COMMUNITY BANCORP /VT 10-Q

ITEM 1. Financial Statements (Unaudited) The following are the unaudited consolidated financial statements for the Company. Community Bancorp. and Subsidiary 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