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Item 2. Management’s Discussion and Analysis

2024-08-14 compared with 2024-05-15 · 225 added, 144 removed, 426 unchanged (46% of the section changed)

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Period Ended March 31, 2024

Period Ended June 30, 2024

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

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.

and its wholly owned subsidiary, Community National Bank, as of June 30, 2024 and December 31, 2023, and its consolidated results of operations for the three-month and six-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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changes in laws or government rules, including the rules of the federal Consumer Financial Protection Bureau, or the way in which courts or government agencies interpret or implement those laws or rules, increase our costs of doing business, causing us to limit or change our product offerings or pricing, or otherwise adversely affect the Company’s business;

regulatory responses to recent high profile bank failures increase our costs of operation, including through regulatory compliance changes and higher FDIC deposit insurance assessments to replenish the Bank Insurance Fund (BIF);

competitive pressures increase among financial service providers in the Company's northern New England market area or in the financial services industry generally, including competitive pressures from non-bank financial service providers, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems;

cybersecurity risks could adversely affect the Company’s business, financial performance or reputation and could result in financial liability for losses incurred by customers or others due to data breaches or other compromise of the Company’s information security systems;

regulatory responses to high profile bank failures increase our costs of operation, including through regulatory compliance changes and higher FDIC deposit insurance assessments to replenish the Bank Insurance Fund (BIF);

competitive pressures increase among financial service providers in the Company’s northern New England market area or in the financial services industry generally, including competitive pressures from non-bank lenders, payment systems and other financial service providers, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems;

cybersecurity risks, including risks to our vendors, could adversely affect the Company’s business, financial performance or reputation and could result in financial liability for losses incurred by customers or others due to data breaches or other compromise of the Company’s information security systems;

higher-than-expected costs are incurred relating to information technology or difficulties arise in implementing technological enhancements;

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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 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.

The Company’s consolidated assets as of June 30, 2024, were $1.10 billion compared to just under $1.10 billion as of December 31, 2023, a slight increase of 0.1%.

Changes in the asset base included an increase in loans of $16.7 million, or 2.0%, which was offset by a decrease of $16.4 million, or 8.6%, in investment securities.

The increase in the loan portfolio was primarily attributable to an increase of $8.1 million in commercial & industrial loans, $26.9 million in CRE loans and $3.2 million in residential first lien loans, which was partially offset by a decrease of $20.4 million in municipal loans and $1.4 million in purchased loans.

The decrease in the investment portfolio was due in part to maturities in the U.S.

Government securities portfolio, paydowns in the MBS and CMO portfolios and an increase in the unrealized loss position of the investment portfolio due to prevailing interest rates.

In addition, cash flows from the investment portfolio were used primarily to fund loan growth and other liquidity needs, rather than to purchase new investment securities.

Total deposits as of June 30, 2024, were $848.7 million compared to $897.0 million as of December 31, 2023, a decrease of $48.2 million, or 5.4%.

Year to date, demand and interest-bearing transaction accounts decreased in total by $68.7 million or 13.8%, money market funds decreased $7.2 million, or 5.9%, and savings accounts decreased $5.8 million, or 3.8%.

This was partially offset by an increase of $33.5 million, or 27.0%, in time deposits.

The Company has been offering 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, and accessing the brokered deposit market, 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 $2.1 million, or 19.4%, for the first three months of 2024, compared to the same period in 2023.

Total interest income increased approximately $2.0 million, or 17.7%, for the second quarter of 2024, compared to the same quarter in 2023, and $4.1 million, or 18.5%, for the first six 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 credit loss expense for the three months ended March 31, 2024 and 2023, was determined under ASU No.

Total interest expense increased $2.2 million, or 73.0%, for the second quarter of 2024, compared to the same quarter of 2023 and increased $4.4 million, or 84.8%, for the first six months of 2024, compared to the same period in 2023.

The higher rate environment has increased borrowing costs and put more pressure on competitive deposit pricing, resulting in an increase in the rates paid on the Company’s money market and time deposit accounts.

The credit loss expense for the six months ended June 30, 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 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.

The credit loss expense for the second quarter of 2024 was $331,582 compared to $281,142 for the same quarter of 2023 and $645,161 for the first six months of 2024 compared to $567,668 for the same period in 2023, resulting in increases of $50,440, or 17.9%, and $77,493, or 13.7%, respectively, between periods.

The current period credit loss expense considers a number of factors, including loan growth and changes in balances of the loan categories within 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.

Consolidated net income for the second quarter of 2024 decreased $468,153 to $2.7 million compared to $3.2 million for the same quarter of 2023, and for the first six months of 2024 consolidated net income decreased $984,014 to $5.6 million compared to $6.5 million for the same period of 2023.

Year over year, the $4.4 million increase in interest expense, despite a $4.1 million increase in interest income, was a contributing factor to the decrease in net income, along with a $828 thousand increase in non-interest expense as well as a $191 thousand decrease in non-interest 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 $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.

Equity capital increased to $91.3 million, with a book value per share of $16.17 as of June 30, 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 net income of $5.6 million for the first six months of 2024, offset in part by an increase in unrealized losses in the investment portfolio of $1.3 million, net of tax, reflected in accumulated other comprehensive loss, and dividends paid totaling $2.5 million.

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.

During the month of July sections of northern Vermont were hit with catastrophic flash flooding following heavy rainfall from two separate storms, leading to significant road washouts and flooding homes and businesses.

The portion of the Company’s service area most impacted was Lamoille, Caledonia, Essex and Orleans counties.

None of the Company’s branches sustained any flood damage.

The impact to the Bank’s customers appears to be manageable.

On June 12, 2024, the Company’s Board of Directors declared a quarterly cash dividend of $0.23 per common share, payable on August 1, 2024, to shareholders of record on July 15, 2024.

As of June 30, 2024, all the Company’s capital ratios, and those of our subsidiary Bank, were in excess of applicable regulatory requirements.

On July 23, 2024, the Company announced the adoption of a stock repurchase program for the repurchase of up to 275,000 shares of the Company’s common stock, representing approximately 5% of the outstanding common shares.

Purchases under the program may be on such terms, including price, as market conditions warrant, and may be made through open market purchases or in privately negotiated transactions.

The repurchase authorization will expire in five years, unless extended, or earlier terminated, by the Board.

CRITICAL ACCOUNTING POLICIES

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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.

There were no material changes during the first three months of 2024 in the Company’s critical accounting policies.

There were no material changes during the first six 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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The Company estimates expected credit losses on OBS credit exposures over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company.

The ACL on OBS credit exposures is adjusted through credit loss expense.

The ACL on OBS credit exposures is recorded as a liability on the balance sheet within Accrued interest and other liabilities, with adjustments made through credit loss expense.

A modified version of these requirements applies to debt securities classified as available-for-sale, which eliminates OTTI impairment analysis and requires that if a decline in the fair value of debt securities AFS is deemed by management to be the result of credit losses rather than other factors, the credit losses on those securities is recorded through an allowance for credit losses rather than a write-down of the security.

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RESULTS OF OPERATIONS

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.

The Company’s net income for the second quarter of 2024 was $2.7 million, or $0.49 per common share, compared to $3.2 million, or $0.58 per common share for the same quarter of 2023, and for the first six months of 2024 was $5.6 million, or $0.99 per common share, compared to $6.5 million, or $1.19 per common share, for the same period in 2023.

Core earnings (NII) were $8.1 million for the second quarter of 2024 compared to $8.3 million for the same period of 2023, and $16.5 million for the first six months of 2024 compared to $16.8 million for the same period in 2023.

Interest and fees on loans, the major component of interest income, increased $2.1 million, or 20.5% for the second quarter of 2024 compared to the same quarter of 2023, and $4.4 million, or 22.5%, for the first six months of 2024 compared to the same period in 2023.

Interest paid on deposits, which is the major component of total interest expense, increased $1.1 million, or 51.1% for the second quarter of 2024 compared to the same quarter of 2023 and increased $2.4 million, or 58.3%, 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.

Interest on borrowed funds increased $1.0 million, or 404.8% for the second quarter of 2024 compared to the same period in 2023 and increased $1.9 million, or 701.6%, for the first six months of 2024 compared to the same period in 2023.

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 and net interest spread.

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

Three Months Ended March 31,

Three Months Ended June 30,

Return on average assets

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Average equity to average assets

Six Months Ended June 30,

Return on average assets

Return on average equity

Dividend payout ratio (1)

Average equity to average assets

Dividends declared per common share divided by earnings per common share.

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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 $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 Company’s tax-exempt interest income of $617,843 and $300,389 for the three months ended June 30, 2024 and 2023, respectively, and $1.2 million and $592,343 for the six months ended June 30, 2024 and 2023, respectively, was derived from loans to local municipalities of $34.1 million and $27.7 million, and tax-exempt municipal investments of $10.3 million and $11.4 million as of June 30, 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,

Three Months Ended June 30,

Net interest income as presented

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Net interest income, tax equivalent

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.

Six Months Ended June 30,

Net interest income as presented

Effect of tax-exempt income

Net interest income, tax equivalent

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 periods.

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 March 31,

Three Months Ended June 30,

Average Assets

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$ 1,049,160,314

$ 966,153,183

Cash and due from banks

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Total interest-bearing liabilities

$ 835,132,143

$ 740,177,596

Noninterest bearing deposits

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Net interest margin (4)

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.

Included in net loans are non-accrual loans with average balances of $6,377,110 and $8,055,008 for the three months ended June 30, 2024 and 2023, 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 $58,625,102 and $35,117,182 for the three months ended June 30, 2024 and 2023, respectively.

Included in other investments is the Company’s FHLBB Stock with average balances of $2,114,103 and $815,824 for the three months ended June 30, 2024 and 2023, respectively, with a dividend rate of approximately 8.4% and 7.55%, 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.

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.

Six Months Ended June 30,

Average Assets

Loans, net (1)

$ 855,916,469

$ 754,033,422

Taxable investment securities

Tax-exempt investment securities

Sweep and interest-earning accounts

Other investments (2)

Total interest-earning assets

1,045,263,074

$ 968,967,041

Cash and due from banks

Premises and equipment

$ 1,106,753,221

$ 1,028,569,914

Average Liabilities and Shareholders’ Equity

Interest-bearing transaction accounts

$ 278,669,658

$ 275,463,700

Money market funds

Savings deposits

Time deposits

Repurchase agreements

Borrowed funds

Finance lease obligations

Junior subordinated debentures

Total interest-bearing liabilities

Noninterest bearing deposits

Other liabilities

Total liabilities

1,017,473,067

Shareholders’ equity

Total liabilities and shareholders’ equity

$ 1,106,753,221

$ 1,028,569,914

Net interest income

Net interest spread (3)

Net interest margin (4)

Included in net loans are non-accrual loans with average balances of $6,450,580 and $8,137,701 for the six months ended June 30, 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 $57,613,672 and $35,147,221 for the six months ended June 30, 2024 and 2023, respectively.

Included in other investments is the Company’s FHLBB Stock with average balances of $1,649,582 and $764,860, respectively, with a dividend rate of approximately 8.4% and 6.67%, respectively, for the six months ended June 30, 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 six-month periods ended June 30, 2024 increased 8.6% and 7.9%, respectively, compared to the same periods last year, and the average yield on interest-earning assets increased 43 bps and 46 bps, respectively.

The average volume of loans increased over the three- and six-month comparison periods of 2024 versus 2023 by 13.6% and 13.5%, respectively, and the average yield on loans increased 38 bps and 42 bps, respectively.

Loans accounted for 82.4% and 81.9% of the average interest-earning asset portfolio for the three- and six-month periods ended June 30, 2024, compared to 78.8% and 77.8%, respectively, for the same periods last year.

Interest earned on the loan portfolio as a percentage of total interest income was 91.4% and 91.1%, respectively, for the three- and six-month periods in 2024 compared to 89.2% and 88.1%, respectively, for the same periods in 2023.

The average volume of the taxable investment portfolio (classified as AFS) decreased 6.7% and 5.1%, respectively, during the three- and six-month periods ended June 30, 2024, compared to the same periods last year, while the average yield increased 16 bps and 14 bps, respectively, between periods.

There were no purchases of taxable AFS investment securities during the first six months of 2024, accounting for the decrease in average volume 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, 2024 decreased 0.7% in both periods, and the tax equivalent yield increased one bps and decreased five bps, respectively.

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

The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing account at the FRBB, decreased 65.6% and 74.9%, respectively, for the three- and six-months ended June 30, 2024, compared to the same periods 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 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 average yield on these funds increased 44 bps and 78 bps, respectively, for the three- and six-month periods ended June 30, 2024, versus the same periods 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- and six-month periods ended June 30, 2024 increased 12.8% and 11.5%, respectively, compared to the same periods in 2023, and the average rate paid on interest-bearing liabilities increased 85 bps and 92 bps, respectively.

The average volume of interest-bearing transaction accounts decreased 0.6% and increased 1.2%, respectively, for the three- and six-month periods ended June 30, 2024, compared to the same periods of 2023, reflecting moderate growth year over year.

The average rate paid on these accounts increased 15 bps and 33 bps, respectively, between comparison periods.

Interest-bearing transaction accounts comprised 32.3% and 33.7% of the average interest-bearing liabilities portfolio for the three- and six-month periods ended June 30, 2024, compared to 36.6% and 37.1%, respectively, for the same periods last year.

Interest paid on these funds accounted for 24.9% and 27.5%, respectively, of total interest expense for the three- and six-month periods of 2024 compared to 39.8% and 41.2%, respectively, for the same periods in 2023.

The average volume of money market accounts increased 3.3% and decreased 4.0%, respectively, for the three- and six-month periods ended June 30, 2024, compared to the same periods in 2023, while the average rate paid on these deposits increased 75 bps and 66 bps, respectively.

The average volume of savings accounts decreased 12.7% and 12.3%, respectively, for the three- and six-month periods ended June 30, 2024, compared to the same periods in 2023, while the average rate paid on these accounts increased one bp in both comparison periods.

The average volume of time deposits increased 36.4% and 32.2%, respectively, for the three- and six-month periods ended June 30, 2024, compared to the same periods in 2023, and the average rate paid increased 167 bps and 179 bps, respectively.

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 increases of $83.1 million and $79.5 million, respectively, for the three- and six-month periods ended June 30, 2024, compared to the same periods in 2023.

The average rate paid on borrowed funds increased by 33 bps and 56 bps, respectively, for the three- and six-month periods ended June 30, 2024, compared to the same periods in 2023.

The average volume of repurchase agreements decreased 20.6% and 14.1%, respectively, for the three- and six-month periods ended June 30, 2024, compared to the same periods in 2023, while the average rate paid increased 11 bps and 50 bps, respectively, between comparison periods.

In summary, between the three- and six-month periods ended June 30, 2024 and 2023, the average yield on interest-earning assets increased 43 bps and 46 bps, respectively, and the average rate paid on interest-bearing liabilities increased 85 bps and 92 bps, respectively.

Net interest spread decreased 42 bps and 46 bps, respectively, for the three- and six-month periods ended June 30, 2024 versus the same periods in 2023, and the net interest margin decreased 30 bps in both comparison 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 March 31, 2024

Three Months Ended March 31, 2023

Three Months Ended March 31, 2022

Three Months Ended June 30, 2024

Six Months Ended June 30, 2024

Three Months Ended June 30, 2023

Six Months Ended June 30, 2023

Average Interest-Earning Assets

23 unchanged sentences

Three Months Ended

Six Months Ended

Income from sold loans

3 unchanged sentences

Total non-interest income

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.

Total non-interest income decreased $66,014, or 3.6% and $190,885, or 5.3%, respectively, for the three and six months ended June 30, 2024, compared to the same periods in 2023, with significant changes noted in the following:

Proceeds from sale of loans into the secondary market amounted to $2.0 million and $2.9 million, respectively for the first six months of 2024 and 2023, accounting for the decrease in income from sold loans between periods.

Although loan volume increased during the first six months of 2024, a complex CRE project closed during the first three months of 2023 generating approximately $126 thousand in documentation fees, accounting for some of 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 six months 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.

3 unchanged sentences

Three Months Ended

Six Months Ended

Salaries and wages

4 unchanged sentences

Service contracts - administrative

Travel, entertainment and meals expense

FDIC insurance

3 unchanged sentences

Total non-interest expense

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.

Total non-interest expense increased $407,648, or 7.0% and $828,090, or 7.1%, respectively, for the three and six months ended June 30, 2024, compared to the same periods in 2023, with significant changes noted in the following:

The increases in salaries and wages during the three and six month periods of 2024 reflect normal salary increases and new hires and promotions in the areas of operations and commercial lending in the latter part of 2023, although the amounts and percentages of such increases were moderated by the effect of several unfilled positions during the first half of 2024.

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 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.

The decrease in occupancy expense is due to a combination of lower building maintenance costs as more repairs are done by staff rather than relying on outside vendors, and the settlement of a flood insurance claim received in the first quarter of 2024 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 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.

Collection & non-accruing loan expenses were higher year over year due primarily to an increase in legal fees and insurance expenses 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.

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

APPLICABLE INCOME TAXES

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 provision for income taxes decreased $223,519, or 29.2% for the second quarter of 2024 and $445,744, or 28.9% for the first six months of 2024 compared to the same periods in 2023, which is consistent with the decrease in income before income taxes but is also partially attributable to an increase in tax-exempt income associated with municipal loans and investments and 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 second quarter of 2024 and 2023, respectively, and $349,224 and $161,058, respectively for the first six months of 2024 and 2023.

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%.

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $149,202 and $67,128 for the second quarter of 2024 and 2023, respectively and $298,404 and 134,256, respectively, for the first six months of 2024 and 2023.

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

March 31, 2024

June 30, 2024

December 31, 2023

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Interest-bearing transaction accounts

(25,713,467 )

Money market funds

4 unchanged sentences

Long-term advances

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.

The increase in the loan portfolio during the first six months of 2024 was primarily attributable to increases in CRE loans and commercial & industrial loans, which was partially offset by a decrease in the municipal loan portfolio.

The decrease in the municipal loan portfolio is cyclical during the second quarter as municipalities pay off current borrowings prior to their June 30 fiscal year end and renew in July based on projected income and expenses for the upcoming fiscal year.

The Company competes with area financial institutions for these municipal funds and was pleased to increase its municipal loan portfolio and associated deposits by approximately $27.3 million following the June 30, 2024 quarter end, through renewals as well as the creation of new municipal relationships.

The decrease in the securities AFS portfolio at June 30, 2024 is attributable to the combined effect during the first six months of the year of maturities amounting to $6.7 million and principal payments on MBS, ABS and CMO investments totaling $7.8 million and an increase of $1.7 million in unrealized losses, 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 $24.2 million, or 15.9%, 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.

The decrease in interest-bearing transaction accounts was primarily due to a decrease of $17.8 million, or 44.5%, in municipal deposit accounts, and a decrease of $11.2 million, or 21.5% in the deposit account of the Company’s trust and asset management affiliate, CFSG.

These decreases were partially offset by an increase of $7.9 million, or 9.0%, 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 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.

The decrease in money market funds was driven by a decrease of $12.0 million, or 12.2%, in retail money market funds and a decrease in municipal deposits of $4.7 million, or 49.0%, which was partially offset by an increase in reciprocal ICS MMAs of $9.5 million, or 72.2%.

The increase in time deposits is attributable to customer response to periodic certificate of deposit specials that have been offered as well as an increase in brokered deposits, as the Company looks to alternate sources of funding to support loan growth.

As a result of the year to date decrease in aggregate deposits, in addition to utilizing brokered 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

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.

Estimated deposits in excess of the FDIC insurance level amounted to $133.6 million as of June 30, 2024 and $217.3 million at December 31, 2023.

The estimated balance of uninsured time deposits as of June 30, 2024 were made up of time CDs of $28.3 million and retirement accounts of $2.9 million.

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

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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.

Under the Company’s interest rate sensitivity modeling, 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 of rising rates would be reduced.

1 unchanged sentence

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 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 prolonged inverted yield curve and an increased need for higher cost funding has resulted in a more liability sensitive balance sheet because in the rising rate environment there may be an initial delay in relief from deposit pricing.

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, 2024:

Percent 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 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%.

As of June 30, 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%.

The quarterly floating rate in effect on the debentures was 8.496% for the March 2024 payment and 8.441% for the June 2024 payment.

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

Residential mortgage loans represented 28.3% of the Company’s loan balances as of June 30, 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 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%.

As of June 30, 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.

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

The following tables show the estimated maturity of the Company’s loan portfolio as of June 30, 2024.

Fixed Rate Loans

13 unchanged sentences

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.

The commercial lending portfolio consists of commercial & industrial, purchased, CRE and municipal loans, which collectively comprised 71.3% of the Company’s loan portfolio as of June 30, 2024, compared to 71.2% as of December 31, 2023.

As of June 30, 2024, the largest components of the CRE portfolio were $122.9 million in owner-occupied CRE and $156.5 million in non-owner occupied CRE.

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.

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.

As of June 30, 2024, the Company had $26.4 million in guaranteed loans with guaranteed balances of $17.5 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 $64 thousand as of June 30, 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.

10 unchanged sentences

Credit loss expense - loans

Credit loss (reversal) expense - OBS credit exposure

Credit loss reversal - 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.

Six Months Ended

Credit loss expense - loans

Credit loss reversal - OBS credit exposure

Credit loss expense

The decrease in the credit loss expense on loans for the three months ended June 30, 2024 compared to the same period in 2023, was due to $350,000 in write down adjustments on two commercial loans in the second quarter of 2023.

The decreases in the OBS credit exposure during both the three-month comparison periods are attributable to fluctuations in utilization of lines of credits.

The increase in the credit loss expense on loans between the six month comparison periods was partly attributed to an increase in the volume of the loan portfolio and the decreases in the OBS credit exposure for the same periods are 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.

1 unchanged sentence

Measurement of Credit Losses on Financial Instruments, rather than under the incurred loss model.

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 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.

The 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 in 2023 amounted to $549,113, net of tax and was recorded as an adjustment to retained earnings, which affected 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 Company’s ACL policy 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 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.

Although the Company, in establishing the ACL, considers the expected 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.

No part of the ACL is segregated to absorb losses from any loan or segment of loans.

12 unchanged sentences

Non-accruing loans

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.

The second quarter ACL analysis indicated that the reserve balance of $10.3 million as of June 30, 2024, 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, 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.

These adjustments to qualitative factors were applied in the first quarter of 2024;

no further adjustments were made to qualitative factors in the second quarter of 2024.

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

1 unchanged sentence

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

For the Three Months Ended March 31,

For the Six Months Ended June 30,

Commercial & industrial

6 unchanged sentences

Commercial real estate

Net recoveries during the period

Net (charge-offs) recoveries during the period

Average amount outstanding

13 unchanged sentences

Average amount outstanding

Net (charge-offs) recoveries during the period

Net charge-offs during the period

Average amount outstanding

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

During the first six 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.

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 $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.

There were decreases of $20,339 and $96,858, respectively, to the allowance for credit losses for OBS credit exposures during the three months ended June 30, 2024 and 2023, and decreases of $24,560 and $17,872, respectively, during the six months ended June 30, 2024 and 2023.

LIQUIDITY AND CAPITAL RESOURCES

7 unchanged sentences

The Company’s strategy is to fund assets to the maximum extent possible with core deposits that provide a sizable source of relatively stable and lower-cost funds.

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.

The Company recognizes that, at times, when loan demand exceeds deposit growth or the Company has other liquidity demands, or when the Company experiences deposit outflows;

it may be desirable to utilize alternative sources of deposit funding to augment retail deposits and borrowings.

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.

As of June 30, 2024, and December 31, 2023, the Company had $1.5 million and $0, respectively, in one-way CDARS deposits, but no one-way ICS deposits outstanding in either period.

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.

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.

As of June 30, 2024 and December 31, 2023, the Company reported $2.5 million and $2.4 million, respectively, in reciprocal CDARS deposits.

The balance in ICS reciprocal money market deposits was $22.8 million as of June 30, 2024, compared to $13.2 million as of December 31, 2023, and the balance in ICS reciprocal demand deposits as of those dates was $95.0 million and $87.1 million, respectively.

As of June 30, 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 $27.8 million and $23.1 million, respectively.

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

4 unchanged sentences

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

FHLBB option advance, 4.54%, due May 15, 2026

FHLBB option advance, 4.74%, due May 26, 2026

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

FHLBB option advance, 4.27%, due June 07, 2027

Total Long-Term Advances

3 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 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 $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 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.

The Company utilized borrowing capacity during 2023 and the first quarter of 2024 under the BFTP, a temporary loan facility established by the FRB in March 2023 to provide additional liquidity to financial institutions in the wake of a number of high profile bank failures.

The Company’s BFTP borrowings are collateralized by 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.

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:

Government Securities, valued at par.

The BFTP ceased extending new loans on March 11, 2024.

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

FRB BTFP Advances

6 unchanged sentences

Total BTFP Advances

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.

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 $41.4 million and $49.9 million, respectively, as of June 30, 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 550 bps.

The Company had no outstanding advances through this facility as of June 30, 2024 or December 31, 2023.

As of June 30, 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.

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, 2023 to March 31, 2024:

The following table illustrates the changes in shareholders’ equity from December 31, 2023 to June 30, 2024:

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

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Change in AOCI on AFS securities, net of tax

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.

To that end, management monitors capital retention and dividend policies on an ongoing basis.

Balance as of June 30, 2024 (book value $16.17 per common share)

To that end, management strives to deploy capital efficiently and monitors capital retention and dividend policies on an ongoing basis.

Consistent with these capital planning considerations, on July 23, 2024, the Company announced the adoption of a stock repurchase program for the repurchase of up to 275,000 shares of the Company’s common stock, representing approximately 5% of the outstanding common shares.

Purchases under the program may be on such terms, including price, as market conditions warrant, and may be made through open market purchases or in privately negotiated transactions.

The repurchase authorization will expire in five years, unless extended, or earlier terminated, by the Board.

As described in more detail in Note 22 to the audited consolidated financial statements contained in the Company’s 2023 Annual Report on Form 10-K and under the caption “LIQUIDITY AND CAPITAL RESOURCES” in the MD&A section of that report, the Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies pursuant to which they must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items.

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

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.

As of June 30, 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.

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 balance sheet date:

Adequacy Purposes

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(Dollars in Thousands)

March 31, 2024

June 30, 2024

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

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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