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Item 2. Management’s Discussion and Analysis

2024-11-14 compared with 2024-08-14 · 174 added, 147 removed, 504 unchanged (39% of the section changed)

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Period Ended June 30, 2024

Period Ended September 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.

and its wholly owned subsidiary, Community National Bank, as of September 30, 2024 and December 31, 2023, and its consolidated results of operations for the three-month and nine-month interim periods and one year period presented.

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

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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 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 Company’s consolidated assets as of September 30, 2024, were $1.18 billion compared to $1.10 billion as of December 31, 2023, an increase of 7.1%.

Changes in the asset base included an increase in loans of $67.3 million, or 8.0%, and an increase in cash of $29.4 million, or 143.8%, which was partially offset by a decrease of $20.2 million, or 10.6%, in investment securities.

The increase in the loan portfolio was primarily attributable to an increase of $6.2 million in commercial & industrial loans, $45.2 million in CRE loans, $11.1 million in municipal loans, and $8.4 million in residential first and Jr.

lien loans, which was minimally offset by a decrease of $2.2 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.

Government securities portfolio and paydowns in the MBS and CMO portfolios.

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

Total deposits as of September 30, 2024, were $929.6 million compared to $897.0 million as of December 31, 2023, an increase of $32.6 million, or 3.6%.

Year to date, time deposits increased $50.7 million, or 40.9% while money market funds decreased $10.3 million, or 8.5%, and savings accounts decreased $7.4 million, or 4.9%.

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 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.

An increase in deposit balances is typical in the third and fourth quarters of the calendar year, with balances increasing through year end due in part to municipal accounts collecting tax payments.

The increase in deposit balances was less than the loan growth, requiring the continued use of borrowed funds as a supplemental funding source.

Total interest income increased approximately $1.9 million, or 15.6%, for the third quarter of 2024, compared to the same quarter in 2023, and $6.0 million, or 17.5%, for the first nine 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.

These increases in total interest income were offset by significant increases in total interest expense, which increased $1.6 million, or 45.1%, for the third quarter of 2024, compared to the same quarter of 2023 and $6.1 million, or 68.4%, for the first nine months of 2024, compared to the same period in 2023.

The higher rate environment and the reliance on wholesale funding 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.

However, the 50 bps FRB rate cut late in the third quarter of 2024 could possibly have a moderate influence in future periods.

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.

The credit loss expense for the nine months ended September 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 credit loss expense for the third quarter of 2024 was $460,745 compared to $240,889 for the same quarter of 2023 and $1.1 million for the first nine months of 2024 compared to $808,557 for the same period in 2023, resulting in increases of $219,856, or 91.3%, and $297,349, or 36.8%, 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.

During the third quarter of 2024, certain qualitative factors used in the ACL calculation were adjusted to better reflect expected credit losses in the loan portfolio.

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.

Consolidated net income for the third quarter of 2024 decreased $248,258 to $3.1 million compared to $3.4 million for the same quarter of 2023, and for the first nine months of 2024 consolidated net income decreased $1.2 million to $8.7 million compared to $9.9 million for the same period of 2023.

Year over year, the $6.1 million increase in interest expense, despite a $6.0 million increase in interest income, was a contributing factor to the decrease in net income, along with a $1.5 million increase in non-interest expense.

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.

Equity capital increased to $98.3 million, with a book value per share of $17.36 as of September 30, 2024, compared to $89.0 million and a book value per share of $15.87 as of December 31, 2023.

The increase in equity capital between periods reflected the combined effect of net income of $8.7 million for the first nine months of 2024, along with a decrease in unrealized losses in the investment portfolio of $3.5 million, net of tax, reflected in accumulated other comprehensive loss, which was offset in part by dividends paid totaling $3.8 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.

The portions of the Company’s service area most impacted were 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.

On September 11, 2024, the Company's Board of Directors declared a quarterly cash dividend of $0.24 per common share, an increase of $0.01 or 4.3% from the previous level, payable on November 1, 2024, to shareholders of record on October 15, 2024.

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

During the third quarter of 2024, the Company adopted a stock repurchase program authorizing 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.

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

Notwithstanding the program’s five-year term, the Board will review and re-evaluate the program annually in light of the Company’s then current capital needs, the number and cost of shares repurchased, the number of shares remaining for repurchase under the authorization, and other relevant factors, and management will confer with the FRBB regarding the program, as appropriate in the circumstances.

As of September 30, 2024, no shares had been repurchased.

CRITICAL ACCOUNTING POLICIES

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The Company’s critical accounting policies govern:

credit losses on debt securities;

valuation of residential MSRs;

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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 six months of 2024 in the Company’s critical accounting policies.

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

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

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RESULTS OF OPERATIONS

The Company’s net income for the 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.

The Company’s net income for the third quarter of 2024 was $3.1 million, or $0.55 per common share, compared to $3.4 million, or $0.61 per common share for the same quarter of 2023, and for the first nine months of 2024 was $8.7 million, or $1.55 per common share, compared to $9.9 million, or $1.80 per common share, for the same period in 2023.

Core earnings (NII) were $8.7 million for the third quarter of 2024 compared to $8.4 million for the same period of 2023, and $25.1 million for the first nine months of 2024 compared to $25.2 million for the same period in 2023.

Interest and fees on loans, the major component of interest income, increased $1.8 million, or 16.7% for the third quarter of 2024 compared to the same quarter of 2023, and $6.2 million, or 20.4%, for the first nine 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 47.0% for the third quarter of 2024 compared to the same quarter of 2023 and increased $3.5 million, or 54.0%, year over year, driven primarily by the increases in the fed funds rate during 2022 and into the third quarter of 2023.

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

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.

Interest on borrowed funds increased $482 thousand, or 71.3% for the third quarter of 2024 compared to the same period in 2023 and increased $2.4 million, or 254.3%, for the first nine 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.

The FOMC’s recent 50 bps decrease in the federal funds rate occurred late in the third quarter and did not reduce the Company’s funding costs for the three- and nine-month periods of 2024.

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 June 30,

Three Months Ended September 30,

Return on average assets

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Average equity to average assets

Six Months Ended June 30,

Nine Months Ended September 30,

Return on average assets

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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.

A portion of the Company’s income from loans to local municipalities and from tax-exempt municipal investment securities 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.

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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 $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 Company’s tax-exempt interest income of $762,126 and $559,985 for the three months ended September 30, 2024 and 2023, respectively, and $2.0 million and $1.2 million for the nine months ended September 30, 2024 and 2023, respectively, was derived from loans to local municipalities of $65.5 million and $58.7 million, and tax-exempt municipal investment securities of $10.5 million and $10.6 million as of September 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,

Three Months Ended September 30,

Net interest income as presented

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Net interest income, tax equivalent

Six Months Ended June 30,

Nine Months Ended September 30,

Net interest income as presented

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

Three Months Ended June 30,

Three Months Ended September 30,

Average Assets

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Net interest margin (4)

Included in net loans are non-accrual loans with average balances of $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.

Included in net loans are non-accrual loans with average balances of $5,324,960 and $7,344,200 for the three months ended September 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 $62,393,304 and $56,085,091 for the three months ended September 30, 2024 and 2023, respectively.

Included in other investments is the Company’s FHLBB Stock with average balances of $2,217,295 and $1,009,480 for the three months ended September 30, 2024 and 2023, respectively, with a dividend rate of approximately 8.41% and 8.04%, respectively, per quarter.

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

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

Six Months Ended June 30,

Nine Months Ended September 30,

Average Assets

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Net interest margin (4)

Included in net loans are non-accrual loans with average balances of $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.

Included in net loans are non-accrual loans with average balances of $6,075,373 and $7,873,201 for the nine months ended September 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 $59,218,512 and $42,203,207 for the nine months ended September 30, 2024 and 2023, respectively.

Included in other investments is the Company’s FHLBB Stock with average balances of $1,840,201 and $847,296, respectively, with a dividend rate of approximately 8.52% and 8.5%, respectively, for the nine months ended September 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 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 volume of interest-earning assets for the three- and nine-month periods ended September 30, 2024 increased 6.0% and 7.2%, respectively, compared to the same periods last year, and the average yield on interest-earning assets increased 46 bps in both comparison periods.

The average volume of loans increased over the three- and nine-month comparison periods of 2024 versus 2023 by 8.4% and 11.7%, respectively, and the average yield on loans increased 44 bps and 43 bps, respectively.

Loans accounted for 82.2% and 82.0% of the average interest-earning asset portfolio for the three- and nine-month periods ended September 30, 2024, compared to 80.5% and 78.7%, respectively, for the same periods last year.

Interest earned on the loan portfolio as a percentage of total interest income was 91.2% and 91.1%, respectively, for the three- and nine-month periods in 2024 compared to 90.3% and 88.9%, respectively, for the same periods in 2023.

The average volume of the taxable investment portfolio (classified as AFS) decreased 8.2% and 6.1%, respectively, during the three- and nine-month periods ended September 30, 2024, compared to the same periods last year, while the average yield increased five bps and 11 bps, respectively, between periods.

There were no purchases of taxable AFS investment securities during the first nine 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 nine-month periods ended September 30, 2024 decreased 0.6% in both periods, and the tax equivalent yield decreased nine bps and seven bps, respectively.

There were no tax-exempt bond purchases during the first nine 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, increased 94.7%, but decreased 48.6%, respectively, for the three- and nine-months ended September 30, 2024, compared to the same periods in 2023.

The decrease in average volume for the nine-month period 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 48 bps and 76 bps, respectively, for the three- and nine-month periods ended September 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 nine-month periods ended September 30, 2024 increased 8.5% and 10.3%, respectively, compared to the same periods in 2023, and the average rate paid on interest-bearing liabilities increased 64 bps and 82 bps, respectively.

The average volume of interest-bearing transaction accounts increased 5.2% and 2.5%, respectively, for the three- and nine-month periods ended September 30, 2024, compared to the same periods of 2023, reflecting moderate growth year over year.

The average rate paid on these accounts increased 32 bps and 34 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.

Interest-bearing transaction accounts comprised 33.0% and 33.5% of the average interest-bearing liabilities portfolio for the three- and nine-month periods ended September 30, 2024, compared to 34.0% and 36.0%, respectively, for the same periods last year.

Interest paid on these funds accounted for 26.3% and 27.1%, respectively, of total interest expense for the three- and nine-month periods of 2024 compared to 30.5% and 36.8%, respectively, for the same periods in 2023.

The average volume of money market accounts decreased 20.9% and 9.9%, respectively, for the three- and nine-month periods ended September 30, 2024, compared to the same periods in 2023, while the average rate paid on these deposits increased 22 bps and 50 bps, respectively.

The average volume of savings accounts decreased 11.8% and 12.1%, respectively, for the three- and nine-month periods ended September 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 52.0% and 39.1%, respectively, for the three- and nine-month periods ended September 30, 2024, compared to the same periods in 2023, and the average rate paid increased 156 bps and 172 bps, respectively.

The average volume of repurchase agreements decreased 8.0% and 12.1%, respectively, for the three- and nine-month periods ended September 30, 2024, compared to the same periods in 2023, while the average rate paid increased 11 bps and 38 bps, respectively, between comparison periods.

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 $44.3 million and $67.6 million in the average volume of borrowed funds, respectively, for the three- and nine-month periods ended September 30, 2024, compared to the same periods in 2023.

The average rate paid on borrowed funds decreased 30 bps for the three-month period but remained the same for the nine-month period ended September 30, 2024, compared to the same periods in 2023.

In summary, between the three- and nine-month periods ended September 30, 2024 and 2023, the average yield on interest-earning assets increased 46 bps in both periods, and the average rate paid on interest-bearing liabilities increased 64 bps and 82 bps, respectively.

Net interest spread decreased 18 bps and 36 bps, respectively, for the three- and nine-month periods ended September 30, 2024 versus the same periods in 2023, and the net interest margin decreased eight bps and 22 bps, respectively, between 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 June 30, 2024

Six Months Ended June 30, 2024

Three Months Ended June 30, 2023

Six Months Ended June 30, 2023

Three Months Ended

September 30, 2024

Nine Months Ended

September 30, 2024

Three Months Ended

September 30, 2023

Nine Months Ended

September 30, 2023

Average Interest-Earning Assets

23 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Income from sold loans

3 unchanged sentences

Total non-interest income

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.

Total non-interest income increased $295,083, or 17.2% and $104,198, or 2.0%, respectively, for the three and nine months ended September 30, 2024, compared to the same periods in 2023, with significant changes noted in the following:

The volume of loans sold into the secondary market for the three- and nine-month periods of 2024 decreased by $724 thousand and $1.6 million, respectively, compared to the same periods last year, accounting for the decrease in income from sold loans in both periods.

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

Income from CFS Partners increased between periods due in part to an equity market rally during the first nine 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.

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

Non-interest Expense

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Salaries and wages

9 unchanged sentences

Total non-interest expense

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.

Total non-interest expense increased $694,114, or 11.9% and $1.5 million, or 8.7%, respectively, for the three and nine months ended September 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 nine 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 part 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.

The decrease in occupancy expense year over year 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 .

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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 provision for income taxes decreased $138,765, or 19.2% for the third quarter of 2024 and $584,509, or 25.8% for the first nine 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 third quarter of 2024 and 2023, respectively, and $523,836 and $241,587, respectively for the first nine 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.

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 third quarter of 2024 and 2023, respectively and $447,606 and $201,384, respectively, for the first nine 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%.

1 unchanged sentence

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

June 30, 2024

September 30, 2024

December 31, 2023

15 unchanged sentences

Demand deposits

(43,025,942 )

Interest-bearing transaction accounts

(25,713,467 )

Money market funds

(10,257,551 )

Savings deposits

3 unchanged sentences

Long-term advances

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 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.

The increase in the loan portfolio during the first nine months of 2024 was primarily attributable to increases in CRE loans, commercial & industrial loans, municipal loans and residential real estate 1 st lien loans.

The decrease in the securities AFS portfolio at September 30, 2024 is attributable to the combined effect during the first nine months of the year of maturities amounting to $11.0 million and principal payments on MBS, ABS and CMO investments totaling $13.5 million, which was partially offset by a decrease of $4.4 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 a significant role in the Company’s liquidity position.

The decrease in money market funds was driven by a decrease of $9.1 million, or 9.3%, in retail money market funds and a decrease in municipal deposits of $1.4 million, or 14.3%.

The decrease in savings deposits is primarily due to a shift of funds between savings and time deposits, resulting from customer response to periodic certificate of deposit specials that have been offered throughout 2024.

The increase in time deposits is also due to an increase in brokered deposits, as the Company looks to alternate sources of funding to support loan growth.

As a result of the fluctuation in aggregate deposits during 2024, in addition to utilizing brokered deposits the Company utilized funding lines of credit 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.

Estimated deposits in excess of the FDIC insurance level amounted to $219.3 million as of September 30, 2024 and $217.3 million at December 31, 2023.

The estimated balance of $35.5 million of uninsured time deposits as of September 30, 2024 was made up of time CDs of $31.4 million and retirement accounts of $4.1 million.

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

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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:

The following table summarizes the estimated impact on the Company's NII over a twelve-month period, assuming a gradual parallel shift of the yield curve beginning September 30, 2024:

Percent Change in NII

3 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 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.

As of September 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, 8.441% for the June 2024 payment, and 8.451% for the September 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 28.3% of the Company’s loan balances as of June 30, 2024, compared to 28.5% as of December 31, 2023.

Residential mortgage loans represented 27.3% of the Company’s loan balances as of September 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 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 June 30, 2024.

As of September 30, 2024, junior lien home equity products made up 13.2% of the residential mortgage portfolio with maximum loan-to-value ratios (including prior liens) of 80%.

The Company also originates some home equity loans with loan-to-value ratios 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 September 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 71.3% 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.

The commercial lending portfolio consists of commercial & industrial, purchased, CRE and municipal loans, which collectively comprised 72.4% of the Company’s loan portfolio as of September 30, 2024, compared to 71.2% as of December 31, 2023.

As of September 30, 2024, the largest components of the CRE portfolio were $124.6 million in owner-occupied CRE and $154.3 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.

As of September 30, 2024, the Company had $20.2 million in guaranteed loans with guaranteed balances of $12.7 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 $54 thousand as of September 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.

9 unchanged sentences

Three Months Ended

September 30,

Credit loss expense - loans

Credit loss reversal - OBS credit exposure

Credit loss expense (reversal) - OBS credit exposure

Credit loss expense

Six Months Ended

Nine Months Ended

September 30,

Credit loss expense – loans

Credit loss reversal - OBS credit exposure

Credit loss expense (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.

The increases in the credit loss expense on loans in both comparison periods of 2024 compared to the same period in 2023, was due in part to an increase in charge-offs as well as an increase in the volume of the loan portfolio.

The increases in the OBS credit exposure during both the three-month and nine-month comparison periods are attributable to increases 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.

11 unchanged sentences

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

September 30,

ACL to total loans outstanding

9 unchanged sentences

Non-accruing loans

The 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.

The following table shows the breakdown of the ACL by loan segment and the percentage of loans in each category to total loans in the respective portfolios at the date indicated:

September 30, 2024

December 31, 2023

Commercial & industrial

Commercial real estate

Residential real estate - 1st lien

Residential real estate - Jr lien

The third quarter ACL analysis indicated that the reserve balance of $9.5 million as of September 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 September 30, 2024, is the completion of a workout of a commercial loan that was in non-accrual status which required a write down of approximately $1.0 million, which is also reflected in the net charge-offs and recoveries table on the next page.

Also included in the ACL calculation are adjustments to several qualitative factors made by management during the third quarter of 2024, including a decrease to the qualitative factors for economic trends in all portfolios to reflect an improving economic environment.

The qualitative factors for volume and terms in the commercial and industrial, CRE, and residential portfolios were decreased to reflect the absence of new or changed risks in those portfolios from new or increasing types of loans, industries, or collateral.

The qualitative factors for concentrations in the commercial and industrial, CRE, and residential portfolios were decreased to reflect concentrations that are within policy as well adjust to the appropriate level for the residential portfolios where the concentration policy does not apply.

The qualitative factor for delinquencies and non-performing loans in the consumer and residential portfolios was decreased to reflect low past due levels and a decrease year to date.

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

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

1 unchanged sentence

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

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Commercial & industrial

Net charge-offs during the period

$ (1,203,641 )

Average amount outstanding

21 unchanged sentences

Net charge-offs during the period

$ (1,378,949 )

Average amount outstanding

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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.

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

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

1 unchanged sentence

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

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

Upon adoption of ASU 2016-13 in 2023, the Company recorded a negative 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.

There was an increase of $53,790 and a decrease of $23,120, respectively, to the allowance for credit losses for OBS credit exposures during the three months ended September 30, 2024 and 2023, and an increase of $29,230 and a decrease of $40,992, respectively, during the nine months ended September 30, 2024 and 2023.

LIQUIDITY AND CAPITAL RESOURCES

10 unchanged sentences

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.

As of September 30, 2024, and December 31, 2023, the Company had $0.5 million and $0, respectively, in one-way CDARS deposits, and no one-way ICS deposits outstanding at either period end.

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.

As of September 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 September 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.

Additionally, the Company had brokered deposits from another source totaling approximately $13.9 million as of September 30, 2024 and $0 at December 31, 2023.

This relationship has provided increased access to short-term funding that is easily accessible without any detrimental effect on the pricing of the core deposit base.

As of September 30, 2024 and December 31, 2023, borrowing capacity of $110.0 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 in the aggregate amount of $150 thousand and $23.1 million, respectively.

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

September 30,

FHLBB Short-Term Advances

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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.

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

The Company’s BTFP 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 BTFP ceased extending new loans on March 11, 2024.

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

September 30,

FRB BTFP Advances

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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.

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 $61.2 million and $49.9 million, respectively, as of September 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 500 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 through this facility as of September 30, 2024 or December 31, 2023.

As of September 30, 2024 and December 31, 2023 the Company had an unsecured line of credit of $12.5 million with one correspondent bank.

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 June 30, 2024:

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

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

3 unchanged sentences

Change in AOCI on AFS securities, net of tax

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

Balance as of September 30, 2024 (book value $17.36 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, 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.

Consistent with these capital planning considerations, During the third quarter of 2024, the Company adopted a stock repurchase program authorizing 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.

The repurchase authorization expires 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.

As of September 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:

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(Dollars in Thousands)

June 30, 2024

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

September 30, 2024

Common equity tier 1 capital

(to risk-weighted assets)

Tier 1 capital (to risk-weighted assets)

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December 31, 2023:

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

Common equity tier 1 capital

(to risk-weighted assets)

Tier 1 capital (to risk-weighted assets)

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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