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 March 31, 2024 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 May 10, 2024, there were 5,534,819 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 25 Item 3 Quantitative and Qualitative Disclosures About Market Risk 44 Item 4 Controls and Procedures 44 PART II OTHER INFORMATION Item 1 Legal Proceedings 45 Item 1A Risk Factors 45 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 45 Item 6 Exhibits 46 Signatures 47 Exhibit Index 48 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 March 31, December 31, Consolidated Balance Sheets 2024 2023 (Unaudited) Assets Cash and due from banks $ 11,236,615 $ 15,001,122 Federal funds sold and overnight deposits 4,679,782 5,433,391 Total cash and cash equivalents 15,916,397 20,434,513 Securities available-for-sale 180,577,058 190,706,019 Restricted equity securities, at cost 1,977,350 1,642,350 Loans held-for-sale 441,000 0 Loans 866,352,361 845,429,854 Allowance for credit losses ( 10,027,768 ) ( 9,842,725 ) Deferred net loan costs 589,095 573,169 Net loans 856,913,688 836,160,298 Bank premises and equipment, net 12,375,501 12,371,371 Accrued interest receivable 4,852,826 4,246,798 Bank owned life insurance 5,252,858 5,232,703 Goodwill 11,574,269 11,574,269 Other assets 17,238,023 16,976,613 Total assets $ 1,107,118,970 $ 1,099,344,934 Liabilities and Shareholders' Equity Liabilities Deposits: Demand, non-interest bearing $ 185,831,108 $ 202,969,957 Interest-bearing transaction accounts 291,012,736 297,030,893 Money market funds 120,044,494 121,375,419 Savings 150,718,352 151,570,686 Time deposits, $ 250,000 and over 30,182,543 24,676,853 Other time deposits 105,965,451 99,343,974 Total deposits 883,754,684 896,967,782 Repurchase agreements 27,166,247 36,255,920 Borrowed funds 85,200,000 54,600,000 Junior subordinated debentures 12,887,000 12,887,000 Accrued interest and other liabilities 8,707,076 9,605,418 Total liabilities 1,017,715,007 1,010,316,120 Shareholders' Equity Preferred stock, 1,000,000 shares authorized, 15 shares issued and outstanding at 03/31/24 and 12/31/23 ($ 100,000 liquidation value, per share) 1,500,000 1,500,000 Common stock - $ 2.50 par value; 15,000,000 shares authorized, 5,745,307 shares issued at 03/31/24 and 5,724,151 shares issued at 12/31/23 14,363,268 14,310,378 Additional paid-in capital 37,882,139 37,574,578 Retained earnings 55,720,936 54,198,230 Accumulated other comprehensive loss ( 17,439,603 ) ( 15,931,595 ) Less: treasury stock, at cost; 210,101 shares at 03/31/24 and 12/31/23 ( 2,622,777 ) ( 2,622,777 ) Total shareholders' equity 89,403,963 89,028,814 Total liabilities and shareholders' equity $ 1,107,118,970 $ 1,099,344,934 Book value per common share outstanding $ 15.88 $ 15.87 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 March 31, Consolidated Statements of Income 2024 2023 (Unaudited) Interest income Interest and fees on loans $ 11,678,217 $ 9,376,025 Interest on taxable debt securities 972,349 943,478 Interest on tax-exempt debt securities 80,411 90,658 Dividends 42,384 30,653 Interest on federal funds sold and overnight deposits 85,933 329,411 Total interest income 12,859,294 10,770,225 Interest expense Interest on deposits 3,080,172 1,844,747 Interest on borrowed funds 945,816 24,520 Interest on repurchase agreements 198,892 132,128 Interest on junior subordinated debentures 276,769 245,465 Total interest expense 4,501,649 2,246,860 Net interest income 8,357,645 8,523,365 Credit loss expense 313,579 286,526 Net interest income after credit loss expense 8,044,066 8,236,839 Non-interest income Service fees 897,920 880,288 Income from sold loans 79,104 107,535 Other income from loans 254,601 428,572 Other income 402,282 342,382 Total non-interest income 1,633,907 1,758,777 Non-interest expense Salaries and wages 2,458,000 2,288,760 Employee benefits 899,236 754,270 Occupancy expenses, net 722,503 770,986 Other expenses 2,220,405 2,065,686 Total non-interest expense 6,300,144 5,879,702 Income before income taxes 3,377,829 4,115,914 Income tax expense 554,928 777,153 Net income $ 2,822,901 $ 3,338,761 Earnings per common share $ 0.51 $ 0.61 Weighted average number of common shares used in computing earnings per share 5,521,509 5,444,040 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 Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended March 31, 2024 2023 Net income $ 2,822,901 $ 3,338,761 Other comprehensive (loss) income, net of tax: Unrealized holding (loss) income on securities AFS arising during the period ( 1,908,870 ) 3,383,314 Tax effect 400,862 ( 710,496 ) Other comprehensive (loss) income, net of tax ( 1,508,008 ) 2,672,818 Total comprehensive income $ 1,314,893 $ 6,011,579 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 Changes in Shareholders' Equity (Unaudited) Three Months Ended March 31, 2024 Additional Total Common Preferred paid-in Retained Treasury shareholders' Stock Stock capital earnings AOCI* stock equity Balance January 1, 2024 $ 14,310,378 $ 1,500,000 $ 37,574,578 $ 54,198,230 $ ( 15,931,595 ) $ ( 2,622,777 ) $ 89,028,814 Issuance of common stock 52,890 307,561 360,451 Cash dividends declared Common stock ( 1,268,320 ) ( 1,268,320 ) Preferred stock ( 31,875 ) ( 31,875 ) Comprehensive income Net income 2,822,901 2,822,901 Other comprehensive loss ( 1,508,008 ) ( 1,508,008 ) Balance March 31, 2024 $ 14,363,268 $ 1,500,000 $ 37,882,139 $ 55,720,936 $ ( 17,439,603 ) $ ( 2,622,777 ) $ 89,403,963 Three Months Ended March 31 2023 Additional Total Common Preferred paid-in Retained Treasury shareholders' Stock Stock capital earnings AOCI* stock equity Balance 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 45,915,334 74,627,250 Change 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 Balance March 31, 2023 $ 14,162,968 $ 1,500,000 $ 36,659,419 $ 47,975,176 $ ( 17,994,999 ) $ ( 2,622,777 ) $ 79,679,787 *Accumulated other comprehensive loss 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 Cash Flows (Unaudited) Three Months Ended March 31, 2024 2023 Cash Flows from Operating Activities: Net income $ 2,822,901 $ 3,338,761 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization, bank premises and equipment 258,219 276,656 Credit loss expense 313,579 286,526 Deferred income tax 165,056 ( 68,835 ) Gain on sale of loans ( 12,092 ) ( 29,331 ) Gain on sale of bank premises and equipment ( 13,981 ) 0 Income from CFS Partners ( 294,327 ) ( 252,051 ) Amortization of bond premium, net 53,550 66,815 Proceeds from sales of loans held for sale 690,092 1,637,381 Originations of loans held for sale ( 1,119,000 ) ( 1,608,050 ) Increase in taxes payable 240,670 778,860 (Increase) decrease in interest receivable ( 606,028 ) 103,159 Decrease in mortgage servicing rights 22,276 23,370 Decrease in right-of-use assets 44,281 50,321 Decrease in operating lease liabilities ( 48,495 ) ( 53,751 ) Increase in other assets ( 143,424 ) ( 72,609 ) Increase in cash surrender value of BOLI ( 20,155 ) ( 19,615 ) Amortization of limited partnerships 149,202 67,128 Change in net deferred loan fees and costs ( 15,926 ) ( 16,336 ) Increase (decrease) in interest payable 200,624 ( 2,485 ) Decrease in accrued expenses ( 1,069,838 ) ( 1,040,367 ) Increase in other liabilities 77,844 73,186 Net cash provided by operating activities 1,695,028 3,538,733 Cash Flows from Investing Activities: Investments - AFS Maturities, calls, pay downs and sales 8,166,541 3,555,278 Proceeds from redemption of restricted equity securities 1,424,800 67,800 Purchases of restricted equity securities ( 1,759,800 ) ( 92,600 ) Investments in limited liability entities 0 ( 1,000 ) Increase in loans, net ( 21,073,009 ) ( 10,074,935 ) Capital expenditures net of proceeds from sales of bank premises and equipment ( 292,650 ) ( 158,971 ) Recoveries of loans charged off 17,746 132,860 Net cash used in investing activities ( 13,516,372 ) ( 6,571,568 ) 7 Table of Contents 2024 2023 Cash Flows from Financing Activities: Net decrease in demand and interest-bearing transaction accounts ( 23,157,006 ) ( 29,855,106 ) Net decrease in money market and savings accounts ( 2,183,259 ) ( 8,183,145 ) Net increase in time deposits 12,127,167 3,611,070 Net (decrease) increase in repurchase agreements ( 9,089,673 ) 4,980,207 Net increase in short-term borrowings 25,600,000 0 Proceeds from long-term borrowings 5,000,000 0 Decrease in finance lease obligations ( 56,229 ) ( 54,493 ) Dividends paid on preferred stock ( 31,875 ) ( 28,125 ) Dividends paid on common stock ( 905,897 ) ( 932,901 ) Net cash provided by (used in) financing activities 7,303,228 ( 30,462,493 ) Net decrease in cash and cash equivalents ( 4,518,116 ) ( 33,495,328 ) Cash and cash equivalents: Beginning 20,434,513 71,140,328 Ending $ 15,916,397 $ 37,645,000 Supplemental Schedule of Cash Paid During the Period: Interest $ 4,301,025 $ 2,249,345 Supplemental Schedule of Noncash Investing and Financing Activities: Change in unrealized (loss) gain on securities AFS $ ( 1,908,870 ) $ 3,383,314 Common Shares Dividends Paid: Dividends declared $ 1,268,320 $ 1,250,794 (Increase) decrease in dividends payable attributable to dividends declared ( 1,972 ) 1,984 Dividends reinvested ( 360,451 ) ( 319,877 ) Total dividends paid $ 905,897 $ 932,901 The accompanying notes are an integral part of these unaudited interim consolidated financial statements. 8 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, 2023, contained in the Company's Annual Report on Form 10-K. 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, 2024. 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 smaller reporting company scaled disclosures where management deems it appropriate, and to provide its audited consolidated statements of income, comprehensive income, cash flows and changes in shareholders’ equity for a two year, rather than a three year, period.is considered a “smaller reporting company” under the disclosure rules of the SEC, as amended in 2018. 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 FASB: Financial Accounting Standards Board ACL: Allowance for Credit Losses 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 ALCO: Asset Liability Committee FHLMC: Federal Home Loan Mortgage Corporation ALL: Allowance for Loan Losses FOMC: Federal Open Market Committee AOCI: Accumulated other comprehensive income FRB: Federal Reserve Board ASC: Accounting Standards Codification FRBB: Federal Reserve Bank of Boston ASU: Accounting Standards Update GAAP: Generally Accepted Accounting Principles Bancorp: Community Bancorp. in the United States Bank: Community National Bank GSE: Government sponsored enterprise BHG: Bankers Healthcare Group 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 CME: CME Group Benchmark Administration Ltd. 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 USDA: U.S. Department of Agriculture DRIP: Dividend Reinvestment Plan VA: U.S. Veterans Administration Exchange Act: Securities Exchange Act of 1934 9 Table of Contents Note 2. Recent Accounting Developments In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures. The ASU provides more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information, such as requiring the disclosure of specific categories in the rate reconciliation and the disaggregation of income tax expense and income taxes paid by federal, state, and foreign taxes. The ASU is effective for annual periods beginning after December 15, 2024. The Company does not believe the ASU will have a material impact on the Company's consolidated financial statements. 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 March 31, 2024 2023 Net income, as reported $ 2,822,901 $ 3,338,761 Less: dividends to preferred shareholders 31,875 28,125 Net income available to common shareholders $ 2,791,026 $ 3,310,636 Weighted average number of common shares used in calculating earnings per share 5,521,509 5,444,040 Earnings per common share $ 0.51 $ 0.61 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 March 31, 2024 U.S. GSE debt securities $ 12,000,000 $ 0 $ 1,265,019 $ 10,734,981 U.S. Government securities 37,667,290 0 1,819,960 35,847,330 Taxable Municipal securities 300,000 0 50,877 249,123 Tax-exempt Municipal securities 10,817,528 99,168 548,726 10,367,970 Agency MBS 129,230,659 215,636 18,265,414 111,180,881 ABS and OAS 2,352,806 0 175,253 2,177,553 CMO 9,541,222 0 221,002 9,320,220 Other investments 743,000 0 44,000 699,000 Total $ 202,652,505 $ 314,804 $ 22,390,251 $ 180,577,058 December 31, 2023 U.S. GSE debt securities $ 12,000,000 $ 0 $ 1,172,426 $ 10,827,574 U.S. Government securities 41,207,049 0 1,943,800 39,263,249 Taxable Municipal securities 300,000 0 53,035 246,965 Tax-exempt Municipal securities 10,832,494 158,982 517,691 10,473,785 Agency MBS 132,043,238 321,880 16,502,319 115,862,799 ABS and OAS 2,533,872 0 186,251 2,347,621 CMO 10,963,942 0 226,346 10,737,596 Other investments 992,000 0 45,570 946,430 Total $ 210,872,595 $ 480,862 $ 20,647,438 $ 190,706,019 10 Table of Contents The Company had investments in Agency MBS exceeding 10% of shareholders’ equity with a book value of $ 129.2 million and $ 132.0 million, respectively, and a fair value of $ 111.2 million and $ 115.9 million, respectively, as of March 31, 2024 and December 31, 2023. There was no ACL on AFS debt securities as of March 31, 2024 or December 31, 2023. 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 March 31, 2024 $ 58,090,195 $ 50,043,997 December 31, 2023 59,300,089 52,107,148 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 and fair value of these pledged investments as of the balance sheet dates as follows: Amortized Fair Cost Value March 31, 2024 $ 78,357,926 $ 69,429,684 December 31, 2023 49,232,069 43,795,542 There were no sales of debt securities during the first three months of 2024 or 2023. The scheduled maturities of debt securities as of the balance sheet dates were as follows: Amortized Fair Cost Value March 31, 2024 Due in one year or less $ 17,783,017 $ 17,414,714 Due from one to five years 38,349,022 35,767,347 Due from five to ten years 4,392,490 4,028,539 Due after ten years 12,897,317 12,185,577 Agency MBS 129,230,659 111,180,881 Total $ 202,652,505 $ 180,577,058 December 31, 2023 Due in one year or less $ 17,366,548 $ 17,061,882 Due from one to five years 43,976,469 41,245,991 Due from five to ten years 4,485,724 4,141,301 Due after ten years 13,000,616 12,394,046 Agency MBS 132,043,238 115,862,799 Total $ 210,872,595 $ 190,706,019 Agency MBS are not due at a single maturity date and have not been allocated to maturity groupings for purposes of the maturity table. 11 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 March 31, 2024 U.S. GSE debt securities $ 0 $ 0 $ 10,734,981 $ 1,265,019 11 $ 10,734,981 $ 1,265,019 U.S. Government securities 0 0 35,847,330 1,819,960 51 35,847,330 1,819,960 Taxable Municipal securities 0 0 249,123 50,877 1 249,123 50,877 Tax-exempt Municipal securities 1,541,929 15,011 4,021,541 533,715 12 5,563,470 548,726 Agency MBS 4,581,444 14,398 99,966,083 18,251,016 121 104,547,527 18,265,414 ABS and OAS 0 0 2,177,553 175,253 4 2,177,553 175,253 CMO 0 0 9,320,220 221,002 9 9,320,220 221,002 Other investments 0 0 699,000 44,000 3 699,000 44,000 Total $ 6,123,373 $ 29,409 $ 163,015,831 $ 22,360,842 212 $ 169,139,204 $ 22,390,251 December 31, 2023 U.S. GSE debt securities $ 0 $ 0 $ 10,827,574 $ 1,172,426 11 $ 10,827,574 $ 1,172,426 U.S. Government securities 0 0 39,263,249 1,943,800 54 39,263,249 1,943,800 Taxable Municipal securities 0 0 246,965 53,035 1 246,965 53,035 Tax-exempt Municipal securities 529,571 9,468 4,058,155 508,223 10 4,587,726 517,691 Agency MBS 1,328,433 9,218 103,000,706 16,493,101 119 104,329,139 16,502,319 ABS and OAS 0 0 2,347,621 186,251 4 2,347,621 186,251 CMO 3,309,165 18,554 7,428,431 207,792 10 10,737,596 226,346 Other investments 0 0 946,430 45,570 4 946,430 45,570 Total $ 5,167,169 $ 37,240 $ 168,119,131 $ 20,610,198 213 $ 173,286,300 $ 20,647,438 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 March 31, 2024, 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. 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: March 31, 2024 December 31, 2023 Commercial & industrial $ 128,888,792 14.88 % $ 121,705,707 14.40 % Purchased 10,207,364 1.18 % 10,568,922 1.25 % Commercial real estate 425,875,535 49.16 % 414,880,621 49.07 % Municipal 56,928,434 6.57 % 54,466,988 6.44 % Residential real estate - 1st lien 209,938,344 24.23 % 208,824,888 24.70 % Residential real estate - Jr lien 31,537,859 3.64 % 31,668,811 3.75 % Consumer 2,976,033 0.34 % 3,313,917 0.39 % Total loans 866,352,361 100.00 % 845,429,854 100.00 % ACL ( 10,027,768 ) ( 9,842,725 ) Deferred net loan costs 589,095 573,169 Net loans $ 856,913,688 $ 836,160,298 (1) As of March 31, 2024, purchased loans consisted of $ 5,452,239 in commercial loans and $ 4,755,125 in consumer loans, compared to $ 4,863,263 and $ 5,705,659 , respectively, as of December 31, 2023. 12 Table of Contents Credit Loss Expense Credit loss expense was made up of the following components for the periods indicated: Three Months Ended March 31, 2024 2023 Credit loss expense - loans $ 317,799 $ 207,540 Credit loss (reversal) expense - OBS credit exposure ( 4,220 ) 78,986 Credit loss expense $ 313,579 $ 286,526 The following tables present the activity in the ACL on loans for the periods presented. As of or for the three months ended March 31, 2024 Residential Residential Commercial Commercial Real Estate Real Estate & Industrial Purchased Real Estate Municipal 1st Lien Jr Lien Consumer Total ACL beginning balance $ 1,100,688 $ 37,065 $ 5,522,082 $ 136,167 $ 2,590,926 $ 431,007 $ 24,790 $ 9,842,725 Charge-offs ( 137,684 ) 0 0 0 0 0 ( 12,818 ) ( 150,502 ) Recoveries 12,315 0 0 0 0 1,209 4,222 17,746 Credit loss expense (reversal) 103,637 ( 1,442 ) 208,450 6,154 ( 16,585 ) 10,178 7,407 317,799 ACL ending balance $ 1,078,956 $ 35,623 $ 5,730,532 $ 142,321 $ 2,574,341 $ 442,394 $ 23,601 $ 10,027,768 As of or for the year ended December 31, 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 ( 386,578 ) 0 0 0 ( 1,625 ) 0 ( 131,332 ) 0 ( 519,535 ) Recoveries 10,237 0 22,058 0 72,588 29,240 44,657 0 178,780 Credit loss expense (reversal) 524,822 13,171 460,678 49,585 244,960 ( 137,929 ) 75,592 0 1,230,879 ACL ending balance $ 1,100,688 $ 37,065 $ 5,522,082 $ 136,167 $ 2,590,926 $ 431,007 $ 24,790 $ 0 $ 9,842,725 As of or for the three months ended March 31, 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 ( 11,577 ) 0 0 0 0 0 ( 25,254 ) 0 ( 36,831 ) Recoveries 1,374 0 22,000 0 72,326 25,548 11,612 0 132,860 Credit loss expense (reversal) 73,635 ( 3,693 ) 124,810 4,602 48,779 ( 48,595 ) 8,002 0 207,540 ACL ending balance $ 1,015,638 $ 20,201 $ 5,186,156 $ 91,185 $ 2,396,109 $ 516,648 $ 30,233 $ 0 $ 9,256,170 13 Table of Contents 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 March 31, 2024 30-89 Days or More Past Due Current Total Loans Commercial & industrial $ 82,818 $ 2,896,266 $ 2,979,084 $ 125,909,708 $ 128,888,792 Purchased 0 0 0 10,207,364 10,207,364 Commercial real estate 174,486 701,757 876,243 424,999,292 425,875,535 Municipal 0 0 0 56,928,434 56,928,434 Residential real estate - 1st lien 1,879,100 749,700 2,628,800 207,309,544 209,938,344 Residential real estate - Jr lien 172,203 149,337 321,540 31,216,319 31,537,859 Consumer 14,399 0 14,399 2,961,634 2,976,033 Totals $ 2,323,006 $ 4,497,060 $ 6,820,066 $ 859,532,295 $ 866,352,361 90 Days Total December 31, 2023 30-89 Days or More Past Due Current Total Loans Commercial & industrial $ 253,974 $ 3,068,578 $ 3,322,552 $ 118,383,155 $ 121,705,707 Purchased 0 0 0 10,568,922 10,568,922 Commercial real estate 178,083 944,669 1,122,752 413,757,869 414,880,621 Municipal 0 0 0 54,466,988 54,466,988 Residential real estate - 1st lien 1,856,944 646,980 2,503,924 206,320,964 208,824,888 Residential real estate - Jr lien 245,856 25,007 270,863 31,397,948 31,668,811 Consumer 14,728 0 14,728 3,299,189 3,313,917 Totals $ 2,549,585 $ 4,685,234 $ 7,234,819 $ 838,195,035 $ 845,429,854 For all loan segments, loans over 30 days past due are considered delinquent. The following table presents 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 as of March 31, 2024 or December 31, 2023. 90 Days or Nonaccrual Total More and with No ACL Nonaccrual Accruing March 31, 2024 Commercial & industrial $ 3,428,349 $ 3,428,349 $ 0 Commercial real estate 2,500,823 2,500,823 38,779 Residential real estate - 1st lien 402,856 402,856 623,890 Residential real estate - Jr lien 53,073 53,073 124,330 Totals $ 6,385,101 $ 6,385,101 $ 786,999 December 31, 2023 Commercial & industrial $ 3,632,659 $ 3,632,659 $ 0 Commercial real estate 2,818,283 2,818,283 38,779 Residential real estate - 1st lien 415,074 415,074 446,395 Residential real estate - Jr lien 89,030 89,030 0 Totals $ 6,955,046 $ 6,955,046 $ 485,174 There were no residential real estate loans in process of foreclosure as of March 31, 2024 or December 31, 2023. 14 Table of Contents 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. The Company utilizes a 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 March 31, 2024, 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 March 31, 2024. 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. 15 Table of Contents 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 first quarter of 2024, the qualitative factor for delinquencies in the C&I and CRE portfolios was adjusted to reflect improving trends in those portfolios. Also, the qualitative factors for collateral in the residential portfolios were adjusted to reflect stabilization of real estate values in that sector. The qualitative factors are determined by management 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. Purchased – Loans in this segment are loans purchased through a loan purchasing program with BHG. BHG originates commercial loans to medical professionals and consumer loans to other 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. 16 Table of Contents 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 March 31, 2024, by collateral type: Business Assets (1) Real Estate March 31, 2024 Commercial & industrial $ 1,180,782 $ 0 Commercial real estate 0 662,978 Residential real estate - 1st lien 0 203,690 Totals $ 1,180,782 $ 866,668 December 31, 2023 Commercial & industrial $ 1,298,717 $ 0 Commercial real estate 0 1,263,495 Residential real estate - 1st lien 0 167,363 Totals $ 1,298,717 $ 1,430,858 (1) Including, but not limited to, inventory, equipment, and accounts receivable, but excluding real estate. 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. 17 Table of Contents 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 Senior Lender of any known increase in loan risk, even if considered temporary in nature. 18 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 three months ended, Revolving Revolving March 31, 2024 Loans Loans Term Loans Amortized Cost Basis by Origination Year Amortized Converted (In thousands) 2024 2023 2022 2021 2020 Prior Cost Basis to Term Total Commercial & Industrial: Pass $ 3,227 $ 16,140 $ 17,684 $ 11,833 $ 2,385 $ 6,932 $ 54,230 $ 0 $ 112,431 Special mention 0 299 888 227 0 568 8,431 0 10,413 Substandard/Doubtful 13 0 413 609 422 1,629 2,959 0 6,045 Total $ 3,240 $ 16,439 $ 18,985 $ 12,669 $ 2,807 $ 9,129 $ 65,620 $ 0 $ 128,889 Current period gross charge-offs $ 0 $ 0 $ 0 $ 5 $ 0 $ 133 $ 0 $ 0 $ 138 Purchased: Pass $ 0 $ 5,066 $ 91 $ 1,523 $ 1,408 $ 2,119 $ 0 $ 0 $ 10,207 Total $ 0 $ 5,066 $ 91 $ 1,523 $ 1,408 $ 2,119 $ 0 $ 0 $ 10,207 Commercial real estate: Pass $ 13,773 $ 68,560 $ 88,375 $ 37,722 $ 42,355 $ 116,175 $ 51,306 $ 0 $ 418,266 Special mention 0 0 369 1,457 0 0 0 0 1,826 Substandard/Doubtful 0 0 0 0 3,292 2,492 0 0 5,784 Total $ 13,773 $ 68,560 $ 88,744 $ 39,179 $ 45,647 $ 118,667 $ 51,306 $ 0 $ 425,876 Municipal: Pass $ 2,349 $ 29,032 $ 691 $ 3,248 $ 4,501 $ 10,509 $ 6,598 $ 0 $ 56,928 Total $ 2,349 $ 29,032 $ 691 $ 3,248 $ 4,501 $ 10,509 $ 6,598 $ 0 $ 56,928 Residential real estate - 1st lien: Pass $ 6,462 $ 29,990 $ 38,372 $ 40,326 $ 32,347 $ 58,420 $ 1,369 $ 0 $ 207,286 Special mention 0 163 299 128 0 0 0 0 590 Substandard/Doubtful 0 0 0 0 1,815 247 0 0 2,062 Total $ 6,462 $ 30,153 $ 38,671 $ 40,454 $ 34,162 $ 58,667 $ 1,369 $ 0 $ 209,938 Residential real estate - Jr lien: Pass $ 485 $ 2,210 $ 1,896 $ 331 $ 583 $ 1,490 $ 23,351 $ 1,164 $ 31,510 Substandard/Doubtful 0 0 0 0 0 28 0 0 28 Total $ 485 $ 2,210 $ 1,896 $ 331 $ 583 $ 1,518 $ 23,351 $ 1,164 $ 31,538 Consumer Pass $ 357 $ 1,239 $ 728 $ 317 $ 178 $ 157 $ 0 $ 0 $ 2,976 Total $ 357 $ 1,239 $ 728 $ 317 $ 178 $ 157 $ 0 $ 0 $ 2,976 Current period gross charge-offs $ 0 $ 0 $ 0 $ 0 $ 0 $ 13 $ 0 $ 0 $ 13 Total Loans $ 26,666 $ 152,699 $ 149,806 $ 97,721 $ 89,286 $ 200,766 $ 148,244 $ 1,164 $ 866,352 Total current period gross charge-offs $ 0 $ 0 $ 0 $ 5 $ 0 $ 146 $ 0 $ 0 $ 151 As of or for the three months ended March 31, 2024, 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, (ii) no Special mention loans within the Purchased, Municipal, Residential real estate Jr lien and Consumer loan segments, and (iii) no Substandard/Doubtful loans within the Purchased, Municipal and Consumer loan segments. 19 Table of Contents 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 number of payments typically would not require the loan to be accounted for as modified. However, pursuant to regulatory guidance, any payment delays 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 considers applicable regulatory guidance, including a 2023 interagency Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts. There were no loan modifications during the first three months of 2024. 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, 2023, 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. 20 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, individually analyzed loans, loans held-for-sale, 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. 21 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 2024 or 2023. March 31, December 31, Assets: (market approach) 2024 2023 Level 1 U.S. Government securities $ 35,847,330 $ 39,263,249 Level 2 U.S. GSE debt securities $ 10,734,981 $ 10,827,574 Taxable Municipal securities 249,123 246,965 Tax-exempt Municipal securities 10,367,970 10,473,785 Agency MBS 111,180,881 115,862,799 ABS and OAS 2,177,553 2,347,621 CMO 9,320,220 10,737,596 Other investments 699,000 946,430 Level 2 Total $ 144,729,728 $ 151,442,770 Grand Total $ 180,577,058 $ 190,706,019 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 2024 or 2023. March 31, December 31, Level 2 2024 2023 Assets: (market approach) Individually analyzed loans, net of related allowance $ 877,419 $ 709,487 Loans held-for-sale 441,000 0 MSRs (1) 764,737 787,013 (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. 22 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: March 31, 2024 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 $ 15,916 $ 15,916 $ 0 $ 0 $ 15,916 Debt securities AFS 180,577 35,847 144,730 0 180,577 Restricted equity securities 1,977 0 1,977 0 1,977 Loans and loans held-for-sale, net of ACL Commercial & industrial 127,796 0 877 123,575 124,452 Purchased 10,171 0 0 9,675 9,675 Commercial real estate 420,120 0 0 393,997 393,997 Municipal 56,787 0 0 54,491 54,491 Residential real estate - 1st lien 208,433 0 0 191,231 191,231 Residential real estate - Jr lien 31,096 0 0 30,618 30,618 Consumer 2,952 0 0 2,968 2,968 MSRs (1) 765 0 1,262 0 1,262 Accrued interest receivable 4,853 0 4,853 0 4,853 Financial liabilities: Deposits Other deposits 883,755 0 881,882 0 881,882 Overnight borrowings 6,600 0 6,600 0 6,600 Short-term advances 72,500 0 72,291 0 72,291 Long-term advances 6,100 0 5,896 0 5,896 Repurchase agreements 27,166 0 27,166 0 27,166 Operating lease obligations 395 0 395 0 395 Finance lease obligations 3,369 0 3,369 0 3,369 Subordinated debentures 12,887 0 12,715 0 12,715 Accrued interest payable 1,283 0 1,283 0 1,283 (1) Reported fair value represents all MSRs for loans serviced by the Company, regardless of carrying amount. 23 Table of Contents December 31, 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 $ 20,435 $ 20,435 $ 0 $ 0 $ 20,435 Debt securities AFS 190,706 39,263 151,443 0 190,706 Restricted equity securities 1,642 0 1,642 0 1,642 Loans and loans held-for-sale, net of ACL Commercial & industrial 120,589 0 709 116,287 116,996 Purchased 10,532 0 0 10,055 10,055 Commercial real estate 409,332 0 0 382,045 382,045 Municipal 54,331 0 0 51,791 51,791 Residential real estate – 1 st lien 206,849 0 0 188,650 188,650 Residential real estate – Jr lien 31,238 0 0 30,745 30,745 Consumer 3,289 0 0 3,295 3,295 MSRs (1) 787 0 1,262 0 1,262 Accrued interest receivable 4,247 0 4,247 0 4,247 Financial liabilities: Deposits Other deposits 896,968 0 894,823 0 894,823 Overnight borrowings 9,000 0 9,000 0 9,000 Short-term advances 44,500 0 44,484 0 44,484 Long-term advances 1,100 0 931 0 931 Repurchase agreements 36,256 0 36,256 0 36,256 Operating lease obligations 443 0 443 0 443 Finance lease obligations 3,425 0 3,425 0 3,425 Subordinated debentures 12,887 0 12,719 0 12,719 Accrued interest payable 1,082 0 1,082 0 1,082 (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: Three Months Ended Year Ended March 31, 2024 December 31, 2023 Balance at beginning of year $ 787,013 $ 862,593 MSRs capitalized 8,051 68,297 MSRs amortized ( 30,327 ) ( 143,877 ) Balance at end of period $ 764,737 $ 787,013 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 March 20, 2024, the Company’s Board declared a cash dividend of $ 0.23 per common share, payable May 1, 2024, to shareholders of record as of April 15, 2024. This dividend has been recorded in the Company’s consolidated financial statements as of the declaration date, including shares issuable under the DRIP. 24 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 March 31, 2024 The following discussion analyzes the consolidated financial condition of Community Bancorp. and its wholly owned subsidiary, Community National Bank, as of March 31, 2024 and December 31, 2023, and its consolidated results of operations for the three-month interim period and one year period presented. The Company is considered a “smaller reporting company” and a “non-accelerated filer” under the disclosure rules of the SEC. Accordingly, the Company has elected to provide its statements of income, comprehensive income, cash flows and changes in shareholders’ equity for a two-year, rather than a three-year, period and provide certain other smaller reporting company scaled disclosures where management deems it appropriate. The following discussion should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in its 2023 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; · the effect of United States monetary and fiscal policies, including deficit spending and 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); 25 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 as of March 31, 2024, were $1.11 billion compared to $1.10 billion as of December 31, 2023, an increase of 0.7%. Changes in the asset base included an increase in loans of $20.9 million, or 2.5%, which was partially offset by a decrease of $4.5 million, or 22.1%, in cash and cash equivalents and a decrease of $10.1 million, or 5.3% in investment securities. These changes in the asset base reflect the Company’s efforts to deploy cash into higher earning assets. The increase in the loan portfolio was primarily attributable to an increase of $7.2 million in commercial & industrial loans, $11.0 million in CRE loans, $2.5 million in municipal loans and $1.1 million in residential first lien loans, which was minimally offset by a decrease of $362 thousand in purchased loans and $338 thousand in consumer loans. Total deposits as of March 31, 2024, were $883.8 million compared to $897.0 million as of December 31, 2023, a decrease of $13.2 million, or 1.5%. Year to date, demand and interest-bearing transaction accounts decreased in total by $23.2 million or 4.6%, as well as a decrease of $1.3 million, or 1.1%, in money market funds and $852 thousand, or 0.6%, in savings accounts. This was partially offset by an increase of $12.1 million, or 9.88%, in time deposits. The Company has been offering competitive interest rates for retail time deposits, accounting for the increase in these funds. A decrease in deposit balances is typical in the first and second quarters of the calendar year with balances increasing through year end due in part to the timing of customers income tax obligations and the spend down of deposited funds by Vermont municipal customers prior to their June 30 fiscal year end. The decrease in deposit balances, combined with the loan growth has required the use of borrowed funds as a supplemental funding source. 26 Table of Contents Total interest income increased $2.1 million, or 19.4%, for the first three months of 2024, compared to the same period in 2023. The growth of the loan portfolio originated at higher interest rates, as well as adjustable-rate loans repricing to current market rates, helped to support the year-over-year increase in interest income. Total interest expense increased $2.3 million, or 100.4%, for the first three months of 2024, compared to the same period in 2023. The increases in the fed funds rate throughout 2022 and into 2023 increased borrowing costs and have put more pressure on competitive deposit pricing, resulting in an increase in the Company’s money market and time deposit rates. Please refer to the interest rate sensitivity discussion in the Interest Rate Risk and Asset and Liability Management section for more information on the impact that the actions of the FRB’s FOMC in regulating interest rates, and changes in the yield curve, could have on net interest income. The credit loss expense for the three months ended March 31, 2024 and 2023, was determined under ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, commonly referenced as the Current Expected Credit Losses, or CECL, which the Company adopted effective January 1, 2023. The credit loss expense for the first three months of 2024 was $313,579 compared to $286,526 for the same period in 2023, an increase of $27,053, or 9.4%. The current period credit loss expense considers a number of factors, including loan growth and changes in balances of the current portfolio, changes in forecasts, historical loss rate and qualitative factors. Please refer to Note 5 of the unaudited consolidated financial statements as well as the ACL and credit loss expense discussion in the Credit Risk section of this MD&A. Consolidated net income for the first three months of 2024 decreased $515,860 to $2.8 million compared to $3.3 million for the same period of 2023. Year over year, the $2.3 million increase in interest expense, despite a $2.1 million increase in interest income, was the main factor contributing to the decrease in net income. These changes, along with other significant changes in non-interest income and non-interest expense are discussed in the appropriate sections of this MD&A. Equity capital increased to $89.4 million, with a book value per share of $15.88 as of March 31, 2024, compared to $89.0 million and a book value per share of $15.87 as of December 31, 2023. The moderate increase in equity capital between periods reflected the combined effect of first quarter net income of $2.8 million, offset in part by an increase in unrealized losses in the investment portfolio of $1.5 million, net of tax, reflected in accumulated other comprehensive loss, and dividends paid totaling $940 thousand. The unrealized loss position in the investment portfolio is considered by management as temporary and does not impact the Company’s regulatory capital ratios. On March 20, 2024, the Company's Board of Directors declared a quarterly cash dividend of $0.23 per common share, payable on May 1, 2024, to shareholders of record on April 15, 2024. As of March 31, 2024, 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. 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 because 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. 27 Table of Contents These policies are described in the Company’s 2023 Annual Report on Form 10-K in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” and in Note 1 (Significant Accounting Policies) to the audited consolidated financial statements. There were no material changes during the first three months of 2024 in the Company’s critical accounting policies. 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 first three months of 2024 was $2.8 million, or $0.51 per common share, compared to $3.3 million, or $0.61 per common share, for the same period in 2023. Core earnings (NII) were $8.36 million for the first three months of 2024 compared to $8.52 million for the same period in 2023. Interest and fees on loans, the major component of interest income, increased $2.3 million, or 24.6%, for the first three months of 2024 compared to the same period in 2023. Interest paid on deposits, which is the major component of total interest expense, increased $1.2 million, or 67.0%, year over year, driven primarily by the increases in the fed funds rate during 2022 and into the third quarter of 2023. A shift from lower yielding interest-bearing accounts and savings accounts to higher yielding money market and certificate of deposit accounts has contributed to the higher interest expense year over year. Market pressures on deposit rates along with an increased use of wholesale funding are driving up the Company’s cost of funds and compressing the net interest margin. 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. The following table shows these ratios annualized, as well as other equity ratios monitored by management, for the comparison periods presented. Three Months Ended March 31, 2024 2023 Return on average assets 1.03 % 1.31 % Return on average equity 12.74 % 17.57 % Dividend payout ratio (1) 45.10 % 37.70 % Average equity to average assets 8.09 % 7.48 % (1) Dividends declared per common share divided by earnings per common share. 28 Table of Contents 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 $575,470 and $291,954 for the three months ended March 31, 2024 and 2023, respectively, was derived from loans to local municipalities of $56.9 million and $36.5 million, and tax-exempt municipal investments of $10.4 million and $11.6 million as of March 31, 2024 and 2023, respectively. The following table shows the reconciliation between reported NII and tax equivalent NII for the comparison periods presented. Three Months Ended March 31, 2024 2023 Net interest income as presented $ 8,357,645 $ 8,523,365 Effect of tax-exempt income 152,973 77,608 Net interest income, tax equivalent $ 8,510,618 $ 8,600,973 29 Table of Contents The following table presents the daily average assets and the daily average liabilities, including the yields on interest-earning assets and interest-bearing liabilities for the comparison period. Interest income (excluding interest on non-accrual loans) is expressed on a tax equivalent basis, both in dollars and as a yield/rate for the comparison periods presented. Net interest income, net interest spread, and net interest margin are also expressed on a tax equivalent basis. Three Months Ended March 31, 2024 2023 Average Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Average Assets Loans, net (1) $ 846,950,757 $ 11,809,815 5.61 % $ 746,342,447 $ 9,429,534 5.12 % Taxable investment securities 175,344,669 972,349 2.23 % 181,762,470 943,478 2.11 % Tax-exempt investment securities 10,362,046 101,786 3.95 % 11,458,866 114,757 4.06 % Sweep and interest-earning accounts 6,458,150 85,933 5.35 % 30,469,901 329,411 4.38 % Other investments (2) 2,250,212 42,384 7.58 % 1,778,480 30,653 6.99 % Total interest-earning assets 1,041,365,834 $ 13,012,267 5.03 % 971,812,164 $ 10,847,833 4.53 % Cash and due from banks 9,979,149 10,034,768 Premises and equipment 12,384,217 12,992,588 BOLI 5,239,847 5,160,130 Goodwill 11,574,269 11,574,269 Other assets 21,175,349 18,678,923 Total assets $ 1,101,718,665 $ 1,030,252,842 Average Liabilities and Shareholders' Equity Interest-bearing transaction accounts $ 288,005,914 $ 1,368,880 1.91 % $ 279,908,863 $ 964,867 1.40 % Money market funds 121,278,322 628,966 2.09 % 135,616,740 513,675 1.54 % Savings deposits 150,752,183 31,607 0.08 % 171,177,131 30,996 0.07 % Time deposits 130,879,679 1,050,719 3.23 % 102,310,661 335,209 1.33 % Repurchase agreements 33,422,054 198,892 2.39 % 36,136,359 132,128 1.48 % Borrowed funds 77,648,374 926,340 4.80 % 1,611,144 3,781 0.95 % Finance lease obligations 3,387,714 19,476 2.30 % 3,608,925 20,739 2.30 % Junior subordinated debentures 12,887,000 276,769 8.64 % 12,887,000 245,465 7.72 % Total interest-bearing liabilities 818,261,240 $ 4,501,649 2.21 % 743,256,823 $ 2,246,860 1.23 % Noninterest bearing deposits 189,356,459 203,297,212 Other liabilities 4,957,458 6,647,483 Total liabilities 1,012,575,157 953,201,518 Shareholders' equity 89,143,508 77,051,324 Total liabilities and shareholders' equity $ 1,101,718,665 $ 1,030,252,842 Net interest income $ 8,510,618 $ 8,600,973 Net interest spread (3) 2.82 % 3.30 % Net interest margin (4) 3.29 % 3.59 % (1) Included in net loans are non-accrual loans with average balances of $6,524,051 and $8,220,394 for the three months ended March 31, 2024 and 2023, respectively. Loans are stated net of unearned discount and ACL, and include loans held-for-sale and tax-exempt loans to local municipalities with average balances of $56,602,242 and $35,177,595 for the three months ended March 31, 2024 and 2023, respectively. (2) Included in other investments is the Company’s FHLBB Stock with average balances of $1,185,062 and $713,330, respectively, with a dividend rate of approximately 8.56% and 6.67%, respectively, for the three months ended March 31, 2024 and 2023, 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. 30 Table of Contents The average volume of interest-earning assets for the three-month period ended March 31, 2024 increased 7.2%, compared to the same period last year, and the average yield on interest-earning assets increased 50 bps. The average volume of loans increased over the three-month comparison period of 2024 versus 2023 by 13.5%, and the average yield on loans increased 49 bps. Loans accounted for 81.3% of the average interest-earning asset portfolio for the three-month period ended March 31, 2024, compared to 76.8% for the same period last year. Interest earned on the loan portfolio as a percentage of total interest income was 90.8% for the three-month period in 2024 compared to 86.9% for the same period in 2023. The average volume of the taxable investment portfolio (classified as AFS) decreased 3.5% during the three-month period ended March 31, 2024, compared to the same period last year, while the average yield increased 12 bps between periods. There were no purchases of taxable AFS investment securities during the first three months of 2024, accounting for the decrease year over year. The average volume of the tax-exempt investment portfolio (classified as AFS) for the three-month period ended March 31, 2024 decreased $1.1 million and the tax equivalent yield decreased 11 bps. There were no tax-exempt bond purchases during the first three months of 2024, accounting for the decrease in this portfolio. The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing account at the FRBB, decreased 78.8% for the three-months ended March 31, 2024, compared to the same period in 2023. The decrease in average volume year over year is attributable to the funding of loan growth, and to a decrease in customer deposit accounts. The average yield on these funds increased 97 bps for the three-month period ended March 31, 2024, versus the same period in 2023, directly related to the increases in the fed funds rate throughout 2022 and into 2023. The average volume of interest-bearing liabilities for the three-month period ended March 31, 2024 increased 10.1%, compared to the same period in 2023, and the average rate paid on interest-bearing liabilities increased 98 bps. The average volume of interest-bearing transaction accounts increased 2.9%, for the three-month period ended March 31, 2024, compared to the same period of 2023, reflecting deposit growth year over year. The average rate paid on these accounts increased 51 bps between comparison periods. Interest paid on these funds accounted for 30.4% of total interest expense for the three-month period of 2024 compared to 42.9% for the same period in 2023. The average volume of money market accounts decreased 10.6% for the three-month period ended March 31, 2024, compared to the same period of 2023, while the average rate paid on these deposits increased 55 bps. The average volume of savings accounts decreased 11.9% for the three-month period ended March 31, 2024, compared to the same period in 2023, while the average rate paid on these accounts increased one bp. The average volume of time deposits increased 27.9% for the three-month period ended March 31, 2024, compared to the same period in 2023, and the average rate paid increased 190 bps. The Company has utilized borrowed funds to fund loan growth and cover deposit outflows, particularly during the second and third quarters of 2023, and continuing into 2024, accounting for the $76.0 million increase for the three months ended March 31, 2024, compared to the same period in 2023. The average rate paid on borrowed funds increased by 385 bps for the three-month period ended March 31, 2024. The average volume of repurchase agreements decreased 7.5% for the three-month period ended March 31, 2024, compared to the same period in 2023 and the average rate paid increased 91 bps between comparison periods. In summary, between the three-month periods ended March 31, 2024 and 2023, the average yield on interest-earning assets increased 50 bps, and the average rate paid on interest-bearing liabilities increased 98 bps. Net interest spread decreased 48 bps for the three-month period ended March 31, 2024, versus the same period in 2023, while the net interest margin decreased 30 bps between periods. 31 Table of Contents The following table summarizes the variances in interest income and interest expense on a fully tax-equivalent basis for the interim periods presented for 2024 and 2023 resulting from volume changes in daily average assets and daily average liabilities and fluctuations in average rates earned and paid. Three Months Ended March 31, 2024 Three Months Ended March 31, 2023 Compared to Compared to Three Months Ended March 31, 2023 Three Months Ended March 31, 2022 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 $ 1,110,136 $ 1,270,145 $ 2,380,281 $ 1,214,870 $ 667,629 $ 1,882,499 Taxable investment securities 64,455 (35,584 ) 28,871 308,179 (20,978 ) 287,201 Tax-exempt investment securities (2,199 ) (10,772 ) (12,971 ) 43,567 57,331 100,898 Sweep and interest-earning accounts 75,924 (319,402 ) (243,478 ) 673,283 (424,532 ) 248,751 Other investments 3,600 8,131 11,731 14,209 (16 ) 14,193 Total $ 1,251,916 $ 912,518 $ 2,164,434 $ 2,254,108 $ 279,434 $ 2,533,542 Average Interest-Bearing Liabilities Interest-bearing transaction accounts $ 376,062 $ 27,951 $ 404,013 $ 791,740 $ 13,049 $ 804,789 Money market funds 189,800 (74,509 ) 115,291 381,189 4,806 385,995 Savings deposits 4,674 (4,063 ) 611 7,898 (342 ) 7,556 Time deposits 621,819 93,691 715,510 108,632 (14,184 ) 94,448 Repurchase agreements 82,893 (16,129 ) 66,764 105,696 5,392 111,088 Borrowed funds 744,444 178,115 922,559 3,779 0 3,779 Finance lease obligations 2 (1,265 ) (1,263 ) (9 ) (1,215 ) (1,224 ) Junior subordinated debentures 31,304 0 31,304 147,113 0 147,113 Total $ 2,050,998 $ 203,791 $ 2,254,789 $ 1,546,038 $ 7,506 $ 1,553,544 Changes in net interest income $ (799,082 ) $ 708,727 $ (90,355 ) $ 708,070 $ 271,928 $ 979,998 (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 32 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 March 31, Change 2024 2023 Income Percent Service fees $ 897,920 $ 880,288 $ 17,632 2.00 % Income from sold loans 79,104 107,535 (28,431 ) -26.44 % Other income from loans 254,601 428,572 (173,971 ) -40.59 % Other income Income from CFS Partners 294,327 252,051 42,276 16.77 % Other miscellaneous income 107,955 90,331 17,624 19.51 % Total non-interest income $ 1,633,907 $ 1,758,777 $ (124,870 ) -7.10 % Total non-interest income decreased $124,870, or 7.1%, for the three months ended March 31, 2024, compared to the same period in 2023, with significant changes noted in the following: · Service fees include interchange income and overdraft fees; the change in the comparison period is due to an increase in overdraft fees of $21,853. · Proceeds from sale of loans into the secondary market amounted to $690 thousand and $1.6 million, respectively for the first three months of 2024 and 2023, accounting for the decrease in income from sold loans between periods. · Although loan volume increased during the first three months of 2024, a complex CRE project closed during the first three months of 2023 generating approximately $126 thousand in documentation fees, accounting for the decrease in other income from loans for 2024 versus 2023. · Income from CFS Partners increased between periods due in part to an equity market rally during the first quarter of 2024 and successful retention in managed accounts. CFS Partners has a small portion of its equity capital invested in the stock market, and as a result is sensitive to general stock market conditions. · Other miscellaneous income is made up of many individual line items that in the aggregate represent less than 7% of total non-interest income. 33 Table of Contents Non-interest Expense The components of non-interest expense for the periods presented were as follows: Three Months Ended March 31, Change 2024 2023 Expense Percent Salaries and wages $ 2,458,000 $ 2,288,760 $ 169,240 7.39 % Employee benefits 899,236 754,270 144,966 19.22 % Occupancy expenses, net 722,503 770,986 (48,483 ) -6.29 % Other expenses Charged-off checks 34,056 635 33,421 5263.15 % Service contracts - administrative 182,764 155,500 27,264 17.53 % Travel, entertainment and meals expense 27,163 18,898 8,265 43.73 % FDIC insurance 156,106 131,643 24,463 18.58 % Collection & non-accruing loan expense 48,000 25,500 22,500 88.24 % Electronic banking expense 109,273 67,167 42,106 62.69 % Other miscellaneous expenses 1,663,043 1,666,343 (3,300 ) -0.20 % Total non-interest expense $ 6,300,144 $ 5,879,702 $ 420,442 7.15 % Total non-interest expense increased $420,442, or 7.2% for the three months ended March 31, 2024, compared to the same period in 2023, with significant changes noted in the following: · I n addition to normal salary increases, the increase in salaries and wages year over year is attributable to new hires and promotions in the areas of operations and commercial lending during the latter part of 2023. · The increase in employee benefits is attributable to an increase in health insurance claims year over year under the Company’s self-insured health insurance plan. · The decrease in occupancy expense is partly due to the settlement of a flood insurance claim where the replacement value received exceeded the depreciated value of equipment resulting in a capital gain on equipment. · An increase in check fraud activity resulted in an increase in charged-off checks . · The increase in service contracts - administrative is due to a combination of new contracts, an increase in transaction-based pricing for certain contracts, and contractual inflationary adjustment factors that are higher than historical increase adjustments. · The increase in 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 FDIC insurance is attributable in part to an increase in the assessment multiplier. · Collection & non-accruing loan expenses were higher year over year due to an increase in legal fees associated with a commercial property in the Company’s non-accruing loan portfolio. · The increase in electronic banking expense is attributable to an upgrade of the Company’s electronic banking platform. 34 Table of Contents APPLICABLE INCOME TAXES The provision for income taxes decreased $222,225, or 25.6% for the first three months of 2024 compared to the same period in 2023, which is consistent with the decrease in income before income taxes but is also partially attributable to an increase in tax credits year over year. Tax credits related to low-income housing limited partnership investments amounted to $174,612 and $80,529 for the first three months of 2024 and 2023, respectively. The Company’s investment in two new limited partnerships were fully funded by year-end 2023 accounting for the increase in tax credits. Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $149,202 and $67,092 for the first three months of 2024 and 2023, respectively. These investments provide tax benefits, including tax credits, and are designed to provide a targeted effective annual yield between 5% - 7%. 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: March 31, 2024 December 31, 2023 Assets Loans $ 866,352,361 78.25 % $ 845,429,854 76.90 % AFS securities 180,577,058 16.31 % 190,706,019 17.35 % Liabilities Demand deposits 185,831,108 16.79 % 202,969,957 18.46 % Interest-bearing transaction accounts 291,012,736 26.29 % 297,030,893 27.02 % Money market funds 120,044,494 10.84 % 121,375,419 11.04 % Savings deposits 150,718,352 13.61 % 151,570,686 13.79 % Time deposits 136,147,994 12.30 % 124,020,827 11.28 % Overnight borrowings 6,600,000 0.60 % 9,000,000 0.82 % Short-term advances 72,500,000 6.55 % 44,500,000 4.05 % Long-term advances 6,100,000 0.55 % 1,100,000 0.10 % 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 $ 20,922,507 2.47 % AFS securities (10,128,961 ) -5.31 % Liabilities Demand deposits (17,138,849 ) -8.44 % Interest-bearing transaction accounts (6,018,157 ) -2.03 % Money market funds (1,330,925 ) -1.10 % Savings deposits (852,334 ) -0.56 % Time deposits 12,127,167 9.78 % Overnight borrowings (2,400,000 ) -26.67 % Short-term advances 28,000,000 62.92 % Long-term advances 5,000,000 454.55 % The increase in the loan portfolio during the first three months of 2024 was attributable to increases of $11.0 million in CRE loans, $7.2 million in commercial & industrial loans, $2.5 million in municipal loans and $1.1 million in residential 1 st lien loans, which were minimally offset by decreases in aggregate totaling $830 thousand in purchased loans, residential Jr. lien and consumer loans. The Company has experienced strong loan activity among its commercial customers, but only minimal local-consumer loan activity during the first three months of 2024. The decrease in the securities AFS portfolio during the first three months of 2024 is attributable to the combined effect of maturities amounting to $3.7 million and principal payments on MBS, ABS and CMO investments totaling $4.4 million and an increase of $1.9 million in unrealized losses arising during the first three months of 2024, which is reflected in OCI. In management’s view, the size of the AFS securities portfolio is appropriate and proportional to the overall asset base, as this portfolio serves an important role in the Company’s liquidity position. 35 Table of Contents The decrease in demand deposit accounts is attributable to a $15.5 million, or 10.1%, decrease in business DDAs. The decrease in interest-bearing transaction accounts was due to a decrease of $13.8 million, or 34.3%, in municipal deposit accounts, and a decrease of $6.8 million, or 12.9% in the deposit account of the Company’s trust and asset management affiliate, CFSG. These decreases were partially offset by an increase of $14.7 million, or 16.9%, in ICS reciprocal DDAs. The moderate decrease in money market funds was driven by a decrease of $11.6 million, or 11.8%, in retail money market funds and offset by an increase in municipal deposits of $1.6 million, or 16.6%, and an increase in reciprocal ICS MMAs of $8.7 million, or 66.0%. The increase in time deposits is attributable to customer response to periodic certificate of deposit specials that have been offered. As a result of the year to date decrease in aggregate deposits, the Company utilized funding lines with the FHLBB and FRB, including long-term advances, as a supplemental funding source, accounting for the significant increase in these funds. UNINSURED DEPOSITS Estimated deposits in excess of the FDIC insurance level amounted to $152.1 million as of March 31, 2024 and $217.3 million at December 31, 2023. The estimated balance of uninsured time deposits as of March 31, 2024 were made up of time CDs of $24.4 million and retirement accounts of $3.1 million. Increments of maturity of these time deposits are summarized as follows: 3 months or less $ 14,484,845 Over 3 through 6 months 10,452,940 Over 6 through 12 months 1,139,735 Over 12 months 1,404,855 Total $ 27,482,375 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, including an inverted 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. 36 Table of Contents Under the Company’s interest rate sensitivity modeling, with the continued asset sensitive balance sheet, in a rising rate environment NII initially trends upward as the short-term asset base (cash and adjustable-rate loans) quickly cycle upward while the retail funding base (deposits) lags the market. If rates paid on deposits must be increased more and/or more quickly than projected due to competitive pressures, the expected benefit of rising rates would be reduced. In a falling rate environment, NII is expected to trend slightly downward compared with the current rate environment scenario for the first year of the simulation as asset yield erosion is not fully offset by decreasing funding costs. Thereafter, net interest income is projected to experience sustained downward pressure as funding costs reach their assumed floors and asset yields continue to reprice into the lower rate environment. The prolonged inverted yield curve and increasing pressure on funding rates has resulted in a more liability sensitive balance sheet in the short term assuming that in a rising rate environment, relief on the deposit pricing may be delayed initially. The following table summarizes the estimated impact on the Company's NII over a twelve-month period, assuming a gradual parallel shift of the yield curve beginning March 31, 2024: Rate Change Percent Change in NII Down 100 bps 0.4 % Up 200 bps -3.1 % 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 of March 31, 2024, the Company had outstanding $12,887,000 in principal amount of Junior Subordinated Debentures due December 15, 2037, which bear interest at a quarterly floating rate equal to 3-month CME SOFR, as adjusted by a spread adjustment factor of 0.26161, plus 2.85%. 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 27.9% of the Company’s loan balances as of March 31, 2024, compared to 28.5% as of December 31, 2023. The Company maintains a residential mortgage loan portfolio of traditional mortgage products and does not offer higher risk loan products, such as option adjustable-rate mortgage products, high loan-to-value products, interest only mortgages, subprime loans and products with deeply discounted teaser rates. Residential mortgages with loan-to-value ratios exceeding 80% are generally covered by PMI. A 90% loan-to-value residential mortgage product without PMI is only available to borrowers with excellent credit and low debt-to-income ratios and has not been widely originated. As of March 31, 2024, junior lien home equity products made up 13.1% of the residential mortgage portfolio with maximum loan-to-value ratios (including prior liens) of 80%. The Company also originates some home equity loans greater than 80% under an insured loan program with stringent underwriting criteria. The following tables show the estimated maturity of the Company’s loan portfolio as of March 31, 2024. Fixed Rate Loans Within 2 - 5 6 - 15 Over 1 Year Years Years 15 Years Total Commercial & industrial $ 4,786,223 $ 27,419,641 $ 17,098,411 $ 0 $ 49,304,275 Purchased 72,303 1,609,890 8,525,171 0 10,207,364 Commercial real estate 8,247,589 13,430,481 18,397,286 120,000 40,195,356 Municipal 37,906,814 4,448,477 4,001,447 0 46,356,738 Residential real estate - 1st lien 11,598 4,174,442 23,812,822 62,149,417 90,148,279 Residential real estate - Jr lien 27,850 319,340 3,383,833 0 3,731,023 Consumer 341,117 1,998,318 82,405 0 2,421,840 Total Loans $ 51,393,494 $ 53,400,589 $ 75,301,375 $ 62,269,417 $ 242,364,875 37 Table of Contents Variable Rate Loans Within 2 - 5 6 - 15 Over 1 Year Years Years 15 Years Total Commercial & industrial $ 28,200,032 $ 36,158,222 $ 9,747,695 $ 5,478,568 $ 79,584,517 Commercial real estate 3,423,030 4,439,051 108,395,083 269,423,015 385,680,179 Municipal 0 0 10,571,696 0 10,571,696 Residential real estate - 1st lien 1,009,685 1,017,513 17,733,910 100,028,957 119,790,065 Residential real estate - Jr lien 253,487 614,149 12,374,297 14,564,903 27,806,836 Consumer 16,225 233,559 256,852 47,557 554,193 Total Loans $ 32,902,459 $ 42,462,494 $ 159,079,533 $ 389,543,000 $ 623,987,486 The Company continues to experience solid growth in the commercial & industrial and CRE loan portfolios, which is consistent with its strategic focus on commercial lending. The commercial lending portfolio consists of commercial & industrial, purchased, CRE and municipal loans, which collectively comprised 71.8% of the Company’s loan portfolio as of March 31, 2024, compared to 71.2% as of December 31, 2023. The largest components of the CRE portfolio were $119.7 million in owner-occupied CRE and $156.3 million in non-owner occupied CRE as of March 31, 2024. Risk in the Company’s commercial & industrial and CRE loan portfolios is mitigated in part by government guarantees issued by federal agencies such as the SBA and RD. As of March 31, 2024, the Company had $26.6 million in guaranteed loans with guaranteed balances of $17.6 million, compared to $26.5 million in guaranteed loans with guaranteed balances of $17.6 million as of December 31, 2023. PPP loans with outstanding balances of $74 thousand as of March 31, 2024, and $84 thousand as of December 31, 2023, are included in these totals, all of which carry a 100% guarantee through the SBA, subject to borrower eligibility requirements. 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. Credit loss expense The credit loss expense was made up of the following components for the periods indicated: Three Months Ended March 31, Change 2024 2023 $ % Credit loss expense - loans $ 317,799 $ 207,540 $ 110,259 53.13 % Credit loss (reversal) expense - OBS credit exposure (4,220 ) 78,986 (83,206 ) -105.34 % Credit loss expense $ 313,579 $ 286,526 $ 27,053 9.44 % The increase in the credit loss expense on loans for the three months ended March 31, 2024, was partly attributed to an increase in the volume of the loan portfolio. The decrease in the OBS credit exposure is attributable to a decrease in unfunded loan commitments under contract. ACL and provisions – Effective January 1, 2023, the Company was required to recognize credit losses under the guidance of ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, rather than under the incurred loss model. The new guidance, which is referred to as the current expected credit loss, or CECL model, requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses over the life of the loans. The adjustment from the adoption of CECL in 2023 amounted to $549,113, net of tax and was recorded as an adjustment to retained earnings, which affects calculation of regulatory capital ratios. Changes in forecasts used in the CECL model could produce different results, quarter to quarter. 38 Table of Contents 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 of 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. 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: March 31, December 31, 2024 2023 ACL to total loans outstanding 1.16 % 1.16 % ACL $ 10,027,768 $ 9,842,725 Loans outstanding $ 866,352,361 $ 845,429,854 Non-accruing loans to loans outstanding 0.74 % 0.82 % Non-accruing loans $ 6,385,101 $ 6,955,046 Loans outstanding $ 866,352,361 $ 845,429,854 ACL to non-accruing loans 157.05 % 141.52 % ACL $ 10,027,768 $ 9,842,725 Non-accruing loans $ 6,385,101 $ 6,955,046 The first quarter ACL analysis indicated that the reserve balance of $10.0 million as of March 31, 2024, is sufficient to cover expected credit losses that are probable and estimable as of the measurement date. Included in the ACL calculation for March 31, 2024, is a decrease to the qualitative factor adjustment for delinquencies and non-performing loans due to improving delinquency trends in the CRE pool of loans as well as a decrease to the qualitative factor adjustment for collateral within the residential pool of loans, reflecting stable real estate values. Management believes that the economic forecasts adequately quantify the risk in these areas, and that the reserve balance continues to be directionally consistent with the overall risk profile of the Company’s loan portfolio and credit risk appetite. While the ACL is described as consisting of separate allocated portions, the entire ACL is available to support loan losses, regardless of category. Management’s assessment of the adequacy of the ACL is presented to the full Board for approval quarterly. 39 Table of Contents Net (charge-offs) recoveries during the periods presented to average loans outstanding were as follows: For the Three Months Ended March 31, 2024 2023 Commercial & industrial -0.10 % -0.01 % Net charge-offs during the period $ (125,369 ) $ (10,203 ) Average amount outstanding $ 125,426,823 $ 117,162,692 Purchased 0.00 % 0.00 % Net charge-offs during the period $ 0 $ 0 Average amount outstanding $ 10,338,317 $ 7,086,337 Commercial real estate 0.00 % 0.01 % Net recoveries during the period $ 0 $ 22,000 Average amount outstanding $ 420,107,132 $ 360,454,697 Municipal 0.00 % 0.00 % Net charge-offs during the period $ 0 $ 0 Average amount outstanding $ 56,602,242 $ 35,177,595 Residential real estate - 1st lien 0.00 % 0.04 % Net recoveries during the period $ 0 $ 72,326 Average amount outstanding $ 209,083,019 $ 198,536,712 Residential real estate - Jr lien 0.00 % 0.08 % Net recoveries during the period $ 1,209 $ 25,548 Average amount outstanding $ 31,530,286 $ 32,704,333 Consumer -0.27 % -0.36 % Net charge-offs during the period $ (8,596 ) $ (13,642 ) Average amount outstanding $ 3,159,725 $ 3,786,350 Total loans -0.02 % 0.01 % Net (charge-offs) recoveries during the period $ (132,756) $ 96,029 Average amount outstanding $ 856,247,544 $ 754,908,716 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. 40 Table of Contents COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET ARRANGEMENTS The Company is a party to financial instruments with OBS 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 three months of 2024, the Company did not engage in any activity that created any additional types of OBS risk. With the adoption of ASU 2016-13 (CECL), the Company is required to establish an allowance for expected credit losses on OBS credit exposures. Expected credit losses are estimated by management over the contractual period during which the Company is exposed to credit risk under a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over the estimated lives of such commitments. Upon adoption of ASU 2016-13 in 2023, the Company recorded 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 $4,220 and an increase of $78,986, respectively, to the allowance for credit losses for OBS credit exposures during the three months ended March 31, 2024 and 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. These sources are supplemented by short-term and long-term borrowings as needed. 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 and/or ICS programs provide an alternative funding source when needed. As of March 31, 2024, and December 31, 2023, the Company had no one-way CDARS or ICS deposits 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. As of March 31, 2024 and December 31, 2023, the Company reported $2.7 million and $2.4 million, respectively, in reciprocal CDARS deposits. The balance in ICS reciprocal money market deposits was $21.9 million as of March 31, 2024, compared to $13.2 million as of December 31, 2023, and the balance in ICS reciprocal demand deposits as of those dates was $101.8 million and $87.1 million, respectively. As of March 31, 2024 and December 31, 2023, borrowing capacity of $109.8 million and $107.9 million, respectively, was available through the FHLBB, secured by the Company's qualifying loan portfolio (generally, residential mortgage and commercial loans), reduced by outstanding advances and by collateral pledges securing FHLBB letters of credit collateralizing public unit deposits of $32.5 million and $23.1 million, respectively. The following table reflects the Company’s outstanding advances with FHLBB as of the dates indicated: March 31, December 31, 2024 2023 FHLBB Short-Term Advances FHLBB term advance, 5.06%, due October 29, 2024 $ 5,000,000 $ 0 FHLBB Long-Term Advances FHLBB term advance, 0.00%, due November 12, 2025 (1) 300,000 300,000 FHLBB term advance, 0.00%, due November 13, 2028 (1) 800,000 800,000 FHLBB option advance, 3.89%, due February 01, 2027 5,000,000 0 Total Long-Term Advances 6,100,000 1,100,000 Overnight Borrowings at 5.55% 6,600,000 9,000,000 Total Advances and Overnight Borrowings $ 17,700,000 $ 10,100,000 (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. 41 Table of Contents The Company also has an unsecured Federal Funds credit line with the FHLBB with an available balance of $500,000 with no outstanding advances during either of the respective comparison periods. Interest is chargeable at a rate determined daily, approximately 25 bps higher than the rate paid on federal funds sold. The Company has a BIC arrangement with the FRBB secured by eligible commercial & industrial loans, CRE loans and home equity loans, resulting in an available credit line of $48.5 million and $49.9 million, respectively, as of March 31, 2024 and December 31, 2023. Credit advances under this FRBB lending program are overnight advances with interest chargeable at the primary credit rate (generally referred to as the discount rate), currently 500 bps. The Company had no outstanding advances through this facility as of March 31, 2024 or December 31, 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. However, that facility ceased extending new loans on March 11, 2024. The Company’s advances under the BTFP as of the balance sheet dates presented were as follows: March 31, December 31, 2024 2023 FRB BTFP Advances FRB BTFP term advance, 4.92%, due April 26, 2024 $ 0 $ 10,000,000 FRB BTFP term advance, 4.71%, due May 13, 2024 10,000,000 10,000,000 FRB BTFP term advance, 4.91%, due May 17, 2024 0 6,500,000 FRB BTFP term advance, 4.93%, due December 16, 2024 0 18,000,000 FRB BTFP term advance, 4.76%, due January 16, 2025 16,000,000 0 FRB BTFP term advance, 4.83%, due January 17, 2025 41,500,000 0 Total BTFP Advances $ 67,500,000 $ 44,500,000 As of March 31, 2024 and December 31, 2023 the Company had an unsecured line of credit with one correspondent bank of $12.5 million. The Company had no outstanding advances against this credit line 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, 2023 to March 31, 2024: Balance as of December 31, 2023 (book value $15.87 per common share) $ 89,028,814 Net income 2,822,901 Issuance of common stock through the DRIP 360,451 Dividends declared on common stock (1,268,320 ) Dividends declared on preferred stock (31,875 ) Change in AOCI on AFS securities, net of tax (1,508,008 ) Balance as of March 31, 2024 (book value $15.88 per common share) $ 89,403,963 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 2023 Annual Report on Form 10-K and under the caption “LIQUIDITY AND CAPITAL RESOURCES” in the MD&A section of that report, the Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies pursuant to which they must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 42 Table of Contents As of March 31, 2024, the Bank was considered well capitalized under the standard regulatory capital framework for Prompt Corrective Action and the Company exceeded currently applicable consolidated regulatory guidelines for capital adequacy. 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. 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. 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) March 31, 2024 Common equity tier 1 capital (to risk-weighted assets) Company $ 93,769 11.94 % $ 35,335 4.50 % $ 54,965 7.00 % N/A N/A Bank $ 107,511 13.70 % $ 35,314 4.50 % $ 54,933 7.00 % $ 51,009 6.50 % Tier 1 capital (to risk-weighted assets) Company $ 108,156 13.77 % $ 47,113 6.00 % $ 66,743 8.50 % N/A N/A Bank $ 107,511 13.70 % $ 47,085 6.00 % $ 66,704 8.50 % $ 62,780 8.00 % Total capital (to risk-weighted assets) Company $ 117,984 15.03 % $ 62,817 8.00 % $ 82,448 10.50 % N/A N/A Bank $ 117,333 14.95 % $ 62,780 8.00 % $ 82,399 10.50 % $ 78,475 10.00 % Tier 1 capital (to average assets) Company $ 108,156 9.77 % $ 44,299 4.00 % N/A N/A N/A N/A Bank $ 107,511 9.71 % $ 44,281 4.00 % N/A N/A $ 55,351 5.00 % December 31, 2023: Common equity tier 1 capital (to risk-weighted assets) Company $ 91,886 11.89 % $ 34,770 4.50 % $ 54,086 7.00 % N/A N/A Bank $ 105,390 13.65 % $ 34,737 4.50 % $ 54,036 7.00 % $ 50,176 6.50 % Tier 1 capital (to risk-weighted assets) Company $ 106,273 13.75 % $ 46,360 6.00 % $ 65,676 8.50 % N/A N/A Bank $ 105,390 13.65 % $ 46,317 6.00 % $ 65,615 8.50 % $ 61,755 8.00 % Total capital (to risk-weighted assets) Company $ 115,944 15.01 % $ 61,813 8.00 % $ 81,130 10.50 % N/A N/A Bank $ 115,051 14.90 % $ 61,755 8.00 % $ 81,054 10.50 % $ 77,194 10.00 % Tier 1 capital (to average assets) Company $ 106,273 9.57 % $ 44,401 4.00 % N/A N/A N/A N/A Bank $ 105,390 9.50 % $ 44,376 4.00 % N/A N/A $ 55,470 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. 43 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 March 31, 2024, 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 March 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 44 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, 2023 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 There were no purchases of the Company’s common stock during the three months ended March 31, 2024, by the Company or by any affiliated purchaser (as defined in SEC Rule 10b-18). During the same reporting period, the Company did not have any publicly announced repurchase plans or programs. 45 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 three-months ended March 31, 2024 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three-month interim periods ended March 31, 2024 and 2023, (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. 46 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: May 15, 2024 /s/Kathryn M. Austin Kathryn M. Austin, President & Chief Executive Officer (Principal Executive Officer) DATED: May 15, 2024 /s/Louise M. Bonvechio Louise M. Bonvechio, Corporate Secretary & Treasurer (Principal Financial Officer) 47 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 March 31, 2024 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 three-months ended March 31, 2024 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three-month interim periods ended March 31, 2024 and 2023, (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. 48