COMMUNITY BANCORP VT

Previous wording

The following discussion analyzes the consolidated financial condition of Community Bancorp. and its wholly owned subsidiary, Community National Bank, as of March 31, 2024 and December 31, 2023, and its consolidated results of operations for the three-month interim period and one year period presented. The Company is considered a “smaller reporting company” and a “non-accelerated filer” under the disclosure rules of the SEC. Accordingly, the Company has elected to provide its statements of income, comprehensive income, cash flows and changes in shareholders’ equity for a two-year, rather than a three-year, period and provide certain other smaller reporting company scaled disclosures where management deems it appropriate.

Current wording

The following discussion analyzes the consolidated financial condition of Community Bancorp. and its wholly owned subsidiary, Community National Bank, as of June 30, 2024 and December 31, 2023, and its consolidated results of operations for the three-month and six-month interim periods and one year period presented. The Company is considered a “smaller reporting company” and a “non-accelerated filer” under the disclosure rules of the SEC. Accordingly, the Company has elected to provide its statements of income, comprehensive income, cash flows and changes in shareholders’ equity for a two-year, rather than a three-year, period and provide certain other smaller reporting company scaled disclosures where management deems it appropriate.

Previous wording

The Company’s consolidated assets as of March 31, 2024, were $1.11 billion compared to $1.10 billion as of December 31, 2023, an increase of 0.7%. Changes in the asset base included an increase in loans of $20.9 million, or 2.5%, which was partially offset by a decrease of $4.5 million, or 22.1%, in cash and cash equivalents and a decrease of $10.1 million, or 5.3% in investment securities. These changes in the asset base reflect the Company’s efforts to deploy cash into higher earning assets. The increase in the loan portfolio was primarily attributable to an increase of $7.2 million in commercial & industrial loans, $11.0 million in CRE loans, $2.5 million in municipal loans and $1.1 million in residential first lien loans, which was minimally offset by a decrease of $362 thousand in purchased loans and $338 thousand in consumer loans.

Current wording

The Company’s consolidated assets as of June 30, 2024, were $1.10 billion compared to just under $1.10 billion as of December 31, 2023, a slight increase of 0.1%. Changes in the asset base included an increase in loans of $16.7 million, or 2.0%, which was offset by a decrease of $16.4 million, or 8.6%, in investment securities. The increase in the loan portfolio was primarily attributable to an increase of $8.1 million in commercial & industrial loans, $26.9 million in CRE loans and $3.2 million in residential first lien loans, which was partially offset by a decrease of $20.4 million in municipal loans and $1.4 million in purchased loans. The decrease in the investment portfolio was due in part to maturities in the U.S. Government securities portfolio, paydowns in the MBS and CMO portfolios and an increase in the unrealized loss position of the investment portfolio due to prevailing interest rates. In addition, cash flows from the investment portfolio were used primarily to fund loan growth and other liquidity needs, rather than to purchase new investment securities.

Previous wording

Total deposits as of March 31, 2024, were $883.8 million compared to $897.0 million as of December 31, 2023, a decrease of $13.2 million, or 1.5%. Year to date, demand and interest-bearing transaction accounts decreased in total by $23.2 million or 4.6%, as well as a decrease of $1.3 million, or 1.1%, in money market funds and $852 thousand, or 0.6%, in savings accounts. This was partially offset by an increase of $12.1 million, or 9.88%, in time deposits. The Company has been offering competitive interest rates for retail time deposits, accounting for the increase in these funds. A decrease in deposit balances is typical in the first and second quarters of the calendar year with balances increasing through year end due in part to the timing of customers income tax obligations and the spend down of deposited funds by Vermont municipal customers prior to their June 30 fiscal year end. The decrease in deposit balances, combined with the loan growth has required the use of borrowed funds as a supplemental funding source.

Current wording

Total deposits as of June 30, 2024, were $848.7 million compared to $897.0 million as of December 31, 2023, a decrease of $48.2 million, or 5.4%. Year to date, demand and interest-bearing transaction accounts decreased in total by $68.7 million or 13.8%, money market funds decreased $7.2 million, or 5.9%, and savings accounts decreased $5.8 million, or 3.8%. This was partially offset by an increase of $33.5 million, or 27.0%, in time deposits. The Company has been offering competitive interest rates for retail time deposits, and accessing the brokered deposit market, accounting for the increase in these funds. A decrease in deposit balances is typical in the first and second quarters of the calendar year, with balances increasing through year end due in part to the timing of customers’ income tax obligations and the spend down of deposited funds by Vermont municipal customers prior to their June 30 fiscal year end. The decrease in deposit balances, combined with the loan growth has required the use of borrowed funds as a supplemental funding source.

Previous wording

Total interest income increased $2.1 million, or 19.4%, for the first three months of 2024, compared to the same period in 2023. The growth of the loan portfolio originated at higher interest rates, as well as adjustable-rate loans repricing to current market rates, helped to support the year-over-year increase in interest income.

Current wording

Total interest income increased approximately $2.0 million, or 17.7%, for the second quarter of 2024, compared to the same quarter in 2023, and $4.1 million, or 18.5%, for the first six months of 2024, compared to the same period in 2023. The growth of the loan portfolio originated at higher interest rates, as well as adjustable-rate loans repricing to current market rates, helped to support the year-over-year increase in interest income.

Previous wording

Total interest expense increased $2.3 million, or 100.4%, for the first three months of 2024, compared to the same period in 2023. The increases in the fed funds rate throughout 2022 and into 2023 increased borrowing costs and have put more pressure on competitive deposit pricing, resulting in an increase in the Company’s money market and time deposit rates. Please refer to the interest rate sensitivity discussion in the Interest Rate Risk and Asset and Liability Management section for more information on the impact that the actions of the FRB’s FOMC in regulating interest rates, and changes in the yield curve, could have on net interest income.

Current wording

Total interest expense increased $2.2 million, or 73.0%, for the second quarter of 2024, compared to the same quarter of 2023 and increased $4.4 million, or 84.8%, for the first six months of 2024, compared to the same period in 2023. The higher rate environment has increased borrowing costs and put more pressure on competitive deposit pricing, resulting in an increase in the rates paid on the Company’s money market and time deposit accounts. Please refer to the interest rate sensitivity discussion in the Interest Rate Risk and Asset and Liability Management section for more information on the impact that the actions of the FRB’s FOMC in regulating interest rates, and changes in the yield curve, could have on our net interest income.

Previous wording

The credit loss expense for the three months ended March 31, 2024 and 2023, was determined under ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, commonly referenced as the Current Expected Credit Losses, or CECL, which the Company adopted effective January 1, 2023. The credit loss expense for the first three months of 2024 was $313,579 compared to $286,526 for the same period in 2023, an increase of $27,053, or 9.4%. The current period credit loss expense considers a number of factors, including loan growth and changes in balances of the current portfolio, changes in forecasts, historical loss rate and qualitative factors. Please refer to Note 5 of the unaudited consolidated financial statements as well as the ACL and credit loss expense discussion in the Credit Risk section of this MD&A.

Current wording

The credit loss expense for the six months ended June 30, 2024 and 2023, was determined under ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, commonly referenced as the Current Expected Credit Losses, or CECL, which the Company adopted effective January 1, 2023. The credit loss expense for the second quarter of 2024 was $331,582 compared to $281,142 for the same quarter of 2023 and $645,161 for the first six months of 2024 compared to $567,668 for the same period in 2023, resulting in increases of $50,440, or 17.9%, and $77,493, or 13.7%, respectively, between periods. The current period credit loss expense considers a number of factors, including loan growth and changes in balances of the loan categories within the current portfolio, changes in forecasts, historical loss rate and qualitative factors. Please refer to Note 5 of the unaudited consolidated financial statements as well as the ACL and credit loss expense discussion in the Credit Risk section of this MD&A.

Previous wording

Consolidated net income for the first three months of 2024 decreased $515,860 to $2.8 million compared to $3.3 million for the same period of 2023. Year over year, the $2.3 million increase in interest expense, despite a $2.1 million increase in interest income, was the main factor contributing to the decrease in net income. These changes, along with other significant changes in non-interest income and non-interest expense are discussed in the appropriate sections of this MD&A.

Current wording

Consolidated net income for the second quarter of 2024 decreased $468,153 to $2.7 million compared to $3.2 million for the same quarter of 2023, and for the first six months of 2024 consolidated net income decreased $984,014 to $5.6 million compared to $6.5 million for the same period of 2023. Year over year, the $4.4 million increase in interest expense, despite a $4.1 million increase in interest income, was a contributing factor to the decrease in net income, along with a $828 thousand increase in non-interest expense as well as a $191 thousand decrease in non-interest income. These changes, along with other significant changes in non-interest income and non-interest expense are discussed in the appropriate sections of this MD&A.

Previous wording

Equity capital increased to $89.4 million, with a book value per share of $15.88 as of March 31, 2024, compared to $89.0 million and a book value per share of $15.87 as of December 31, 2023. The moderate increase in equity capital between periods reflected the combined effect of first quarter net income of $2.8 million, offset in part by an increase in unrealized losses in the investment portfolio of $1.5 million, net of tax, reflected in accumulated other comprehensive loss, and dividends paid totaling $940 thousand. The unrealized loss position in the investment portfolio is considered by management as temporary and does not impact the Company’s regulatory capital ratios.

Current wording

Equity capital increased to $91.3 million, with a book value per share of $16.17 as of June 30, 2024, compared to $89.0 million and a book value per share of $15.87 as of December 31, 2023. The moderate increase in equity capital between periods reflected the combined effect of net income of $5.6 million for the first six months of 2024, offset in part by an increase in unrealized losses in the investment portfolio of $1.3 million, net of tax, reflected in accumulated other comprehensive loss, and dividends paid totaling $2.5 million. The unrealized loss position in the investment portfolio is considered by management as temporary and does not impact the Company’s regulatory capital ratios.

Previous wording

These policies are described in the Company’s 2023 Annual Report on Form 10-K in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” and in Note 1 (Significant Accounting Policies) to the audited consolidated financial statements. There were no material changes during the first three months of 2024 in the Company’s critical accounting policies.

Current wording

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.

Previous wording

**ACL -**Management believes that the calculation of the ACL is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. In estimating the ACL, management has adopted a methodology consistent with ASU No. 2016-13 that requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses over the life of the loans at the measurement date. Further consideration is given to qualitative factors, including changes in current economic indicators and their probable impact on borrowers and collateral, trends in delinquent and non-performing loans, trends in criticized and classified assets, levels of exceptions, the impact of competition in the market, concentrations of credit risk in a variety of areas, including portfolio product mix, the level of loans to individual borrowers and their related interests, loans to industry segments and the geographic distribution of CRE loans. Management’s estimates used in calculating the ACL may increase or decrease based on changes in these factors, which in turn will affect the amount of the Company’s provision for credit losses charged against current period income. This evaluation is inherently subjective and actual results could differ significantly from these estimates under different assumptions, judgments or conditions. The Company estimates expected credit losses on OBS credit exposures over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The ACL on OBS credit exposures is adjusted through credit loss expense.

Current wording

**ACL -**Management believes that the calculation of the ACL is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. In estimating the ACL, management has adopted a methodology consistent with ASU No. 2016-13 that requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses over the life of the loans at the measurement date. Further consideration is given to qualitative factors, including changes in current economic indicators and their probable impact on borrowers and collateral, trends in delinquent and non-performing loans, trends in criticized and classified assets, levels of exceptions, the impact of competition in the market, concentrations of credit risk in a variety of areas, including portfolio product mix, the level of loans to individual borrowers and their related interests, loans to industry segments and the geographic distribution of CRE loans. Management’s estimates used in calculating the ACL may increase or decrease based on changes in these factors, which in turn will affect the amount of the Company’s provision for credit losses charged against current period income. This evaluation is inherently subjective and actual results could differ significantly from these estimates under different assumptions, judgments or conditions. The Company estimates expected credit losses on OBS credit exposures over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The ACL on OBS credit exposures is recorded as a liability on the balance sheet within Accrued interest and other liabilities, with adjustments made through credit loss expense.

Previous wording

The Company’s net income for the first three months of 2024 was $2.8 million, or $0.51 per common share, compared to $3.3 million, or $0.61 per common share, for the same period in 2023. Core earnings (NII) were $8.36 million for the first three months of 2024 compared to $8.52 million for the same period in 2023. Interest and fees on loans, the major component of interest income, increased $2.3 million, or 24.6%, for the first three months of 2024 compared to the same period in 2023. Interest paid on deposits, which is the major component of total interest expense, increased $1.2 million, or 67.0%, year over year, driven primarily by the increases in the fed funds rate during 2022 and into the third quarter of 2023. A shift from lower yielding interest-bearing accounts and savings accounts to higher yielding money market and certificate of deposit accounts has contributed to the higher interest expense year over year. Market pressures on deposit rates along with an increased use of wholesale funding are driving up the Company’s cost of funds and compressing the net interest margin.

Current wording

The Company’s net income for the second quarter of 2024 was $2.7 million, or $0.49 per common share, compared to $3.2 million, or $0.58 per common share for the same quarter of 2023, and for the first six months of 2024 was $5.6 million, or $0.99 per common share, compared to $6.5 million, or $1.19 per common share, for the same period in 2023. Core earnings (NII) were $8.1 million for the second quarter of 2024 compared to $8.3 million for the same period of 2023, and $16.5 million for the first six months of 2024 compared to $16.8 million for the same period in 2023. Interest and fees on loans, the major component of interest income, increased $2.1 million, or 20.5% for the second quarter of 2024 compared to the same quarter of 2023, and $4.4 million, or 22.5%, for the first six months of 2024 compared to the same period in 2023. Interest paid on deposits, which is the major component of total interest expense, increased $1.1 million, or 51.1% for the second quarter of 2024 compared to the same quarter of 2023 and increased $2.4 million, or 58.3%, year over year, driven primarily by the increases in the fed funds rate during 2022 and into the third quarter of 2023. A shift from lower yielding interest-bearing accounts and savings accounts to higher yielding money market and certificate of deposit accounts has contributed to the higher interest expense year over year. Interest on borrowed funds increased $1.0 million, or 404.8% for the second quarter of 2024 compared to the same period in 2023 and increased $1.9 million, or 701.6%, for the first six months of 2024 compared to the same period in 2023. Market pressures on deposit rates along with an increased use of wholesale funding are driving up the Company’s cost of funds and compressing the net interest margin and net interest spread.

Previous wording

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

Current wording

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.

Previous wording

The following table presents the daily average assets and the daily average liabilities, including the yields on interest-earning assets and interest-bearing liabilities for the comparison period. Interest income (excluding interest on non-accrual loans) is expressed on a tax equivalent basis, both in dollars and as a yield/rate for the comparison periods presented. Net interest income, net interest spread, and net interest margin are also expressed on a tax equivalent basis.

Current wording

The following table presents the daily average assets and the daily average liabilities, including the yields on interest-earning assets and interest-bearing liabilities for the comparison periods. Interest income (excluding interest on non-accrual loans) is expressed on a tax equivalent basis, both in dollars and as a yield/rate for the comparison periods presented. Net interest income, net interest spread, and net interest margin are also expressed on a tax equivalent basis.

Previous wording

The average volume of interest-earning assets for the three-month period ended March 31, 2024 increased 7.2%, compared to the same period last year, and the average yield on interest-earning assets increased 50 bps.

Current wording

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.

Previous wording

The average volume of loans increased over the three-month comparison period of 2024 versus 2023 by 13.5%, and the average yield on loans increased 49 bps. Loans accounted for 81.3% of the average interest-earning asset portfolio for the three-month period ended March 31, 2024, compared to 76.8% for the same period last year. Interest earned on the loan portfolio as a percentage of total interest income was 90.8% for the three-month period in 2024 compared to 86.9% for the same period in 2023.

Current wording

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.

Previous wording

The average volume of the taxable investment portfolio (classified as AFS) decreased 3.5% during the three-month period ended March 31, 2024, compared to the same period last year, while the average yield increased 12 bps between periods. There were no purchases of taxable AFS investment securities during the first three months of 2024, accounting for the decrease year over year.

Current wording

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.

Previous wording

The average volume of the tax-exempt investment portfolio (classified as AFS) for the three-month period ended March 31, 2024 decreased $1.1 million and the tax equivalent yield decreased 11 bps. There were no tax-exempt bond purchases during the first three months of 2024, accounting for the decrease in this portfolio.

Current wording

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.

Previous wording

The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing account at the FRBB, decreased 78.8% for the three-months ended March 31, 2024, compared to the same period in 2023. The decrease in average volume year over year is attributable to the funding of loan growth, and to a decrease in customer deposit accounts. The average yield on these funds increased 97 bps for the three-month period ended March 31, 2024, versus the same period in 2023, directly related to the increases in the fed funds rate throughout 2022 and into 2023.

Current wording

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.

Previous wording

The average volume of interest-bearing liabilities for the three-month period ended March 31, 2024 increased 10.1%, compared to the same period in 2023, and the average rate paid on interest-bearing liabilities increased 98 bps.

Current wording

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.

Previous wording

The average volume of interest-bearing transaction accounts increased 2.9%, for the three-month period ended March 31, 2024, compared to the same period of 2023, reflecting deposit growth year over year. The average rate paid on these accounts increased 51 bps between comparison periods. Interest paid on these funds accounted for 30.4% of total interest expense for the three-month period of 2024 compared to 42.9% for the same period in 2023.

Current wording

The average volume of interest-bearing transaction accounts decreased 0.6% and increased 1.2%, respectively, for the three- and six-month periods ended June 30, 2024, compared to the same periods of 2023, reflecting moderate growth year over year. The average rate paid on these accounts increased 15 bps and 33 bps, respectively, between comparison periods. Interest-bearing transaction accounts comprised 32.3% and 33.7% of the average interest-bearing liabilities portfolio for the three- and six-month periods ended June 30, 2024, compared to 36.6% and 37.1%, respectively, for the same periods last year. Interest paid on these funds accounted for 24.9% and 27.5%, respectively, of total interest expense for the three- and six-month periods of 2024 compared to 39.8% and 41.2%, respectively, for the same periods in 2023.

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

The Company has utilized borrowed funds to fund loan growth and cover deposit outflows, particularly during the second and third quarters of 2023, and continuing into 2024, accounting for the $76.0 million increase for the three months ended March 31, 2024, compared to the same period in 2023. The average rate paid on borrowed funds increased by 385 bps for the three-month period ended March 31, 2024.

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

In summary, between the three-month periods ended March 31, 2024 and 2023, the average yield on interest-earning assets increased 50 bps, and the average rate paid on interest-bearing liabilities increased 98 bps. Net interest spread decreased 48 bps for the three-month period ended March 31, 2024, versus the same period in 2023, while the net interest margin decreased 30 bps between periods.

Current wording

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.

Previous wording

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

Current wording

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:

Previous wording

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

Current wording

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:

Previous wording

The provision for income taxes decreased $222,225, or 25.6% for the first three months of 2024 compared to the same period in 2023, which is consistent with the decrease in income before income taxes but is also partially attributable to an increase in tax credits year over year. Tax credits related to low-income housing limited partnership investments amounted to $174,612 and $80,529 for the first three months of 2024 and 2023, respectively. The Company’s investment in two new limited partnerships were fully funded by year-end 2023 accounting for the increase in tax credits.

Current wording

The provision for income taxes decreased $223,519, or 29.2% for the second quarter of 2024 and $445,744, or 28.9% for the first six months of 2024 compared to the same periods in 2023, which is consistent with the decrease in income before income taxes but is also partially attributable to an increase in tax-exempt income associated with municipal loans and investments and an increase in tax credits year over year. Tax credits related to low-income housing limited partnership investments amounted to $174,612 and $80,529 for the second quarter of 2024 and 2023, respectively, and $349,224 and $161,058, respectively for the first six months of 2024 and 2023. The Company’s investment in two new limited partnerships were fully funded by year-end 2023 accounting for the increase in tax credits.

Previous wording

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $149,202 and $67,092 for the first three months of 2024 and 2023, respectively. These investments provide tax benefits, including tax credits, and are designed to provide a targeted effective annual yield between 5% - 7%.

Current wording

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $149,202 and $67,128 for the second quarter of 2024 and 2023, respectively and $298,404 and 134,256, respectively, for the first six months of 2024 and 2023. These investments provide tax benefits, including tax credits, and are designed to provide a targeted effective annual yield between 5% and 7%.

Previous wording

The decrease in the securities AFS portfolio during the first three months of 2024 is attributable to the combined effect of maturities amounting to $3.7 million and principal payments on MBS, ABS and CMO investments totaling $4.4 million and an increase of $1.9 million in unrealized losses arising during the first three months of 2024, which is reflected in OCI. In management’s view, the size of the AFS securities portfolio is appropriate and proportional to the overall asset base, as this portfolio serves an important role in the Company’s liquidity position.

Current wording

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.

Previous wording

The decrease in demand deposit accounts is attributable to a $15.5 million, or 10.1%, decrease in business DDAs. The decrease in interest-bearing transaction accounts was due to a decrease of $13.8 million, or 34.3%, in municipal deposit accounts, and a decrease of $6.8 million, or 12.9% in the deposit account of the Company’s trust and asset management affiliate, CFSG. These decreases were partially offset by an increase of $14.7 million, or 16.9%, in ICS reciprocal DDAs. The moderate decrease in money market funds was driven by a decrease of $11.6 million, or 11.8%, in retail money market funds and offset by an increase in municipal deposits of $1.6 million, or 16.6%, and an increase in reciprocal ICS MMAs of $8.7 million, or 66.0%. The increase in time deposits is attributable to customer response to periodic certificate of deposit specials that have been offered. As a result of the year to date decrease in aggregate deposits, the Company 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.

Current wording

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.

Previous wording

Estimated deposits in excess of the FDIC insurance level amounted to $152.1 million as of March 31, 2024 and $217.3 million at December 31, 2023. The estimated balance of uninsured time deposits as of March 31, 2024 were made up of time CDs of $24.4 million and retirement accounts of $3.1 million. Increments of maturity of these time deposits are summarized as follows:

Current wording

Estimated deposits in excess of the FDIC insurance level amounted to $133.6 million as of June 30, 2024 and $217.3 million at December 31, 2023. The estimated balance of uninsured time deposits as of June 30, 2024 were made up of time CDs of $28.3 million and retirement accounts of $2.9 million. Increments of maturity of these time deposits are summarized as follows:

Previous wording

Under the Company’s interest rate sensitivity modeling, with the continued asset sensitive balance sheet, in a rising rate environment NII initially trends upward as the short-term asset base (cash and adjustable-rate loans) quickly cycle upward while the retail funding base (deposits) lags the market. If rates paid on deposits must be increased more and/or more quickly than projected due to competitive pressures, the expected benefit of rising rates would be reduced. In a falling rate environment, NII is expected to trend slightly downward compared with the current rate environment scenario for the first year of the simulation as asset yield erosion is not fully offset by decreasing funding costs. Thereafter, net interest income is projected to experience sustained downward pressure as funding costs reach their assumed floors and asset yields continue to reprice into the lower rate environment. The prolonged inverted yield curve and increasing pressure on funding rates has resulted in a more liability sensitive balance sheet in the short term assuming that in a rising rate environment, relief on the deposit pricing may be delayed initially.

Current wording

Under the Company’s interest rate sensitivity modeling, in a rising rate environment NII initially trends upward as the short-term asset base (cash and adjustable-rate loans) quickly cycle upward while the retail funding base (deposits) lags the market. If rates paid on deposits must be increased more and/or more quickly than projected due to competitive pressures, the expected benefit of rising rates would be reduced. In a falling rate environment, NII is expected to trend slightly downward compared with the current rate environment scenario for the first year of the simulation as asset yield erosion is not fully offset by decreasing funding costs. Thereafter, net interest income is projected to experience sustained downward pressure as funding costs reach their assumed floors and asset yields continue to reprice into the lower rate environment. The prolonged inverted yield curve and an increased need for higher cost funding has resulted in a more liability sensitive balance sheet because in the rising rate environment there may be an initial delay in relief from deposit pricing.

Previous wording

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

Current wording

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.

Previous wording

Residential mortgage loans represented 27.9% of the Company’s loan balances as of March 31, 2024, compared to 28.5% as of December 31, 2023. The Company maintains a residential mortgage loan portfolio of traditional mortgage products and does not offer higher risk loan products, such as option adjustable-rate mortgage products, high loan-to-value products, interest only mortgages, subprime loans and products with deeply discounted teaser rates. Residential mortgages with loan-to-value ratios exceeding 80% are generally covered by PMI. A 90% loan-to-value residential mortgage product without PMI is only available to borrowers with excellent credit and low debt-to-income ratios and has not been widely originated. As of March 31, 2024, junior lien home equity products made up 13.1% of the residential mortgage portfolio with maximum loan-to-value ratios (including prior liens) of 80%. The Company also originates some home equity loans greater than 80% under an insured loan program with stringent underwriting criteria.

Current wording

Residential mortgage loans represented 28.3% of the Company’s loan balances as of June 30, 2024, compared to 28.5% as of December 31, 2023. The Company maintains a residential mortgage loan portfolio of traditional mortgage products and does not offer higher risk loan products, such as option adjustable-rate mortgage products, high loan-to-value products, interest only mortgages, subprime loans and products with deeply discounted teaser rates. Residential mortgages with loan-to-value ratios exceeding 80% are generally covered by PMI. A 90% loan-to-value residential mortgage product without PMI is only available to borrowers with excellent credit and low debt-to-income ratios and has not been widely originated. As of June 30, 2024, junior lien home equity products made up 13.1% of the residential mortgage portfolio with maximum loan-to-value ratios (including prior liens) of 80%. The Company also originates some home equity loans greater than 80% under an insured loan program with stringent underwriting criteria.

Previous wording

The Company continues to experience solid growth in the commercial & industrial and CRE loan portfolios, which is consistent with its strategic focus on commercial lending. The commercial lending portfolio consists of commercial & industrial, purchased, CRE and municipal loans, which collectively comprised 71.8% of the Company’s loan portfolio as of March 31, 2024, compared to 71.2% as of December 31, 2023. The largest components of the CRE portfolio were $119.7 million in owner-occupied CRE and $156.3 million in non-owner occupied CRE as of March 31, 2024.

Current wording

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.

Previous wording

Risk in the Company’s commercial & industrial and CRE loan portfolios is mitigated in part by government guarantees issued by federal agencies such as the SBA and RD. As of March 31, 2024, the Company had $26.6 million in guaranteed loans with guaranteed balances of $17.6 million, compared to $26.5 million in guaranteed loans with guaranteed balances of $17.6 million as of December 31, 2023. PPP loans with outstanding balances of $74 thousand as of March 31, 2024, and $84 thousand as of December 31, 2023, are included in these totals, all of which carry a 100% guarantee through the SBA, subject to borrower eligibility requirements.

Current wording

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.

Previous wording

The increase in the credit loss expense on loans for the three months ended March 31, 2024, was partly attributed to an increase in the volume of the loan portfolio. The decrease in the OBS credit exposure is attributable to a decrease in unfunded loan commitments under contract.

Current wording

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.

Previous wording

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 new guidance, which is referred to as the current expected credit loss, or CECL model, requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses over the life of the loans. The adjustment from the adoption of CECL in 2023 amounted to $549,113, net of tax and was recorded as an adjustment to retained earnings, which affects calculation of regulatory capital ratios. Changes in forecasts used in the CECL model could produce different results, quarter to quarter.

Current wording

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.