31, 2024, compared to 71.2% as of December 31, 2023.

The largest components of the CRE portfolio were $119.7 million in owner-occupied CRE and $156.3 million in non-owner occupied CRE as of March 31, 2024.

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 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.

As of March 31, 2024, the Company had $26.6 million in guaranteed loans with guaranteed balances of $17.6 million, compared to $26.5 million in guaranteed loans with guaranteed balances of $17.6 million as of December 31, 2023.

PPP loans with outstanding balances of $74 thousand as of March 31, 2024, and $84 thousand as of December 31, 2023, 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.

6 unchanged sentences

Interest payments received on non-accrual or impaired loans are generally applied as a reduction of the loan book balance.

Provision for Credit Losses

The provision for credit losses was made up of the following components for the periods indicated:

Credit loss expense

The credit loss expense was made up of the following components for the periods indicated:

Three Months Ended

September 30,

Provision for credit losses on loans

Provision for credit losses on OBS credit exposure

Provision for credit 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.

Credit loss expense - loans

Credit loss (reversal) expense - OBS credit exposure

Credit loss expense

The increase in the credit loss expense on loans for the three months ended March 31, 2024, was partly attributed to an increase in the volume of the loan portfolio.

The decrease in the OBS credit exposure is attributable to a decrease in unfunded loan commitments under contract.

ACL and provisions – Effective January 1, 2023, the Company was required to recognize credit losses under the guidance of ASU No.

2016-13, Financial Instruments—Credit Losses (Topic 326):

1 unchanged sentence

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, which affects calculation of regulatory capital ratios.

The adjustment from the adoption of CECL in 2023 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.

6 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 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.

Management believes the reserve balance continues to be directionally consistent with the overall risk profile of the Company’s loan portfolio and credit risk appetite.

The first quarter ACL analysis indicated that the reserve balance of $10.0 million as of March 31, 2024, is sufficient to cover expected credit losses that are probable and estimable as of the measurement date.

Included in the ACL calculation for March 31, 2024, is a decrease to the qualitative factor adjustment for delinquencies and non-performing loans due to improving delinquency trends in the CRE pool of loans as well as a decrease to the qualitative factor adjustment for collateral within the residential pool of loans, reflecting stable real estate values.

Management believes that the economic forecasts adequately quantify the risk in these areas, and that the reserve balance continues to be directionally consistent with the overall risk profile of the Company’s loan portfolio and credit risk appetite.

While the ACL is described as consisting of separate allocated portions, the entire ACL is available to support loan losses, regardless of category.

The adequacy of the ACL is presented to the full Board for approval quarterly.

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

For the Nine Months Ended September 30,

Management’s assessment of the adequacy of the ACL is presented to the full Board for approval quarterly.

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

For the Three Months Ended March 31,

Commercial & industrial

6 unchanged sentences

Commercial real estate

Net recoveries (charge-offs) during the period

Net recoveries during the period

Average amount outstanding

13 unchanged sentences

Average amount outstanding

Net charge-offs during the period

Net (charge-offs) recoveries during the period

Average amount outstanding

11 unchanged sentences

COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET ARRANGEMENTS

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.

The Company is a party to financial instruments with OBS risk in the normal course of business to meet the financing needs of its customers.

These financial instruments include commitments to extend credit, standby letters of credit and risk-sharing commitments on certain sold loans.

1 unchanged sentence

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

During the first three months of 2024, the Company did not engage in any activity that created any additional types of OBS 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.

1 unchanged sentence

The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over the estimated lives of such commitments.

Upon adoption of ASU 2016-13, the Company recorded an adjustment to retained earnings of $451,704 to reflect an allowance for credit losses for unfunded commitments.

Upon adoption of ASU 2016-13 in 2023, the Company recorded an adjustment to retained earnings of $451,704 to reflect an allowance for credit losses for unfunded commitments.

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

There was a decrease of $4,220 and an increase of $78,986, respectively, to the allowance for credit losses for OBS credit exposures during the three months ended March 31, 2024 and 2023.

LIQUIDITY AND CAPITAL RESOURCES

8 unchanged sentences

The Company recognizes that, at times, when loan demand exceeds deposit growth or the Company has other liquidity demands, it may be desirable to utilize alternative sources of deposit funding to augment retail deposits and borrowings.

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

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

One-way deposits acquired through the CDARS and/or ICS programs provide an alternative funding source when needed.

As of March 31, 2024, and December 31, 2023, the Company had no one-way CDARS or ICS deposits 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 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.

As of March 31, 2024 and December 31, 2023, the Company reported $2.7 million and $2.4 million, respectively, in reciprocal CDARS deposits.

The balance in ICS reciprocal money market deposits was $21.9 million as of March 31, 2024, compared to $13.2 million as of December 31, 2023, and the balance in ICS reciprocal demand deposits as of those dates was $101.8 million and $87.1 million, respectively.

As of March 31, 2024 and December 31, 2023, borrowing capacity of $109.8 million and $107.9 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 $32.5 million and $23.1 million, respectively.

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

September 30,

FHLBB Advances (1)

FHLBB term advance, 0.00%, due September 22, 2023

FHLBB Short-Term Advances

FHLBB term advance, 5.06%, due October 29, 2024

FHLBB Long-Term Advances

FHLBB term advance, 0.00%, due November 12, 2025 (1)

FHLBB term advance, 0.00%, due November 13, 2028 (1)

Total FRBB Advances

FHLBB option advance, 3.89%, due February 01, 2027

Total Long-Term Advances

Overnight Borrowings at 5.55%

Total Advances and Overnight Borrowings

Under the JNE program, the FHLBB provides a subsidy, funded by the FHLBB’s earnings, to write down interest rates to zero percent on advances that finance qualifying loans to small businesses.

2 unchanged sentences

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 $59.9 million and $56.1 million, respectively, at September 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 $48.5 million and $49.9 million, respectively, as of March 31, 2024 and December 31, 2023.

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 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.

The Company had no outstanding advances through this facility as of March 31, 2024 or December 31, 2023.

The Company had additional potential borrowing capacity, subject to pledging of required collateral consisting of eligible U.S.

Agency and U.S.

Government Securities, under the FRB’s BTFP which was established in March 2023 to provide banks with an additional source of liquidity.

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

September 30,

FRBB Advances

However, that facility ceased extending new loans on March 11, 2024.

The Company’s advances under the BTFP as of the balance sheet dates presented were as follows:

FRB BTFP Advances

FRB BTFP term advance, 4.92%, due April 26, 2024

1 unchanged sentence

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

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

FRB BTFP term advance, 4.93%, due December 16, 2024

FRB BTFP term advance, 4.76%, due January 16, 2025

FRB BTFP term advance, 4.83%, due January 17, 2025

Total BTFP Advances

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.

As of March 31, 2024 and December 31, 2023 the Company had an unsecured line of credit with one correspondent bank of $12.5 million.

The Company had no outstanding advances against this credit line 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 September 30, 2023:

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

Cumulative change in accounting principle (Note 2)

The following table illustrates the changes in shareholders' equity from December 31, 2023 to March 31, 2024:

Balance as of December 31, 2023 (book value $15.87 per common share)

Issuance of common stock through the DRIP

2 unchanged sentences

Change in AOCI on AFS securities, net of tax

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

Balance as of March 31, 2024 (book value $15.88 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 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.

As of March 31, 2024, 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 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)

September 30, 2023

Common equity tier 1 capital

(to risk-weighted assets)

March 31, 2024

Common equity tier 1 capital (to risk-weighted assets)

Tier 1 capital (to risk-weighted assets)

2 unchanged sentences

December 31, 2023:

Common equity tier 1 capital

(to risk-weighted assets)

Common equity tier 1 capital (to risk-weighted assets)

Tier 1 capital (to risk-weighted assets)

10 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