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Item 2. Management’s Discussion and Analysis

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 
 
 MANAGEMENT’S DISCUSSION AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
 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 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. Accordingly, the Company has elected to provide its statements of income, comprehensive income, cash flows and changes in shareholders’ equity for a two-year, rather than a three-year, period and provide certain other smaller reporting company scaled disclosures where management deems it appropriate.
 
 The following discussion should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in its 2023 Annual Report on Form 10-K filed with the SEC. Please refer to Note 1 in the accompanying consolidated financial statements for a listing of acronyms and defined terms used throughout the following discussion.
 
 FORWARD-LOOKING STATEMENTS 
 
 This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the results of operations, financial condition and business of the Company and its subsidiary. Words used in the discussion below such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects”, “plans,” “assumes”, “predicts,” “may”, “might”, “will”, “could”, “should” and similar expressions, indicate that management of the Company is making forward-looking statements.
 
 Forward-looking statements are not guarantees of future performance. They necessarily involve risks, uncertainties and assumptions. Examples of forward looking statements included in this discussion include, but are not limited to, statements regarding the estimated contingent liability related to assumptions made within the asset/liability management process; management’s expectations as to the future interest rate environment and the Company’s related liquidity level; credit risk expectations relating to the Company’s loan portfolio and off-balance sheet commitments; and management’s general outlook for the future performance of the Company and the local or national economy. Although forward-looking statements are based on management’s expectations and estimates as of the date they are made, many of the factors that could influence or determine actual results are unpredictable and not within the Company’s control.
 
 Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities: 
 
 · 
 interest rates change in such a way as to negatively affect loan demand, the local economy or the Company’s net income, asset valuations or margins; 
 
 · 
 general economic or business conditions, either nationally, regionally or locally, deteriorate, resulting in a decline in credit quality or a diminished demand for the Company’s products and services; 
 
 · 
 the impact of inflation and slowing economic growth on the Company’s customers and on its financial results and performance; 
 
 · 
 the effect of United States monetary and fiscal policies, including deficit spending and the interest rate policies of the FRB and its regulation of the money supply; 
 
 · 
 changes in applicable accounting policies, practices and standards; 
 
 · 
 the geographic concentration of the Company’s loan portfolio and deposit base; 
 
 · 
 reductions in deposit levels, which necessitate increased borrowings to fund loans and sale of investment securities; 
 
 · 
 increases in the level of nonperforming assets and charge-offs; 
 
 · 
 changes in federal or state tax laws or policy; 
 
 · 
 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 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);
 
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 · 
 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; 
 
 · 
 management’s risk management measures may not be completely effective; 
 
 · 
 changes in consumer and business spending, borrowing and savings habits; 
 
 · 
 operational and internal system failures due to changes in normal business practices, including remote working for Company staff; 
 
 · 
 increased cybercrime and payment system risk due to increased usage by customers of online, mobile and other remote banking channels; 
 
 · 
 the ongoing challenges to find qualified workers to maintain a stable workforce; 
 
 · 
 losses due to the fraudulent or negligent conduct of third parties, including the Company’s service providers, customers and employees; and 
 
 · 
 adverse changes in the credit rating of U.S. government debt. 
 
 Readers are cautioned not to place undue reliance on such statements as they speak only as of the date they are made. The Company does not undertake, and disclaims any obligation, to revise or update any forward-looking statements to reflect the occurrence or anticipated occurrence of events or circumstances after the date of this Report, except as required by applicable law. The Company claims the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995.
 
 NON-GAAP FINANCIAL MEASURES 
 
 Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, three non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled Interest Income Versus Interest Expense (NII)) and core earnings (as defined and discussed in the Results of Operations section), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G.
 
 Management believes that these non-GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.
 
 OVERVIEW 
 
 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, 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.
 
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 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 $2.2 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. 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 our net interest income.
 
 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 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 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 $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. 
 
 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 
 
 The Company’s consolidated financial statements are prepared according to U.S. GAAP. 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 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. Management evaluates on an ongoing basis its judgment as to which policies are considered to be critical and communicates all evaluations with the Company’s Audit Committee.
 
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 The Company’s critical accounting policies govern:
 
 · 
 the ACL; 
 · 
 OREO; 
 · 
 credit losses on debt securities; 
 · 
 valuation of residential MSRs; and 
 · 
 the carrying value of goodwill. 
 
 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 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. In estimating the ACL, management has adopted a methodology consistent with ASU No. 2016-13 that 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 at the measurement date. Further consideration is given to qualitative factors, including changes in current economic indicators and their probable impact on borrowers and collateral, trends in delinquent and non-performing loans, trends in criticized and classified assets, levels of exceptions, the impact of competition in the market, concentrations of credit risk in a variety of areas, including portfolio product mix, the level of loans to individual borrowers and their related interests, loans to industry segments and the geographic distribution of CRE loans. Management’s estimates used in calculating the ACL may increase or decrease based on changes in these factors, which in turn will affect the amount of the Company’s provision for credit losses charged against current period income. This evaluation is inherently subjective and actual results could differ significantly from these estimates under different assumptions, judgments or conditions. 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 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. The Company’s securities portfolio is evaluated for impairment on a quarterly basis.
 
 RESULTS OF OPERATIONS 
 
 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. 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. 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. 
 
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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 June 30, 
 
 2024 
 
 2023 
 
 Return on average assets
 
 0.99 % 
 
 1.25 % 
 Return on average equity
 
 12.27 % 
 
 16.05 % 
 Dividend payout ratio (1)
 
 46.94 % 
 
 39.66 % 
 Average equity to average assets 
 
 8.04 % 
 
 7.78 % 
 
 Six Months Ended June 30, 
 
 2024 
 
 2023 
 
 Return on average assets
 
 1.01 % 
 
 1.28 % 
 Return on average equity
 
 12.50 % 
 
 16.79 % 
 Dividend payout ratio (1)
 
 46.46 % 
 
 38.66 % 
 Average equity to average assets 
 
 8.07 % 
 
 7.63 % 
 
 (1)
 Dividends declared per common share divided by earnings per common share.
 
 INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST INCOME) 
 
 The largest component of the Company’s operating income is NII, which is the difference between interest earned on loans and investments and the interest paid on deposits and other sources of funds (i.e., borrowings). The Company’s level of net interest income can fluctuate over time due to changes in the level and mix of earning assets and sources of funds (volume), and changes in the yield earned and costs of funds (rate). A portion of the Company’s income from loans to local municipalities is not subject to income taxes. Because the proportion of tax-exempt items in the Company’s balance sheet varies from year-to-year, to improve comparability of information, the non-taxable income shown in the tables below has been converted to a tax equivalent basis. The Company’s corporate tax rate is 21%; 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 $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 June 30, 
 
 2024 
 
 2023 
 
 Net interest income as presented
 
 $ 8,101,293 
 
 $ 8,268,863 
 
 Effect of tax-exempt income
 
 164,237 
 
 79,850 
 
 Net interest income, tax equivalent
 
 $ 8,265,530 
 
 $ 8,348,713 
 
 Six Months Ended June 30, 
 
 2024 
 
 2023 
 
 Net interest income as presented
 
 $ 16,458,939 
 
 $ 16,792,229 
 
 Effect of tax-exempt income
 
 317,209 
 
 157,458 
 
 Net interest income, tax equivalent
 
 $ 16,776,148 
 
 $ 16,949,687 
 
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 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 June 30, 
 
 2024 
 
 2023 
 
 Average 
 
 Average 
 
 Average 
 
 Income/ 
 
 Yield/ 
 
 Average 
 
 Income/ 
 
 Yield/ 
 
 Balance 
 
 Expense 
 
 Rate 
 
 Balance 
 
 Expense 
 
 Rate 
 
 Average Assets 
 
 Loans, net (1)
 
 $ 864,882,180 
 
 $ 12,209,973 
 
 5.68 % 
 $ 761,639,880 
 
 $ 10,070,719 
 
 5.30 % 
 Taxable investment securities
 
 166,488,058 
 
 932,209 
 
 2.25 % 
 
 178,445,569 
 
 929,963 
 
 2.09 % 
 Tax-exempt investment securities
 
 10,267,118 
 
 101,786 
 
 3.99 % 
 
 11,559,086 
 
 114,758 
 
 3.98 % 
 Sweep and interest-earning accounts
 
 4,343,705 
 
 54,452 
 
 5.04 % 
 
 12,627,674 
 
 144,877 
 
 4.60 % 
 Other investments (2)
 
 3,179,253 
 
 63,270 
 
 8.00 % 
 
 1,880,974 
 
 33,999 
 
 7.25 % 
 Total interest-earning assets
 
 $ 1,049,160,314 
 
 $ 13,361,690 
 
 5.12 % 
 $ 966,153,183 
 
 $ 11,294,316 
 
 4.69 % 
 Cash and due from banks
 
 10,633,735 
 
 11,054,246 
 
 Premises and equipment
 
 12,578,195 
 
 12,750,400 
 
 BOLI
 
 5,260,952 
 
 5,179,747 
 
 Goodwill
 
 11,574,269 
 
 11,574,269 
 
 Other assets
 
 22,580,312 
 
 20,193,636 
 
 Total assets
 
 $ 1,111,787,777 
 
 $ 1,026,905,481 
 
 Average Liabilities and Shareholders’ Equity 
 
 Interest-bearing transaction accounts
 
 $ 269,333,402 
 
 $ 1,266,535 
 
 1.89 % 
 $ 271,067,384 
 
 $ 1,172,966 
 
 1.74 % 
 Money market funds
 
 124,253,641 
 
 737,873 
 
 2.39 % 
 
 120,237,077 
 
 490,517 
 
 1.64 % 
 Savings deposits
 
 147,164,162 
 
 32,447 
 
 0.09 % 
 
 168,652,681 
 
 33,032 
 
 0.08 % 
 Time deposits
 
 145,399,534 
 
 1,322,980 
 
 3.66 % 
 
 106,617,890 
 
 527,868 
 
 1.99 % 
 Repurchase agreements
 
 29,128,815 
 
 177,871 
 
 2.46 % 
 
 36,663,793 
 
 214,654 
 
 2.35 % 
 Borrowed funds
 
 103,634,110 
 
 1,255,272 
 
 4.87 % 
 
 20,497,549 
 
 232,016 
 
 4.54 % 
 Finance lease obligations
 
 3,331,479 
 
 19,152 
 
 2.30 % 
 
 3,554,222 
 
 20,426 
 
 2.30 % 
 Junior subordinated debentures
 
 12,887,000 
 
 284,030 
 
 8.86 % 
 
 12,887,000 
 
 254,124 
 
 7.91 % 
 Total interest-bearing liabilities
 
 $ 835,132,143 
 
 $ 5,096,160 
 
 2.45 % 
 $ 740,177,596 
 
 $ 2,945,603 
 
 1.60 % 
 Noninterest bearing deposits
 
 181,445,666 
 
 199,692,664 
 
 Other liabilities
 
 5,793,166 
 
 7,133,908 
 
 Total liabilities
 
 1,022,370,975 
 
 947,004,168 
 
 Shareholders’ equity
 
 89,416,802 
 
 79,901,313 
 
 Total liabilities and shareholders’ equity
 
 $ 1,111,787,777 
 
 $ 1,026,905,481 
 
 Net interest income
 
 $ 8,265,530 
 
 $ 8,348,713 
 
 Net interest spread (3)
 
 2.67 % 
 
 3.09 % 
 Net interest margin (4)
 
 3.17 % 
 
 3.47 % 
 
 (1)
 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.
 
 (2)
 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.
 
 (3)
 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.
 
 (4)
 Net interest margin is net interest income divided by average earning assets.
 
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 Six Months Ended June 30, 
 
 2024 
 
 2023 
 
 Average 
 
 Average 
 
 Average 
 
 Income/ 
 
 Yield/ 
 
 Average 
 
 Income/ 
 
 Yield/ 
 
 Balance 
 
 Expense 
 
 Rate 
 
 Balance 
 
 Expense 
 
 Rate 
 
 Average Assets 
 
 Loans, net (1)
 
 $ 855,916,469 
 
 $ 24,019,787 
 
 5.64 % 
 $ 754,033,422 
 
 $ 19,500,253 
 
 5.22 % 
 Taxable investment securities
 
 170,916,364 
 
 1,904,557 
 
 2.24 % 
 
 180,094,857 
 
 1,873,441 
 
 2.10 % 
 Tax-exempt investment securities
 
 10,314,582 
 
 203,573 
 
 3.97 % 
 
 11,509,253 
 
 229,515 
 
 4.02 % 
 Sweep and interest-earning accounts
 
 5,400,927 
 
 140,385 
 
 5.23 % 
 
 21,499,499 
 
 474,288 
 
 4.45 % 
 Other investments (2)
 
 2,714,732 
 
 105,655 
 
 7.83 % 
 
 1,830,010 
 
 64,653 
 
 7.12 % 
 Total interest-earning assets
 
 1,045,263,074 
 
 $ 26,373,957 
 
 5.07 % 
 $ 968,967,041 
 
 $ 22,142,150 
 
 4.61 % 
 Cash and due from banks
 
 10,306,442 
 
 10,547,324 
 
 Premises and equipment
 
 12,481,206 
 
 12,870,825 
 
 BOLI
 
 5,250,400 
 
 5,169,993 
 
 Goodwill
 
 11,574,269 
 
 11,574,269 
 
 Other assets
 
 21,877,830 
 
 19,440,462 
 
 Total assets
 
 $ 1,106,753,221 
 
 $ 1,028,569,914 
 
 Average Liabilities and Shareholders’ Equity 
 
 Interest-bearing transaction accounts
 
 $ 278,669,658 
 
 $ 2,635,415 
 
 1.90 % 
 $ 275,463,700 
 
 $ 2,137,833 
 
 1.57 % 
 Money market funds
 
 122,765,982 
 
 1,366,838 
 
 2.24 % 
 
 127,884,423 
 
 1,004,192 
 
 1.58 % 
 Savings deposits
 
 148,958,173 
 
 64,055 
 
 0.09 % 
 
 169,907,932 
 
 64,028 
 
 0.08 % 
 Time deposits
 
 138,139,607 
 
 2,373,699 
 
 3.46 % 
 
 104,476,174 
 
 863,077 
 
 1.67 % 
 Repurchase agreements
 
 31,275,434 
 
 376,762 
 
 2.42 % 
 
 36,401,533 
 
 346,782 
 
 1.92 % 
 Borrowed funds
 
 90,641,242 
 
 2,181,613 
 
 4.84 % 
 
 11,106,519 
 
 235,796 
 
 4.28 % 
 Finance lease obligations
 
 3,359,597 
 
 38,628 
 
 2.30 % 
 
 3,581,422 
 
 41,166 
 
 2.30 % 
 Junior subordinated debentures
 
 12,887,000 
 
 560,799 
 
 8.75 % 
 
 12,887,000 
 
 499,589 
 
 7.82 % 
 Total interest-bearing liabilities
 
 826,696,693 
 
 $ 9,597,809 
 
 2.33 % 
 
 741,708,703 
 
 $ 5,192,463 
 
 1.41 % 
 Noninterest bearing deposits
 
 185,401,062 
 
 201,484,980 
 
 Other liabilities
 
 5,375,312 
 
 6,892,039 
 
 Total liabilities
 
 1,017,473,067 
 
 950,085,722 
 
 Shareholders’ equity
 
 89,280,154 
 
 78,484,192 
 
 Total liabilities and shareholders’ equity
 
 $ 1,106,753,221 
 
 $ 1,028,569,914 
 
 Net interest income
 
 $ 16,776,148 
 
 $ 16,949,687 
 
 Net interest spread (3)
 
 2.74 % 
 
 3.20 % 
 Net interest margin (4)
 
 3.23 % 
 
 3.53 % 
 
 (1)
 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.
 
 (2)
 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.
 
 (3)
 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.
 
 (4)
 Net interest margin is net interest income divided by average earning assets.
 
 35 
 
 Table of Contents 
 
 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 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.
 
 36 
 
 Table of Contents 
 
 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 June 30, 2024 
 
 Six Months Ended June 30, 2024 
 
 Compared to 
 
 Compared to 
 
 Three Months Ended June 30, 2023 
 
 Six Months Ended June 30, 2023 
 
 Variance 
 
 Variance 
 
 Variance 
 
 Variance 
 
 Due to 
 
 Due to 
 
 Total 
 
 Due to 
 
 Due to 
 
 Total 
 
 Rate (1) 
 
 Volume (1) 
 
 Variance 
 
 Rate (1) 
 
 Volume (1) 
 
 Variance 
 
 Average Interest-Earning Assets 
 
 Loans, net
 
 $ 775,041 
 
 $ 1,364,213 
 
 $ 2,139,254 
 
 $ 1,882,242 
 
 $ 2,637,292 
 
 $ 4,519,534 
 
 Taxable investment securities
 
 69,139 
 
 (66,893 ) 
 
 2,246 
 
 133,353 
 
 (102,237 ) 
 
 31,116 
 
 Tax-exempt investment securities
 
 (155 ) 
 
 (12,817 ) 
 
 (12,972 ) 
 
 (2,357 ) 
 
 (23,585 ) 
 
 (25,942 ) 
 Sweep and interest-earning accounts
 
 13,383 
 
 (103,808 ) 
 
 (90,425 ) 
 
 84,774 
 
 (418,677 ) 
 
 (333,903 ) 
 Other investments
 
 5,804 
 
 23,467 
 
 29,271 
 
 9,765 
 
 31,237 
 
 41,002 
 
 Total
 
 $ 863,212 
 
 $ 1,204,162 
 
 $ 2,067,374 
 
 $ 2,107,777 
 
 $ 2,124,030 
 
 $ 4,231,807 
 
 Average Interest-Bearing Liabilities 
 
 Interest-bearing transaction accounts
 
 $ 101,717 
 
 $ (8,148 ) 
 $ 93,569 
 
 $ 472,622 
 
 $ 24,960 
 
 $ 497,582 
 
 Money market funds
 
 230,933 
 
 16,423 
 
 247,356 
 
 419,659 
 
 (57,013 ) 
 
 362,646 
 
 Savings deposits
 
 4,223 
 
 (4,808 ) 
 
 (585 ) 
 
 9,403 
 
 (9,376 ) 
 
 27 
 
 Time deposits
 
 602,702 
 
 192,410 
 
 795,112 
 
 1,231,843 
 
 278,779 
 
 1,510,622 
 
 Repurchase agreements
 
 9,304 
 
 (46,087 ) 
 
 (36,783 ) 
 
 91,667 
 
 (61,687 ) 
 
 29,980 
 
 Borrowed funds
 
 82,241 
 
 941,015 
 
 1,023,256 
 
 257,763 
 
 1,688,054 
 
 1,945,817 
 
 Finance lease obligations
 
 0 
 
 (1,274 ) 
 
 (1,274 ) 
 
 (1 ) 
 
 (2,537 ) 
 
 (2,538 ) 
 Junior subordinated debentures
 
 29,906 
 
 0 
 
 29,906 
 
 61,210 
 
 0 
 
 61,210 
 
 Total
 
 $ 1,061,026 
 
 $ 1,089,531 
 
 $ 2,150,557 
 
 $ 2,544,166 
 
 $ 1,861,180 
 
 $ 4,405,346 
 
 Changes in net interest income
 
 $ (197,814 ) 
 $ 114,631 
 
 $ (83,183 ) 
 $ (436,389 ) 
 $ 262,850 
 
 $ (173,539 ) 
 
 (1) Items which have shown a year-to-year increase in volume have variances allocated as follows:
 
 Variance due to rate = Change in rate x new volume
 
 Variance due to volume = Change in volume x old rate
 
 Items which have shown a year-to-year decrease in volume have variances allocated as follows:
 
 Variance due to rate = Change in rate x old volume
 
 Variances due to volume = Change in volume x new rate
 
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 Table of Contents 
 
 NON-INTEREST INCOME AND NON-INTEREST EXPENSE 
 
 Non-interest Income 
 
 The components of non-interest income for the periods presented were as follows:
 
 Three Months Ended 
 
 Six Months Ended 
 
 June 30, 
 
 Change 
 
 June 30, 
 
 Change 
 
 2024 
 
 2023 
 
 Income 
 
 Percent 
 
 2024 
 
 2023 
 
 Income 
 
 Percent 
 
 Service fees
 
 $ 964,181 
 
 $ 939,451 
 
 $ 24,730 
 
 2.63 % 
 $ 1,862,101 
 
 $ 1,819,739 
 
 $ 42,362 
 
 2.33 % 
 Income from sold loans
 
 98,469 
 
 106,660 
 
 (8,191 ) 
 
 -7.68 % 
 
 177,573 
 
 214,195 
 
 (36,622 ) 
 
 -17.10 % 
 Other income from loans
 
 278,223 
 
 341,876 
 
 (63,653 ) 
 
 -18.62 % 
 
 532,824 
 
 770,448 
 
 (237,624 ) 
 
 -30.84 % 
 Other income
 
 Income from CFS Partners
 
 328,598 
 
 303,152 
 
 25,446 
 
 8.39 % 
 
 622,925 
 
 555,203 
 
 67,722 
 
 12.20 % 
 Other miscellaneous income
 
 102,946 
 
 147,292 
 
 (44,346 ) 
 
 -30.11 % 
 
 210,901 
 
 237,624 
 
 (26,723 ) 
 
 -11.25 % 
 Total non-interest income
 
 $ 1,772,417 
 
 $ 1,838,431 
 
 $ (66,014 ) 
 
 -3.59 % 
 $ 3,406,324 
 
 $ 3,597,209 
 
 $ (190,885 ) 
 
 -5.31 % 
 
 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. 
 
 · 
 Other miscellaneous income is made up of many individual line items that in the aggregate represent less than 7% of total non-interest income. 
 
 38 
 
 Table of Contents 
 
 Non-interest Expense 
 
 The components of non-interest expense for the periods presented were as follows:
 
 Three Months Ended 
 
 Six Months Ended 
 
 June 30, 
 
 Change 
 
 June 30, 
 
 Change 
 
 2024 
 
 2023 
 
 Expense 
 
 Percent 
 
 2024 
 
 2023 
 
 Expense 
 
 Percent 
 
 Salaries and wages
 
 $ 2,288,000 
 
 $ 2,264,760 
 
 $ 23,240 
 
 1.03 % 
 $ 4,746,000 
 
 $ 4,553,520 
 
 $ 192,480 
 
 4.23 % 
 Employee benefits
 
 954,154 
 
 811,870 
 
 142,284 
 
 17.53 % 
 
 1,853,390 
 
 1,566,140 
 
 287,250 
 
 18.34 % 
 Occupancy expenses, net
 
 694,230 
 
 700,228 
 
 (5,998 ) 
 
 -0.86 % 
 
 1,416,733 
 
 1,471,214 
 
 (54,481 ) 
 
 -3.70 % 
 Other expenses
 
 Charged-off checks
 
 5,471 
 
 2,218 
 
 3,253 
 
 146.66 % 
 
 39,527 
 
 2,853 
 
 36,674 
 
 1285.45 % 
 Service contracts - administrative
 
 201,875 
 
 152,989 
 
 48,886 
 
 31.95 % 
 
 384,639 
 
 308,489 
 
 76,150 
 
 24.68 % 
 FDIC insurance
 
 140,531 
 
 124,700 
 
 15,831 
 
 12.70 % 
 
 296,637 
 
 256,343 
 
 40,294 
 
 15.72 % 
 Collection & non-accruing loan expense
 
 90,500 
 
 10,500 
 
 80,000 
 
 761.90 % 
 
 138,500 
 
 36,000 
 
 102,500 
 
 284.72 % 
 Electronic banking expense
 
 113,747 
 
 68,468 
 
 45,279 
 
 66.13 % 
 
 223,020 
 
 135,635 
 
 87,385 
 
 64.43 % 
 ATM fees
 
 174,727 
 
 150,644 
 
 24,083 
 
 15.99 % 
 
 339,333 
 
 311,470 
 
 27,863 
 
 8.95 % 
 Other miscellaneous expenses
 
 1,608,336 
 
 1,577,546 
 
 30,790 
 
 1.95 % 
 
 3,133,937 
 
 3,101,962 
 
 31,975 
 
 1.03 % 
 Total non-interest expense
 
 $ 6,271,571 
 
 $ 5,863,923 
 
 $ 407,648 
 
 6.95 % 
 $ 12,571,716 
 
 $ 11,743,626 
 
 $ 828,090 
 
 7.05 % 
 
 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 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 FDIC insurance is attributable in part to an increase in the assessment multiplier. 
 
 · 
 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. 
 
 39 
 
 Table of Contents 
 
 APPLICABLE INCOME TAXES 
 
 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 $67,128 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:
 
 June 30, 2024 
 
 December 31, 2023 
 
 Assets 
 
 Loans
 
 $ 862,172,136 
 
 78.35 % 
 $ 845,429,854 
 
 76.90 % 
 AFS securities
 
 174,354,789 
 
 15.84 % 
 
 190,706,019 
 
 17.35 % 
 
 Liabilities 
 
 Demand deposits
 
 159,944,015 
 
 14.53 % 
 
 202,969,957 
 
 18.46 % 
 Interest-bearing transaction accounts
 
 271,317,426 
 
 24.66 % 
 
 297,030,893 
 
 27.02 % 
 Money market funds
 
 114,194,530 
 
 10.38 % 
 
 121,375,419 
 
 11.04 % 
 Savings deposits
 
 145,754,922 
 
 13.25 % 
 
 151,570,686 
 
 13.79 % 
 Time deposits
 
 157,521,253 
 
 14.31 % 
 
 124,020,827 
 
 11.28 % 
 Overnight borrowings
 
 13,100,000 
 
 1.19 % 
 
 9,000,000 
 
 0.82 % 
 Short-term advances
 
 62,500,000 
 
 5.68 % 
 
 44,500,000 
 
 4.05 % 
 Long-term advances
 
 31,100,000 
 
 2.83 % 
 
 1,100,000 
 
 0.10 % 
 
 The following table reflects the changes in the composition of the Company’s major categories of assets and liabilities between the balance sheet dates, as disclosed in the table above:
 
 Volume Change 
 
 Percentage 
 
 Assets 
 
 Loans
 
 $ 16,742,282 
 
 1.98 % 
 AFS securities
 
 (16,351,230 ) 
 
 -8.57 % 
 
 Liabilities 
 
 Demand deposits
 
 (43,025,942 ) 
 
 -21.20 % 
 Interest-bearing transaction accounts
 
 (25,713,467 ) 
 
 -8.66 % 
 Money market funds
 
 (7,180,889 ) 
 
 -5.92 % 
 Savings deposits
 
 (5,815,764 ) 
 
 -3.84 % 
 Time deposits
 
 33,500,426 
 
 27.01 % 
 Overnight borrowings
 
 4,100,000 
 
 45.56 % 
 Short-term advances
 
 18,000,000 
 
 40.45 % 
 Long-term advances
 
 30,000,000 
 
 2727.27 % 
 
 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. 
 
 40 
 
 Table of Contents 
 
 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 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 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 $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:
 
 3 months or less
 
 $ 13,179,093 
 
 Over 3 through 6 months
 
 13,376,543 
 
 Over 6 through 12 months
 
 2,727,174 
 
 Over 12 months
 
 1,929,699 
 
 Total
 
 $ 31,212,509 
 
 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. The Company’s ALCO is made up of the Executive Officers and certain Vice Presidents of the Bank representing major business lines. The ALCO formulates strategies to manage interest rate risk by evaluating the impact on earnings and capital of such factors as current interest rate forecasts and economic indicators, potential changes in such forecasts and indicators, liquidity and various business strategies. The ALCO meets at least quarterly to review financial statements, liquidity levels, yields and spreads to better understand, measure, monitor and control the Company’s interest rate risk. In the ALCO process, the committee members apply policy limits set forth in the Asset Liability, Liquidity and Investment policies approved and periodically reviewed by the Company’s Board of Directors. The ALCO’s methods for evaluating interest rate risk include an analysis of the effects of interest rate changes on net interest income and an analysis of the Company’s interest rate sensitivity “gap”, which provides a static analysis of the maturity and repricing characteristics of the entire balance sheet. The ALCO Policy also includes a contingency funding plan to help management prepare for unforeseen liquidity restrictions, including hypothetical severe liquidity crises.
 
 Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change, thereby impacting NII, the primary component of the Company’s earnings. Fluctuations in interest rates can also have an impact on liquidity. The ALCO uses an outside consultant to perform rate shock simulations to the Company’s net interest income, as well as a variety of other analyses. It is ALCO’s function to provide the assumptions used in the modeling process. Assumptions used in prior period simulation models are regularly tested by comparing projected NII with actual NII. The ALCO utilizes the results of the simulation model to quantify the estimated exposure of NII and liquidity to sustained interest rate changes. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on the Company’s balance sheet. The model also simulates the balance sheet’s sensitivity to a prolonged flat rate environment. 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, 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.
 
 41 
 
 Table of Contents 
 
 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. 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 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:
 
 Rate Change 
 
 Percent Change in NII 
 
 Down 100 bps
 
 0.6 % 
 Up 200 bps
 
 -5.1 % 
 
 The estimated amounts shown in the table above are within the ALCO Policy limits. However, those amounts do not represent a forecast and should not be relied upon as indicative of future results. The ALCO model also provides alternate scenarios including a sustained flat, or inverted yield curve. 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 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. The Company’s Board of Directors prescribes policies for managing credit risk, including Loan, Appraisal and Environmental policies. These policies are supplemented by comprehensive underwriting standards and procedures. The Company maintains a Credit Administration department whose function includes credit analysis and monitoring of and reporting on the status of the loan portfolio, including delinquent and non-performing loan trends. The Company also monitors concentration of credit risk in a variety of areas, including portfolio mix, the level of loans to individual borrowers and their related interests, loans to industry segments, and the geographic distribution of commercial real estate loans. 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 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. Residential mortgages with loan-to-value ratios exceeding 80% are generally covered by PMI. A 90% loan-to-value residential mortgage product without PMI is only available to borrowers with excellent credit and low debt-to-income ratios and has not been widely originated. As of June 30, 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. 
 
 42 
 
 Table of Contents 
 
 The following tables show the estimated maturity of the Company’s loan portfolio as of June 30, 2024.
 
 Fixed Rate Loans 
 
 Within 
 
 2 - 5 
 
 6 - 15 
 
 Over 
 
 1 Year 
 
 Years 
 
 Years 
 
 15 Years 
 
 Total 
 
 Commercial & industrial
 
 $ 2,933,645 
 
 $ 28,025,384 
 
 $ 16,941,437 
 
 $ 0 
 
 $ 47,900,466 
 
 Purchased
 
 33,812 
 
 1,505,268 
 
 7,669,724 
 
 0 
 
 9,208,804 
 
 Commercial real estate
 
 11,571,977 
 
 10,858,538 
 
 18,427,187 
 
 393,334 
 
 41,251,036 
 
 Municipal
 
 12,407,827 
 
 4,825,089 
 
 5,395,925 
 
 0 
 
 22,628,841 
 
 Residential real estate - 1st lien
 
 33,564 
 
 3,815,198 
 
 24,638,845 
 
 61,454,001 
 
 89,941,608 
 
 Residential real estate - Jr lien
 
 25,465 
 
 266,034 
 
 3,210,575 
 
 0 
 
 3,502,074 
 
 Consumer
 
 567,191 
 
 2,110,638 
 
 79,874 
 
 0 
 
 2,757,703 
 
 Total Loans
 
 $ 27,573,481 
 
 $ 51,406,149 
 
 $ 76,363,567 
 
 $ 61,847,335 
 
 $ 217,190,532 
 
 Variable Rate Loans 
 
 Within 
 
 2 - 5 
 
 6 - 15 
 
 Over 
 
 1 Year 
 
 Years 
 
 Years 
 
 15 Years 
 
 Total 
 
 Commercial & industrial
 
 $ 32,403,119 
 
 $ 34,231,512 
 
 $ 9,745,646 
 
 5,500,879.00 
 
 $ 81,881,156 
 
 Commercial real estate
 
 4,600,873 
 
 3,473,760 
 
 110,058,742 
 
 282,420,198 
 
 400,553,573 
 
 Municipal
 
 0 
 
 0 
 
 10,372,453 
 
 1,100,000 
 
 11,472,453 
 
 Residential real estate - 1st lien
 
 735,695 
 
 1,622,276 
 
 18,131,573 
 
 101,597,459 
 
 122,087,003 
 
 Residential real estate - Jr lien
 
 303,334 
 
 616,614 
 
 12,441,698 
 
 15,088,355 
 
 28,450,001 
 
 Consumer
 
 31,159 
 
 240,643 
 
 218,235 
 
 47,381 
 
 537,418 
 
 Total Loans
 
 $ 38,074,180 
 
 $ 40,184,805 
 
 $ 160,968,347 
 
 $ 405,754,272 
 
 $ 644,981,604 
 
 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 71.3% 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 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. Commercial & industrial and CRE loans are generally placed on non-accrual status when there is deterioration in the financial position of the borrower, payment in full of principal and interest is not expected, and/or principal or interest has been in default for 90 days or more. However, such a loan need not be placed on non-accrual status if it is both well secured and in the process of collection. Residential mortgages and home equity loans are considered for non-accrual status at 90 days past due and are evaluated on a case-by-case basis. The Company obtains current property appraisals or market value analyses and considers the cost of carrying and selling collateral in order to assess the level of specific allocations required. Consumer loans are generally not placed in non-accrual but are charged off by the time they reach 120 days past due. When a loan is placed in non-accrual status, the Company reverses the accrued interest against current period income and discontinues the accrual of interest until the borrower clearly demonstrates the ability and intention to resume normal payments, typically demonstrated by regular timely payments for a period of not less than six months. Interest payments received on non-accrual or impaired loans are generally applied as a reduction of the loan book balance.
 
 43 
 
 Table of Contents 
 
 Credit loss expense 
 
 The credit loss expense was made up of the following components for the periods indicated:
 
 Three Months Ended 
 
 June 30, 
 
 Change 
 
 2024 
 
 2023 
 
 $ 
 
 % 
 
 Credit loss expense - loans
 
 $ 351,921 
 
 $ 378,000 
 
 ($26,079)
 
 -6.90 % 
 Credit loss reversal - OBS credit exposure
 
 (20,339 ) 
 
 (96,858 ) 
 
 76,519 
 
 -79.00 % 
 Credit loss expense
 
 $ 331,582 
 
 $ 281,142 
 
 $ 50,440 
 
 17.94 % 
 
 Six Months Ended 
 
 June 30, 
 
 Change 
 
 2024 
 
 2023 
 
 $ 
 
 % 
 
 Credit loss expense - loans
 
 $ 669,721 
 
 $ 585,540 
 
 $ 84,181 
 
 14.38 % 
 Credit loss reversal - OBS credit exposure
 
 (24,560 ) 
 
 (17,872 ) 
 
 (6,688 ) 
 
 37.42 % 
 Credit loss expense
 
 $ 645,161 
 
 $ 567,668 
 
 $ 77,493 
 
 13.65 % 
 
 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. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, rather than under the incurred loss model. 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 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 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.
 
 When establishing the ACL each quarter, the Company applies a combination of significant key assumptions and methodologies, as discussed in the ACL section under Critical Accounting Policies in this MD&A and presented in Note 5 of the accompanying unaudited interim consolidated financial statements. 
 
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 The following table summarizes the Company’s credit risk ratios for the balance sheet dates presented:
 
 June 30, 
 
 December 31, 
 
 2024 
 
 2023 
 
 ACL to total loans outstanding
 
 1.20 % 
 
 1.16 % 
 ACL
 
 $ 10,335,715 
 
 $ 9,842,725 
 
 Loans outstanding
 
 $ 862,172,136 
 
 $ 845,429,854 
 
 Non-accruing loans to loans outstanding
 
 0.67 % 
 
 0.82 % 
 Non-accruing loans
 
 $ 5,817,105 
 
 $ 6,955,046 
 
 Loans outstanding
 
 $ 862,172,136 
 
 $ 845,429,854 
 
 ACL to non-accruing loans
 
 177.68 % 
 
 141.52 % 
 ACL
 
 $ 10,335,715 
 
 $ 9,842,725 
 
 Non-accruing loans
 
 $ 5,817,105 
 
 $ 6,955,046 
 
 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. Management’s assessment of the adequacy of the ACL is presented to the full Board for approval quarterly. 
 
 45 
 
 Table of Contents 
 
 Net (charge-offs) recoveries during the periods presented to average loans outstanding were as follows:
 
 For the Six Months Ended June 30, 
 
 2024 
 
 2023 
 
 Commercial & industrial
 
 -0.08 % 
 
 -0.30 % 
 Net charge-offs during the period
 
 $ (107,450 ) 
 $ (359,227 ) 
 Average amount outstanding
 
 $ 126,491,436 
 
 $ 120,387,470 
 
 Purchased
 
 0.00 % 
 
 0.00 % 
 Net charge-offs during the period
 
 $ 0 
 
 $ 0 
 
 Average amount outstanding
 
 $ 9,994,314 
 
 $ 6,722,228 
 
 Commercial real estate
 
 -0.01 % 
 
 0.01 % 
 Net (charge-offs) recoveries during the period
 
 $ (45,393 ) 
 $ 22,058 
 
 Average amount outstanding
 
 $ 427,244,969 
 
 $ 365,744,547 
 
 Municipal
 
 0.00 % 
 
 0.00 % 
 Net charge-offs during the period
 
 $ 0 
 
 $ 0 
 
 Average amount outstanding
 
 $ 57,613,672 
 
 $ 35,147,221 
 
 Residential real estate - 1st lien
 
 0.00 % 
 
 0.04 % 
 Net recoveries during the period
 
 $ 0 
 
 $ 72,588 
 
 Average amount outstanding
 
 $ 209,128,975 
 
 $ 198,568,849 
 
 Residential real estate - Jr lien
 
 0.01 % 
 
 0.08 % 
 Net recoveries during the period
 
 $ 2,415 
 
 $ 26,777 
 
 Average amount outstanding
 
 $ 31,625,031 
 
 $ 32,398,451 
 
 Consumer
 
 -0.81 % 
 
 -1.20 % 
 Net charge-offs during the period
 
 $ (26,303 ) 
 $ (44,836 ) 
 Average amount outstanding
 
 $ 3,236,126 
 
 $ 3,734,220 
 
 Total loans
 
 -0.02 % 
 
 -0.04 % 
 Net charge-offs during the period
 
 $ (176,731 ) 
 $ (282,640 ) 
 Average amount outstanding
 
 $ 865,334,523 
 
 $ 762,702,986 
 
 In addition to credit risk in the Company’s loan and investment portfolios and its off-balance sheet commitments, and liquidity risk in its loan and deposit-taking operations, the Company’s business activities also generate market risk. Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Declining capital markets and changes in interest rates can result in fair value adjustments to asset valuations or the need to create a related reserve or allowance. The Company does not have any market risk sensitive instruments acquired for trading purposes. The Company’s market risk arises primarily from interest rate risk inherent in its lending, deposit taking and investment activities. During recessionary periods, a declining housing market can result in an increase in loan loss reserves or ultimately an increase in foreclosures. Interest rate risk is directly related to the different maturities and repricing characteristics of interest-bearing assets and liabilities, as well as to loan prepayment risks, early withdrawal of time deposits, and the fact that the speed and magnitude of responses to interest rate changes vary by product. Rapid changes in prevailing interest rates, particularly after a long period of relative stability, create a challenging interest rate environment. As discussed above under “Interest Rate Risk and Asset and Liability Management”, the Company actively monitors and manages its interest rate risk through the ALCO process. 
 
 COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET ARRANGEMENTS 
 
 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. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. During the first six months of 2024, the Company did not engage in any activity that created any additional types of OBS risk.
 
 46 
 
 Table of Contents 
 
 With the adoption of ASU 2016-13 (CECL), the Company is required to establish an allowance for expected credit losses on OBS credit exposures. Expected credit losses are estimated by management over the contractual period during which the Company is exposed to credit risk under a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. 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 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 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 
 
 Managing liquidity risk is essential to maintaining both depositor confidence and stability in earnings. Liquidity management refers to the ability of the Company to adequately cover fluctuations in assets and liabilities. Meeting loan demand (assets) and covering the withdrawal of deposit funds (liabilities) are two key components of the liquidity management process. The Company’s principal sources of funds are deposits, amortization and prepayment of loans and securities, maturities of investment securities, sales of loans available-for-sale, and earnings and funds provided from operations. These sources are supplemented by short-term and long-term borrowings as needed. Maintaining a relatively stable funding base, which is achieved by diversifying funding sources, competitively pricing deposit products, and extending the contractual maturity of liabilities, reduces the Company’s exposure to rollover risk on deposits and limits reliance on volatile short-term borrowed funds. Short-term funding needs arise from declines in deposits or other funding sources and from funding requirements for loan commitments. 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, 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 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 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. 
 
 47 
 
 Table of Contents 
 
 The following table reflects the Company’s outstanding advances with FHLBB as of the dates indicated:
 
 June 30, 
 
 December 31, 
 
 2024 
 
 2023 
 
 FHLBB Short-Term Advances 
 
 FHLBB term advance, 5.06%, due October 29, 2024
 
 $ 5,000,000 
 
 $ 0 
 
 FHLBB Long-Term Advances 
 
 FHLBB term advance, 0.00%, due November 12, 2025 (1)
 
 300,000 
 
 300,000 
 
 FHLBB term advance, 0.00%, due November 13, 2028 (1)
 
 800,000 
 
 800,000 
 
 FHLBB option advance, 4.54%, due May 15, 2026
 
 10,000,000 
 
 0 
 
 FHLBB option advance, 4.74%, due May 26, 2026
 
 5,000,000 
 
 0 
 
 FHLBB option advance, 3.89%, due February 01, 2027
 
 5,000,000 
 
 0 
 
 FHLBB option advance, 4.27%, due June 07, 2027
 
 10,000,000 
 
 0 
 
 Total Long-Term Advances
 
 31,100,000 
 
 1,100,000 
 
 Overnight Borrowings at 5.54%
 
 13,100,000 
 
 9,000,000 
 
 Total Advances and Overnight Borrowings
 
 $ 49,200,000 
 
 $ 10,100,000 
 
 (1)
 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. 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 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, 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:
 
 June 30, 
 
 December 31, 
 
 2024 
 
 2023 
 
 FRB BTFP Advances 
 
 FRB BTFP term advance, 4.92%, due April 26, 2024
 
 $ 0 
 
 $ 10,000,000 
 
 FRB BTFP term advance, 4.71%, due May 13, 2024
 
 0 
 
 10,000,000 
 
 FRB BTFP term advance, 4.91%, due May 17, 2024
 
 0 
 
 6,500,000 
 
 FRB BTFP term advance, 4.93%, due December 16, 2024
 
 0 
 
 18,000,000 
 
 FRB BTFP term advance, 4.76%, due January 16, 2025
 
 16,000,000 
 
 0 
 
 FRB BTFP term advance, 4.83%, due January 17, 2025
 
 41,500,000 
 
 0 
 
 Total BTFP Advances
 
 $ 57,500,000 
 
 $ 44,500,000 
 
 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.
 
 48 
 
 Table of Contents 
 
 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 June 30, 2024:
 
 Balance as of December 31, 2023 (book value $15.87 per common share)
 
 $ 89,028,814 
 
 Net income
 
 5,551,087 
 
 Issuance of common stock through the DRIP
 
 701,869 
 
 Dividends declared on common stock
 
 (2,541,328 ) 
 Dividends declared on preferred stock
 
 (63,750 ) 
 Change in AOCI on AFS securities, net of tax
 
 (1,347,958 ) 
 Balance as of June 30, 2024 (book value $16.17 per common share)
 
 $ 91,328,734 
 
 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, while at the same time satisfying all regulatory capital requirements. 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 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. 
 
 49 
 
 Table of Contents 
 
 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: 
 
 Minimum 
 
 Minimum 
 
 Minimum 
 
 For Capital 
 
 To Be Well 
 
 For Capital 
 
 Adequacy Purposes 
 
 Capitalized Under 
 
 Adequacy 
 
 with Conservation 
 
 Prompt Corrective 
 
 Actual 
 
 Purposes 
 
 Buffer (1) 
 
 Action Provisions (2) 
 
 Amount 
 
 Ratio 
 
 Amount 
 
 Ratio 
 
 Amount 
 
 Ratio 
 
 Amount 
 
 Ratio 
 
 (Dollars in Thousands) 
 
 June 30, 2024 
 
 Common equity tier 1 capital (to risk-weighted assets)
 
 Company
 
 $ 95,534 
 
 11.95 % 
 $ 35,983 
 
 4.50 % 
 $ 55,974 
 
 7.00 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 108,933 
 
 13.63 % 
 $ 35,958 
 
 4.50 % 
 $ 55,935 
 
 7.00 % 
 $ 51,940 
 
 6.50 % 
 Tier 1 capital (to risk-weighted assets)
 
 Company
 
 $ 109,921 
 
 13.75 % 
 $ 47,977 
 
 6.00 % 
 $ 67,968 
 
 8.50 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 108,933 
 
 13.63 % 
 $ 47,944 
 
 6.00 % 
 $ 67,921 
 
 8.50 % 
 $ 63,926 
 
 8.00 % 
 Total capital (to risk-weighted assets)
 
 Company
 
 $ 119,930 
 
 15.00 % 
 $ 63,970 
 
 8.00 % 
 $ 83,960 
 
 10.50 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 118,936 
 
 14.88 % 
 $ 63,926 
 
 8.00 % 
 $ 83,902 
 
 10.50 % 
 $ 79,907 
 
 10.00 % 
 Tier 1 capital (to average assets)
 
 Company
 
 $ 109,921 
 
 9.83 % 
 $ 44,749 
 
 4.00 % 
 
 N/A 
 
 N/A 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 108,933 
 
 9.74 % 
 $ 44,730 
 
 4.00 % 
 
 N/A 
 
 N/A 
 
 $ 55,912 
 
 5.00 % 
 
 December 31, 2023: 
 
 Common equity tier 1 capital (to risk-weighted assets)
 
 Company
 
 $ 91,886 
 
 11.89 % 
 $ 34,770 
 
 4.50 % 
 $ 54,086 
 
 7.00 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 105,390 
 
 13.65 % 
 $ 34,737 
 
 4.50 % 
 $ 54,036 
 
 7.00 % 
 $ 50,176 
 
 6.50 % 
 Tier 1 capital (to risk-weighted assets)
 
 Company
 
 $ 106,273 
 
 13.75 % 
 $ 46,360 
 
 6.00 % 
 $ 65,676 
 
 8.50 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 105,390 
 
 13.65 % 
 $ 46,317 
 
 6.00 % 
 $ 65,615 
 
 8.50 % 
 $ 61,755 
 
 8.00 % 
 Total capital (to risk-weighted assets)
 
 Company
 
 $ 115,944 
 
 15.01 % 
 $ 61,813 
 
 8.00 % 
 $ 81,130 
 
 10.50 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 115,051 
 
 14.90 % 
 $ 61,755 
 
 8.00 % 
 $ 81,054 
 
 10.50 % 
 $ 77,194 
 
 10.00 % 
 Tier 1 capital (to average assets)
 
 Company
 
 $ 106,273 
 
 9.57 % 
 $ 44,401 
 
 4.00 % 
 
 N/A 
 
 N/A 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 105,390 
 
 9.50 % 
 $ 44,376 
 
 4.00 % 
 
 N/A 
 
 N/A 
 
 $ 55,470 
 
 5.00 % 
 
 (1)
 Conservation Buffer is calculated based on risk-weighted assets and does not apply to calculations of average assets.
 
 (2)
 Applicable to banks, but not bank holding companies.
 
 The Company’s ability to pay dividends to its shareholders is largely dependent on the Bank’s ability to pay dividends to the Company. In general, a national bank may not pay dividends that exceed net income for the current and preceding two years. Regardless of statutory restrictions, as a matter of regulatory policy, banks and bank holding companies should pay dividends only out of current earnings and only if, after paying such dividends, they remain adequately capitalized.
 
 50 
 
 Table of Contents 
 
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 
 
 Omitted, in accordance with the regulatory relief available to smaller reporting companies in SEC Release Nos. 33-10513 and 34-83550.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
COMMUNITY BANCORP /VT 10-Q

Item 2. Management’s Discussion and Analysis
