COMMUNITY BANCORP /VT 10-Q

cmtv_10q.htm UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to_______ Commission File Number 000-16435 Community Bancorp./VT (Exact name of Registrant as Specified in its Charter) Vermont 03-0284070 (State of Incorporation) (IRS Employer Identification Number) 4811 US Route 5 , Derby , Vermont 05829 (Address of Principal Executive Offices) (zip code) Registrant's Telephone Number: ( 802 ) 334-7915 Securities registered pursuant to Section 12(b) of the Act: NONE Title of Each Class Trading Symbol(s) Name of each exchange on which registered (Not Applicable) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file for such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ NO ☐ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒ At August 02, 2023, there were 5,473,366 shares outstanding of the Corporation's common stock. FORM 10-Q Index Page PART I FINANCIAL INFORMATION Item 1 Financial Statements 3 Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 33 Item 3 Quantitative and Qualitative Disclosures About Market Risk 53 Item 4 Controls and Procedures 53 PART II OTHER INFORMATION Item 1 Legal Proceedings 54 Item 1A Risk Factors 54 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 54 Item 6 Exhibits 55 Signatures 56 Exhibit Index 57 2 Table of Contents PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (Unaudited) The following are the unaudited consolidated financial statements for the Company. Community Bancorp. and Subsidiary June 30, December 31, Consolidated Balance Sheets 2023 2022 (Unaudited) Assets Cash and due from banks $ 13,754,587 $ 12,302,771 Federal funds sold and overnight deposits 5,586,640 58,837,557 Total cash and cash equivalents 19,341,227 71,140,328 Securities available-for-sale 186,536,541 192,918,109 Restricted equity securities, at cost 1,787,850 1,411,750 Loans held-for-sale 904,250 0 Loans 780,985,276 748,548,608 Allowance for credit losses ( 9,255,501 ) ( 8,709,225 ) Deferred net loan costs 521,300 493,275 Net loans 772,251,075 740,332,658 Bank premises and equipment, net 12,651,906 13,042,468 Accrued interest receivable 3,212,265 3,214,332 Bank owned life insurance 5,192,876 5,153,387 Goodwill 11,574,269 11,574,269 Other assets 18,406,068 17,244,846 Total assets $ 1,031,858,327 $ 1,056,032,147 Liabilities and Shareholders' Equity Liabilities Deposits: Demand, non-interest bearing $ 201,716,781 $ 216,093,534 Interest-bearing transaction accounts 267,151,188 294,050,079 Money market funds 109,035,047 140,117,086 Savings 166,057,812 171,072,921 Time deposits, $ 250,000 and over 18,091,657 15,632,058 Other time deposits 89,129,231 86,006,601 Total deposits 851,181,716 922,972,279 Borrowed funds 41,200,000 1,300,000 Repurchase agreements 35,134,331 33,077,829 Junior subordinated debentures 12,887,000 12,887,000 Accrued interest and other liabilities 10,938,178 10,618,676 Total liabilities 951,341,225 980,855,784 Shareholders' Equity Preferred stock, 1,000,000 shares authorized, 15 shares issued and outstanding at 06/30/23 and 12/31/22 ($ 100,000 liquidation value, per share) 1,500,000 1,500,000 Common stock - $ 2.50 par value; 15,000,000 shares authorized, 5,683,475 shares issued at 06/30/23 and 5,647,710 shares issued at 12/31/22 14,208,688 14,119,275 Additional paid-in capital 36,995,946 36,383,235 Retained earnings 49,886,680 46,464,447 Accumulated other comprehensive loss ( 19,451,435 ) ( 20,667,817 ) Less: treasury stock, at cost; 210,101 shares at 06/30/23 and 12/31/22 ( 2,622,777 ) ( 2,622,777 ) Total shareholders' equity 80,517,102 75,176,363 Total liabilities and shareholders' equity $ 1,031,858,327 $ 1,056,032,147 Book value per common share outstanding $ 14.44 $ 13.55 The accompanying notes are an integral part of these unaudited interim consolidated financial statements. 3 Table of Contents Community Bancorp. and Subsidiary Three Months Ended June 30, Consolidated Statements of Income 2023 2022 (Unaudited) Interest income Interest and fees on loans $ 10,014,968 $ 7,630,710 Interest on taxable debt securities 929,963 736,407 Interest on tax-exempt debt securities 90,659 33,786 Dividends 33,999 16,632 Interest on federal funds sold and overnight deposits 144,877 169,965 Total interest income 11,214,466 8,587,500 Interest expense Interest on deposits 2,224,384 585,458 Interest on borrowed funds 252,441 21,665 Interest on repurchase agreements 214,654 22,129 Interest on junior subordinated debentures 254,124 121,063 Total interest expense 2,945,603 750,315 Net interest income 8,268,863 7,837,185 Provision for credit losses 281,142 337,500 Net interest income after provision for credit losses 7,987,721 7,499,685 Non-interest income Service fees 939,451 936,382 Income from sold loans 106,660 195,542 Other income from loans 341,876 322,913 Other income 450,444 179,459 Total non-interest income 1,838,431 1,634,296 Non-interest expense Salaries and wages 2,264,760 2,034,000 Employee benefits 811,870 704,623 Occupancy expenses, net 700,228 673,177 Other expenses 2,087,065 2,022,664 Total non-interest expense 5,863,923 5,434,464 Income before income taxes 3,962,229 3,699,517 Income tax expense 765,890 678,365 Net income $ 3,196,339 $ 3,021,152 Earnings per common share $ 0.58 $ 0.56 Weighted average number of common shares used in computing earnings per share 5,461,597 5,396,060 Dividends declared per common share $ 0.23 $ 0.23 The accompanying notes are an integral part of these unaudited interim consolidated financial statements. 4 Table of Contents Community Bancorp. and Subsidiary Six Months Ended June 30, Consolidated Statements of Income 2023 2022 (Unaudited) Interest income Interest and fees on loans $ 19,390,993 $ 15,117,910 Interest on taxable debt securities 1,873,441 1,392,684 Interest on tax-exempt debt securities 181,317 44,735 Dividends 64,653 33,092 Interest on federal funds sold and overnight deposits 474,288 250,625 Total interest income 21,984,692 16,839,046 Interest expense Interest on deposits 4,069,131 1,137,418 Interest on borrowed funds 276,961 43,630 Interest on repurchase agreements 346,782 43,169 Interest on junior subordinated debentures 499,589 219,415 Total interest expense 5,192,463 1,443,632 Net interest income 16,792,229 15,395,414 Provision for credit losses 567,668 1,200,000 Net interest income after provision for credit losses 16,224,561 14,195,414 Non-interest income Service fees 1,819,739 1,799,269 Income from sold loans 214,195 399,384 Other income from loans 770,448 594,174 Other income 792,827 527,899 Total non-interest income 3,597,209 3,320,726 Non-interest expense Salaries and wages 4,553,520 4,074,000 Employee benefits 1,566,140 1,476,675 Occupancy expenses, net 1,471,214 1,426,541 Other expenses 4,152,752 3,910,836 Total non-interest expense 11,743,626 10,888,052 Income before income taxes 8,078,144 6,628,088 Income tax expense 1,543,043 1,201,394 Net income $ 6,535,101 $ 5,426,694 Earnings per common share $ 1.19 $ 1.00 Weighted average number of common shares used in computing earnings per share 5,452,867 5,389,406 Dividends declared per common share $ 0.46 $ 0.46 The accompanying notes are an integral part of these unaudited interim consolidated financial statements. 5 Table of Contents Community Bancorp. and Subsidiary Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Three Months Ended June 30, 2023 2022 Net income $ 3,196,339 $ 3,021,152 Other comprehensive loss, net of tax: Unrealized holding loss on securities AFS arising during the period ( 1,843,589 ) ( 7,031,667 ) Tax effect 387,153 1,476,649 Other comprehensive loss, net of tax ( 1,456,436 ) ( 5,555,018 ) Total comprehensive income (loss) $ 1,739,903 $ ( 2,533,866 ) Six Months Ended June 30, 2023 2022 Net income $ 6,535,101 $ 5,426,694 Other comprehensive income (loss), net of tax: Unrealized holding gain (loss) on securities AFS arising during the period 1,539,725 ( 18,100,828 ) Tax effect ( 323,343 ) 3,801,173 Other comprehensive gain (loss), net of tax 1,216,382 ( 14,299,655 ) Total comprehensive income (loss) $ 7,751,483 $ ( 8,872,961 ) The accompanying notes are an integral part of these unaudited interim consolidated financial statements. 6 Table of Contents Community Bancorp. and Subsidiary Consolidated Statements of Changes in Shareholders' Equity (Unaudited) Six Months Ended June 30, 2023 Additional Total Common Preferred paid-in Retained Treasury shareholders' Stock Stock capital earnings AOCI* stock equity January 1, 2023 $ 14,119,275 $ 1,500,000 $ 36,383,235 $ 46,464,447 $ ( 20,667,817 ) $ ( 2,622,777 ) $ 75,176,363 Cumulative change in accounting principle (Note 2) ( 549,113 ) ( 549,113 ) Balance at January 1, 2023 (as adjusted for change in accounting principle) 45,915,334 74,627,250 Issuance of common stock 43,693 276,184 319,877 Cash dividends declared Common stock ( 1,250,794 ) ( 1,250,794 ) Preferred stock ( 28,125 ) ( 28,125 ) Comprehensive income Net income 3,338,761 3,338,761 Other comprehensive income 2,672,818 2,672,818 March 31, 2023 $ 14,162,968 $ 1,500,000 $ 36,659,419 $ 47,975,176 $ ( 17,994,999 ) $ ( 2,622,777 ) $ 79,679,787 Issuance of common stock 45,720 336,527 382,247 Cash dividends declared Common stock ( 1,254,836 ) ( 1,254,836 ) Preferred stock ( 30,000 ) ( 30,000 ) Comprehensive income Net income 3,196,340 3,196,340 Other comprehensive loss ( 1,456,436 ) ( 1,456,436 ) June 30, 2023 $ 14,208,688 $ 1,500,000 $ 36,995,946 $ 49,886,680 $ ( 19,451,435 ) $ ( 2,622,777 ) $ 80,517,102 *Accumulated other comprehensive loss The accompanying notes are an integral part of these unaudited interim consolidated financial statements. 7 Table of Contents Community Bancorp. and Subsidiary Consolidated Statements of Changes in Shareholders' Equity (Unaudited) Six Months Ended June 30, 2022 Additional Total Common Preferred paid-in Retained Treasury shareholders' Stock Stock capital earnings AOCI* stock equity January 1, 2022 $ 13,969,848 $ 1,500,000 $ 35,322,063 $ 37,758,105 $ ( 1,166,971 ) $ ( 2,622,777 ) $ 84,760,268 Issuance of common stock 35,597 237,086 272,683 Cash dividends declared Common stock ( 1,236,880 ) ( 1,236,880 ) Preferred stock ( 12,188 ) ( 12,188 ) Comprehensive loss Net income 2,405,542 2,405,542 Other comprehensive loss ( 8,744,637 ) ( 8,744,637 ) March 31, 2022 $ 14,005,445 $ 1,500,000 $ 35,559,149 $ 38,914,579 $ ( 9,911,608 ) $ ( 2,622,777 ) $ 77,444,788 Issuance of common stock 33,048 287,882 320,930 Cash dividends declared Common stock ( 1,240,049 ) ( 1,240,049 ) Preferred stock ( 13,124 ) ( 13,124 ) Comprehensive loss Net income 3,021,152 3,021,152 Other comprehensive loss ( 5,555,018 ) ( 5,555,018 ) June 30, 2022 $ 14,038,493 $ 1,500,000 $ 35,847,031 $ 40,682,558 $ ( 15,466,626 ) $ ( 2,622,777 ) $ 73,978,679 *Accumulated other comprehensive loss The accompanying notes are an integral part of these unaudited interim consolidated financial statements. 8 Table of Contents Community Bancorp. and Subsidiary Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2023 2022 Cash Flows from Operating Activities: Net income $ 6,535,101 $ 5,426,694 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization, bank premises and equipment 543,590 570,063 Provision for credit losses 567,668 1,200,000 Deferred income tax ( 24,713 ) 13,973 Gain on sale of loans ( 56,608 ) ( 198,869 ) Loss on sale of bank premises and equipment 449 0 Income from CFS Partners ( 555,203 ) ( 298,831 ) Amortization of bond premium, net 128,123 361,335 Proceeds from sales of loans held for sale 2,911,663 7,827,010 Originations of loans held for sale ( 3,759,305 ) ( 8,110,641 ) (Decrease) increase in taxes payable ( 722,500 ) 151,237 Decrease (increase) in interest receivable 2,067 ( 250,179 ) Decrease in mortgage servicing rights 41,224 1,019 Decrease in right-of-use assets 100,646 99,340 Decrease in operating lease liabilities ( 107,511 ) ( 102,577 ) Increase in other assets ( 130,411 ) ( 287,979 ) Increase in cash surrender value of BOLI ( 39,489 ) ( 40,239 ) Amortization of limited partnerships 134,256 134,184 Change in net deferred loan fees and costs ( 28,025 ) ( 443,511 ) Increase (decrease) in interest payable 204,150 ( 7,759 ) (Decrease) increase in accrued expenses ( 502,279 ) 82,812 Increase in other liabilities 432,388 132,754 Net cash provided by operating activities 5,675,281 6,259,836 Cash Flows from Investing Activities: Investments - AFS Maturities, calls, pay downs and sales 7,793,170 9,909,154 Purchases 0 ( 34,822,702 ) Proceeds from redemption of restricted equity securities 1,171,200 43,500 Purchases of restricted equity securities ( 1,547,300 ) 0 Investments in limited liability entities ( 81,250 ) 0 Increase in loans, net ( 32,867,687 ) ( 13,648,856 ) Capital expenditures net of proceeds from sales of bank premises and equipment ( 254,123 ) ( 168,101 ) Recoveries of loans charged off 148,379 31,359 Net cash used in investing activities ( 25,637,611 ) ( 38,655,646 ) 9 Table of Contents 2023 2022 Cash Flows from Financing Activities: Net decrease in demand and interest-bearing transaction accounts ( 41,275,644 ) ( 14,107,598 ) Net (decrease) increase in money market and savings accounts ( 36,097,148 ) 7,448,461 Net increase (decrease) in time deposits 5,582,229 ( 832,174 ) Net increase (decrease) in repurchase agreements 2,056,502 ( 1,375,064 ) Net increase in short-term borrowings 13,400,000 0 Proceeds from long-term borrowings 26,500,000 0 Decrease in finance lease obligations ( 109,299 ) ( 105,918 ) Dividends paid on preferred stock ( 58,125 ) ( 25,312 ) Dividends paid on common stock ( 1,835,286 ) ( 1,897,885 ) Net cash used in financing activities ( 31,836,771 ) ( 10,895,490 ) Net decrease in cash and cash equivalents ( 51,799,101 ) ( 43,291,300 ) Cash and cash equivalents: Beginning 71,140,328 110,358,926 Ending $ 19,341,227 $ 67,067,626 Supplemental Schedule of Cash Paid During the Period: Interest $ 4,988,313 $ 1,451,391 Income taxes, net of refunds $ 2,156,000 $ 902,000 Supplemental Schedule of Noncash Investing and Financing Activities: Change in unrealized gain (loss) on securities AFS $ 1,539,725 $ ( 18,100,828 ) Common Shares Dividends Paid: Dividends declared $ 2,505,630 $ 2,476,929 Decrease in dividends payable attributable to dividends declared 31,780 14,569 Dividends reinvested ( 702,124 ) ( 593,613 ) Total dividends paid $ 1,835,286 $ 1,897,885 The accompanying notes are an integral part of these unaudited interim consolidated financial statements. 10 Table of Contents Notes to Consolidated Financial Statements Note 1. Basis of Presentation and Consolidation and Certain Definitions Basis of Presentation and Consolidation. The interim consolidated financial statements of Community Bancorp. and Subsidiary are unaudited. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments necessary for the fair presentation of the consolidated financial condition and results of operations of the Company and its subsidiary, Community National Bank (the Bank), contained herein have been made. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2022, contained in the Company's Annual Report on Form 10-K. Certain amounts in the 2022 consolidated financial statements were reclassified to conform to the current period presentation. The reclassification had no effect on net income or shareholders’ equity as previously reported. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for any other interim period or the full annual period ending December 31, 2023. The Company is considered a “smaller reporting company” under the disclosure rules of the SEC, as amended in 2018. Accordingly, the Company has elected to provide its consolidated statements of income, comprehensive income, cash flows and changes in shareholders’ equity for a two year, rather than a three year, period, and provides certain other smaller reporting company scaled disclosures where management deems it appropriate. In addition to the definitions provided elsewhere in this quarterly report, the definitions, acronyms and abbreviations identified below are used throughout this report, including in Part I. “Financial Information” and Part II. “Other Information”, and are intended to aid the reader and provide a reference page when reviewing this report. ABS: Asset backed security FDIC: Federal Deposit Insurance Corporation AFS: Available-for-sale FDICIA: Federal Deposit Insurance Corporation Agency MBS: MBS issued by a US government agency Improvement Act of 1991 or GSE FHLBB: Federal Home Loan Bank of Boston ACL: Allowance for Credit Losses FHLMC: Federal Home Loan Mortgage Corporation ALCO: Asset Liability Committee FOMC: Federal Open Market Committee ALL: Allowance for Loan Losses FRB: Federal Reserve Board AOCI: Accumulated other comprehensive income FRBB: Federal Reserve Bank of Boston ASC: Accounting Standards Codification GAAP: Generally Accepted Accounting Principles ASU: Accounting Standards Update in the United States Bancorp: Community Bancorp. GSE: Government sponsored enterprise Bank: Community National Bank HTM: Held-to-maturity BIC: Borrower-in-Custody ICS: Insured Cash Sweeps of the IntraFi Network Board: Board of Directors IRS: Internal Revenue Service BOLI: Bank owned life insurance JNE: Jobs for New England bp or bps: Basis point(s) Jr: Junior BTFP: Bank Term Funding Program LIBOR London Interbank Offered Rate CDARS: Certificate of Deposit Accounts Registry MBS: Mortgage-backed security Service of the IntraFi Network MSRs: Mortgage servicing rights CDs: Certificates of deposit NII: Net interest income CDI: Core deposit intangible OAS: Other amortizing security CECL: Current Expected Credit Loss OBS: Off-balance sheet CFSG: Community Financial Services Group, LLC OCI: Other comprehensive income (loss) CFS Partners: Community Financial Services Partners, OREO: Other real estate owned LLC OTTI: Other-than-temporary impairment CMO Collateralized Mortgage Obligations PMI: Private mortgage insurance Company: Community Bancorp. and Subsidiary PPP: Paycheck Protection Program CRE: Commercial Real Estate RD: USDA Rural Development DCF: Discounted cash flow SBA: U.S. Small Business Administration DDA or DDAs: Demand Deposit Account(s) SEC: U.S. Securities and Exchange Commission DTC: Depository Trust Company SOFR: Secured Overnight Financing Rate DRIP: Dividend Reinvestment Plan TDR: Troubled-debt restructuring Exchange Act: Securities Exchange Act of 1934 USDA: U.S. Department of Agriculture FASB: Financial Accounting Standards Board VA: U.S. Veterans Administration 11 Table of Contents Note 2. Recent Accounting Developments In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and has issued subsequent amendments thereto, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 , which extended the sunset date of December 31, 2022, to December 31, 2024. The guidance is effective for all entities as of March 12, 2020, through December 31, 2024. The Company is assessing ASU No. 2020-04 and its impact on the transition away from LIBOR for its Junior Subordinated Debentures due December 15, 2037, the Company’s only financial instruments that utilize LIBOR as a reference rate. That transition will become effective for the Debentures as of the first London banking day after June 30, 2023 (see the Interest Rate Risk and Asset and Liability Management section of the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations following these Notes). In March 2023, the FASB issued ASU No. 2023-02, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method . ASU No. 2014-01, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects , previously introduced the option to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met; however, this guidance limited the proportional amortization method to investments in low-income-housing tax credit (LIHTC) structures. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the income statement as a component of net income tax expense (benefit). Equity investments in other tax credit structures are typically accounted for using the equity method, which results in investment income, gains and losses, and tax credits being presented gross on the income statement in their respective line items. The amendments in this update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. The amendments in this update are effective for the Company for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. Early adoption is permitted in any interim period. If early adoption is elected, adoption must be as of the beginning of the fiscal year that includes the interim period of adoption. The amendments in this update must be applied on either a modified retrospective or a retrospective basis. The Company is analyzing the impact of early adoption of this ASU and is currently evaluating the impact of this standard for its tax equity investments as well as the impact within the consolidated financial statements. Accounting Standards Adopted in 2023 The Company adopted the following accounting standards effective January 1, 2023, and applied them to the Company’s interim consolidated financial statements beginning with the quarter ended March 31, 2023. Prior periods have not been restated as a result of adoption of these accounting standards. ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . Under that guidance, which replaced the existing incurred loss model for recognizing credit losses, banks and other lending institutions are required to recognize the full amount of expected credit losses over the life of a loan. 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. A modified version of these requirements also applies to debt securities classified as available for sale, which requires that credit losses on those securities be recorded through an allowance for credit losses rather than a write-down. Upon adoption of this ASU on January 1, 2023, the Company recorded a cumulative-effect adjustment of $ 549,113 as a reduction to retained earnings, with a corresponding adjustment of $ 243,376 increasing the ACL on loans, an adjustment of $ 451,704 , increasing other liabilities for the ACL on off-balance sheet credit exposures, and an adjustment of $ 145,967 increasing deferred tax assets. There was no allowance recorded for credit losses on AFS debt securities resulting from adoption of this ASU. ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The guidance amends Topic 326 (CECL) to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, under the CECL model creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to Topic 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance became effective for the Company beginning with the fiscal year 2023, including interim periods. Adoption of this ASU did not have a material impact on the consolidated financial statements. 12 Table of Contents Note 3. Earnings per Common Share Earnings per common share amounts are computed based on the weighted average number of shares of common stock issued during the period (retroactively adjusted for stock splits and stock dividends, if any), including Dividend Reinvestment Plan shares issuable upon reinvestment of dividends declared, and reduced for shares held in treasury. The following tables illustrate the calculation of earnings per common share for the periods presented, as adjusted for the cash dividends declared on the preferred stock: Three Months Ended June 30, 2023 2022 Net income, as reported $ 3,196,339 $ 3,021,152 Less: dividends to preferred shareholders 30,000 13,124 Net income available to common shareholders $ 3,166,339 $ 3,008,028 Weighted average number of common shares used in calculating earnings per share 5,461,597 5,396,060 Earnings per common share $ 0.58 $ 0.56 Six Months Ended June 30, 2023 2022 Net income, as reported $ 6,535,101 $ 5,426,694 Less: dividends to preferred shareholders 58,125 25,312 Net income available to common shareholders $ 6,476,976 $ 5,401,382 Weighted average number of common shares used in calculating earnings per share 5,452,867 5,389,406 Earnings per common share $ 1.19 $ 1.00 Note 4. Investment Securities Debt securities AFS as of the balance sheet dates consisted of the following: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value June 30, 2023 U.S. GSE debt securities $ 12,000,000 $ 0 $ 1,474,322 $ 10,525,678 U.S. Government securities 41,288,500 0 2,906,560 38,381,940 Taxable Municipal securities 300,000 0 54,558 245,442 Tax-exempt Municipal securities 12,010,573 75,171 646,507 11,439,237 Agency MBS 129,348,788 0 18,951,174 110,397,614 ABS and OAS 2,686,936 0 227,032 2,459,904 CMO 11,789,814 0 367,872 11,421,942 Other investments 1,734,000 0 69,216 1,664,784 Total $ 211,158,611 $ 75,171 $ 24,697,241 $ 186,536,541 13 Table of Contents Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value December 31, 2022 U.S. GSE debt securities $ 12,000,000 $ 0 $ 1,624,709 $ 10,375,291 U.S. Government securities 41,368,624 0 3,137,035 38,231,589 Taxable Municipal securities 300,000 0 65,142 234,858 Tax-exempt Municipal securities 12,042,410 40,513 759,356 11,323,567 Agency MBS 135,193,097 69,447 20,030,945 115,231,599 ABS and OAS 2,929,740 0 236,134 2,693,606 CMO 12,278,033 581 342,689 11,935,925 Other investments 2,968,000 0 76,326 2,891,674 Total $ 219,079,904 $ 110,541 $ 26,272,336 $ 192,918,109 The Company had investments in Agency MBS exceeding 10 % of shareholders’ equity with a book value of $ 129.3 million and $ 135.2 million, respectively, and a fair value of $ 110.4 million and $ 115.2 million, respectively, at June 30, 2023 and December 31, 2022. Investment securities pledged as collateral for repurchase agreements consisted of certain U.S. GSE debt securities, Agency MBS, ABS and OAS, and CMO. These repurchase agreements mature daily. The aggregate amortized cost and fair value of these pledged investments as of the balance sheet dates were as follows: Amortized Fair Cost Value June 30, 2023 $ 53,615,357 $ 45,066,265 December 31, 2022 55,899,113 46,789,284 There were no sales of debt securities during the first six months of 2023 or 2022. The scheduled maturities of debt securities as of the balance sheet dates were as follows: Amortized Fair Cost Value June 30, 2023 Due in one year or less $ 9,490,328 $ 9,261,518 Due from one to five years 53,150,139 49,018,937 Due from five to ten years 4,903,728 4,434,174 Due after ten years 14,265,628 13,424,298 Agency MBS 129,348,788 110,397,614 Total $ 211,158,611 $ 186,536,541 December 31, 2022 Due in one year or less $ 1,976,000 $ 1,966,767 Due from one to five years 58,875,224 54,736,949 Due from five to ten years 8,631,626 7,591,761 Due after ten years 14,403,957 13,391,033 Agency MBS 135,193,097 115,231,599 Total $ 219,079,904 $ 192,918,109 Agency MBS are not due at a single maturity date and have not been allocated to maturity groupings for purposes of the maturity table. 14 Table of Contents Debt securities with unrealized losses as of the balance sheet dates are presented in the table below. Less than 12 months 12 months or more Totals Fair Unrealized Fair Unrealized Number of Fair Unrealized Value Loss Value Loss Securities Value Loss June 30, 2023 U.S. GSE debt securities $ 0 $ 0 $ 10,525,678 $ 1,474,322 11 $ 10,525,678 $ 1,474,322 U.S. Government securities 0 0 38,381,940 2,906,560 54 38,381,940 2,906,560 Taxable Municipal securities 0 0 245,442 54,558 1 245,442 54,558 Tax-exempt Municipal securities 3,050,243 28,616 4,503,273 617,891 16 7,553,516 646,507 Agency MBS 7,083,036 136,925 103,314,578 18,814,249 122 110,397,614 18,951,174 ABS and OAS 0 0 2,459,904 227,032 4 2,459,904 227,032 CMO 6,197,924 113,282 5,224,018 254,590 10 11,421,942 367,872 Other investments 982,655 8,345 682,129 60,871 10 1,664,784 69,216 Total $ 17,313,858 $ 287,168 $ 165,336,962 $ 24,410,073 228 $ 182,650,820 $ 24,697,241 Less than 12 months 12 months or more Totals Fair Unrealized Fair Unrealized Number of Fair Unrealized Value Loss Value Loss Securities Value Loss December 31, 2022 U.S. GSE debt securities $ 2,723,388 $ 276,611 $ 7,651,903 $ 1,348,098 11 $ 10,375,291 $ 1,624,709 U.S. Government securities 4,837,891 169,501 33,393,698 2,967,534 54 38,231,589 3,137,035 Taxable Municipal securities 0 0 234,858 65,142 1 234,858 65,142 Tax-exempt Municipal securities 8,608,507 522,128 592,388 237,228 19 9,200,895 759,356 Agency MBS 14,541,901 810,356 97,718,436 19,220,589 120 112,260,337 20,030,945 ABS and OAS 2,693,606 236,134 0 0 4 2,693,606 236,134 CMO 8,954,323 232,398 1,014,910 110,291 9 9,969,233 342,689 Other investments 2,451,892 20,108 439,782 56,218 12 2,891,674 76,326 Total $ 44,811,508 $ 2,267,236 $ 141,045,975 $ 24,005,100 230 $ 185,857,483 $ 26,272,336 The Company adopted ASU No. 2016-13 effective January 1, 2023, which requires credit losses on debt securities AFS to be recorded in an allowance for credit losses and eliminates the concept of OTTI for debt securities AFS. Under the ASU, if the Company intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, then the credit loss is recorded through an allowance rather than as a write-down of the security. As of June 30, 2023, the Company did not have the intent to sell, nor was it more likely than not that we would be required to sell any of the debt securities AFS in an unrealized loss position prior to recovery. As of June 30, 2023, the Company also determined that no individual debt securities in an unrealized loss position represented credit losses that would require an allowance for credit losses. The Company concluded that the unrealized losses were primarily attributed to increases in market interest rates since these securities were purchased under other market conditions. As of December 31, 2022, in management’s view the unrealized losses on securities AFS were due to market conditions rather than reduced estimated cash flows or deterioration in the creditworthiness of the issuer. At December 31, 2022, the Company did not intend to sell these securities, did not anticipate that these securities would be required to be sold before anticipated recovery, and expected full principal and interest to be collected. Therefore, under the accounting principles pertaining to OTTI analysis then in effect, the Company did not consider the declines in the fair value of these securities to be OTTI as of December 31, 2022. 15 Table of Contents Note 5. Loans, Allowance for Credit Losses, Credit Quality and Off-Balance Sheet Credit Exposures The composition of net loans as of the balance sheet dates was as follows: June 30, 2023 December 31, 2022 Commercial & industrial $ 126,208,794 16.16 % $ 112,951,873 15.09 % Purchased 6,167,811 0.79 % 7,530,458 1.00 % Commercial real estate 384,836,723 49.28 % 356,892,986 47.68 % Municipal 27,744,099 3.55 % 34,633,055 4.63 % Residential real estate - 1st lien 200,150,628 25.63 % 198,743,375 26.55 % Residential real estate - Jr lien 32,032,350 4.10 % 33,756,872 4.51 % Consumer 3,844,871 0.49 % 4,039,989 0.54 % Total loans 780,985,276 100.00 % 748,548,608 100.00 % ACL ( 9,255,501 ) ( 8,709,225 ) Deferred net loan costs 521,300 493,275 Net loans $ 772,251,075 $ 740,332,658 Provision for Credit Losses The provision for credit losses was made up of the following components for the periods indicated: Three Months Ended June 30, 2023 2022 Provision for loan losses $ 378,000 $ 337,500 Provision for credit losses on OBS credit exposure ( 96,858 ) 0 Provision for credit losses $ 281,142 $ 337,500 Six Months Ended June 30, 2023 2022 Provision for loan losses $ 585,540 $ 1,200,000 Provision for credit losses on OBS credit exposure ( 17,872 ) 0 Provision for credit losses $ 567,668 $ 1,200,000 The following tables present the activity in the ACL on loans for the three and six month periods following adoption of ASU 2016-13 (CECL) on January 1, 2023 and select information on impairment evaluation by portfolio segment for those interim periods. As of or for the three months ended June 30, 2023 Residential Residential Commercial Commercial Real Estate Real Estate & Industrial Purchased Real Estate Municipal 1st Lien Jr Lien Consumer Total ACL beginning balance $ 1,015,638 $ 20,201 $ 5,186,156 $ 91,185 $ 2,396,109 $ 516,648 $ 30,233 $ 9,256,170 Charge-offs ( 350,000 ) 0 0 0 0 0 ( 44,187 ) ( 394,187 ) Recoveries 976 0 57 0 262 1,230 12,993 15,518 Provision (credit) 387,728 ( 1,864 ) 85,308 ( 21,825 ) ( 81,817 ) ( 24,642 ) 35,112 378,000 ACL ending balance $ 1,054,342 $ 18,337 $ 5,271,521 $ 69,360 $ 2,314,554 $ 493,236 $ 34,151 $ 9,255,501 16 Table of Contents As of or for the six months ended June 30, 2023 Residential Residential Commercial Commercial Real Estate Real Estate & Industrial Purchased Real Estate Municipal 1st Lien Jr Lien Consumer Unallocated Total ACL beginning balance $ 1,116,322 $ 53,090 $ 5,061,813 $ 62,339 $ 2,001,836 $ 241,950 $ 69,686 $ 102,189 $ 8,709,225 Impact of adopting CECL ( 164,116 ) ( 29,196 ) ( 22,467 ) 24,244 273,168 297,745 ( 33,813 ) ( 102,189 ) 243,376 Charge-offs ( 361,578 ) 0 0 0 0 0 ( 69,441 ) 0 ( 431,019 ) Recoveries 2,351 0 22,058 0 72,588 26,777 24,605 0 148,379 Provision (credit) 461,363 ( 5,557 ) 210,117 ( 17,223 ) ( 33,038 ) ( 73,236 ) 43,114 0 585,540 ACL ending balance $ 1,054,342 $ 18,337 $ 5,271,521 $ 69,360 $ 2,314,554 $ 493,236 $ 34,151 $ 0 $ 9,255,501 Residential Residential Commercial Commercial Real Estate Real Estate & Industrial Purchased Real Estate Municipal 1st Lien Jr Lien Consumer Total ACL evaluated for impairment Individually $ 0 $ 0 $ 0 $ 0 $ 962 $ 0 $ 0 $ 962 Collectively 1,054,342 18,337 5,271,521 69,360 2,313,592 493,236 34,151 9,254,539 Total $ 1,054,342 $ 18,337 $ 5,271,521 $ 69,360 $ 2,314,554 $ 493,236 $ 34,151 $ 9,255,501 Loans evaluated for impairment Individually $ 3,649,767 $ 0 $ 2,988,778 $ 0 $ 974,378 $ 69,354 $ 0 $ 7,682,277 Collectively 122,559,027 6,167,811 381,847,945 27,744,099 199,176,250 31,962,996 3,844,871 773,302,999 Total $ 126,208,794 $ 6,167,811 $ 384,836,723 $ 27,744,099 $ 200,150,628 $ 32,032,350 $ 3,844,871 $ 780,985,276 The following tables present activity in the ALL and select loan information on impairment evaluation, by portfolio segment, under the incurred loss methodology, for the periods indicated: As of or for the year ended December 31, 2022 Residential Residential Commercial Commercial Real Estate Real Estate & Industrial Purchased Real Estate Municipal 1st Lien Jr Lien Consumer Unallocated Total ALL beginning balance $ 870,392 $ 68,655 $ 4,151,760 $ 76,728 $ 1,765,892 $ 182,014 $ 55,698 $ 539,117 $ 7,710,256 Charge-offs ( 76,875 ) 0 ( 667,474 ) 0 0 0 ( 63,625 ) 0 ( 807,974 ) Recoveries 14,112 0 667,474 0 111,763 5,089 30,505 0 828,943 Provision (credit) 308,693 ( 15,565 ) 910,053 ( 14,389 ) 124,181 54,847 47,108 ( 436,928 ) 978,000 ALL ending balance $ 1,116,322 $ 53,090 $ 5,061,813 $ 62,339 $ 2,001,836 $ 241,950 $ 69,686 $ 102,189 $ 8,709,225 ALL evaluated for impairment Individually $ 2,322 $ 0 $ 0 $ 0 $ 106,280 $ 0 $ 0 $ 0 $ 108,602 Collectively 1,114,000 53,090 5,061,813 62,339 1,895,556 241,950 69,686 102,189 8,600,623 Total $ 1,116,322 $ 53,090 $ 5,061,813 $ 62,339 $ 2,001,836 $ 241,950 $ 69,686 $ 102,189 $ 8,709,225 Loans evaluated for impairment Individually $ 3,442,124 $ 0 $ 3,176,835 $ 0 $ 3,816,012 $ 77,416 $ 0 $ 10,512,387 Collectively 109,509,749 7,530,458 353,716,151 34,633,055 194,927,363 33,679,456 4,039,989 738,036,221 Total $ 112,951,873 $ 7,530,458 $ 356,892,986 $ 34,633,055 $ 198,743,375 $ 33,756,872 $ 4,039,989 $ 748,548,608 17 Table of Contents As of or for the six months ended June 30, 2022 Residential Residential Commercial Purchased Commercial Real Estate Real Estate & Industrial Loans Real Estate Municipal 1st Lien Jr Lien Consumer Unallocated Total ALL beginning balance $ 870,392 $ 68,655 $ 4,151,760 $ 76,728 $ 1,765,892 $ 182,014 $ 55,698 $ 539,117 $ 7,710,256 Charge-offs ( 20,578 ) 0 ( 667,474 ) 0 0 0 ( 20,790 ) 0 ( 708,842 ) Recoveries 2,454 0 0 0 12,563 2,430 13,912 0 31,359 Provision (credit) 254,980 ( 8,833 ) 1,324,038 ( 18,409 ) 67,053 ( 3,230 ) ( 7,264 ) ( 408,335 ) 1,200,000 ALL ending balance $ 1,107,248 $ 59,822 $ 4,808,324 $ 58,319 $ 1,845,508 $ 181,214 $ 41,556 $ 130,782 $ 8,232,773 ALL evaluated for impairment Individually $ 0 $ 0 $ 0 $ 0 $ 102,062 $ 0 $ 0 $ 0 $ 102,062 Collectively 1,107,248 59,822 4,808,324 58,319 1,743,446 181,214 41,556 130,782 8,130,711 Total $ 1,107,248 $ 59,822 $ 4,808,324 $ 58,319 $ 1,845,508 $ 181,214 $ 41,556 $ 130,782 $ 8,232,773 Loans evaluated for impairment Individually $ 145,810 $ 0 $ 3,396,349 $ 0 $ 3,718,383 $ 82,400 $ 0 $ 7,342,942 Collectively 120,626,432 8,546,059 314,687,305 32,399,252 182,387,758 33,474,960 3,463,839 695,585,605 Total $ 120,772,242 $ 8,546,059 $ 318,083,654 $ 32,399,252 $ 186,106,141 $ 33,557,360 $ 3,463,839 $ 702,928,547 The following is an age analysis of past due loans (including non-accrual) as of the balance sheet dates, by portfolio segment: 90 Days Total June 30, 2023 30-89 Days or More Past Due Current Total Loans Commercial & industrial $ 64,312 $ 3,029,266 $ 3,093,578 $ 123,115,216 $ 126,208,794 Purchased 0 0 0 6,167,811 6,167,811 Commercial real estate 864,534 776,328 1,640,862 383,195,861 384,836,723 Municipal 0 0 0 27,744,099 27,744,099 Residential real estate - 1st lien 1,078,947 384,329 1,463,276 198,687,352 200,150,628 Residential real estate - Jr lien 288,822 25,007 313,829 31,718,521 32,032,350 Consumer 55,267 0 55,267 3,789,604 3,844,871 Totals $ 2,351,882 $ 4,214,930 $ 6,566,812 $ 774,418,464 $ 780,985,276 90 Days Total December 31, 2022 30-89 Days or More Past Due Current Total Loans Commercial & industrial $ 2,377,668 $ 879,802 $ 3,257,470 $ 109,694,403 $ 112,951,873 Purchased 0 0 0 7,530,458 7,530,458 Commercial real estate 1,395,444 353,842 1,749,286 355,143,700 356,892,986 Municipal 0 0 0 34,633,055 34,633,055 Residential real estate - 1st lien 1,517,653 641,141 2,158,794 196,584,581 198,743,375 Residential real estate - Jr lien 321,579 25,007 346,586 33,410,286 33,756,872 Consumer 18,745 0 18,745 4,021,244 4,039,989 Totals $ 5,631,089 $ 1,899,792 $ 7,530,881 $ 741,017,727 $ 748,548,608 For all loan segments, loans over 30 days past due are considered delinquent. 18 Table of Contents The following tables present the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more and still accruing as of the dates presented: 90 Days or Nonaccrual Nonaccrual Total More and June 30, 2023 with an ACL with No ACL Nonaccrual Accruing Commercial & industrial $ 0 $ 3,649,767 $ 3,649,767 $ 0 Commercial real estate 0 2,991,511 2,991,511 0 Residential real estate - 1st lien 124,090 856,192 980,282 350,504 Residential real estate - Jr lien 0 123,502 123,502 0 Totals $ 124,090 $ 7,620,972 $ 7,745,062 $ 350,504 90 Days or Nonaccrual Nonaccrual Total More and December 31, 2022 with an ALL with No ALL Nonaccrual Accruing Commercial & industrial $ 452,963 $ 2,989,161 $ 3,442,124 $ 0 Commercial real estate 0 3,180,478 3,180,478 324,927 Residential real estate - 1st lien 278,026 858,304 1,136,330 248,157 Residential real estate - Jr lien 0 131,088 131,088 0 Totals $ 730,989 $ 7,159,031 $ 7,890,020 $ 573,084 As of June 30, 2023, there were no residential real estate loans in process of foreclosure, compared to 5 residential real estate loans with an aggregate balance of $195,082 in process of foreclosure at December 31, 2022. Allowance for loan losses (prior to adoption of CECL) Please refer to Note 4 to the audited consolidated financial statements contained in the Company’s 2022 Annual Report on Form 10-K for a description of the ALL, under previously applicable GAAP, prior to adoption of CECL. Allowance for credit losses Effective January 1, 2023, with the adoption of CECL, the Company established the ACL through a provision for credit losses charged to earnings. Credit losses are charged against the allowance when management believes that future payments of a loan balance are unlikely. Subsequent recoveries, if any, are credited to the allowance. Unsecured loans are charged off when they become uncollectible and no later than 120 days past due. Unsecured loans to customers who subsequently file bankruptcy, are charged off within 30 days of receipt of the notification of filing or by the end of the month in which the loans become 120 days past due, whichever occurs first. For secured loans, both residential and commercial, the potential loss on impaired loans is carried as a loan loss reserve specific allocation; the loss portion is charged off when collection of the full loan appears unlikely. The unsecured portion of a real estate loan is that portion of the loan exceeding the "fair value" of the collateral less the estimated cost to sell. The value of the collateral is determined in accordance with the Company’s appraisal policy. The unsecured portion of an impaired real estate secured loan is charged off by the end of the month in which the loan becomes 180 days past due. As described below, the allowance consists of general and specific components. However, the entire allowance is available to absorb losses in the loan portfolio, regardless of general or specific components considered in determining the amount of the allowance. General component The general component of the ACL is based on methodologies, inputs, and assumptions utilized to estimate lifetime credit losses when applied to the following loan segments: commercial and industrial, purchased loans, CRE, municipal, residential real estate 1st lien, residential real estate Jr lien and consumer loans. The Company does not disaggregate its portfolio segments further into classes. 19 Table of Contents The Company utilizes a discounted cash flow (DCF) approach to calculate the expected loss for each portfolio segment. Within the DCF model, probability of default (PD) and loss given default (LGD) assumptions are applied to calculate the expected loss for each segment. PD is management’s estimate of the probability the asset will default within a given timeframe and LGD is management’s estimate of the percentage of assets not expected to be collected due to default. The Company's PD and LGD assumptions may be derived from internal historical default and loss experience or from external data where there are not statistically meaningful loss events for a loan segment, or it does not have default and loss data that covers a full economic cycle. As of June 30, 2023, the primary macroeconomic drivers used within the DCF model included forecasts of civilian unemployment and changes in national gross domestic product (GDP). Management monitors and assesses its macroeconomic drivers at least annually (generally in the fourth quarter, or more frequently as circumstances warrant) to determine whether they continue to be the most predictive indicator of losses within the Company's loan portfolio, and these macroeconomic drivers may change from time to time. To determine its reasonable and supportable forecast, management may leverage macroeconomic forecasts obtained from various reputable sources, which may include, but are not limited to, the FOMC forecast and other publicly available forecasts from well recognized, leading economists or firms. The Company's reasonable and supportable forecast period generally ranges from one to three years, depending on the facts and circumstances of the current state of the economy, portfolio segment, and management's judgment of what can be reasonably supported. The model reversion period generally ranges from one to six years, and it also depends on the current state of the economy and management's judgments of such. Management monitors and assesses the forecast and reversion period at least annually, or more frequently as circumstances warrant. The Company used a one-year forecast and reversion period to calculate the ACL on loans as of June 30, 2023. When the DCF method is used to determine the ACL, management does not adjust the effective interest rate used to discount expected cash flows to incorporate expected prepayments. Expected credit losses are estimated over the contractual term of the loans. For term loans, the contractual life is calculated based on the maturity date. For commercial revolving loans with no stated maturity date, the contractual life is calculated based on the internal review date. For all other revolving loans, the contractual life is based on either the estimated maturity date or a default date. The contractual term excludes expected extensions, renewals, and modifications. In calculating the ACL on loans, the contractual life of a loan must be adjusted for prepayments in order to arrive at expected cash flows. The Company models term loans using an annualized prepayment. When the Company has a specific expectation of differing payment behavior for a given loan, the loan may be evaluated individually. For revolving loans that do not have a principal payment schedule, a curtailment rate is factored into the expected cash flow. Management has elected to use loss rate methodologies appropriate for each loan segment. The DCF method was chosen for the commercial and industrial, CRE, residential real estate 1 st lien, residential real estate Jr Lien and consumer loans. The DCF model, being periodic in nature, allows for effective incorporation of a reasonable and supportable forecast in a directionally consistent and objective manner. For the purchased loans segment, a long-term average loss rate is calculated and applied on a quarterly basis for the remaining life of the pool. Due to the lack of any historical loss data, a manual entry methodology was chosen for the municipal loans given the immaterial nature of the pool when considering prior loss history as well as the inability to reasonably forecast a PD or LGD for the pool. Qualitative factors are also applied to include the levels of and trends in delinquencies and non-performing loans, levels of and trends in loan risk groups, trends in volumes and terms of loans, effects of any changes in loan related policies, experience, ability and the depth of management, documentation and credit data exception levels, national and local economic trends, external factors such as competition and regulation and lastly, 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. This evaluation is inherently subjective as it requires estimates that are susceptible to revision as more information becomes available. The qualitative factors are determined based on the various risk characteristics of each loan segment. The Company has policies, procedures and internal controls that management believes are commensurate with the risk profile of each of these segments. Major risk characteristics relevant to each portfolio segment are as follows: Commercial & Industrial – Loans in this segment include commercial and industrial loans and to a lesser extent loans to finance agricultural production. Commercial loans are made to businesses and are generally secured by assets of the business, including trade assets and equipment. While not the primary collateral, in many cases these loans may also be secured by the real estate of the business. Repayment is expected from the cash flows of the business. A weakened economy, soft consumer spending, unfavorable foreign trade conditions and the rising cost of labor or raw materials are examples of issues that can impact credit quality in this segment. 20 Table of Contents Purchased – Loans in this segment are loans purchased through a loan purchasing program with Bankers Healthcare Group (BHG). BHG originates commercial loans to medical professionals nationwide and sells them individually to a secondary market, primarily banks, through a bid process. The Bank has established conservative credit parameters and expects a low risk of default in this portfolio. Commercial Real Estate – Loans in this segment are principally made to businesses and are generally secured by either owner-occupied, or non-owner occupied CRE. A relatively small portion of this segment includes farm loans secured by farmland and buildings. As with commercial and industrial loans, repayment of owner-occupied CRE loans is expected from the cash flows of the business and the segment would be impacted by the same risk factors as commercial and industrial loans. The non-owner occupied CRE portion includes both residential and commercial construction loans, vacant land and real estate development loans, multi-family dwelling loans and commercial rental property loans. Repayment of construction loans is expected from permanent financing takeout; the Company generally requires a commitment or eligibility for the take-out financing prior to construction loan origination. Real estate development loans are generally repaid from the sale of the subject real property as the project progresses. Construction and development lending entail additional risks, including the project exceeding budget, not being constructed according to plans, not receiving permits, or the pre-leasing or occupancy rate not meeting expectations. Repayment of multi-family loans and commercial rental property loans is expected from the cash flow generated by rental payments received from the individuals or businesses occupying the real estate. CRE loans are impacted by factors such as competitive market forces, vacancy rates, cap rates, net operating incomes, lease renewals and overall economic demand. In addition, loans in the recreational and tourism sector can be affected by weather conditions, such as unseasonably low winter snowfalls. CRE lending also carries a higher degree of environmental risk than other real estate lending. Municipal – Loans in this segment are made to local municipalities, attributable to municipal financing transactions and backed by the full faith and credit of town governments or dedicated governmental revenue sources, with no historical losses recognized by the Company. Qualitative factors are not utilized in the manual entry method for municipal loans. Residential Real Estate - 1 st Lien – Loans in this segment are collateralized by first mortgages on 1 – 4 family owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment. Residential Real Estate – Jr Lien – Loans in this segment are collateralized by junior lien mortgages on 1 – 4 family residential real estate and repayment is primarily dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment. Consumer – Loans in this segment are made to individuals for consumer and household purposes. This segment includes both loans secured by automobiles and other consumer goods, as well as loans that are unsecured. This segment also includes overdrafts, which are extensions of credit made to both individuals and businesses to cover temporary shortages in their deposit accounts and are generally unsecured. The Company maintains policies restricting the size and term of these extensions of credit. The overall health of the economy, including unemployment rates, has an impact on the credit quality of this segment. Specific component Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are also not included in the collective evaluation. In general, loans individually evaluated for estimated credit losses include those (i) greater than $ 100,000 with a nonaccrual status or (ii) have other unique characteristics differing from the portfolio segment. Specific reserves are established when appropriate for such loans based on the present value of expected future cash flows of the loan. However, when management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. The following table presents the amortized cost basis of collateral-dependent loans as of June 30, 2023, by collateral type: Business Commercial Residential Assets (1) Real Estate Real Estate Total Commercial & industrial $ 1,565,635 $ 0 $ 0 $ 1,565,635 Commercial real estate 0 776,329 0 776,329 Residential real estate - 1st lien 0 0 319,420 319,420 $ 1,565,635 $ 776,329 $ 319,420 $ 2,661,384 (1) Including, but not limited to, inventory, equipment and accounts receivable. 21 Table of Contents Impaired loans, by portfolio segment, prior to adoption of ASU 2022-02 (Troubled Debt Restructurings and Vintage Disclosures), were as follows: As of December 31, 2022 Unpaid Recorded Principal Related Investment (1) Balance Allowance Related allowance recorded Commercial & industrial $ 452,963 $ 462,745 $ 2,322 Residential real estate – 1st lien 1,041,730 1,073,350 106,280 Total with related allowance 1,494,693 1,536,095 108,602 No related allowance recorded Commercial & industrial 2,989,161 3,078,769 Commercial real estate 3,176,962 3,671,196 Residential real estate - 1st lien 2,785,669 3,805,682 Residential real estate - Jr lien 77,419 126,250 Total with no related allowance 9,029,211 10,681,897 Total impaired loans $ 10,523,904 $ 12,217,992 $ 108,602 (1) Recorded investment in impaired loans in the table above includes accrued interest receivable and deferred net loan costs of $ 11,517 . As of June 30, 2022 Unpaid Recorded Principal Related Investment (1) Balance Allowance Related allowance recorded Residential real estate – 1st lien $ 1,011,645 $ 1,033,657 $ 102,062 No related allowance recorded Commercial & industrial 145,810 181,929 Commercial real estate 3,396,482 4,548,768 Residential real estate - 1st lien 2,739,726 3,745,194 Residential real estate - Jr lien 82,405 128,821 Total with no related allowance 6,364,423 8,604,712 Total impaired loans $ 7,376,068 $ 9,638,369 $ 102,062 (1) Recorded investment in impaired loans in the table above includes accrued interest receivable and deferred net loan costs of $ 33,126 . 22 Table of Contents As of June 30, 2022 Three Months Ended Six Months Ended Average Interest Average Interest Recorded Income Recorded Income Investment Recognized Investment Recognized Related allowance recorded Residential real estate - 1st lien $ 1,062,379 $ 12,570 $ 942,448 $ 26,957 Residential real estate - Jr lien 0 48 0 100 Total with related allowance 1,062,379 12,618 942,448 27,057 No related allowance recorded Commercial & industrial 184,023 0 153,803 204 Commercial real estate 3,554,895 ( 178 ) 3,887,955 1,492 Residential real estate - 1st lien 2,787,897 49,794 2,875,480 92,508 Residential real estate - Jr lien 84,051 34 85,557 71 Total with no related allowance 6,610,866 49,650 7,002,795 94,275 Total impaired loans $ 7,673,245 $ 62,268 $ 7,945,243 $ 121,332 For all loan segments, the accrual of interest is discontinued when a loan is specifically determined to be impaired or when the loan is delinquent 90 days and management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is considered by management to be doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is generally not recognized on specific impaired loans unless the likelihood of further loss is considered by management to be remote. Interest payments received on impaired loans are generally applied as a reduction of the loan principal balance. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and a satisfactory payment performance of six or more months has occurred. Credit Quality Grouping In developing the ACL, management uses credit quality groupings to help evaluate trends in credit quality. The Company groups credit risk into Groups A, B and C. The manner the Company utilizes to assign risk grouping is driven by loan purpose. Commercial purpose loans are individually risk graded while the retail portion of the portfolio is generally grouped by delinquency pool. Group A loans - Pass – are loans that are expected to perform as agreed under their respective terms. Such loans carry a normal level of risk that does not require management attention beyond that warranted by the loan or loan relationship characteristics, such as loan size or relationship size. Group A loans include commercial purpose loans that are individually risk rated, including purchased and retail loans that are rated by pool. Group A retail loans include performing consumer and residential real estate loans. Residential real estate loans are loans to individuals secured by 1-4 family homes, including first mortgages, home equity and home improvement loans. Loan balances fully secured by deposit accounts or that are fully guaranteed by the federal government are considered acceptable risk. Group B loans – Special Mention - are loans that require greater attention than the acceptable risk loans in Group A. Characteristics of such loans may include, but are not limited to, borrowers that are experiencing negative operating trends such as reduced sales or margins, borrowers that have exposure to adverse market conditions such as increased competition or regulatory burden, or borrowers that have had unexpected or adverse changes in management. These loans have a greater likelihood of migrating to an unacceptable risk level if these characteristics are left unchecked. Group B is limited to commercial purpose loans that are individually risk rated. 23 Table of Contents Group C loans – Substandard/Doubtful – are loans that have distinct shortcomings that require a greater degree of management attention. Examples of these shortcomings include a borrower's inadequate capacity to service debt, poor operating performance, or insolvency. These loans are more likely to result in repayment through collateral liquidation. Group C loans range from those that are likely to sustain some loss if the shortcomings are not corrected, to those for which loss is imminent and non-accrual treatment is warranted. Group C loans include individually rated commercial purpose loans and retail loans adversely rated in accordance with the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification Policy. Group C retail loans include 1-4 family residential real estate loans and home equity loans past due 90 days or more with loan-to-value ratios greater than 60%, home equity loans 90 days or more past due where the Bank does not hold first mortgage, irrespective of loan-to-value, loans in bankruptcy where repayment is likely but not yet established, and lastly consumer loans that are 90 days or more past due. Commercial purpose loan ratings are assigned by the commercial account officer; for larger and more complex commercial loans, the credit rating is a collaborative assignment by the lender and the credit analyst. The credit risk rating is based on the borrower's expected performance, i.e., the likelihood that the borrower will be able to service its obligations in accordance with the loan terms. Credit risk ratings are meant to measure risk versus simply record history. Assessment of expected future payment performance requires consideration of numerous factors. While past performance is part of the overall evaluation, expected performance is based on an analysis of the borrower's financial strength, and historical and projected factors such as size and financing alternatives, capacity and cash flow, balance sheet and income statement trends, the quality and timeliness of financial reporting, and the quality of the borrower’s management. Other factors influencing the credit risk rating to a lesser degree include collateral coverage and control, guarantor strength and commitment, documentation, structure and covenants and industry conditions. There are uncertainties inherent in this process. Credit risk ratings are dynamic and require updating whenever relevant information is received. Risk ratings are assessed on an ongoing basis and at various points, including delinquency or at the time of other adverse events. For larger, more complex or adversely rated loans, risk ratings are also assessed at the time of annual or periodic review. Lenders are required to make immediate disclosure to the Chief Lending Officer of any known increase in loan risk, even if considered temporary in nature. 24 Table of Contents The risk ratings within the loan portfolio and current period gross charge-offs, by loan segment and origination year were as follows: As of or for the six months ended, Revolving Revolving June 30, 2023 Loans Loans (In thousands) Term Loans Amortized Cost Basis by Origination Year Amortized Converted 2023 2022 2021 2020 2019 Prior Cost Basis to Term Total Commercial & industrial: Pass $ 9,792 $ 21,220 $ 15,016 $ 3,378 $ 4,621 $ 6,049 $ 54,526 $ 0 $ 114,602 Special mention 0 133 943 245 17 56 5,678 0 7,072 Substandard/Doubtful 0 385 0 261 292 1,538 2,059 0 4,535 Total commercial $ 9,792 $ 21,738 $ 15,959 $ 3,884 $ 4,930 $ 7,643 $ 62,263 $ 0 $ 126,209 Current period gross charge-offs $ 0 $ 150 $ 0 $ 0 $ 0 $ 212 $ 0 $ 0 $ 362 Purchased: Pass $ 164 $ 100 $ 1,802 $ 1,580 $ 2,522 $ 0 $ 0 $ 0 $ 6,168 Total purchased $ 164 $ 100 $ 1,802 $ 1,580 $ 2,522 $ 0 $ 0 $ 0 $ 6,168 Commercial real estate: Pass $ 33,532 $ 80,335 $ 40,459 $ 44,798 $ 35,745 $ 91,753 $ 47,781 $ 0 $ 374,403 Special mention 0 379 1,499 2,757 0 1,497 0 0 6,132 Substandard/Doubtful 0 0 0 594 1,408 2,300 0 0 4,302 Total commercial real estate $ 33,532 $ 80,714 $ 41,958 $ 48,149 $ 37,153 $ 95,550 $ 47,781 $ 0 $ 384,837 Municipal: Pass $ 3,642 $ 908 $ 3,459 $ 5,273 $ 661 $ 11,306 $ 2,495 $ 0 $ 27,744 Total municipal $ 3,642 $ 908 $ 3,459 $ 5,273 $ 661 $ 11,306 $ 2,495 $ 0 $ 27,744 Residential real estate - 1st lien: Pass $ 12,432 $ 40,124 $ 43,113 $ 34,367 $ 10,661 $ 54,485 $ 2,262 $ 0 $ 197,444 Special mention 0 303 131 0 0 0 0 0 434 Substandard/Doubtful 0 0 0 1,854 40 378 0 0 2,272 Total residential real estate - 1st lien $ 12,432 $ 40,427 $ 43,244 $ 36,221 $ 10,701 $ 54,863 $ 2,262 $ 0 $ 200,150 Residential real estate - Jr lien: Pass $ 873 $ 1,994 $ 412 $ 623 $ 664 $ 1,194 $ 24,478 $ 1,712 $ 31,950 Special mention 0 50 0 0 0 0 0 0 50 Substandard/Doubtful 0 0 0 0 0 32 0 0 32 Total residential real estate - Jr lien $ 873 $ 2,044 $ 412 $ 623 $ 664 $ 1,226 $ 24,478 $ 1,712 $ 32,032 Consumer Pass $ 1,509 $ 1,180 $ 560 $ 319 $ 167 $ 110 $ 0 $ 0 $ 3,845 Total consumer $ 1,509 $ 1,180 $ 560 $ 319 $ 167 $ 110 $ 0 $ 0 $ 3,845 Current period gross charge-offs $ 16 $ 19 $ 0 $ 0 $ 1 $ 33 $ 0 $ 0 $ 69 Total Loans $ 62,850 $ 147,111 $ 107,394 $ 96,049 $ 56,798 $ 170,698 $ 139,279 $ 1,712 $ 780,985 As of or for the six months ended, June 30, 2023, there were (i) no current period gross charge-offs within the Purchased, CRE, Municipal, Residential real estate 1st lien and Residential real estate Jr lien loan segments and (ii) no Special mention or Substandard/Doubtful loans within the Purchased, Municipal and Consumer loan segments. 25 Table of Contents Before the adoption of ASC 326 (CECL), the risk ratings within the loan portfolio, by segment, as of December 31, 2022, were as follows: Residential Residential Commercial Commercial Real Estate Real Estate & Industrial Purchased Real Estate Municipal 1st Lien Jr Lien Consumer Total Group A $ 104,697,047 $ 7,530,458 $ 347,732,935 $ 34,633,055 $ 195,269,893 $ 33,538,767 $ 4,039,989 $ 727,442,144 Group B 6,296,411 0 2,754,649 0 0 0 0 9,051,060 Group C 1,958,415 0 6,405,402 0 3,473,482 218,105 0 12,055,404 Total $ 112,951,873 $ 7,530,458 $ 356,892,986 $ 34,633,055 $ 198,743,375 $ 33,756,872 $ 4,039,989 $ 748,548,608 Modifications of Loans A loan is considered modified if, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. The Company is deemed to have granted such a concession if it has modified a loan in any of the following ways: · Reduced accrued interest; · Reduced the original contractual interest rate to a rate that is below the current market rate for the borrower; · Converted a variable-rate loan to a fixed-rate loan; · Extended the term of the loan beyond an insignificant delay; · Deferred or forgiven principal in an amount greater than three months of payments; · Performed a refinancing and deferred or forgiven principal on the original loan; · Capitalized protective advance to pay delinquent real estate taxes; or · Capitalized delinquent accrued interest. An insignificant delay or insignificant shortfall in the amount of payments typically would not require the loan to be accounted for as modified. However, pursuant to regulatory guidance, any payment delay longer than three months is generally not considered insignificant. Management’s assessment of whether a concession has been granted also takes into consideration payments expected to be received from third parties, including third-party guarantors, provided the third party has the ability to perform on the guarantee. The Company’s modified loans are principally a result of extending loan repayment terms to relieve cash flow difficulties. The Company has only, on a limited basis, reduced accrued interest or reduced interest rates for borrowers below the current market rate for the borrower. The Company has not generally forgiven principal within the terms of original restructurings, nor converted variable rate terms to fixed rate terms. However, the Company evaluates each potential loan modification on its own merits and does not foreclose the granting of any particular type of concession. In connection with modifications, the Company takes into account applicable regulatory guidance, including a 2023 interagency Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts. There were no loan modifications for the first six months of 2023. Prior to adoption of ASU 2022-02, new TDRs, by portfolio segment, during the periods presented below were as follows. Year ended December 31, 2022 Pre- Post- Modification Modification Outstanding Outstanding Number of Recorded Recorded Contracts Investment Investment Residential real estate – 1st lien 2 $ 562,592 $ 562,592 26 Table of Contents Six months ended June 30, 2022 Pre- Post- Modification Modification Outstanding Outstanding Number of Recorded Recorded Contracts Investment Investment Residential real estate – 1st lien 1 $ 292,592 $ 292,592 There were no TDRs for the three months ended June 30, 2022. There were no TDRs for which there was a payment default during the twelve-month period ended December 31, 2022. The TDRs for which there was a payment default during the twelve-month period ended June 30, 2022 were as follows: Number of Recorded Contracts Investment Commercial real estate 2 $ 2,412,179 Prior to adoption of ASU 2022-02, TDRs were treated as other impaired loans and carried individual specific reserves with respect to the calculation of the ALL. These loans were categorized as non-performing, may have been past due, and were generally adversely risk rated. The TDRs that had defaulted under their restructured terms were generally in collection status and their ALL reserve was typically calculated using the fair value of collateral method. Prior to adoption of ASU 2022-02, the specific allowances within the ALL related to TDRs as of December 31, 2022, totaled $ 106,280 . As of the balance sheet dates, the Company evaluates whether it is contractually committed to lend additional funds to debtors with impaired, non-accrual or modified loans. The Company is contractually committed to lend on one SBA guaranteed line of credit to a borrower whose lending relationship was previously modified. Off-Balance Sheet Credit Exposures In the ordinary course of business, the Company enters into commitments to extend credit, including commercial letters of credit and standby letters of credit. Such financial instruments are recorded as loans when they are funded. Allowance for Credit Losses on OBS Credit Exposures Effective January 1, 2023, with the adoption of ASU No. 2016-13 (CECL), 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. To appropriately measure expected credit losses, management disaggregates the loan portfolio into similar risk characteristics, identical to those determined for the loan portfolio. An estimated funding rate is then applied to the qualifying unfunded loan commitments and letters of credit using the Company's own historical experience to estimate the expected funded amount for each loan segment as of the reporting date. Once the expected funded amount for each loan segment is determined, the loss rate, which is the calculated expected loan loss as a percent of the amortized cost basis for each loan segment, is applied to calculate the ACL on OBS credit exposures as of the reporting date. The ACL on OBS credit exposures is presented within accrued interest and other liabilities on the consolidated balance sheets. Note 6. Goodwill and Other Intangible Assets As a result of a merger with LyndonBank on December 31, 2007, the Company recorded goodwill amounting to $ 11,574,269 . Goodwill is not amortizable and is not deductible for tax purposes. As of December 31, 2022, the most recent evaluation, management concluded that no impairment existed. Management evaluates its goodwill intangible for impairment at least annually, or more frequently as circumstances warrant. 27 Table of Contents Note 7. Fair Value Certain assets and liabilities are recorded at fair value to provide additional insight into the Company’s quality of earnings and comprehensive income. The fair values of some of these assets and liabilities are measured on a recurring basis while others are measured on a non-recurring basis, with the determination based upon applicable existing accounting pronouncements. For example, securities available-for-sale are recorded at fair value on a recurring basis. Other assets, such as MSRs, loans held-for-sale, impaired loans, and OREO are recorded at fair value on a non-recurring basis using the lower of cost or market methodology to determine impairment of individual assets. The Company groups assets and liabilities which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value. The level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with Level 1 considered highest and Level 3 considered lowest). A brief description of each level follows. Level 1 Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasury and other U.S. Government debt securities that are highly liquid and are actively traded in over-the-counter markets. Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes MSRs, collateral-dependent impaired loans and OREO. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. The following methods and assumptions were used by the Company in estimating its fair value measurements: Debt Securities AFS: Fair value measurement is based upon quoted prices for similar assets, if available. If quoted prices are not available, fair values are measured using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curves, prepayment speeds and default rates, net of any related credit allowance. Level 1 securities would include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 securities include federal agency securities, municipal securities and other asset-backed securities. Individually analyzed loans: Individually analyzed loans are reported based on one of three measures: the present value of expected future cash flows discounted at the loan’s effective interest rate; the loan’s observable market price; or the fair value of the collateral if the loan is collateral dependent. If the fair value is less than an impaired loan’s recorded investment, an impairment loss is recognized as part of the ACL. Accordingly, certain individually analyzed loans may be subject to measurement at fair value on a non-recurring basis. Management has estimated the fair value of collateral-dependent loans using Level 2 inputs, such as the fair value of collateral based on independent third-party appraisals. Loans held-for-sale: The fair value of loans held-for-sale is based upon an actual purchase and sale agreement between the Company and an independent market participant. The sale is executed within a reasonable period following quarter-end at the stated fair value. MSRs: MSRs represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method and compared to fair value for impairment. In evaluating the carrying values of MSRs, the Company obtains third party valuations based on loan level data including note rate, and the type and term of the underlying loans. The Company classifies MSRs as non-recurring Level 2. 28 Table of Contents Assets and Liabilities Recorded at Fair Value on a Recurring Basis Assets measured at fair value on a recurring basis and reflected in the consolidated balance sheets at the dates presented, segregated by fair value hierarchy, are summarized below. There were no Level 3 assets or liabilities measured on a recurring basis as of the balance sheet dates presented, nor were there any transfers of assets between Levels during either of the periods presented for 2023 or 2022. June 30, December 31, Assets: (market approach) 2023 2022 Level 1 U.S. Government securities $ 38,381,940 $ 38,231,589 Level 2 U.S. GSE debt securities $ 10,525,678 $ 10,375,291 Taxable Municipal securities 245,442 234,858 Tax-exempt Municipal securities 11,439,237 11,323,567 Agency MBS 110,397,614 115,231,599 ABS and OAS 2,459,904 2,693,606 CMO 11,421,942 11,935,925 Other investments 1,664,784 2,891,674 Level 2 Total $ 148,154,601 $ 154,686,520 Grand Total $ 186,536,541 $ 192,918,109 Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis The following table includes assets measured at fair value on a non-recurring basis that have had a fair value adjustment since their initial recognition. Individually analyzed loans measured at fair value only include those loans with a partial write-down or with a related specific ACL and are presented net of the specific allowances as disclosed in Note 5. Assets measured at fair value on a non-recurring basis and reflected in the consolidated balance sheets at the dates presented, segregated by fair value hierarchy level, are summarized below. There were no Level 1 or Level 3 assets or liabilities measured on a non-recurring basis as of the balance sheet dates presented, nor were there any transfers of assets between levels during either of the periods presented for 2023 or 2022. June 30, December 31, Level 2 2023 2022 Assets: (market approach) Individually analyzed loans, net of related allowance $ 679,802 $ 94,458 Loans held-for-sale 904,250 0 MSRs (1) 821,369 862,593 (1) Represents MSRs at lower of cost or fair value. FASB ASC Topic 825, “Financial Instruments”, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, if the fair values can be reasonably determined. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques using observable inputs when available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. 29 Table of Contents The estimated fair values of commitments to extend credit and letters of credit were immaterial as of the dates presented in the tables below. The estimated fair values of the Company's financial instruments as of the balance sheet dates were as follows: June 30, 2023 Fair Fair Fair Fair Carrying Value Value Value Value Amount Level 1 Level 2 Level 3 Total (Dollars in Thousands) Financial assets: Cash and cash equivalents $ 19,341 $ 19,341 $ 0 $ 0 $ 19,341 Debt securities AFS 186,537 38,382 148,155 0 186,537 Restricted equity securities 1,788 0 1,788 0 1,788 Loans and loans held-for-sale, net of ACL Commercial & industrial 125,131 0 680 121,015 121,695 Purchased 6,149 0 0 5,726 5,726 Commercial real estate 379,534 0 0 356,483 356,483 Municipal 27,675 0 0 26,268 26,268 Residential real estate - 1st lien 199,316 0 0 182,022 182,022 Residential real estate - Jr lien 31,539 0 0 31,135 31,135 Consumer 3,811 0 0 3,822 3,822 MSRs (1) 821 0 1,271 0 1,271 Accrued interest receivable 3,212 0 3,212 0 3,212 Financial liabilities: Deposits Other deposits 850,933 0 847,656 0 847,656 Brokered deposits 249 0 226 0 226 Short-term borrowings 13,400 0 13,400 0 13,400 Long-term borrowings 27,800 0 27,441 0 27,441 Repurchase agreements 35,134 0 35,134 0 35,134 Operating lease obligations 551 0 551 0 551 Finance lease obligations 3,536 0 3,536 0 3,536 Subordinated debentures 12,887 0 12,782 0 12,782 Accrued interest payable 278 0 278 0 278 (1) Reported fair value represents all MSRs for loans serviced by the Company, regardless of carrying amount. 30 Table of Contents December 31, 2022 Fair Fair Fair Fair Carrying Value Value Value Value Amount Level 1 Level 2 Level 3 Total (Dollars in Thousands) Financial assets: Cash and cash equivalents $ 71,140 $ 71,140 $ 0 $ 0 $ 71,140 Debt securities AFS 192,918 38,232 154,686 0 192,918 Restricted equity securities 1,412 0 1,412 0 1,412 Loans and loans held-for-sale, net of ACL Commercial & industrial 111,792 0 0 109,534 109,534 Purchased 7,476 0 0 7,119 7,119 Commercial real estate 351,738 0 29 340,254 340,283 Municipal 34,566 0 0 34,558 34,558 Residential real estate - 1st lien 197,281 0 65 180,879 180,944 Residential real estate - Jr lien 33,510 0 0 33,218 33,218 Consumer 3,970 0 0 3,949 3,949 MSRs (1) 863 0 1,287 0 1,287 Accrued interest receivable 3,214 0 3,214 0 3,214 Financial liabilities: Deposits Other deposits 922,723 0 918,882 0 918,882 Brokered deposits 249 0 225 0 225 Long-term borrowings 1,300 0 1,025 0 1,025 Repurchase agreements 33,078 0 33,078 0 33,078 Operating lease obligations 658 0 658 0 658 Finance lease obligations 3,645 0 3,645 0 3,645 Subordinated debentures 12,887 0 12,740 0 12,740 Accrued interest payable 74 0 74 0 74 (1) Reported fair value represents all MSRs for loans serviced by the Company, regardless of carrying amount. 31 Table of Contents Note 8. Loan Servicing The following table shows the changes in the carrying amount of the MSRs, included in other assets in the consolidated balance sheets, for the periods indicated: Six Months Ended June 30, 2023 Year Ended December 31, 2022 Balance at beginning of year $ 862,593 $ 897,720 MSRs capitalized 28,610 120,629 MSRs amortized ( 69,834 ) ( 155,756 ) Balance at end of period $ 821,369 $ 862,593 Note 9. Legal Proceedings In the normal course of business, the Company is involved in litigation that is considered incidental to its business. Management does not expect that any such litigation will be material to the Company's consolidated financial condition or results of operations. Note 10. Subsequent Events The Company has evaluated events and transactions through the date that the financial statements were issued for potential recognition or disclosure in these financial statements, as required by GAAP. On June 14, 2023, the Company’s Board declared a cash dividend of $ 0.23 per common share, payable August 1, 2023, to shareholders of record as of July 15, 2023. This dividend has been recorded in the Company’s consolidated financial statements as of the declaration date, including shares issuable under the DRIP. 32 Table of Contents ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Period Ended June 30, 2023 The following discussion analyzes the consolidated financial condition of Community Bancorp. and its wholly-owned subsidiary, Community National Bank, as of June 30, 2023 and December 31, 2022, and its consolidated results of operations for the three- and six-month interim periods and one year period presented. The Company is considered a “smaller reporting company” and a “non-accelerated filer” under the disclosure rules of the SEC. Accordingly, the Company has elected to provide its statements of income, comprehensive income, cash flows and changes in shareholders’ equity for a two-year, rather than a three-year, period and provide certain other smaller reporting company scaled disclosures where management deems it appropriate. The following discussion should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in its 2022 Annual Report on Form 10-K filed with the SEC. Please refer to Note 1 in the accompanying consolidated financial statements for a listing of acronyms and defined terms used throughout the following discussion. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the results of operations, financial condition and business of the Company and its subsidiary. Words used in the discussion below such as "believes," "expects," "anticipates," "intends," "estimates," “projects”, "plans," “assumes”, "predicts," “may”, “might”, “will”, “could”, “should” and similar expressions, indicate that management of the Company is making forward-looking statements. Forward-looking statements are not guarantees of future performance. They necessarily involve risks, uncertainties and assumptions. Examples of forward looking statements included in this discussion include, but are not limited to, statements regarding the estimated contingent liability related to assumptions made within the asset/liability management process; management's expectations as to the future interest rate environment and the Company's related liquidity level; credit risk expectations relating to the Company's loan portfolio and off-balance sheet commitments; and management's general outlook for the future performance of the Company and the local or national economy. Although forward-looking statements are based on management's expectations and estimates as of the date they are made, many of the factors that could influence or determine actual results are unpredictable and not within the Company's control. Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities: · interest rates change in such a way as to negatively affect loan demand, the local economy or the Company's net income, asset valuations or margins; · general economic or business conditions, either nationally, regionally or locally, deteriorate, resulting in a decline in credit quality or a diminished demand for the Company's products and services; · the impact of inflation and slowing economic growth on the Company’s customers and on its financial results and performance; · changes in the United States monetary and fiscal policies, including the interest rate policies of the FRB and its regulation of the money supply; · changes in applicable accounting policies, practices and standards; · the geographic concentration of the Company’s loan portfolio and deposit base; · reductions in deposit levels, which necessitate increased borrowings to fund loans and sale of investment securities; · increases in the level of nonperforming assets and charge-offs; · changes in federal or state tax laws or policy; · changes in laws or government rules, including the rules of the federal Consumer Financial Protection Bureau, or the way in which courts or government agencies interpret or implement those laws or rules, increase our costs of doing business, causing us to limit or change our product offerings or pricing, or otherwise adversely affect the Company's business; · regulatory responses to recent high profile bank failures increase our costs of operation, including through regulatory compliance changes and higher FDIC deposit insurance assessments to replenish the Bank Insurance Fund (BIF); 33 Table of Contents · competitive pressures increase among financial service providers in the Company's northern New England market area or in the financial services industry generally, including competitive pressures from non-bank financial service providers, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems; · cybersecurity risks could adversely affect the Company’s business, financial performance or reputation and could result in financial liability for losses incurred by customers or others due to data breaches or other compromise of the Company’s information security systems; · higher-than-expected costs are incurred relating to information technology or difficulties arise in implementing technological enhancements; · management’s risk management measures may not be completely effective; · changes in consumer and business spending, borrowing and savings habits; · operational and internal system failures due to changes in normal business practices, including remote working for Company staff; · increased cybercrime and payment system risk due to increased usage by customers of online, mobile and other remote banking channels; · the ongoing challenges to find qualified workers to maintain a stable workforce; · losses due to the fraudulent or negligent conduct of third parties, including the Company’s service providers, customers and employees; and · adverse changes in the credit rating of U.S. government debt. Readers are cautioned not to place undue reliance on such statements as they speak only as of the date they are made. The Company does not undertake, and disclaims any obligation, to revise or update any forward-looking statements to reflect the occurrence or anticipated occurrence of events or circumstances after the date of this Report, except as required by applicable law. The Company claims the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995. NON-GAAP FINANCIAL MEASURES Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, three non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled Interest Income Versus Interest Expense (NII)) and core earnings (as defined and discussed in the Results of Operations section), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G. Management believes that these non-GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP. OVERVIEW The Company’s consolidated assets at June 30, 2023, were $1.03 billion compared to $1.06 billion at December 31, 2022, a decrease of 2.3%. Significant changes in the asset base were due to a decrease of $51.8 million, or 72.8%, in cash and cash equivalents, which was partially offset by an increase in loans of $32.4 million, or 4.3%. This change in the asset base reflects the Company’s efforts to deploy cash into higher earning assets. The increase in the loan portfolio was primarily attributable to an increase of $13.3 million in commercial & industrial loans, $27.9 million in CRE loans and $1.4 million in residential first lien loans, which was partially offset by a decrease of $6.9 million in municipal loans and $1.7 million in residential junior lien loans and $1.4 million in purchased loans. Total deposits at June 30, 2023, were $851.2 million compared to $923.0 million at December 31, 2022, a decrease of $71.8 million, or 7.8%. Year to date, demand and interest-bearing transaction accounts decreased in total by $41.3 million or 8.1%, followed by a decrease of $31.1 million, or 22.2% in money market funds and $5.0 million, or 2.9% in savings accounts. This was offset minimally by an increase of $5.6 million, or 5.5% in time deposits. An increase of $2.1 million, or 6.2%, in repurchase agreements is also noted since year end. Although a decline in deposits in the first six months is a normal occurrence for the Company primarily due to normal seasonal outflows, the decline is augmented by the continued spend-down of Covid relief funds. Pricing pressures, as depositors look for alternative products with higher interest rates in the current rate environment, resulted in deposit outflows as well. The decrease in deposit balances combined with the loan growth, has required the use of borrowed funds as a supplemental funding source. 34 Table of Contents Total interest income increased $2.6 million, or 30.1%, for the second quarter of 2023, and $5.1 million, or 30.6%, for the first six months of 2023, compared to the same periods in 2022. The increase in the loan portfolio, coupled with increases in the fed funds rate throughout 2022 and into 2023, helped to support the year over year increase in interest income. Total interest expense increased $2.2 million, or 292.6% for the second quarter of 2023, and $3.7 million, or 259.7%, for the first six months of 2023, compared to the same periods in 2022. The recent increases in the fed funds rate have put more pressure on competitive deposit pricing, resulting in an increase in the Company’s money market and time deposit rates. Please refer to the interest rate sensitivity discussion in the Interest Rate Risk and Asset and Liability Management section for more information on the impact that the actions of the FRB’s FOMC in regulating interest rates, and changes in the yield curve, could have on net interest income. The provision for credit losses for the three and six months ended June 30, 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 provision for credit losses for the second quarter of 2023 was $281,142 compared to $337,500 for the same quarter in 2022 and for the first six months of 2023 was $567,668 compared to $1.2 million for the same period in 2022, a decrease of $632,332, or 52.7%. This decrease to the provision year over year was driven primarily by a write-down on a non-performing CRE loan totaling $667,474 during the first quarter of 2022, which necessitated a substantial provision for that quarter. Please refer to Note 5 of the unaudited consolidated financial statements as well as the ACL and provisions discussion in the Credit Risk section of this MD&A. Consolidated net income for the second quarter of 2023 increased $175,187 to $3.2 million compared to $3.0 million for the same quarter of 2022, and for the first six months of 2023 increased $1.1 million to $6.5 million compared to $5.4 million in the same period of 2022. Year over year, a $5.1 million increase in interest income was partially offset by an increase of $3.7 million in interest expense and coupled with a decrease of $632,332 in the provision for credit losses between periods, resulted in an increase of $2.0 million in net interest income after provision for credit losses. 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 $80.5 million, with a book value per share of $14.44 as of June 30, 2023, compared to $75.2 million and a book value per share of $13.55 as of December 31, 2022. Equity capital increased between periods despite a cumulative effect charge to retained earnings of $549,113 upon the transition to CECL effective on January 1, 2023. The increase in equity capital is partially related to the decrease in unrealized losses in the investment portfolio of $1.2 million, net of tax, reflected in the accumulated other comprehensive loss component of the shareholders’ equity portion of the balance sheet. This position is considered by management as temporary and, unlike the charge to retained earnings in connection with the transition to CECL, does not impact the Company’s regulatory capital ratios. The week of July 10, 2023 brought heavy rainfall to the state of Vermont which caused extensive flooding across much of the state leading to Governor Phil Scott declaring a state of emergency. Preliminary figures from self-reporting data released by Vermont Emergency Management suggest that the impact was considerable, and that the total damage will be at least comparable, if not greater, than what was suffered in 2011 during Tropical Storm Irene. The State Emergency Operations Center has received reports of damage to over 4,000 residential units and over 800 businesses. The portion of the Company’s service area most impacted was central Vermont, including one of the Bank’s branches which sustained extensive flooding. The branch has been closed for restoration and repairs, anticipating reopening within a few weeks. The impact to the Bank’s customers appears to be manageable with many having flood insurance coverage and or qualifying for the various assistance programs offered at the state and federal level. On June 14, 2023, the Company's Board of Directors declared a quarterly cash dividend of $0.23 per common share, payable on August 1, 2023, to shareholders of record on July 15, 2023. As of June 30, 2023, all the Company’s capital ratios, and those of our subsidiary Bank, were in excess of applicable regulatory requirements. While we believe that we have sufficient capital to withstand an economic downturn from any headwinds related to inflation or recessionary periods, should one occur, our equity capital and regulatory capital ratios could be adversely impacted, including as a result of credit losses and other adverse impacts of deteriorating economic conditions, or government monetary policy. 35 Table of Contents CRITICAL ACCOUNTING POLICIES The Company’s consolidated financial statements are prepared according to U.S. GAAP. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities in the consolidated financial statements and related notes. The SEC has defined a company’s critical accounting policies as those that are most important to the portrayal of the Company’s financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Because of the significance of these estimates and assumptions, there is a high likelihood that materially different amounts would be reported for the Company under different conditions or using different assumptions or estimates. Management evaluates on an ongoing basis its judgment as to which policies are considered to be critical and communicates all evaluations with the Company’s Audit Committee. The Company’s critical accounting policies govern: · the ACL; · OREO; · credit losses on debt securities; · valuation of residential MSRs; and · the carrying value of goodwill. These policies are described in the Company’s 2022 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. With the exception of the ACL policy, there were no material changes during the first six months of 2023 in the Company’s critical accounting policies. ACL - Management believes that the calculation of the ACL is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. In estimating the ACL, management has adopted a methodology consistent with ASU No. 2016-13 that requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses over the life of the loans at the measurement date. Further consideration is given to qualitative factors, including changes in current economic indicators and their probable impact on borrowers and collateral, trends in delinquent and non-performing loans, trends in criticized and classified assets, levels of exceptions, the impact of competition in the market, concentrations of credit risk in a variety of areas, including portfolio product mix, the level of loans to individual borrowers and their related interests, loans to industry segments and the geographic distribution of CRE loans. Management’s estimates used in calculating the ACL may increase or decrease based on changes in these factors, which in turn will affect the amount of the Company’s provision for credit losses charged against current period income. This evaluation is inherently subjective and actual results could differ significantly from these estimates under different assumptions, judgments or conditions. The Company estimates expected credit losses on OBS credit exposures over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on OBS credit exposures is adjusted through credit loss expense. A modified version of these requirements applies to debt securities classified as available for sale, which eliminates OTTI impairment analysis and requires that if a decline in the fair value of debt securities AFS is deemed by management to be the result of credit losses rather than other factors, the credit losses on those securities is recorded through an allowance for credit losses rather than a write-down of the security. The Company’s securities portfolio is evaluated for impairment on a quarterly basis. RESULTS OF OPERATIONS The Company’s net income for the second quarter of 2023 was $3.2 million or $0.58 per common share, compared to $3.0 million or $0.56 per common share for the same quarter of 2022. Net income for the first six months of 2023 was $6.5 million or $1.19 per common share, compared to $5.4 million or $1.00 per common share for the same period of 2022. Core earnings (NII) were $8.3 million for the second quarter of 2023 compared to $7.8 million for the same quarter of 2022, and $16.8 million for the first six months of 2023 compared to $15.4 million for the same period in 2022. Interest and fees on loans, the major component of interest income, increased $2.4 million, or 31.3% for the second quarter of 2023 compared to the same quarter of 2022, and $4.3 million, or 28.3% for the first six months of 2023 compared to the same period in 2022. Interest paid on deposits, which is the major component of total interest expense, increased $1.6 million, or 279.9% for the second quarter of 2023 compared to the same quarter of 2022, and increased $2.9 million, or 257.8%, year over year, driven primarily by the increases in the fed funds rate during 2022 and into the first six months of 2023. Return on average assets, which is net income divided by average total assets, measures how effectively a corporation uses its assets to produce earnings. Return on average equity, which is net income divided by average shareholders' equity, measures how effectively a corporation uses its equity capital to produce earnings. 36 Table of Contents The following tables show these ratios annualized, as well as other equity ratios monitored by management, for the comparison periods presented. Three Months Ended June 30, 2023 2022 Return on average assets 1.25 % 1.20 % Return on average equity 16.05 % 16.12 % Dividend payout ratio (1) 39.66 % 41.07 % Average equity to average assets 7.78 % 7.45 % Six Months Ended June 30, 2023 2022 Return on average assets 1.28 % 1.09 % Return on average equity 16.79 % 13.84 % Dividend payout ratio (1) 38.66 % 46.00 % Average equity to average assets 7.63 % 7.84 % (1) Dividends declared per common share divided by earnings per common share. INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST INCOME) The largest component of the Company’s operating income is NII, which is the difference between interest earned on loans and investments and the interest paid on deposits and other sources of funds (i.e., borrowings). The Company’s level of net interest income can fluctuate over time due to changes in the level and mix of earning assets and sources of funds (volume), and changes in the yield earned and costs of funds (rate). A portion of the Company’s income from loans to local municipalities is not subject to income taxes. Because the proportion of tax-exempt items in the Company's balance sheet varies from year-to-year, to improve comparability of information, the non-taxable income shown in the tables below has been converted to a tax equivalent basis. The Company’s corporate tax rate is 21%; therefore, to equalize tax-free and taxable income in the comparison, we divide the tax-free income by 79%, with the result that every tax-free dollar is equivalent to $1.27 in taxable income for the periods presented. The Company’s tax-exempt interest income of $300,389 and $256,652 for the three months ended June 30, 2023 and 2022, respectively, and $592,343 and $492,695 for the six months ended June 30, 2023 and 2022, respectively, was derived from loans to local municipalities of $27.7 million and $32.4 million, and tax-exempt municipal investments of $11.4 million and $7.2 million at June 30, 2023 and 2022, respectively. The following tables show the reconciliation between reported NII and tax equivalent NII for the comparison periods presented. Three Months Ended June 30, 2023 2022 Net interest income as presented $ 8,268,863 $ 7,837,185 Effect of tax-exempt income 79,850 68,224 Net interest income, tax equivalent $ 8,348,713 $ 7,905,409 Six Months Ended June 30, 2023 2022 Net interest income as presented $ 16,792,229 $ 15,395,414 Effect of tax-exempt income 157,458 130,970 Net interest income, tax equivalent $ 16,949,687 $ 15,526,384 37 Table of Contents The following tables present the daily average assets and the daily average liabilities, including the yields on interest-earning assets and interest-bearing liabilities for the respective comparison periods. Interest income (excluding interest on non-accrual loans) is expressed on a tax equivalent basis, both in dollars and as a yield/rate for the comparison periods presented. Net interest income, net interest spread and net interest margin are also expressed on a tax equivalent basis. Three Months Ended June 30, 2023 2022 Average Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Average Assets Loans, net (1) $ 761,639,880 $ 10,070,719 5.30 % $ 695,516,495 $ 7,689,953 4.43 % Taxable investment securities 178,445,569 929,963 2.09 % 181,906,304 736,407 1.62 % Tax-exempt investment securities 11,559,086 114,758 3.98 % 5,442,227 42,767 3.15 % Sweep and interest-earning accounts 12,627,674 144,877 4.60 % 68,587,282 169,965 0.99 % Other investments (2) 1,880,974 33,999 7.25 % 1,777,950 16,632 3.75 % Total interest-earning assets $ 966,153,183 $ 11,294,316 4.69 % $ 953,230,258 $ 8,655,724 3.64 % Cash and due from banks 11,054,246 10,783,678 Premises and equipment 12,750,400 13,372,966 BOLI 5,179,747 5,100,214 Goodwill 11,574,269 11,574,269 Other assets 20,193,636 15,107,662 Total assets $ 1,026,905,481 $ 1,009,169,047 Average Liabilities and Shareholders' Equity Interest-bearing transaction accounts $ 271,067,384 $ 1,172,966 1.74 % $ 259,645,648 $ 211,278 0.33 % Money market funds 120,237,077 490,517 1.64 % 127,849,142 121,221 0.38 % Savings deposits 168,652,681 33,032 0.08 % 181,057,302 26,003 0.06 % Time deposits 106,617,890 527,868 1.99 % 106,162,111 226,956 0.86 % Borrowed funds 20,497,549 232,016 4.54 % 1,301,132 5 0.00 % Repurchase agreements 36,663,793 214,654 2.35 % 29,958,442 22,129 0.30 % Finance lease obligations 3,554,222 20,426 2.30 % 3,769,886 21,660 2.30 % Junior subordinated debentures 12,887,000 254,124 7.91 % 12,887,000 121,063 3.77 % Total interest-bearing liabilities $ 740,177,596 $ 2,945,603 1.60 % $ 722,630,663 $ 750,315 0.42 % Noninterest bearing deposits 199,692,664 207,476,087 Other liabilities 7,133,908 3,894,500 Total liabilities 947,004,168 934,001,250 Shareholders' equity 79,901,313 75,167,797 Total liabilities and shareholders' equity $ 1,026,905,481 $ 1,009,169,047 Net interest income $ 8,348,713 $ 7,905,409 Net interest spread (3) 3.09 % 3.22 % Net interest margin (4) 3.47 % 3.33 % 1. Included in net loans are non-accrual loans with average balances of $8,586,182 and $5,014,853 for the three months ended June 30, 2023 and 2022, 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 $35,117,182 and $47,565,225 for the three months ended June 30, 2023 and 2022, respectively. 2. Included in other investments is the Company’s FHLBB Stock with average balances of $815,824 and $712,800 for the three months ended June 30, 2023 and 2022, respectively, with a dividend rate of approximately 3.72% and 2.09%, respectively, per quarter. 3. Net interest spread is the difference between the average yield on average interest-earning assets and the average rate paid on average interest-bearing liabilities. 4. Net interest margin is net interest income divided by average earning assets. 38 Table of Contents Six Months Ended June 30, 2023 2022 Average Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Average Assets Loans, net (1) $ 754,033,422 $ 19,500,253 5.22 % $ 690,602,453 $ 15,236,988 4.45 % Taxable investment securities 180,094,857 1,873,441 2.10 % 183,839,728 1,392,684 1.53 % Tax-exempt investment securities 11,509,253 229,515 4.02 % 3,846,121 56,627 2.97 % Sweep and interest-earning accounts 21,499,499 474,288 4.45 % 69,406,084 250,625 0.73 % Other investments (2) 1,830,010 64,653 7.12 % 1,778,671 33,092 3.75 % Total interest-earning assets 968,967,041 $ 22,142,150 4.61 % 949,473,057 $ 16,970,016 3.60 % Cash and due from banks 10,547,324 14,427,409 Premises and equipment 12,870,825 13,517,613 BOLI 5,169,993 5,090,222 Goodwill 11,574,269 11,574,269 Other assets 19,440,462 13,504,921 Total assets $ 1,028,569,914 $ 1,007,587,491 Average Liabilities and Shareholders' Equity Interest-bearing transaction accounts $ 275,463,700 $ 2,137,833 1.57 % $ 259,195,319 $ 371,356 0.29 % Money market funds 127,884,423 1,004,192 1.58 % 129,288,338 248,902 0.39 % Savings deposits 169,907,932 64,028 0.08 % 177,129,696 49,443 0.06 % Time deposits 104,476,174 863,077 1.67 % 106,397,607 467,717 0.89 % Borrowed funds 11,106,519 235,796 4.28 % 1,301,138 6 0.00 % Repurchase agreements 36,401,533 346,782 1.92 % 29,405,997 43,169 0.30 % Finance lease obligations 3,581,422 41,166 2.30 % 3,796,341 43,624 2.30 % Junior subordinated debentures 12,887,000 499,589 7.82 % 12,887,000 219,415 3.43 % Total interest-bearing liabilities 741,708,703 $ 5,192,463 1.41 % 719,401,436 $ 1,443,632 0.40 % Noninterest bearing deposits 201,484,980 205,503,506 Other liabilities 6,892,039 3,638,994 Total liabilities 950,085,722 928,543,936 Shareholders' equity 78,484,192 79,043,555 Total liabilities and shareholders' equity $ 1,028,569,914 $ 1,007,587,491 Net interest income $ 16,949,687 $ 15,526,384 Net interest spread (3) 3.20 % 3.20 % Net interest margin (4) 3.53 % 3.30 % 1. Included in net loans are non-accrual loans with average balances of $8,137,701 and $5,375,840 for the six months ended June 30, 2023 and 2022, 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 $35,147,221 and $48,289,600 for the six months ended June 30, 2023 and 2022, respectively. 2. Included in other investments is the Company’s FHLBB Stock with average balances of $764,860 and $713,521, respectively, with a dividend rate of approximately 6.67% and 2.4%, respectively, for the six months ended June 30, 2023 and 2022, respectively. 3. Net interest spread is the difference between the average yield on average interest-earning assets and the average rate paid on average interest-bearing liabilities. 4. Net interest margin is net interest income divided by average earning assets. 39 Table of Contents The average volume of interest-earning assets for the three- and six-month periods ended June 30, 2023, increased 1.4% and 2.1%, respectively, compared to the same periods last year, and the average yield on interest-earning assets increased 105 bps and 101 bps, respectively. The average volume of loans increased over the three- and six-month comparison periods of 2023 versus 2022 by 9.5% and 9.2%, respectively, and the average yield on loans increased 87 bps and 77 bps, respectively. Loans accounted for 78.8% and 77.8%, respectively, of the average interest-earning asset portfolio for the three- and six- month periods ended June 30, 2023, compared to 73.0% and 72.7%, respectively, for the same periods last year. Interest earned on the loan portfolio as a percentage of total interest income was 89.2% and 88.1%, respectively, for the three- and six-month periods in 2023 compared to 88.8% and 89.8%, respectively, for the same periods in 2022. The average volume of the taxable investment portfolio (classified as AFS) decreased 1.9% and 2.0% during the three- and six-month periods ended June 30, 2023, compared to the same periods last year, while the average yield increased 47 bps and 57 bps, respectively, between periods. There were no investment purchases during the first six months of 2023 accounting for the decrease in investments year over year. The average volume of the tax-exempt investment portfolio (classified as AFS) for the three- and six-month periods ended June 30, 2023, increased $6.1 million and $7.7 million, respectively, and the tax equivalent yield increased 83 bps and 105 bps, respectively. The Company began investing in these tax-exempt bonds during December 2021, and purchased several bonds during 2022, accounting for the increase in this portfolio. The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing account at the FRBB, decreased 81.6% for the three-months ended June 30, 2023, compared to the same period in 2022, and 69.0% for the six-months ended June 30, 2023, compared to the same period in 2022. The decrease in average volume year over year is attributable to the funding of investment and loan growth, and also to a decrease in customer deposit accounts. The average yield on these funds increased 361 bps and 372 bps for the three- and six-month periods ended June 30, 2023, versus the same periods in 2022, directly related to the increases in the fed funds rate throughout 2022 and into 2023. The average volume of interest-bearing liabilities for the three- and six-month periods ended June 30, 2023, increased 2.4% and 3.1%, respectively, compared to the same periods in 2022, and the average rate paid on interest-bearing liabilities increased 118 bps and 101 bps, respectively. The average volume of interest-bearing transaction accounts increased 4.4% and 6.3%, respectively for the three- and six-month periods ended June 30, 2023, compared to the same periods of 2022, reflecting deposit growth during the third and fourth quarters of 2022. The average rate paid on these accounts increased 141 bps and 128 bps, respectively, between comparison periods. Interest paid on these funds as a percentage of total interest expense accounts for 39.8% and 41.2% for the three- and six-month periods of 2023, respectively. The average volume of money market accounts decreased 6.0% and 1.1%, respectively, for the three- and six-month periods ended June 30, 2023, compared to the same periods of 2022, while the average rate paid on these deposits increased 126 bps and 119 bps, respectively. The average volume of savings accounts decreased 6.9% and 4.1%, respectively, for the three- and six-month periods ended June 30, 2023, compared to the same periods in 2022, while the average rate paid on these accounts increased two bps in both comparison periods. The average volume of time deposits increased 0.4% and decreased 1.8%, respectively, for the three- and six-month periods ended June 30, 2023, compared to the same periods in 2022, and the average rate paid increased 113 bps and 78 bps, respectively. As a result of the decrease in deposits, the Company has had to rely on borrowed funds during the first six months of 2023, particularly during the second quarter of 2023, accounting for the increase of $19.2 million for the three months ended June 30, 2023, and $9.8 million for the six months ended June 30, 2023, compared to the respective periods in 2022. The average rate paid increased accordingly for the three- and six-month periods ended June 30, 2023, by 454 bps and 428 bps. 40 Table of Contents The average volume of repurchase agreements increased 22.4% and 23.8%, respectively, for the three- and six-month periods ended June 30, 2023, compared to the same periods in 2022 and the average rate paid increased 205 bps and 162 bps, respectively, between comparison periods. In summary, between the three- and six-month periods ended June 30, 2023 and 2022, the average yield on interest-earning assets increased 105 bps and 101 bps, respectively, and the average rate paid on interest-bearing liabilities increased 118 and 101 bps, respectively. Net interest spread decreased 13 bps for the three-month period ended June 30, 2023, versus 2022, with no change noted for the six-month period of 2023 versus 2022, while net interest margins increased 14 bps and 23 bps, respectively, between 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 2023 and 2022 resulting from volume changes in daily average assets and daily average liabilities and fluctuations in average rates earned and paid. Three Months Ended June 30, Six Months Ended June 30, Variance Variance Variance Variance Due to Due to Total Due to Due to Total Rate (1) Volume (1) Variance Rate (1) Volume (1) Variance Average Interest-Earning Assets Loans, net $ 1,650,456 $ 730,310 $ 2,380,766 $ 2,863,526 $ 1,399,739 $ 4,263,265 Taxable investment securities 211,589 (18,033 ) 193,556 519,755 (38,998 ) 480,757 Tax-exempt investment securities 23,953 48,038 71,991 60,026 112,862 172,888 Sweep and interest-earning accounts 616,684 (641,772 ) (25,088 ) 1,280,824 (1,057,161 ) 223,663 Other investments 16,404 963 17,367 30,606 955 31,561 Total $ 2,519,086 $ 119,506 $ 2,638,592 $ 4,754,737 $ 417,397 $ 5,172,134 Average Interest-Bearing Liabilities Interest-bearing transaction accounts $ 952,291 $ 9,397 $ 961,688 $ 1,743,082 $ 23,395 $ 1,766,477 Money market funds 400,420 (31,124 ) 369,296 766,290 (11,000 ) 755,290 Savings deposits 9,503 (2,474 ) 7,029 17,450 (2,865 ) 14,585 Time deposits 299,935 977 300,912 411,272 (15,912 ) 395,360 Borrowed funds 232,011 0 232,011 235,790 0 235,790 Repurchase agreements 187,510 5,015 192,525 293,206 10,407 303,613 Finance lease obligations 3 (1,237 ) (1,234 ) (7 ) (2,451 ) (2,458 ) Junior subordinated debentures 133,061 0 133,061 280,174 0 280,174 Total $ 2,214,734 $ (19,446 ) $ 2,195,288 $ 3,747,257 $ 1,574 $ 3,748,831 Changes in net interest income $ 304,352 $ 138,952 $ 443,304 $ 1,007,480 $ 415,823 $ 1,423,303 (1) Items which have shown a year-to-year increase in volume have variances allocated as follows: Variance due to rate = Change in rate x new volume Variance due to volume = Change in volume x old rate Items which have shown a year-to-year decrease in volume have variances allocated as follows: Variance due to rate = Change in rate x old volume Variances due to volume = Change in volume x new rate 41 Table of Contents NON-INTEREST INCOME AND NON-INTEREST EXPENSE Non-interest Income The components of non-interest income for the periods presented were as follows: Three Months Ended Six Months Ended June 30, Change June 30, Change 2023 2022 Income Percent 2023 2022 Income Percent Service fees $ 939,451 $ 936,382 $ 3,069 0.33 % $ 1,819,739 $ 1,799,269 $ 20,470 1.14 % Income from sold loans 106,660 195,542 (88,882 ) -45.45 % 214,195 399,384 (185,189 ) -46.37 % Other income from loans 341,876 322,913 18,963 5.87 % 770,448 594,174 176,274 29.67 % Other income Income from CFS Partners 303,152 72,961 230,191 315.50 % 555,203 298,831 256,372 85.79 % VISA card commission 47,752 23,576 24,176 102.54 % 67,665 47,152 20,513 43.50 % Other miscellaneous income 99,540 82,922 16,618 20.04 % 169,959 181,916 (11,957 ) -6.57 % Total non-interest income $ 1,838,431 $ 1,634,296 $ 204,135 12.49 % $ 3,597,209 $ 3,320,726 $ 276,483 8.33 % Total non-interest income increased $204,135, or 12.5%, for the three months ended June 30, 2023, and $276,483, or 8.3% for the six months ended June 30, 2023, compared to the same periods in 2022, with significant changes noted in the following: · The decrease in income from sold loans is due primarily to a lower volume of loans sold into the secondary market during both comparison periods of 2023 versus 2022, as the rising interest rate environment has adversely affected residential mortgage lending activity. · An increase in CRE loan volume in 2023 resulted in a significant increase in documentation fees collected at origination as well as commercial rate lock fees collected, accounting for the increase in other income from loans for both comparison periods of 2023 versus 2022. · Income from CFS Partners increased between periods due primarily to the late rebound of market prices during the latter part of the first quarter of 2023. 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. · The increase in VISA card commission is attributable to additional income from a renegotiated contract in June of 2023. · Included in other miscellaneous income for 2022 is a one-time credit totaling $23,400 associated with a renegotiated contract with the Company’s check printing vendor, accounting for the decrease for the six months ended June 30, 2023, versus 2022. 42 Table of Contents Non-interest Expense The components of non-interest expense for the periods presented were as follows: Three Months Ended Six Months Ended June 30, Change June 30, Change 2023 2022 Expense Percent 2023 2022 Expense Percent Salaries and wages $ 2,264,760 $ 2,034,000 $ 230,760 11.35 % $ 4,553,520 $ 4,074,000 $ 479,520 11.77 % Employee benefits 811,870 704,623 107,247 15.22 % 1,566,140 1,476,675 89,465 6.06 % Occupancy expenses, net 700,228 673,177 27,051 4.02 % 1,471,214 1,426,541 44,673 3.13 % Other expenses Service contracts - administrative 152,989 147,668 5,321 3.60 % 308,489 286,173 22,316 7.80 % Travel, entertainment and meals expense 51,271 27,328 23,943 87.61 % 70,169 43,950 26,219 59.66 % Audit fees 118,672 115,028 3,644 3.17 % 245,609 215,756 29,853 13.84 % FDIC insurance 124,700 96,426 28,274 29.32 % 256,343 186,410 69,933 37.52 % Collection & non-accruing loan expense 10,500 11,000 (500 ) -4.55 % 36,000 47,000 (11,000 ) -23.40 % ATM fees 150,644 153,301 (2,657 ) -1.73 % 311,470 294,191 17,279 5.87 % State deposit tax 256,956 246,098 10,858 4.41 % 513,828 486,576 27,252 5.60 % Other miscellaneous expenses 1,221,333 1,225,815 (4,482 ) -0.37 % 2,410,844 2,350,780 60,064 2.56 % Total non-interest expense $ 5,863,923 $ 5,434,464 $ 429,459 7.90 % $ 11,743,626 $ 10,888,052 $ 855,574 7.86 % Total non-interest expense increased $429,459, or 7.9% for the three months ended June 30, 2023, and $855,574, or 7.9%, for the six months ended June 30, 2023, compared to the same periods in 2022, with significant changes noted in the following: · In addition to normal salary increases, the increase in salaries and wages year over year is attributable to new hires in the area of commercial lending and operations during the last quarter of 2022. Also contributing to the increase was a one-time salary adjustment in November of 2022 of $2,000 to all employees below vice president status that impacted the year over year comparison by $57,500. · 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 increase in service contracts - administrative is due to a combination of an increase in transaction-based pricing for certain contracts and contractual inflationary adjustment factors that are higher than historical increase adjustments. · The increase in travel, entertainment and meals expenses is attributable to an increase in travel expenses as more seminars and training sessions return to in-person attendance. · The increase in audit fees reflects increased audit services due to additional audit requirements required by FDICIA due to the Company surpassing $1.0 billion asset size. · The Company increased the 2023 monthly accrual for FDIC insurance in anticipation of an increase in the assessment multiplier, as announced by the FDIC in late 2022. · Collection & non-accruing loan expenses were lower year over year due to a decrease in expenses associated with properties in the Company’s non-accruing loan portfolio. · ATM fees are transaction-based and reflect increased customer activity year over year, as well as annual contractual price adjustments. · State deposit tax increased year over year due primarily to the increase in deposits. The calculation is based on an average of month-end deposit totals over a 12-month period. 43 Table of Contents APPLICABLE INCOME TAXES The provision for income taxes increased $87,525, or 12.9% for the second quarter of 2023 compared to the same quarter of 2022, and $341,649, or 28.4%, for the first six months of 2023 compared to the same period in 2022. Tax credits related to limited partnership investments amounted to $80,529 and $96,237, respectively, for the second quarter of 2023 compared to the same quarter of 2022, and $161,058 and $192,474 for the first six months of 2023 and 2022. Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $67,128 and $67,092, respectively, for the second quarter of 2023 compared to the same quarter of 2022, and $134,256 and $134,184 for the first six months of 2023 and 2022, respectively. These investments provide tax benefits, including tax credits, and are designed to provide a targeted effective annual yield between 7% and 10%. CHANGES IN FINANCIAL CONDITION The following table reflects the composition of the Company's major categories of assets and liabilities as a percentage of total assets or liabilities and shareholders’ equity, as of the balance sheet dates: June 30, 2023 December 31, 2022 Assets Loans $ 780,985,276 75.69 % $ 748,548,608 70.88 % AFS securities 186,536,541 18.08 % 192,918,109 18.27 % Liabilities Demand deposits 201,716,781 19.55 % 216,093,534 20.46 % Interest-bearing transaction accounts 267,151,188 25.89 % 294,050,079 27.84 % Money market funds 109,035,047 10.57 % 140,117,086 13.27 % Savings deposits 166,057,812 16.09 % 171,072,921 16.20 % Time deposits 107,220,888 10.39 % 101,638,659 9.62 % Borrowed funds 13,400,000 1.30 % 0 0.00 % Long-term advances 27,800,000 2.69 % 1,300,000 0.12 % The following table reflects the changes in the composition of the Company's major categories of assets and liabilities between the balance sheet dates, as disclosed in the table above: Volume Change Percentage Assets Loans $ 32,436,668 4.33 % AFS securities (6,381,568 ) -3.31 % Liabilities Demand deposits (14,376,753 ) -6.65 % Interest-bearing transaction accounts (26,898,891 ) -9.15 % Money market funds (31,082,039 ) -22.18 % Savings deposits (5,015,109 ) -2.93 % Time deposits 5,582,229 5.49 % Borrowed funds 13,400,000 100.00 % Long-term advances 26,500,000 2038.46 % The increase in the loan portfolio during the first six months of 2023 was attributable to increases of $27.9 million in CRE loans, $13.3 million in commercial & industrial and $1.4 million in residential 1 st lien loans, which was partially offset by decreases of $6.9 million in municipal loans, $1.4 million in purchased loans, and $1.7 million in residential junior lien loans. The Company has experienced strong loan activity among its commercial customers, but only minimal consumer loan activity. There were no securities AFS purchased during the first six months of 2023. The change in the securities AFS portfolio is attributable to maturities amounting to $1.2 million and principal payments on various securities totaling $6.6 million, which was partially offset by a decrease of $1.5 million in unrealized losses arising during the first six months of 2023, which is reflected in OCI. In management’s view, the size of the securities AFS portfolio is appropriate and proportional to the overall asset base, as this portfolio serves an important role in the Company’s liquidity position. 44 Table of Contents The decrease in the demand deposit accounts was entirely made up of business DDAs. The decrease in interest-bearing transaction accounts consists of a decrease of $10.9 million, or 8.86%, in consumer interest-bearing transaction accounts, a decrease of $17.0 million, or 42.1%, in municipal deposit accounts and a decrease of $8.6 million, or 10.1% in ICS deposit accounts. These decreases were partially offset by a combined increase of $9.6 million, or 21.6%, in health savings accounts and the deposit account of the Company’s trust and asset management affiliate, CFSG. The decrease in money market funds was driven by decreases of $16.8 million, or 56.9%, in ICS accounts, $8.3 million, or 8.2%, in retail money market funds, and $6.0 million, or 68.1%, in municipal deposits. 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 had to rely on borrowed funds and long-term advances as a supplemental funding source, accounting for the significant increase in these funds. CERTAIN TIME DEPOSITS Increments of maturity of time CDs of $250,000 or more outstanding at June 30, 2023, are summarized as follows: 3 months or less $ 1,875,195 Over 3 through 6 months 2,407,340 Over 6 through 12 months 11,679,773 Over 12 months 2,129,349 Total $ 18,091,657 Interest Rate Risk and Asset and Liability Management - Management actively monitors and manages the Company’s interest rate risk exposure and attempts to structure the balance sheet to maximize net interest income while controlling its exposure to interest rate risk. The Company's ALCO is made up of the Executive Officers and certain Vice Presidents of the Bank representing major business lines. The ALCO formulates strategies to manage interest rate risk by evaluating the impact on earnings and capital of such factors as current interest rate forecasts and economic indicators, potential changes in such forecasts and indicators, liquidity and various business strategies. The ALCO meets at least quarterly to review financial statements, liquidity levels, yields and spreads to better understand, measure, monitor and control the Company’s interest rate risk. In the ALCO process, the committee members apply policy limits set forth in the Asset Liability, Liquidity and Investment policies approved and periodically reviewed by the Company’s Board of Directors. The ALCO's methods for evaluating interest rate risk include an analysis of the effects of interest rate changes on net interest income and an analysis of the Company's interest rate sensitivity "gap", which provides a static analysis of the maturity and repricing characteristics of the entire balance sheet. The ALCO Policy also includes a contingency funding plan to help management prepare for unforeseen liquidity restrictions, including hypothetical severe liquidity crises. Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change, thereby impacting NII, the primary component of the Company’s earnings. Fluctuations in interest rates can also have an impact on liquidity. The ALCO uses an outside consultant to perform rate shock simulations to the Company's net interest income, as well as a variety of other analyses. It is ALCO’s function to provide the assumptions used in the modeling process. Assumptions used in prior period simulation models are regularly tested by comparing projected NII with actual NII. The ALCO utilizes the results of the simulation model to quantify the estimated exposure of NII and liquidity to sustained interest rate changes. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on the Company’s balance sheet. The model also simulates the balance sheet’s sensitivity to a prolonged flat rate environment. All rate scenarios are simulated assuming a parallel shift of the yield curve; however further simulations are performed utilizing non-parallel changes in the yield curve. The results of this sensitivity analysis are compared to the ALCO policy limits which specify a maximum tolerance level for NII exposure over a 1-year horizon, assuming no balance sheet growth, given a 200 bp shift upward and a 100 bp shift downward in interest rates. Under the Company’s interest rate sensitivity modeling, with the continued asset sensitive balance sheet, in a rising rate environment NII initially trends upward as the short-term asset base (cash and adjustable-rate loans) quickly cycle upward while the retail funding base (deposits) lags the market. If rates paid on deposits must be increased more and/or more quickly than projected due to competitive pressures, the expected benefit to 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 current rising rate environment has had a positive impact on the Company’s NII, however market expectations for higher deposit rates and increased borrowing costs are applying increasing pressure to the spread between interest income and interest expense. 45 Table of Contents The following table summarizes the estimated impact on the Company's NII over a twelve-month period, assuming a gradual parallel shift of the yield curve beginning June 30, 2023: Rate Change Percent Change in NII Down 100 bps 0.3% Up 200 bps -2.7% The estimated amounts shown in the table above are within the ALCO Policy limits. However, those amounts do not represent a forecast and should not be relied upon as indicative of future results. The ALCO model also provides alternate scenarios including a sustained flat, or inverted yield curve. While assumptions used in the ALCO process, including the interest rate simulation analyses, are developed based upon current economic and local market conditions, and expected future conditions, the Company cannot provide any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change. As the market rates continue to increase, the impact of a falling rate environment is more pronounced, and the possibility more plausible than during the last several years of near zero short-term rates. As of June 30, 2023, the Company had outstanding $12,887,000 in principal amount of Junior Subordinated Debentures due December 15, 2037, which previously bore a quarterly floating rate of interest equal to the 3-month London Interbank Offered Rate (LIBOR), plus 2.85%. As previously announced, 3-month LIBOR for U.S. dollar denominated deposits was phased out as of June 30, 2023. The Indenture governing the terms of the Company’s Debentures contains detailed fallback provisions in the event 3-month LIBOR is not available, empowering the Trustee to obtain substitute quotations from other leading banks. However, under the federal Adjustable Interest Rate (LIBOR) Act enacted in March 2022 (the “LIBOR Act”), fallback provisions like those in the Company’s Indenture are deemed “ineffective” and were replaced as a matter of law, as of the first London banking day after June 30, 2023 (the “LIBOR Replacement Date”), without need to amend contract documents, with a benchmark interest rate identified in regulations promulgated by the Federal Reserve. As required under the LIBOR Act, the Federal Reserve-identified benchmark rates specified in the final regulations for various tenors of LIBOR are based on the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York and each includes an appropriate “tenor spread adjustment” to reflect historical spreads between LIBOR and SOFR. In accordance with the LIBOR Act and its implementing regulations, as of the LIBOR Replacement Date, the Company’s Junior Subordinated Debentures bear interest at a quarterly floating rate equal to 3-month CME SOFR, as adjusted by a spread adjustment of 0.26161 percent, plus 2.85%. Aside from the Debentures, the Company does not have any other exposures to the phase out of LIBOR. The Company has not generally utilized LIBOR as an interest rate benchmark for its variable rate commercial, residential or other loans and has not utilized derivatives or other financial instruments tied to LIBOR for hedging or investment purposes. Accordingly, the Company’s exposure to the phase out of LIBOR is limited to the effect on the interest rate paid on its Debentures. Credit Risk - As a financial institution, one of the primary risks the Company manages is credit risk, the risk of loss stemming from borrowers’ failure to repay loans or inability to meet other contractual obligations. The Company’s Board of Directors prescribes policies for managing credit risk, including Loan, Appraisal and Environmental policies. These policies are supplemented by comprehensive underwriting standards and procedures. The Company maintains a Credit Administration department whose function includes credit analysis and monitoring of and reporting on the status of the loan portfolio, including delinquent and non-performing loan trends. The Company also monitors concentration of credit risk in a variety of areas, including portfolio mix, the level of loans to individual borrowers and their related interests, loans to industry segments, and the geographic distribution of commercial real estate loans. Loans are reviewed periodically by an independent loan review firm to help ensure accuracy of the Company's internal risk ratings and compliance with various internal policies, procedures and regulatory guidance. Residential mortgage loans represented 29.7% of the Company’s loan balances at June 30, 2023, compared to 31.1% at December 31, 2022. 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, 2023, 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 greater than 80% under an insured loan program with stringent underwriting criteria. Consistent with the strategic focus on commercial lending, the commercial & industrial and CRE loan portfolios have seen solid growth over recent years. Commercial & industrial, purchased, CRE and municipal loans collectively comprised 69.8% of the Company’s loan portfolio at June 30, 2023, compared to 68.4% at December 31, 2022. The largest components of the CRE portfolio were $105.2 million in owner-occupied CRE and $149.8 million in non-owner occupied CRE at June 30, 2023. 46 Table of Contents 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. At June 30, 2023, the Company had $26.2 million in guaranteed loans with guaranteed balances of $17.0 million, compared to $27.0 million in guaranteed loans with guaranteed balances of $18.3 million at December 31, 2022. PPP loans with outstanding balances of $106,910 at June 30, 2023, and $199,664 at December 31, 2022, are included in these totals, all of which carry a 100% guarantee through the SBA, subject to borrower eligibility requirements. The Company works actively with customers early in the delinquency process to help them to avoid default and foreclosure. Commercial & industrial and CRE loans are generally placed on non-accrual status when there is deterioration in the financial position of the borrower, payment in full of principal and interest is not expected, and/or principal or interest has been in default for 90 days or more. However, such a loan need not be placed on non-accrual status if it is both well secured and in the process of collection. Residential mortgages and home equity loans are considered for non-accrual status at 90 days past due and are evaluated on a case-by-case basis. The Company obtains current property appraisals or market value analyses and considers the cost of carrying and selling collateral in order to assess the level of specific allocations required. Consumer loans are generally not placed in non-accrual but are charged off by the time they reach 120 days past due. When a loan is placed in non-accrual status, the Company reverses the accrued interest against current period income and discontinues the accrual of interest until the borrower clearly demonstrates the ability and intention to resume normal payments, typically demonstrated by regular timely payments for a period of not less than six months. Interest payments received on non-accrual or impaired loans are generally applied as a reduction of the loan book balance. Provision for Credit Losses The provision for credit losses was made up of the following components for the periods indicated: Three Months Ended June 30, Change 2023 2022 $ % Provision for loan losses $ 378,000 $ 337,500 $ 40,500 12.00 % Provision for credit losses on OBS credit exposure (96,858 ) 0 (96,858 ) 100.00 % Provision for credit losses $ 281,142 $ 337,500 $ (56,358 ) -16.70 % Six Months Ended June 30, Change 2023 2022 $ % Provision for loan losses $ 585,540 $ 1,200,000 $ (614,460 ) -51.21 % Provision for credit losses on OBS credit exposure (17,872 ) 0 (17,872 ) 100.00 % Provision for credit losses $ 567,668 $ 1,200,000 $ (632,332 ) -52.69 % ACL and provisions – As stated in Note 2 of the accompanying notes to the Company’s unaudited interim consolidated financial statements, 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 amounted to $549,113, net of tax and was recorded as an adjustment to retained earnings and affects calculation of regulatory capital ratios. Changes in forecasts used in the model could produce different results, quarter to quarter. The Company’s board of directors has approved an ACL policy that provides guidance in maintaining an adequate methodology for establishing, estimating and maintaining allowances for credit losses under ASC 326. The policy creates a measurement model to establish a proper ACL based on current expected credit losses rather than incurred losses. The Company maintains an ACL at a level that management believes is appropriate to absorb losses inherent in the loan portfolio as of the measurement date (See Note 5 to the accompanying unaudited interim consolidated financial statements). Although the Company, in establishing the ACL, considers the inherent losses in individual loans and pools of loans, the ACL is a general reserve available to absorb all credit losses in the loan portfolio. No part of the ACL is segregated to absorb losses from any loan or segment of loans. 47 Table of Contents When establishing the ACL each quarter, the Company applies a combination of significant key assumptions and methodologies, as discussed in the ACL section under Critical Accounting Policies in this MD&A and presented in Note 5 of the accompanying unaudited interim consolidated financial statements. The following table summarizes the Company’s credit risk ratios for the balance sheet dates presented: June 30, December 31, 2023 2022 ACL to total loans outstanding 1.19 % 1.16 % ACL $ 9,255,501 $ 8,709,225 Loans outstanding $ 780,985,276 $ 748,548,608 Non-accruing loans to loans outstanding 0.99 % 1.05 % Non-accruing loans $ 7,745,062 $ 7,890,020 Loans outstanding $ 780,985,276 $ 748,548,608 ACL to non-accruing loans 119.50 % 110.38 % ACL $ 9,255,501 $ 8,709,225 Non-accruing loans $ 7,745,062 $ 7,890,020 The provision for credit losses for the three months ended June 30, 2023, was $281,142 compared to $337,500 for the same period in 2023, and $567,668 for first six months ended June 30, 2023, compared to $1.2 million for the same period in 2022. The $632,332 year over year decrease was driven in part by a write-down totaling $667,474, on a single non-performing loan, in March of 2022. The second quarter ACL analysis indicates that the reserve balance of $9.3 million at June 30, 2023, is sufficient to cover expected credit losses that are probable and estimable as of the measurement date. Included in the ACL calculation for June 30, 2023, is a decrease to the qualitative factor adjustment for delinquencies and nonperforming loans. Management feels that the economic forecasts adequately quantify the risk in this area. Management believes the reserve balance continues to be directionally consistent with the overall risk profile of the Company’s loan portfolio and credit risk appetite. While the ACL is described as consisting of separate allocated portions, the entire ACL is available to support loan losses, regardless of category. The adequacy of the ACL is presented to the full Board for approval quarterly. 48 Table of Contents Net charge-offs during the periods presented to average loans outstanding were as follows: For the Six Months Ended June 30, 2023 2022 Commercial & industrial -0.30 % -0.02 % Net charge-offs during the period $ (359,227 ) $ (18,124 ) Average amount outstanding $ 120,387,470 $ 113,095,165 Purchased 0.00 % 0.00 % Net charge-offs during the period $ 0 $ 0 Average amount outstanding $ 6,722,228 $ 9,052,590 Commercial real estate 0.01 % -0.22 % Net recoveries (charge-offs) during the period $ 22,058 $ (667,474 ) Average amount outstanding $ 365,744,547 $ 308,380,329 Municipal 0.00 % 0.00 % Net charge-offs during the period $ 0 $ 0 Average amount outstanding $ 35,147,221 $ 48,289,600 Residential real estate - 1st lien 0.04 % 0.01 % Net recoveries during the period $ 72,588 $ 12,563 Average amount outstanding $ 198,568,849 $ 182,598,259 Residential real estate - Jr lien 0.08 % 0.01 % Net recoveries during the period $ 26,777 $ 2,430 Average amount outstanding $ 32,398,451 $ 33,169,602 Consumer -1.20 % -0.20 % Net charge-offs during the period $ (44,836 ) $ (6,878 ) Average amount outstanding $ 3,734,220 $ 3,471,138 Total loans -0.04 % -0.10 % Net charge-offs during the period $ (282,640 ) $ (677,483 ) Average amount outstanding $ 762,702,986 $ 698,056,683 In addition to credit risk in the Company’s loan and investment portfolios and its off-balance sheet commitments, and liquidity risk in its loan and deposit-taking operations, the Company’s business activities also generate market risk. Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Declining capital markets and changes in interest rates can result in fair value adjustments to asset valuations or the need to create a related reserve or allowance. The Company does not have any market risk sensitive instruments acquired for trading purposes. The Company’s market risk arises primarily from interest rate risk inherent in its lending, deposit taking and investment activities. During recessionary periods, a declining housing market can result in an increase in loan loss reserves or ultimately an increase in foreclosures. Interest rate risk is directly related to the different maturities and repricing characteristics of interest-bearing assets and liabilities, as well as to loan prepayment risks, early withdrawal of time deposits, and the fact that the speed and magnitude of responses to interest rate changes vary by product. Rapid changes in prevailing interest rates, particularly after a long period of relative stability, create a challenging interest rate environment. As discussed above under "Interest Rate Risk and Asset and Liability Management", the Company actively monitors and manages its interest rate risk through the ALCO process. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET ARRANGEMENTS The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and risk-sharing commitments on certain sold loans. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. During the first six months of 2023, the Company did not engage in any activity that created any additional types of off-balance sheet risk. 49 Table of Contents With the adoption of ASU 2016-13 (CECL), the Company is required to establish an allowance for expected credit losses on OBS credit exposures. Expected credit losses are estimated by management over the contractual period during which the Company is exposed to credit risk under a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over the estimated lives of such commitments. Upon adoption of ASU 2016-13, the Company recorded an adjustment to retained earnings of $451,704 to reflect an allowance for credit losses for unfunded commitments. The allowance for credit losses for OBS credit exposures is presented in the "Accrued interest and other liabilities" line of the consolidated balance sheets. There was a decrease of $17,872 to the allowance for credit losses for OBS credit exposures during the six months ended June 30, 2023. LIQUIDITY AND CAPITAL RESOURCES Managing liquidity risk is essential to maintaining both depositor confidence and stability in earnings. Liquidity management refers to the ability of the Company to adequately cover fluctuations in assets and liabilities. Meeting loan demand (assets) and covering the withdrawal of deposit funds (liabilities) are two key components of the liquidity management process. The Company’s principal sources of funds are deposits, amortization and prepayment of loans and securities, maturities of investment securities, sales of loans available-for-sale, and earnings and funds provided from operations. Maintaining a relatively stable funding base, which is achieved by diversifying funding sources, competitively pricing deposit products, and extending the contractual maturity of liabilities, reduces the Company’s exposure to rollover risk on deposits and limits reliance on volatile short-term borrowed funds. Short-term funding needs arise from declines in deposits or other funding sources and from funding requirements for loan commitments. The Company’s strategy is to fund assets to the maximum extent possible with core deposits that provide a sizable source of relatively stable and lower-cost funds. The Company recognizes that, at times, when loan demand exceeds deposit growth or the Company has other liquidity demands, it may be desirable to utilize alternative sources of deposit funding to augment retail deposits and borrowings. One-way deposits acquired through the CDARS program provide an alternative funding source when needed. At June 30, 2023, and December 31, 2022, the Company had no one-way CDARS outstanding. 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. At June 30, 2023 and December 31, 2022, the Company reported $2.5 million and $2.8 million, respectively, in reciprocal CDARS deposits. The balance in ICS reciprocal money market deposits was $12.7 million at June 30, 2023, compared to $29.5 million at December 31, 2022, and the balance in ICS reciprocal demand deposits as of those dates was $76.7 million and $85.3 million, respectively. On June 30, 2023 and December 31, 2022, borrowing capacity of $108.1 million and $112.3 million, respectively, was available through the FHLBB, secured by the Company's qualifying loan portfolio (generally, residential mortgage and commercial loans), reduced by outstanding advances and by collateral pledges securing FHLBB letters of credit collateralizing public unit deposits of $24.6 million and $52.4 million, respectively. The following table reflects the Company’s outstanding advances with FHLBB as of the dates indicated: June 30, December 31, 2023 2022 FHLBB Advances (1) FHLBB term advance, 0.00%, due September 22, 2023 $ 200,000 $ 200,000 FHLBB term advance, 0.00%, due November 12, 2025 300,000 300,000 FHLBB term advance, 0.00%, due November 13, 2028 800,000 800,000 Total FRBB Advances 1,300,000 1,300,000 Overnight borrowings at 5.27% 13,400,000 0 $ 14,700,000 $ 1,300,000 (1) Under the JNE program, the FHLBB provides a subsidy, funded by the FHLBB’s earnings, to write down interest rates to zero percent on advances that finance qualifying loans to small businesses. JNE advances must support small business in New England that create and/or retain jobs, or otherwise contribute to overall economic development activities. 50 Table of Contents The Company also has an unsecured Federal Funds credit line with the FHLBB with an available balance of $500,000 and no outstanding advances during any 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 $53.7 million and $56.1 million, respectively, at June 30, 2023 and December 31, 2022. Credit advances under this FRBB lending program are overnight advances with interest chargeable at the primary credit rate (generally referred to as the discount rate), currently 500 bps. The Company had no outstanding advances through this facility at June 30, 2023 or December 31, 2022. As of June 30, 2023, the Company had additional potential borrowing capacity, subject to pledging of required collateral consisting of eligible U.S. Agency and U.S. Government Securities, under the FRB’s BTFP which was established in March 2023 to provide banks with an additional source of liquidity. The Company’s advances under the BTFP were as follows: June 30, 2023 FRBB Advances FRB BTFP term advance, 4.92%, due April 26, 2024 $ 10,000,000 FRB BTFP term advance, 4.71%, due May 13, 2024 10,000,000 FRB BTFP term advance, 4.91%, due May 17, 2024 6,500,000 Total BTFP Advances $ 26,500,000 As of June 30, 2023, the Company had an unsecured line of credit with one correspondent bank of $12.5 million, compared to unsecured lines of credit with two correspondent banks with aggregate available borrowing capacity totaling $20.5 million as of December 31, 2022. The Company had no outstanding advances against these credit lines as of the balance sheet dates presented. 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, 2022 to June 30, 2023: Balance at December 31, 2022 (book value $13.55 per common share) $ 75,176,363 Cumulative change in accounting principle (Note 2) (549,113 ) Net income 6,535,101 Issuance of common stock through the DRIP 702,124 Dividends declared on common stock (2,505,630 ) Dividends declared on preferred stock (58,125 ) Change in AOCI on AFS securities, net of tax 1,216,382 Balance at June 30, 2023 (book value $14.44 per common share) $ 80,517,102 The primary objective of the Company’s capital planning process is to balance appropriately the retention of capital to support operations and future growth, with the goal of providing shareholders with an attractive return on their investment. To that end, management monitors capital retention and dividend policies on an ongoing basis. As described in more detail in Note 22 to the audited consolidated financial statements contained in the Company’s 2022 Annual Report on Form 10-K and under the caption “LIQUIDITY AND CAPITAL RESOURCES” in the MD&A section of that report, the Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies pursuant to which they must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As of June 30, 2023, the Bank was considered well capitalized under the standard regulatory capital framework for Prompt Corrective Action and the Company exceeded currently applicable consolidated regulatory guidelines for capital adequacy. While we believe that the Company has sufficient capital to withstand an extended economic downturn, our regulatory capital ratios could be adversely impacted by future credit losses and other operational impacts of deteriorating economic conditions and inflation. 51 Table of Contents The following table shows the Company’s actual capital ratios and those of its subsidiary, as well as currently applicable regulatory capital requirements, as of the dates indicated. The calculations as of June 30, 2023 reflect adoption of ASU 2016-13 (CECL), including the beginning period cumulative effect adjustment of $549,113, which reduced retained earnings. Minimum Minimum Minimum For Capital To Be Well For Capital Adequacy Purposes Capitalized Under Adequacy with Conservation Prompt Corrective Actual Purposes Buffer (1) Action Provisions (2) Amount Ratio Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) June 30, 2023 Common equity tier 1 capital (to risk-weighted assets) Company $ 86,894 11.78 % $ 33,201 4.50 % $ 51,647 7.00 % N/A N/A Bank $ 100,143 13.58 % $ 33,177 4.50 % $ 51,608 7.00 % $ 47,227 6.50 % Tier 1 capital (to risk-weighted assets) Company $ 101,281 13.73 % $ 44,269 6.00 % $ 62,714 8.50 % N/A N/A Bank $ 100,143 13.58 % $ 44,236 6.00 % $ 62,667 8.50 % $ 58,981 8.00 % Total capital (to risk-weighted assets) Company $ 110,511 14.98 % $ 59,025 8.00 % $ 77,470 10.50 % N/A N/A Bank $ 109,366 14.83 % $ 58,891 8.00 % $ 77,412 10.50 % $ 73,726 10.00 % Tier 1 capital (to average assets) Company $ 101,281 9.79 % $ 41,370 4.00 % N/A N/A N/A N/A Bank $ 100,143 9.69 % $ 41,351 4.00 % N/A N/A $ 51,689 5.00 % December 31, 2022: Common equity tier 1 capital (to risk-weighted assets) Company $ 82,770 11.74 % $ 31,731 4.50 % $ 49,359 7.00 % N/A N/A Bank $ 96,112 13.64 % $ 31,703 4.50 % $ 49,315 7.00 % $ 45,793 6.50 % Tier 1 capital (to risk-weighted assets) Company $ 97,157 13.78 % $ 42,308 6.00 % $ 59,936 8.50 % N/A N/A Bank $ 96,112 13.64 % $ 42,270 6.00 % $ 59,883 8.50 % $ 56,361 8.00 % Total capital (to risk-weighted assets) Company $ 105,971 15.03 % $ 56,410 8.00 % $ 74,038 10.50 % N/A N/A Bank $ 104,918 14.89 % $ 56,361 8.00 % $ 73,973 10.50 % $ 70,451 10.00 % Tier 1 capital (to average assets) Company $ 97,157 9.24 % $ 42,047 4.00 % N/A N/A N/A N/A Bank $ 96,112 9.15 % $ 42,025 4.00 % N/A N/A $ 52,531 5.00 % (1) Conservation Buffer is calculated based on risk-weighted assets and does not apply to calculations of average assets. (2) Applicable to banks, but not bank holding companies. The Company's ability to pay dividends to its shareholders is largely dependent on the Bank's ability to pay dividends to the Company. In general, a national bank may not pay dividends that exceed net income for the current and preceding two years. Regardless of statutory restrictions, as a matter of regulatory policy, banks and bank holding companies should pay dividends only out of current earnings and only if, after paying such dividends, they remain adequately capitalized. 52 Table of Contents ITEM 3. Quantitative and Qualitative Disclosures about Market Risk Omitted, in accordance with the regulatory relief available to smaller reporting companies in SEC Release Nos. 33-10513 and 34-83550. ITEM 4. Controls and Procedures Disclosure Controls and Procedures Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act). As of June 30, 2023, an evaluation was performed under the supervision and with the participation of management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, management concluded that its disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports it files with the Commission under the Exchange Act was recorded, processed, summarized, and reported on a timely basis. For this purpose, the term “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 53 Table of Contents PART II. OTHER INFORMATION ITEM 1. Legal Proceedings In the normal course of business, the Company is involved in litigation that is considered incidental to its business. Management does not expect that any such litigation will be material to the Company's consolidated financial condition or results of operations. ITEM 1A. Risk Factors In management’s view, the Risk Factors identified in our Annual Report on Form 10-K for the year ended December 31, 2022 represent the most significant risks to the Company's future results of operations and financial condition as of the date of this quarterly report. ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table provides information as to the purchases of the Company’s common stock during the three months ended June 30, 2023, by the Company or by any affiliated purchaser (as defined in SEC Rule 10b-18). During the monthly periods presented, the Company did not have any publicly announced repurchase plans or programs. Total Number Average of Shares Price Paid For the period: Purchased (1) Per Share April 1 - April 30 0 $ 0.00 May 1 - May 31 7,600 18.25 June 1 - June 30 0 0.00 Total 7,600 $ 18.25 (1) All 7,600 shares were purchased for the account of participants invested in the Company Stock Fund under the Company’s Retirement Savings Plan by or on behalf of the Plan Trustee, the Human Resources Committee of the Bank. Such share purchases were facilitated through CFSG, which provides certain investment advisory services to the Plan. Both the Plan Trustee and CFSG may be considered affiliates of the Company under Rule 10b-18. 54 Table of Contents ITEM 6. Exhibits The following exhibits are filed with, or incorporated by reference in, this report: Exhibit 31.1 Certification from the Chief Executive Officer (Principal Executive Officer) of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 Certification from the Treasurer (Principal Financial Officer) of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 Certification from the Chief Executive Officer (Principal Executive Officer) of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002* Exhibit 32.2 Certification from the Treasurer (Principal Financial Officer) of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002* Exhibit 101 The following materials from the Company’s Quarterly Report on Form 10-Q for the six-months ended June 30, 2023 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three- and six-month interim periods ended June 30, 2023 and 2022, (iii) the unaudited consolidated statements of comprehensive income, (iv) the unaudited consolidated statements of cash flows and (v) related notes. Exhibit 104 Cover page Interactive Data File (formatted in iXBRL and contained in Exhibit 101) *This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act. 55 Table of Contents SIGNATURES Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMUNITY BANCORP. DATED: August 11, 2023 /s/Kathryn M. Austin Kathryn M. Austin, President & Chief Executive Officer (Principal Executive Officer) DATED: August 11, 2023 /s/Louise M. Bonvechio Louise M. Bonvechio, Corporate Secretary & Treasurer (Principal Financial Officer) 56 Table of Contents SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2023 COMMUNITY BANCORP. EXHIBITS EXHIBIT INDEX Exhibit 31.1 Certification from the Chief Executive Officer (Principal Executive Officer) of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 Certification from the Treasurer (Principal Financial Officer) of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 Certification from the Chief Executive Officer (Principal Executive Officer) of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002* Exhibit 32.2 Certification from the Treasurer (Principal Financial Officer) of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002* Exhibit 101 The following materials from the Company’s Quarterly Report on Form 10-Q for the six-months ended June 30, 2023 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three- and six-month interim periods ended June 30, 2023 and 2022, (iii) the unaudited consolidated statements of comprehensive income, (iv) the unaudited consolidated statements of cash flows and (v) related notes. Exhibit 104 Cover page Interactive Data File (formatted in iXBRL and contained in Exhibit 101) * This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act. 57