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Item 2. Management’s Discussion and Analysis

2025-05-15 compared with 2024-11-14 · 171 added, 271 removed, 407 unchanged (52% of the section changed)

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Period Ended September 30, 2024

Period Ended March 31, 2025

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

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.

and its wholly owned subsidiary, Community National Bank, as of March 31, 2025 and December 31, 2024, and its consolidated results of operations for the three-month interim period and one year period presented.

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

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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;

general economic or business conditions, either internationally (including due to changing tariff policies), 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;

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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 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 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.

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.

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.

The Company’s consolidated assets as of March 31, 2025, were $1.19 billion compared to $1.25 billion as of December 31, 2024, a decrease of 4.9%.

Changes in the asset base included an increase in loans of $12.3 million, or 1.3%, an increase in investment securities AFS of $8.6 million, or 5.4%, and an increase in cash of $3.5 million, or 35.5%, which more than offset by a decrease in overnight deposits of $85.6 million, or 84.7%.

The increase in the loan portfolio was primarily attributable to an increase of $7.6 million in residential first and Jr.

lien loans, $4.6 million in CRE loans, and $3.4 million in municipal loans, which was partially offset by a decrease of $3.2 million, collectively, in commercial & industrial and purchased loans.

The increase in the investment portfolio was due to the purchase of MBS classified as AFS.

The decrease in overnight deposits is partly due to the increase in the loan and investment securities portfolios, as well as reflecting decreases in deposit balances and payoff of BTFP advances that matured during the first quarter of 2025.

Total deposits as of March 31, 2025, were $979.7 million compared to $1.0 billion as of December 31, 2024, a decrease of approximately $22.0 million, or 2.2%.

Year to date, time deposits increased $2.5 million, or 1.4% and savings accounts increased $387 thousand, or 0.3%, while interest-bearing demand deposits decreased $17.9 million, or 5.9%, and money market funds decreased $6.8 million, or 4.0%.

A decrease in deposit balances is typical in the first and second quarters of the calendar year, 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 borrowed funds was the result of maturities in the BTFP funds.

Total interest income increased approximately $1.7 million, or 13.0%, for the first three months of 2025, compared to the same period in 2024.

The growth in the volume of the loan portfolio and origination of loans 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 $585 thousand, or 13.0%, for the first three months of 2025, compared to the same period in 2024.

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

The increase of $1.1 million, or 35.9%, in interest on deposits was partially offset by a decrease of $575 thousand, or 60.8% in interest on borrowed funds due to the decrease in borrowed funds.

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 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 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 credit loss expense for the first three months of 2025 was $325,054 compared to $313,579 for the same period in 2024, resulting in an increase of $11,475, or 3.7%.

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.

During the first quarter of 2025, 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 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 $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 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 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 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.

Consolidated net income for the first three months of 2025 increased $703 thousand to $3.5 million compared to $2.8 million for the same period in 2024.

The $1.1 million increase in net interest income after credit loss expense was a contributing factor to the increase in net income.

This change, 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 $102.9 million, with a book value per share of $18.05 as of March 31, 2025, compared to $98.0 million and a book value per share of $17.24 as of December 31, 2024.

Please refer to the section of this Management’s Discussion and Analysis titled “LIQUIDITY AND CAPITAL RESOURCES” for a discussion in of the changes in the Company’s equity capital for the three months ended March 31, 2025.

On March 19, 2025, the Company's Board of Directors declared a quarterly cash dividend of $0.24 per common share, payable on May 1, 2025, to shareholders of record on April 15, 2025.

As described in more detail below under “LIQUIDITY AND CAPITAL RESOURCES” as of March 31, 2025, the Company’s capital ratios, and those of our subsidiary Bank, were in excess of applicable regulatory requirements.

During the first quarter of 2025, CFS Partners, in which the Company currently holds a one-third ownership interest, agreed to redeem all of the limited liability company membership interest of Guaranty Bancorp, Inc., representing a one-third ownership interest, contingent upon, and just prior to, consummation of the pending merger of Guaranty Bancorp with and into Bar Harbor Bankshares.

Under the terms of the redemption agreement, beginning March 1, 2025, Guaranty Bancorp has agreed to forego its distributional interest in CFS Partners through the closing date of the redemption.

Accordingly, beginning March 1, 2025, the Company’s share of the profit and loss from the operations of CFS Partners’ sole subsidiary, CFSG, has increased from one-third to one-half.

The redemption of Guaranty Bancorp’s membership interest in CFS Partners is expected to occur before year end 2025.

The Company does not have a controlling interest in the partnership and will still remain accounting for the investment using the equity method.

Considering recent trade policy developments between Canada and the United States, management is assessing the potential risk to the local economy.

Canada is Vermont’s largest international trading partner;

many businesses who rely on trade with Canada are now at risk of experiencing increased costs, reduced sales, and a sense of uncertainty about the future.

Management is evaluating the impact on the bank’s customers, however the impact on profits for many of these businesses remains uncertain.

In light of these challenges, the Company’s own strategic focus will be to safeguard its balance sheet while supporting clients.

CRITICAL ACCOUNTING POLICIES

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These policies are described in the Company’s 2024 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 nine months of 2024 in the Company’s critical accounting policies.

There were no material changes during the first three months of 2025 in the Company’s critical accounting policies.

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

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RESULTS OF OPERATIONS

The Company’s net income for the third quarter of 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 $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.

The Company’s net income for the first three months of 2025 was $3.5 million, or $0.62 per common share, compared to $2.8 million, or $0.51 per common share, for the same period in 2024.

Core earnings (NII) were $9.4 million for the first three months of 2025 compared to $8.4 million for the same period in 2024.

Interest and fees on loans, the major component of interest income, increased $1.5 million, or 13.2% for the first three months of 2025 compared to the same period in 2024.

Interest paid on deposits, which is the major component of total interest expense, increased $1.1 million, or 35.9% for the first three months of 2025 compared to the same period in 2024, driven primarily by the increases in the fed funds rate.

Interest on borrowed funds decreased $575 thousand, or 60.8%, for the first three months of 2025 compared to the same period in 2024.

Market pressures on deposit rates have stabilized and a decrease in wholesale funding has resulted in an improved net interest margin and net interest spread.

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

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

Three Months Ended September 30,

Return on average assets

Return on average equity

Dividend payout ratio (1)

Average equity to average assets

Nine Months Ended September 30,

Three Months Ended March 31,

Return on average assets

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

The Company’s tax-exempt interest income of $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 Company’s tax-exempt interest income of $818,363 and $575,470 for the three months ended March 31, 2025 and 2024, respectively, was derived from loans to local municipalities of $70.4 million and $56.9 million, and tax-exempt municipal investment securities of $10.0 million and $10.4 million as of March 31, 2025 and 2024, respectively.

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

Three Months Ended September 30,

Net interest income as presented

Effect of tax-exempt income

Net interest income, tax equivalent

Nine Months Ended September 30,

Three Months Ended March 31,

Net interest income as presented

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Net interest income, tax equivalent

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

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

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

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

Three Months Ended September 30,

Three Months Ended March 31,

Average Assets

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Total interest-bearing liabilities

$ 840,699,872

$ 776,627,172

Noninterest bearing deposits

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1,090,112,067

Shareholders' equity

Total liabilities and shareholders' equity

1,012,575,157

$ 1,071,985,898

Net interest income

Net interest spread (3)

Net interest margin (4)

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.

Nine Months Ended September 30,

Average Assets

Loans, net (1)

$ 864,456,129

$ 774,050,459

Taxable investment securities

Tax-exempt investment securities

Sweep and interest-earning accounts

Other investments (2)

Total interest-earning assets

1,054,173,994

$ 983,049,969

Cash and due from banks

Premises and equipment

$ 1,115,813,333

$ 1,043,200,940

Average Liabilities and Shareholders' Equity

Interest-bearing transaction accounts

$ 278,254,672

$ 271,528,726

Money market funds

Savings deposits

Time deposits

Repurchase agreements

Borrowed funds

Finance lease obligations

Junior subordinated debentures

Total interest-bearing liabilities

Noninterest bearing deposits

Other liabilities

Total liabilities

1,024,739,482

Shareholders' equity

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Net interest margin (4)

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.

Included in net loans are non-accrual loans with average balances of $8,730,643 and $6,524,051 for the three months ended March 31, 2025 and 2024, 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 $68,300,830 and $56,602,242 for the three months ended March 31, 2025 and 2024, respectively.

Included in other investments is the Company’s FHLBB Stock with average balances of $1,824,887 and $1,185,062, respectively, with a dividend rate of approximately 6.96% and 8.56%, respectively, for the three months ended March 31, 2025 and 2024, respectively.

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

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

The average volume of interest-earning assets for the three- and nine-month periods ended September 30, 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 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 average volume of interest-earning assets for the three-month period ended March 31, 2025 increased 7.8% compared to the same period last year, and the average yield on interest-earning assets increased 29 bps.

The average volume of loans increased over the three-month comparison period of 2025 versus 2024 by 9.8%, and the average yield on loans increased 24 bps.

Loans accounted for 82.8% of the average interest-earning asset portfolio for the three-month period ended March 31, 2025, compared to 81.3% for the same period last year.

Interest earned on the loan portfolio as a percentage of total interest income was 91.0% for the three-month period in 2025 compared to 90.8% for the same period in 2024.

The average volume of the taxable investment portfolio (classified as AFS) decreased 14.6% during the three-month period ended March 31, 2025, compared to the same period last year, while the average yield increased 10 bps between periods.

There were purchases of taxable AFS investment securities during the first three months of 2025, however maturities and paydowns on this portfolio in 2024 and into 2025 outweighed purchases during the same time period, 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-month period ended March 31, 2025 decreased 0.1% and the tax equivalent yield increased nine bps.

There were no tax-exempt bond purchases during the first three months of 2025, 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 368.9% for the three-month period ended March 31, 2025, compared to the same periods in 2024.

The average volume grew steadily throughout 2024 with the influx of customer deposit accounts, primarily municipal deposit accounts.

The average yield on these funds decreased 104 bps for the three-month period ended March 31, 2025, versus the same period in 2024.

The average volume of interest-bearing liabilities for the three-month period ended March 31, 2025 increased 8.7% compared to the same period in 2024, and the average rate paid on interest-bearing liabilities increased 11 bps.

The average volume of interest-bearing transaction accounts increased 2.9% for the three-month period ended March 31, 2025, compared to the same period in 2024, reflecting moderate growth year over year, while the average rate paid on these accounts decreased two bps between comparison periods.

Interest-bearing transaction accounts comprised 33.3% of the average interest-bearing liabilities portfolio for the three-month period ended March 31, 2025, compared to 35.2% for the same period last year.

Interest paid on these funds accounted for 27.2% of total interest expense for the three-month period of 2025 compared to 30.4% for the same period in 2024.

The average volume of money market accounts increased 37.2% for the three-month period ended March 31, 2025, compared to the same period in 2024, and the average rate paid on these deposits increased 52 bps.

The increase was driven primarily by increases in the average volume of municipal deposit accounts during the third and fourth quarter of 2024.

The average volume of savings accounts decreased 5.2% for the three-month period ended March 31, 2025, compared to the same period in 2024, with no change in the average rate paid on these accounts.

The average volume of time deposits increased 44.8% for the three-month period ended March 31, 2025, compared to the same period in 2024, and the average rate paid increased 42 bps.

The increase in both the average volume and average rate paid are attributable to CD promotional rates offered throughout 2024 and into 2025.

The average volume of repurchase agreements increased 37.3% for the three-month period ended March 31, 2025, compared to the same period in 2024, and the average rate paid increased 14 bps between comparison periods.

The Company utilized borrowed funds to fund loan growth and cover deposit outflows during 2023 and into the first and second quarters of 2024, but as deposit accounts began to increase, the need for these funds decreased, accounting for the 57.8% decrease in average volume of borrowed funds during the three-month period ended March 31, 2025, compared to the same period in 2024.

The average rate paid on borrowed funds decreased as well by 43 bps for the three-month period ended March 31, 2025, compared to the same period in 2024.

In summary, between the three-month periods ended March 31, 2025 and 2024, the average yield on interest-earning assets increased 29 bps and the average rate paid on interest-bearing liabilities increased 11 bps.

Net interest spread increased 18 bps for the three-month period ended March 31, 2025 versus the same period in 2024, and the net interest margin increased 20 bps 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 2025 and 2024 resulting from volume changes in daily average assets and daily average liabilities and fluctuations in average rates earned and paid.

Three Months Ended

September 30, 2024

Nine Months Ended

September 30, 2024

Three Months Ended

September 30, 2023

Nine Months Ended

September 30, 2023

Three Months Ended March 31, 2025

Three Months Ended March 31, 2024

Average Interest-Earning Assets

23 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Income from sold loans

3 unchanged sentences

Total non-interest income

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.

Total non-interest income decreased $55,298, or 3.4%, for the three months ended March 31, 2025, compared to the same period in 2024, with significant changes noted in the following:

The volume of loans sold into the secondary market during the first three months of 2025 decreased by $274 thousand compared to the same period last year, accounting for the decrease in income from sold loans year over year.

Although loan volume increased during the first three months of 2025, the increase was primarily in the 1 – 4 family residential loan portfolio with moderate growth in the CRE portfolio, generating documentation fees totaling $154 thousand for the first three months of 2025 compared to $175 thousand for the same period in 2024, offset by increases in Commercial LOC annual renewal fees and residential doc fees, accounting for the moderate increase in other income from loans year over year.

Income from CFS Partners decreased between periods due to realized losses from an equity portfolio.

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 approximately 7% of total non-interest income.

Non-interest Expense

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

Salaries and wages

3 unchanged sentences

Charged-off checks

Outsourcing expense

Service contracts - administrative

Consultant services

FDIC insurance

Collection & non-accruing loan expense

Electronic banking expense

ATM & debit card expense

Other miscellaneous expenses

Total non-interest expense

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.

Total non-interest expense increased $203,468, or 3.2% for the three months ended March 31, 2025, compared to the same period in 2024, with significant changes noted in the following:

The decrease in salaries and wages during the first quarter of 2025 reflects changes in senior leadership as well as unfilled positions during the quarter.

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 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 .

The increase in occupancy expense year over year is primarily due to normal increases in contracted services including increased expenses for plowing and sanding during the winter months.

In addition, 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, resulted in a capital gain on equipment, accounting for a portion of the year over year increase.

The Company received a recovery for a $53 thousand fraudulent check that was charged off in 2024, accounting for most of the decrease in charged-off checks .

The decrease in outsourcing expense is attributable to a renegotiated contract from the Company’s core provider.

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.

The increase in FDIC insurance is attributable in part to an increase in the assessment multiplier, as well as an increase in total assets.

The increase in consultant services is attributable to an increased utilization of these services for branch network and technology projects during 2025.

Collection & non-accruing loan expenses were lower during the first three months of 2025 due to the recovery of expenses associated with properties in foreclosure that were resolved.

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

APPLICABLE INCOME TAXES

The provision for income taxes decreased $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 third quarter of 2024 and 2023, respectively and $447,606 and $201,384, respectively, for the first nine months of 2024 and 2023.

The provision for income taxes increased $107,884, or 19.4%, for the first three months of 2025 compared to the same period in 2024, which is consistent with the increase in income before income taxes.

Tax credits, which consist of credits from affordable housing investments and NMTC, amounted to $249,612 and $174,612, respectively for the first three months of 2025 and 2024.

The Company’s investment in a project during the last quarter of 2024 generated NMTC for the first quarter of 2025, accounting for the increase in tax credits between comparison periods.

Amortization expense related to the affordable housing investments and NMTC is included as a component of income tax expense and amounted to $212,868 and $149,202, respectively for the first three months of 2025 and 2024.

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:

September 30, 2024

March 31, 2025

December 31, 2024

7 unchanged sentences

Time deposits

Overnight borrowings

Short-term advances

Long-term advances

2 unchanged sentences

AFS securities

(20,228,492 )

Demand deposits

Interest-bearing transaction accounts

Money market funds

(17,919,979 )

Money market funds

Savings deposits

Time deposits

Overnight borrowings

Short-term advances

Long-term advances

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.

(36,500,000 )

The increase in the loan portfolio during the first three months of 2025 was primarily attributable to increases in CRE loans, municipal loans and residential real estate 1 st lien loans.

The increase in the securities AFS portfolio at March 31, 2025 is attributable to the combined effect during the first three months of the year of purchases totaling $15.0 million and a decrease of $3.0 million in unrealized losses reflected in OCI, which was partially offset by maturities of $5.5 million and principal payments on MBS, ABS and CMO investments totaling $3.9 million.

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.

The decrease in interest-bearing transactions accounts is attributable to a decrease of $12.9 million, or 29.9% in government agency accounts for our municipal customers, and a decrease of $4.7 million, or 4.5% in retail deposit accounts.

The decrease in money market funds was driven by a decrease of $12.5 million, or 28.2%, in ICS accounts, which was partially offset by an increase in retail money market funds of $2.8 million, or 2.3%, and an increase in municipal deposits of $3.0 million, or 71.7%.

The increase in time deposits is attributable to an increase in retail time deposits.

The Company used overnight deposits to cover maturities in borrowed funds during the first three months of 2025 and used those funds to cover fluctuations in aggregate deposits during the same period, enabling the Company to rely less on other sources of funding, including brokered deposits.

UNINSURED DEPOSITS

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.

Estimated deposits in excess of the FDIC insurance level amounted to $244.6 million as of March 31, 2025 and $258.0 million as of December 31, 2024.

The estimated balance of $40.5 million of uninsured time deposits as of March 31, 2025 was made up of time CDs of $37.2 million and retirement accounts of $3.3 million.

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

7 unchanged sentences

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.

12 unchanged sentences

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

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

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

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

1 unchanged sentence

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

The prolonged inverted yield curve and 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 September 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 March 31, 2025:

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 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.

As of March 31, 2025, the Company had $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 7.47% for the March 2025 payment, compared to a floating rate of 8.50% for the March 2024 payment.

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

4 unchanged sentences

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

Residential mortgage loans represented 27.3% of the Company’s loan balances as of September 30, 2024, compared to 28.5% as of December 31, 2023.

Residential mortgage loans represented 27.8% of the Company’s loan balances as of March 31, 2025, compared to 27.4% as of December 31, 2024.

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

1 unchanged sentence

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

As of September 30, 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%.

As of March 31, 2025, junior lien home equity products made up 13.8% of the residential mortgage portfolio with maximum loan-to-value ratios (including prior liens) of 80%.

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.

The following tables show the estimated maturity of the Company’s loan portfolio as of March 31, 2025.

Fixed Rate Loans

Commercial & industrial

Purchased (1)

Commercial real estate

10 unchanged sentences

$ 679,221,591

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 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.

Consists of commercial loans totaling $13 thousand within 1 year;

$2.9 million in 2 – 5 years and $833 thousand in 6 – 15 years and consumer loans of $0, $197 thousand and $3.3 million in those maturity categories, respectively.

The Company experienced solid growth in the CRE loan portfolios, which is consistent with its strategic focus on commercial lending.

Commercial & industrial, purchased, CRE and municipal loans collectively comprised 71.9% of the Company’s loan portfolio as of March 31, 2025, compared to 72.3% as of December 31, 2024.

The largest components of the CRE portfolio were $128.3 million in owner-occupied CRE and $151.9 million in non-owner occupied CRE as of March 31, 2025, compared to $125.5 million and 154.6 million, respectively, as of December 31, 2024.

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

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.

As of March 31, 2025, the Company had $25.3 million in guaranteed loans with guaranteed balances of $17.1 million, compared to $25.5 million in guaranteed loans with guaranteed balances of $17.2 million as of December 31, 2024.

PPP loans with outstanding balances of $33 thousand as of March 31, 2025, and $43 thousand as of December 31, 2024, 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.

2 unchanged sentences

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.

The Company obtains current property appraisals or market value analyses and considers the cost to carry and sell collateral 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.

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

Credit loss expense

1 unchanged sentence

Three Months Ended

September 30,

Credit loss expense - loans

Credit loss expense (reversal) - OBS credit exposure

Credit loss expense

Nine Months Ended

September 30,

Credit loss expense – loans

Credit loss expense (reversal) - OBS credit exposure

Credit loss reversal - OBS credit exposure

Credit loss expense

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.

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 increase in the credit loss expense on loans in the first months of 2025 compared to the same period in 2024, was due in part to an increase in certain qualitative factors as well as an increase in the volume of the loan portfolio.

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

ACL and provisions –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 losses incurred.

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).

3 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

10 unchanged sentences

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

March 31, 2025

December 31, 2024

3 unchanged sentences

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.

The first quarter ACL analysis indicated that the reserve balance of $10.2 million as of March 31, 2025, was sufficient to cover expected credit losses that are probable and estimable as of the measurement date.

Included in the ACL calculation for the first quarter of 2025 are adjustments to several qualitative factors made by management, including an increase in the risk status of the qualitative factors for volumes and terms in the residential portfolios to reflect increasing trends in volumes.

The quantitative factor for exceptions in that portfolio was also adjusted by increasing the risk status as an increasing trend was noted.

In addition, the risk status for delinquency and non-performing loans was increased to reflect the uncertainty as to how and when inflation or a recession will, or could, affect our consumer customers’ ability to pay.

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.

1 unchanged sentence

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

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

For the Nine Months Ended September 30,

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

For the Three Months Ended March 31,

Commercial & industrial

Net charge-offs during the period

$ (1,203,641 )

Average amount outstanding

4 unchanged sentences

Commercial real estate

Net (charge-offs) recoveries during the period

Net charge-offs during the period

Average amount outstanding

4 unchanged sentences

Residential real estate - 1st lien

Net recoveries during the period

Net charge-offs during the period

Average amount outstanding

7 unchanged sentences

Net charge-offs during the period

$ (1,378,949 )

Average amount outstanding

6 unchanged sentences

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.

During recessionary periods, a declining housing market can result in an increase in loan loss reserves or ultimately an increase in foreclosures and credit-related losses.

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.

4 unchanged sentences

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.

Such instruments involve, to varying degrees, elements of credit and interest rate risk more than 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 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.

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 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 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.

During the first three months of 2025, the Company did not engage in any activity that created any additional types of OBS risk.

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 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.

As of March 31, 2025, and December 31, 2024, the Company had $236 thousand 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 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.

As of March 31, 2025 and December 31, 2024, the Company reported $1.8 million and $2.5 million, respectively, in reciprocal CDARS deposits.

The balance in ICS reciprocal money market deposits was $31.9 million as of March 31, 2025, compared to $44.4 million as of December 31, 2024, and the balance in ICS reciprocal demand deposits as of those dates was $107.0 million and $109.5 million, respectively.

Additionally, the Company had brokered deposits from another source totaling approximately $14.0 million as of March 31, 2025 and $13.8 million as of December 31, 2024.

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

As of March 31, 2025 and December 31, 2024, borrowing capacity of $106.8 million and $108.7 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 of $36.1 million and $31.1 million, respectively.

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

September 30,

FHLBB Short-Term Advances

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

FHLBB Long-Term Advances

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

FHLBB option advance, 3.66%, due March 26, 2027

FHLBB option advance, 3.51%, due March 27, 2028

Total Long-Term Advances

Overnight Borrowings at 5.54%

Total Advances and Overnight Borrowings

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

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

The BTFP loans matured and were repaid during the first quarter of 2025.

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

September 30,

FRB BTFP Advances

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

FRB BTFP term advance, 4.71%, due May 13, 2024

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

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

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

Total BTFP Advances

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 $61.2 million and $49.9 million, respectively, as of September 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 $60.6 million and $60.8 million, respectively, as of March 31, 2025, and December 31, 2024.

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 450 bps.

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 through this facility as of March 31, 2025, or December 31, 2024.

As of March 31, 2025, and December 31, 2024, 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 September 30, 2024:

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

Issuance of common stock through the DRIP

Dividends declared on common stock

Dividends declared on preferred stock

Change in AOCI on AFS securities, net of tax

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, 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.

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As of March 31, 2025, 2,000 shares had been repurchased for an aggregate purchase price of $35,380.

The following table illustrates the changes in shareholders' equity from December 31, 2024, to March 31, 2025:

Balance as of December 31, 2024 (book value $17.24 per common share)

Issuance of common stock through the DRIP

Dividends declared on common stock

Dividends declared on preferred stock

Repurchase of shares through the stock buyback program

Change in AOCI on AFS securities, net of tax

Balance as of March 31, 2025 (book value $18.05 per common share)

$ 102,905,030

As described in more detail in Note 22 to the audited consolidated financial statements contained in the Company’s 2024 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 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.

As of March 31, 2025, 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)

September 30, 2024

March 31, 2025

Common equity tier 1 capital

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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