COMMUNITY BANCORP /VT 10-Q

ITEM 1. Financial Statements (Unaudited) The following are the unaudited consolidated financial statements for the Company. Community Bancorp. and Subsidiary September 30, December 31, Consolidated Balance Sheets 2023 2022 (Unaudited) Assets Cash and due from banks $ 12,267,270 $ 12,302,771 Federal funds sold and overnight deposits 5,265,072 58,837,557 Total cash and cash equivalents 17,532,342 71,140,328 Securities available-for-sale 181,928,461 192,918,109 Restricted equity securities, at cost 1,423,550 1,411,750 Loans held-for-sale 56,700 0 Loans 838,572,268 748,548,608 Allowance for credit losses ( 9,487,973 ) ( 8,709,225 ) Deferred net loan costs 550,230 493,275 Net loans 829,634,525 740,332,658 Bank premises and equipment, net 12,597,756 13,042,468 Accrued interest receivable 3,830,129 3,214,332 Bank owned life insurance 5,212,622 5,153,387 Goodwill 11,574,269 11,574,269 Other assets 19,499,790 17,244,846 Total assets $ 1,083,290,144 $ 1,056,032,147 Liabilities and Shareholders' Equity Liabilities Deposits: Demand, non-interest bearing $ 205,188,102 $ 216,093,534 Interest-bearing transaction accounts 284,744,064 294,050,079 Money market funds 137,192,956 140,117,086 Savings 159,409,376 171,072,921 Time deposits, $ 250,000 and over 21,306,259 15,632,058 Other time deposits 93,364,162 86,006,601 Total deposits 901,204,919 922,972,279 Borrowed funds 49,150,000 1,300,000 Repurchase agreements 31,580,426 33,077,829 Junior subordinated debentures 12,887,000 12,887,000 Accrued interest and other liabilities 9,661,103 10,618,676 Total liabilities 1,004,483,448 980,855,784 Shareholders' Equity Preferred stock, 1,000,000 shares authorized, 15 shares issued and outstanding at 09/30/23 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, 5,700,828 shares issued at 09/30/23 and 5,647,710 shares issued at 12/31/22 14,252,070 14,119,275 Additional paid-in capital 37,242,239 36,383,235 Retained earnings 51,959,399 46,464,447 Accumulated other comprehensive loss ( 23,524,235 ) ( 20,667,817 ) Less: treasury stock, at cost; 210,101 shares at 09/30/23 and 12/31/22 ( 2,622,777 ) ( 2,622,777 ) Total shareholders' equity 78,806,696 75,176,363 Total liabilities and shareholders' equity $ 1,083,290,144 $ 1,056,032,147 Book value per common share outstanding $ 14.08 $ 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 September 30, Consolidated Statements of Income 2023 2022 (Unaudited) Interest income Interest and fees on loans $ 10,919,330 $ 8,182,209 Interest on taxable debt securities 941,956 799,856 Interest on tax-exempt debt securities 90,659 68,155 Dividends 39,904 23,029 Interest on federal funds sold and overnight deposits 94,515 358,907 Total interest income 12,086,364 9,432,156 Interest expense Interest on deposits 2,501,243 837,983 Interest on borrowed funds 676,837 21,363 Interest on repurchase agreements 201,518 45,153 Interest on junior subordinated debentures 276,707 154,091 Total interest expense 3,656,305 1,058,590 Net interest income 8,430,059 8,373,566 Provision for credit losses 240,889 125,000 Net interest income after provision for credit losses 8,189,170 8,248,566 Non-interest income Service fees 937,890 939,807 Income from sold loans 144,747 109,411 Other income from loans 310,645 301,710 Other income 318,309 180,675 Total non-interest income 1,711,591 1,531,603 Non-interest expense Salaries and wages 2,164,760 1,984,000 Employee benefits 797,304 629,681 Occupancy expenses, net 662,277 677,805 Other expenses 2,190,203 2,049,423 Total non-interest expense 5,814,544 5,340,909 Income before income taxes 4,086,217 4,439,260 Income tax expense 723,708 828,754 Net income $ 3,362,509 $ 3,610,506 Earnings per common share $ 0.61 $ 0.66 Weighted average number of common shares used in computing earnings per share 5,478,960 5,409,612 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 Nine Months Ended September 30, Consolidated Statements of Income 2023 2022 (Unaudited) Interest income Interest and fees on loans $ 30,310,324 $ 23,300,119 Interest on taxable debt securities 2,815,397 2,192,540 Interest on tax-exempt debt securities 271,975 112,890 Dividends 104,556 56,121 Interest on federal funds sold and overnight deposits 568,803 609,532 Total interest income 34,071,055 26,271,202 Interest expense Interest on deposits 6,570,373 1,975,401 Interest on borrowed funds 953,799 64,993 Interest on repurchase agreements 548,300 88,322 Interest on junior subordinated debentures 776,296 373,506 Total interest expense 8,848,768 2,502,222 Net interest income 25,222,287 23,768,980 Provision for credit losses 808,557 1,325,000 Net interest income after provision for credit losses 24,413,730 22,443,980 Non-interest income Service fees 2,757,629 2,739,076 Income from sold loans 358,942 508,795 Other income from loans 1,081,093 895,884 Other income 1,111,136 708,574 Total non-interest income 5,308,800 4,852,329 Non-interest expense Salaries and wages 6,718,280 6,058,000 Employee benefits 2,363,444 2,106,356 Occupancy expenses, net 2,133,492 2,104,346 Other expenses 6,342,955 5,960,259 Total non-interest expense 17,558,171 16,228,961 Income before income taxes 12,164,359 11,067,348 Income tax expense 2,266,751 2,030,148 Net income $ 9,897,608 $ 9,037,200 Earnings per common share $ 1.80 $ 1.67 Weighted average number of common shares used in computing earnings per share 5,461,660 5,396,215 Dividends declared per common share $ 0.69 $ 0.69 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 September 30, 2023 2022 Net income $ 3,362,509 $ 3,610,506 Other comprehensive loss, net of tax: Unrealized holding loss on securities AFS arising during the period ( 5,155,445 ) ( 8,978,128 ) Tax effect 1,082,645 1,885,407 Other comprehensive loss, net of tax ( 4,072,800 ) ( 7,092,721 ) Total comprehensive loss $ ( 710,291 ) $ ( 3,482,215 ) Nine Months Ended September 30, 2023 2022 Net income $ 9,897,608 $ 9,037,200 Other comprehensive loss, net of tax: Unrealized holding loss on securities AFS arising during the period ( 3,615,720 ) ( 27,078,956 ) Tax effect 759,302 5,686,580 Other comprehensive loss, net of tax ( 2,856,418 ) ( 21,392,376 ) Total comprehensive income (loss) $ 7,041,190 $ ( 12,355,176 ) 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) Nine Months Ended September 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 45,915,334 74,627,250 in accounting principle) 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 loss 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 Issuance of common stock 43,382 246,293 289,675 Cash dividends declared Common stock ( 1,258,852 ) ( 1,258,852 ) Preferred stock ( 30,938 ) ( 30,938 ) Comprehensive loss Net income 3,362,509 3,362,509 Other comprehensive loss ( 4,072,800 ) ( 4,072,800 ) September 30, 2023 $ 14,252,070 $ 1,500,000 $ 37,242,239 $ 51,959,399 $ ( 23,524,235 ) $ ( 2,622,777 ) $ 78,806,696 *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) Nine Months Ended September 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 Issuance of common stock 33,780 270,581 304,361 Cash dividends declared Common stock ( 1,243,187 ) ( 1,243,187 ) Preferred stock ( 17,813 ) ( 17,813 ) Comprehensive loss Net income 3,610,506 3,610,506 Other comprehensive loss ( 7,092,721 ) ( 7,092,721 ) September 30, 2022 $ 14,072,273 $ 1,500,000 $ 36,117,612 $ 43,032,064 $ ( 22,559,347 ) $ ( 2,622,777 ) $ 69,539,825 *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) Nine Months Ended September 30, 2023 2022 Cash Flows from Operating Activities: Net income $ 9,897,608 $ 9,037,200 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization, bank premises and equipment 809,560 853,685 Provision for credit losses 808,557 1,325,000 Deferred income tax ( 269,192 ) ( 38,020 ) Gain on sale of loans ( 114,912 ) ( 218,501 ) Loss on sale of bank premises and equipment 449 0 Income from CFS Partners ( 705,342 ) ( 386,217 ) Amortization of bond premium, net 201,050 518,833 Proceeds from sales of loans held for sale 5,597,777 10,756,242 Originations of loans held for sale ( 5,539,565 ) ( 10,328,741 ) (Decrease) increase in taxes payable ( 271,441 ) 251,872 Increase in interest receivable ( 615,797 ) ( 309,185 ) Decrease in mortgage servicing rights 48,123 17,084 Decrease in right-of-use assets 150,971 149,011 Decrease in operating lease liabilities ( 161,271 ) ( 153,871 ) Increase in other assets ( 71,207 ) ( 209,618 ) Increase in cash surrender value of BOLI ( 59,235 ) ( 60,433 ) Amortization of limited partnerships 201,384 201,537 Change in net deferred loan fees and costs ( 56,955 ) ( 504,574 ) Increase (decrease) in interest payable 720,343 ( 25,558 ) Decrease in accrued expenses ( 310,304 ) ( 4,198 ) Increase in other liabilities 369,059 12,439 Net cash provided by operating activities 10,629,660 10,883,987 Cash Flows from Investing Activities: Investments - AFS Maturities, calls, pay downs and sales 11,164,002 14,994,113 Purchases ( 3,991,124 ) ( 47,476,763 ) Proceeds from redemption of restricted equity securities 3,516,500 43,500 Purchases of restricted equity securities ( 3,528,300 ) 0 Decrease in limited partnership contributions payable ( 1,823,301 ) 0 Investments in limited liability entities ( 282,000 ) 0 Increase in loans, net ( 90,497,664 ) ( 34,956,148 ) Capital expenditures net of proceeds from sales of bank premises and equipment ( 516,267 ) ( 398,378 ) Recoveries of loans charged off 159,827 147,510 Net cash used in investing activities ( 85,798,327 ) ( 67,646,166 ) 9 Table of Contents 2023 2022 Cash Flows from Financing Activities: Net (decrease) increase in demand and interest-bearing transaction accounts ( 20,211,447 ) 5,391,362 Net (decrease) increase in money market and savings accounts ( 14,587,675 ) 19,373,851 Net increase (decrease) in time deposits 13,031,762 ( 1,124,017 ) Net decrease in repurchase agreements ( 1,497,403 ) ( 354,951 ) Net increase in short-term borrowings 3,550,000 0 Proceeds from long-term borrowings 44,500,000 0 Repayments on long-term borrowings ( 200,000 ) 0 Decrease in finance lease obligations ( 164,420 ) ( 159,333 ) Dividends paid on preferred stock ( 89,063 ) ( 43,125 ) Dividends paid on common stock ( 2,771,073 ) ( 2,778,271 ) Net cash provided by financing activities 21,560,681 20,305,516 Net decrease in cash and cash equivalents ( 53,607,986 ) ( 36,456,663 ) Cash and cash equivalents: Beginning 71,140,328 110,358,926 Ending $ 17,532,342 $ 73,902,263 Supplemental Schedule of Cash Paid During the Period: Interest $ 8,128,425 $ 2,527,780 Income taxes, net of refunds $ 2,606,000 $ 1,614,759 Supplemental Schedule of Noncash Investing and Financing Activities: Change in unrealized loss on securities AFS $ ( 3,615,720 ) $ ( 27,078,956 ) Common Shares Dividends Paid: Dividends declared $ 3,764,480 $ 3,720,116 Increase in dividends payable attributable to dividends declared ( 1,608 ) ( 43,871 ) Dividends reinvested ( 991,799 ) ( 897,974 ) Total dividends paid $ 2,771,073 $ 2,778,271 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 BHG: Bankers Healthcare Group ICS: Insured Cash Sweeps of the IntraFi Network BIC: Borrower-in-Custody IRS: Internal Revenue Service Board: Board of Directors JNE: Jobs for New England BOLI: Bank owned life insurance Jr: Junior bp or bps: Basis point(s) LIBOR London Interbank Offered Rate BTFP: Bank Term Funding Program MBS: Mortgage-backed security CDARS: Certificate of Deposit Accounts Registry MSRs: Mortgage servicing rights Service of the IntraFi Network NII: Net interest income CDs: Certificates of deposit OAS: Other amortizing security CDI: Core deposit intangible OBS: Off-balance sheet CECL: Current Expected Credit Loss OCI: Other comprehensive income (loss) CFSG: Community Financial Services Group, LLC OREO: Other real estate owned CFS Partners: Community Financial Services Partners, OTTI: Other-than-temporary impairment LLC PMI: Private mortgage insurance CMO: Collateralized Mortgage Obligations PPP: Paycheck Protection Program Company: Community Bancorp. and Subsidiary RD: USDA Rural Development CRE: Commercial Real Estate SBA: U.S. Small Business Administration DCF: Discounted cash flow SEC: U.S. Securities and Exchange Commission DDA or DDAs: Demand Deposit Account(s) SOFR: Secured Overnight Financing Rate DTC: Depository Trust Company TDR: Troubled-debt restructuring DRIP: Dividend Reinvestment Plan USDA: U.S. Department of Agriculture Exchange Act: Securities Exchange Act of 1934 VA: U.S. Veterans Administration FASB: Financial Accounting Standards Board 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 provide 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 became 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 unaudited 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 September 30, 2023 2022 Net income, as reported $ 3,362,509 $ 3,610,506 Less: dividends to preferred shareholders 30,938 17,813 Net income available to common shareholders $ 3,331,571 $ 3,592,693 Weighted average number of common shares used in calculating earnings per share 5,478,960 5,409,612 Earnings per common share $ 0.61 $ 0.66 Nine Months Ended September 30, 2023 2022 Net income, as reported $ 9,897,608 $ 9,037,200 Less: dividends to preferred shareholders 89,063 43,125 Net income available to common shareholders $ 9,808,545 $ 8,994,075 Weighted average number of common shares used in calculating earnings per share 5,461,660 5,396,215 Earnings per common share $ 1.80 $ 1.67 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 September 30, 2023 U.S. GSE debt securities $ 12,000,000 $ 0 $ 1,601,656 $ 10,398,344 U.S. Government securities 41,247,775 0 2,705,620 38,542,155 Taxable Municipal securities 300,000 0 66,286 233,714 Tax-exempt Municipal securities 11,994,655 0 1,398,268 10,596,387 Agency MBS 130,156,068 0 23,333,064 106,823,004 ABS and OAS 2,533,447 0 234,381 2,299,066 CMO 11,740,029 0 374,375 11,365,654 Other investments 1,734,000 0 63,863 1,670,137 Total $ 211,705,974 $ 0 $ 29,777,513 $ 181,928,461 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 $ 130.2 million and $ 135.2 million, respectively, and a fair value of $ 106.8 million and $ 115.2 million, respectively, at September 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 September 30, 2023 $ 53,615,357 $ 45,066,265 December 31, 2022 55,899,113 46,789,284 Investment securities pledged as collateral for BTFP borrowings consisted of U.S. Government securities and U.S. GSE debt securities with an aggregate amortized cost of $49,934,319 and fair value of $42,323,851 at September 30, 2023. The Company began utilizing the BTFP during 2023 as a source of liquidity. For more information on these borrowings, see the Liquidity and Capital Resources section of the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations following these Notes. There were no sales of debt securities during the first nine months of 2023 or 2022. The scheduled maturities of debt securities as of the balance sheet dates were as follows: Amortized Fair Cost Value September 30, 2023 Due in one year or less $ 15,695,850 $ 15,361,820 Due from one to five years 47,182,358 43,290,817 Due from five to ten years 4,509,457 4,030,167 Due after ten years 14,162,241 12,422,653 Agency MBS 130,156,068 106,823,004 Total $ 211,705,974 $ 181,928,461 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 September 30, 2023 U.S. GSE debt securities $ 0 $ 0 $ 10,398,344 $ 1,601,656 11 $ 10,398,344 $ 1,601,656 U.S. Government securities 0 0 38,542,155 2,705,620 54 38,542,155 2,705,620 Taxable Municipal securities 0 0 233,714 66,286 1 233,714 66,286 Tax-exempt Municipal securities 6,459,331 426,299 4,137,056 971,969 23 10,596,387 1,398,268 Agency MBS 7,854,937 203,432 98,968,067 23,129,632 123 106,823,004 23,333,064 ABS and OAS 0 0 2,299,066 234,381 4 2,299,066 234,381 CMO 3,891,798 28,927 7,473,856 345,448 10 11,365,654 374,375 Other investments 0 0 1,670,137 63,863 7 1,670,137 63,863 Total $ 18,206,066 $ 658,658 $ 163,722,395 $ 29,118,855 233 $ 181,928,461 $ 29,777,513 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 September 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 and 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: September 30, 2023 December 31, 2022 Commercial & industrial $ 126,161,034 15.04 % $ 112,951,873 15.09 % Purchased 5,977,866 0.71 % 7,530,458 1.00 % Commercial real estate 407,039,093 48.54 % 356,892,986 47.68 % Municipal 58,747,359 7.01 % 34,633,055 4.63 % Residential real estate - 1st lien 206,098,103 24.58 % 198,743,375 26.55 % Residential real estate - Jr lien 31,054,331 3.70 % 33,756,872 4.51 % Consumer 3,494,482 0.42 % 4,039,989 0.54 % Total loans 838,572,268 100.00 % 748,548,608 100.00 % ACL ( 9,487,973 ) ( 8,709,225 ) Deferred net loan costs 550,230 493,275 Net loans $ 829,634,525 $ 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 September 30, 2023 2022 Provision for loan losses $ 264,009 $ 125,000 Provision for credit losses on OBS credit exposure ( 23,120 ) 0 Provision for credit losses $ 240,889 $ 125,000 Nine Months Ended September 30, 2023 2022 Provision for loan losses $ 849,549 $ 1,325,000 Provision for credit losses on OBS credit exposure ( 40,992 ) 0 Provision for credit losses $ 808,557 $ 1,325,000 The following tables present the activity in the ACL on loans for the three- and nine-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 September 30, 2023 Commercial & Industrial Purchased Commercial Real Estate Municipal Residential Real Estate 1st Lien Residential Real Estate Jr Lien Consumer Total ACL beginning balance $ 1,054,342 $ 18,337 $ 5,271,521 $ 69,360 $ 2,314,554 $ 493,236 $ 34,151 $ 9,255,501 Charge-offs 0 0 0 0 0 0 ( 42,985 ) ( 42,985 ) Recoveries 1,585 0 0 0 0 1,237 8,626 11,448 Provision (credit) 9,401 ( 170 ) 43,638 77,508 122,263 ( 17,723 ) 29,092 264,009 ACL ending balance $ 1,065,328 $ 18,167 $ 5,315,159 $ 146,868 $ 2,436,817 $ 476,750 $ 28,884 $ 9,487,973 16 Table of Contents As of or for the nine months ended September 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 ( 164,115 ) ( 29,196 ) ( 22,467 ) 24,243 273,167 297,746 ( 33,813 ) ( 102,189 ) 243,376 Charge-offs ( 361,578 ) 0 0 0 0 0 ( 112,426 ) 0 ( 474,004 ) Recoveries 3,935 0 22,058 0 72,588 28,015 33,231 0 159,827 Provision (credit) 470,764 ( 5,727 ) 253,755 60,286 89,226 ( 90,961 ) 72,206 0 849,549 ACL ending balance $ 1,065,328 $ 18,167 $ 5,315,159 $ 146,868 $ 2,436,817 $ 476,750 $ 28,884 $ 0 $ 9,487,973 Commercial & Industrial Purchased Commercial Real Estate Municipal Residential Real Estate 1st Lien Residential Real Estate Jr Lien Consumer Total ACL evaluated for impairment Individually $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Collectively 1,065,328 18,167 5,315,159 146,868 2,436,817 476,750 28,884 9,487,973 Total $ 1,065,328 $ 18,167 $ 5,315,159 $ 146,868 $ 2,436,817 $ 476,750 $ 28,884 $ 9,487,973 Loans evaluated for impairment Individually $ 3,619,626 $ 0 $ 2,897,499 $ 0 $ 614,502 $ 66,962 $ 0 $ 7,198,589 Collectively 122,541,408 5,977,866 404,141,594 58,747,359 205,483,601 30,987,369 3,494,482 831,373,679 Total $ 126,161,034 $ 5,977,866 $ 407,039,093 $ 58,747,359 $ 206,098,103 $ 31,054,331 $ 3,494,482 $ 838,572,268 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 nine months ended September 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 ( 47,500 ) 0 ( 667,474 ) 0 0 0 ( 35,706 ) 0 ( 750,680 ) Recoveries 12,862 0 0 0 111,163 3,728 19,757 0 147,510 Provision (credit) 255,773 ( 12,107 ) 1,419,813 ( 4,432 ) ( 63,658 ) ( 2,998 ) 13,171 ( 280,562 ) 1,325,000 ALL ending balance $ 1,091,527 $ 56,548 $ 4,904,099 $ 72,296 $ 1,813,397 $ 182,744 $ 52,920 $ 258,555 $ 8,432,086 ALL evaluated for impairment Individually $ 4,259 $ 0 $ 8,867 $ 0 $ 96,784 $ 4 $ 0 $ 0 $ 109,914 Collectively 1,087,268 56,548 4,895,232 72,296 1,716,613 182,740 52,920 258,555 8,322,172 Total $ 1,091,527 $ 56,548 $ 4,904,099 $ 72,296 $ 1,813,397 $ 182,744 $ 52,920 $ 258,555 $ 8,432,086 Loans evaluated for impairment Individually $ 3,408,207 $ 0 $ 3,812,657 $ 0 $ 3,670,995 $ 79,742 $ 0 $ 10,971,601 Collectively 117,815,855 8,078,281 320,514,503 40,164,698 188,895,584 33,693,729 4,059,750 713,222,400 Total $ 121,224,062 $ 8,078,281 $ 324,327,160 $ 40,164,698 $ 192,566,579 $ 33,773,471 $ 4,059,750 $ 724,194,001 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 September 30, 2023 30-89 Days or More Past Due Current Total Loans Commercial & industrial $ 0 $ 3,093,578 $ 3,093,578 $ 123,067,456 $ 126,161,034 Purchased 0 0 0 5,977,866 5,977,866 Commercial real estate 585,102 1,092,154 1,677,256 405,361,837 407,039,093 Municipal 0 0 0 58,747,359 58,747,359 Residential real estate - 1st lien 303,985 787,911 1,091,896 205,006,207 206,098,103 Residential real estate - Jr lien 187,736 25,007 212,743 30,841,588 31,054,331 Consumer 24,779 0 24,779 3,469,703 3,494,482 Totals $ 1,101,602 $ 4,998,650 $ 6,100,252 $ 832,472,016 $ 838,572,268 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. There were no nonaccrual loans with an ACL at September 30, 2023. 90 Days or Total More and September 30, 2023 Nonaccrual Accruing Commercial & industrial $ 3,619,626 $ 64,311 Commercial real estate 2,900,078 315,826 Residential real estate - 1st lien 574,302 619,469 Residential real estate - Jr lien 120,786 0 Totals $ 7,214,792 $ 999,606 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 the balance sheet dates presented, residential real estate loans in process of foreclosure consisted of the following: Number of loans Balance September 30, 2023 1 $ 33,825 December 31, 2022 1 $ 19,746 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. 19 Table of Contents 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. 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 September 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 September 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. During the third quarter of 2023, the qualitative factor for collateral in the CRE loan segment was adjusted to reflect the stable values of real estate in the commercial sector. 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: 20 Table of Contents 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. 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. 21 Table of Contents The following table presents the amortized cost basis of collateral-dependent loans as of September 30, 2023, by collateral type: Business Commercial Residential Assets (1) Real Estate Real Estate Commercial & industrial $ 1,548,677 $ 0 $ 0 Commercial real estate 0 776,329 0 Residential real estate - 1st lien 0 0 311,338 Totals $ 1,548,677 $ 776,329 $ 311,338 (1) Including, but not limited to, inventory, equipment and accounts receivable, but excluding real estate. 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 . 22 Table of Contents As of September 30, 2022 Unpaid Recorded Principal Related Investment (1) Balance Allowance Related allowance recorded Commercial & industrial $ 954,098 $ 965,266 $ 4,259 Commercial real estate 249,709 252,806 8,867 Residential real estate - 1st lien 1,172,194 1,192,445 96,784 Residential real estate - Jr lien 2,532 2,529 4 Total with related allowance 2,378,533 2,413,046 109,914 No related allowance recorded Commercial & industrial 2,454,109 2,525,175 Commercial real estate 3,563,089 4,751,499 Residential real estate - 1st lien 2,511,284 3,515,246 Residential real estate - Jr lien 77,213 124,795 Total with no related allowance 8,605,695 10,916,715 Total impaired loans $ 10,984,228 $ 13,329,761 $ 109,914 (1) Recorded investment in impaired loans in the table above includes accrued interest receivable and deferred net loan costs of $ 12,627 . As of September 30, 2022 Three Months Ended Nine Months Ended Average Interest Average Interest Recorded Income Recorded Income Investment Recognized Investment Recognized Related allowance recorded Commercial & industrial $ 477,049 $ 0 $ 238,525 $ 0 Commercial real estate 124,854 0 62,427 0 Residential real estate - 1st lien 1,031,145 31,349 969,497 58,306 Residential real estate - Jr lien 1,266 147 633 247 Total with related allowance 1,634,314 31,496 1,271,082 58,553 No related allowance recorded Commercial & industrial 1,299,959 0 728,879 204 Commercial real estate 3,479,786 72,754 3,806,739 74,245 Residential real estate - 1st lien 2,686,280 27,154 2,814,818 119,663 Residential real estate - Jr lien 79,809 0 83,471 0 Total with no related allowance 7,545,834 99,908 7,433,907 194,112 Total impaired loans $ 9,180,148 $ 131,404 $ 8,704,989 $ 252,665 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. 23 Table of Contents 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. 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 nine months ended, Revolving Revolving September 30, 2023 Loans Loans Term Loans Amortized Cost Basis by Origination Year Amortized Converted (In thousands) 2023 2022 2021 2020 2019 Prior Cost Basis to Term Total Commercial & Industrial: Pass $ 10,874 $ 20,286 $ 13,821 $ 3,108 $ 4,176 $ 4,795 $ 58,359 $ 0 $ 115,419 Special mention 0 0 777 0 13 2 4,631 0 5,423 Substandard/Doubtful 0 429 132 482 271 1,565 2,440 0 5,319 Total commercial $ 10,874 $ 20,715 $ 14,730 $ 3,590 $ 4,460 $ 6,362 $ 65,430 $ 0 $ 126,161 Current period gross charge-offs $ 0 $ 150 $ 0 $ 0 $ 0 $ 212 $ 0 $ 0 $ 362 Purchased: Pass $ 337 $ 97 $ 1,641 $ 1,521 $ 2,382 $ 0 $ 0 $ 0 $ 5,978 Total purchased $ 337 $ 97 $ 1,641 $ 1,521 $ 2,382 $ 0 $ 0 $ 0 $ 5,978 Commercial real estate: Pass $ 64,005 $ 85,851 $ 39,398 $ 43,929 $ 35,241 $ 87,004 $ 41,990 $ 0 $ 397,418 Special mention 0 377 1,485 0 0 1,258 0 0 3,120 Substandard/Doubtful 0 0 0 3,344 1,381 1,776 0 0 6,501 Total commercial real estate $ 64,005 $ 86,228 $ 40,883 $ 47,273 $ 36,622 $ 90,038 $ 41,990 $ 0 $ 407,039 Municipal: Pass $ 32,286 $ 838 $ 3,327 $ 5,042 $ 631 $ 10,707 $ 5,916 $ 0 $ 58,747 Total municipal $ 32,286 $ 838 $ 3,327 $ 5,042 $ 631 $ 10,707 $ 5,916 $ 0 $ 58,747 Residential real estate - 1st lien: Pass $ 22,995 $ 39,726 $ 41,687 $ 33,854 $ 10,516 $ 52,682 $ 1,956 $ 0 $ 203,416 Special mention 0 301 130 0 0 0 0 0 431 Substandard/Doubtful 0 0 0 1,842 40 369 0 0 2,251 Total residential real estate - 1st lien $ 22,995 $ 40,027 $ 41,817 $ 35,696 $ 10,556 $ 53,051 $ 1,956 $ 0 $ 206,098 Residential real estate - Jr lien: Pass $ 1,424 $ 1,967 $ 355 $ 609 $ 645 $ 1,121 $ 23,142 $ 1,710 $ 30,973 Special mention 0 50 0 0 0 0 0 0 50 Substandard/Doubtful 0 0 0 0 0 31 0 0 31 Total residential real estate - Jr lien $ 1,424 $ 2,017 $ 355 $ 609 $ 645 $ 1,152 $ 23,142 $ 1,710 $ 31,054 Consumer Pass $ 1,580 $ 969 $ 470 $ 248 $ 133 $ 95 $ 0 $ 0 $ 3,495 Total consumer $ 1,580 $ 969 $ 470 $ 248 $ 133 $ 95 $ 0 $ 0 $ 3,495 Current period gross charge-offs $ 31 $ 27 $ 0 $ 0 $ 1 $ 53 $ 0 $ 0 $ 112 Total Loans $ 133,501 $ 150,891 $ 103,223 $ 93,979 $ 55,429 $ 161,405 $ 138,434 $ 1,710 $ 838,572 Total current period gross charge-offs $ 31 $ 177 $ 0 $ 0 $ 1 $ 265 $ 0 $ 0 $ 474 As of or for the nine months ended, September 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 nine 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 Nine months ended September 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 new TDRs for the three months ended September 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 September 30, 2022 were as follows: Number of Recorded Contracts Investment Commercial real estate 1 $ 818,570 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. September 30, December 31, Assets: (market approach) 2023 2022 Level 1 U.S. Government securities $ 38,542,155 $ 38,231,589 Level 2 U.S. GSE debt securities $ 10,398,344 $ 10,375,291 Taxable Municipal securities 233,714 234,858 Tax-exempt Municipal securities 10,596,387 11,323,567 Agency MBS 106,823,004 115,231,599 ABS and OAS 2,299,066 2,693,606 CMO 11,365,654 11,935,925 Other investments 1,670,137 2,891,674 Level 2 Total $ 143,386,306 $ 154,686,520 Grand Total $ 181,928,461 $ 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. September 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 56,700 0 MSRs (1) 814,470 862,593 (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: September 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 $ 17,532 $ 17,532 $ 0 $ 0 $ 17,532 Debt securities AFS 181,928 38,542 143,386 0 181,928 Restricted equity securities 1,424 0 1,424 0 1,424 Loans and loans held-for-sale, net of ACL Commercial & industrial 125,074 0 680 120,780 121,460 Purchased 5,960 0 0 5,537 5,537 Commercial real estate 401,695 0 0 376,490 376,490 Municipal 58,600 0 0 55,681 55,681 Residential real estate - 1st lien 204,319 0 0 184,617 184,617 Residential real estate - Jr lien 30,577 0 0 30,109 30,109 Consumer 3,466 0 0 3,473 3,473 MSRs (1) 814 0 1,286 0 1,286 Accrued interest receivable 3,830 0 3,830 0 3,830 Financial liabilities: Deposits Other deposits 900,956 0 897,998 0 897,998 Brokered deposits 249 0 227 0 227 Short-term borrowings 3,550 0 3,550 0 3,550 Long-term borrowings 45,600 0 45,223 0 45,223 Repurchase agreements 31,580 0 31,580 0 31,580 Operating lease obligations 497 0 497 0 497 Finance lease obligations 3,480 0 3,480 0 3,480 Subordinated debentures 12,887 0 12,694 0 12,694 Accrued interest payable 794 0 794 0 794 (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. 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: Nine Months Ended Year Ended September 30, 2023 December 31, 2022 Balance at beginning of year $ 862,593 $ 897,720 MSRs capitalized 55,666 120,629 MSRs amortized ( 103,789 ) ( 155,756 ) Balance at end of period $ 814,470 $ 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 September 21, 2023, the Company’s Board declared a cash dividend of $ 0.23 per common share, payable November 1, 2023, to shareholders of record as of October 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. 31 Table of Contents