COMMUNITY BANCORP /VT 10-Q

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, 2025 The following discussion analyzes the consolidated financial condition of Community Bancorp. and its wholly owned subsidiary, Community National Bank, as of March 31, 2025 and December 31, 2024, 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 2024 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 internationally (including due to changing tariff policies), 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 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); · 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 lenders, payment systems and other financial service providers, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems; 28 Table of Contents · cybersecurity risks, including risks to our vendors, 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, 2025, were $1.19 billion compared to $1.25 billion as of December 31, 2024, a decrease of 4.9%. Changes in the asset base included an increase in loans of $12.3 million, or 1.3%, an increase in investment securities AFS of $8.6 million, or 5.4%, and an increase in cash of $3.5 million, or 35.5%, which more than offset by a decrease in overnight deposits of $85.6 million, or 84.7%. The increase in the loan portfolio was primarily attributable to an increase of $7.6 million in residential first and Jr. lien loans, $4.6 million in CRE loans, and $3.4 million in municipal loans, which was partially offset by a decrease of $3.2 million, collectively, in commercial & industrial and purchased loans. The increase in the investment portfolio was due to the purchase of MBS classified as AFS. The decrease in overnight deposits is partly due to the increase in the loan and investment securities portfolios, as well as reflecting decreases in deposit balances and payoff of BTFP advances that matured during the first quarter of 2025. Total deposits as of March 31, 2025, were $979.7 million compared to $1.0 billion as of December 31, 2024, a decrease of approximately $22.0 million, or 2.2%. Year to date, time deposits increased $2.5 million, or 1.4% and savings accounts increased $387 thousand, or 0.3%, while interest-bearing demand deposits decreased $17.9 million, or 5.9%, and money market funds decreased $6.8 million, or 4.0%. A decrease in deposit balances is typical in the first and second quarters of the calendar year, 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 borrowed funds was the result of maturities in the BTFP funds. Total interest income increased approximately $1.7 million, or 13.0%, for the first three months of 2025, compared to the same period in 2024. The growth in the volume of the loan portfolio and origination of loans 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. 29 Table of Contents Total interest expense increased $585 thousand, or 13.0%, for the first three months of 2025, compared to the same period in 2024. The higher rate environment put more pressure on competitive deposit pricing, resulting in an increase in the rates paid on the Company’s money market and time deposit accounts. The increase of $1.1 million, or 35.9%, in interest on deposits was partially offset by a decrease of $575 thousand, or 60.8% in interest on borrowed funds due to the decrease in borrowed funds. Please refer to the interest rate sensitivity discussion in the Interest Rate Risk and Asset and Liability Management section for more information on the impact that the actions of the FRB’s FOMC in regulating interest rates, and changes in the yield curve, could have on our net interest income. The credit loss expense for the first three months of 2025 was $325,054 compared to $313,579 for the same period in 2024, resulting in an increase of $11,475, or 3.7%. The current period credit loss expense considers a number of factors, including loan growth and changes in balances of the loan categories within the current portfolio, changes in forecasts, historical loss rate and qualitative factors. During the first quarter of 2025, certain qualitative factors used in the ACL calculation were adjusted to better reflect expected credit losses in the loan portfolio. 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 2025 increased $703 thousand to $3.5 million compared to $2.8 million for the same period in 2024. The $1.1 million increase in net interest income after credit loss expense was a contributing factor to the increase in net income. This change, 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 $102.9 million, with a book value per share of $18.05 as of March 31, 2025, compared to $98.0 million and a book value per share of $17.24 as of December 31, 2024. Please refer to the section of this Management’s Discussion and Analysis titled “LIQUIDITY AND CAPITAL RESOURCES” for a discussion in of the changes in the Company’s equity capital for the three months ended March 31, 2025. On March 19, 2025, the Company's Board of Directors declared a quarterly cash dividend of $0.24 per common share, payable on May 1, 2025, to shareholders of record on April 15, 2025. As described in more detail below under “LIQUIDITY AND CAPITAL RESOURCES” as of March 31, 2025, the Company’s capital ratios, and those of our subsidiary Bank, were in excess of applicable regulatory requirements. During the first quarter of 2025, CFS Partners, in which the Company currently holds a one-third ownership interest, agreed to redeem all of the limited liability company membership interest of Guaranty Bancorp, Inc., representing a one-third ownership interest, contingent upon, and just prior to, consummation of the pending merger of Guaranty Bancorp with and into Bar Harbor Bankshares. Under the terms of the redemption agreement, beginning March 1, 2025, Guaranty Bancorp has agreed to forego its distributional interest in CFS Partners through the closing date of the redemption. Accordingly, beginning March 1, 2025, the Company’s share of the profit and loss from the operations of CFS Partners’ sole subsidiary, CFSG, has increased from one-third to one-half. The redemption of Guaranty Bancorp’s membership interest in CFS Partners is expected to occur before year end 2025. The Company does not have a controlling interest in the partnership and will still remain accounting for the investment using the equity method. Considering recent trade policy developments between Canada and the United States, management is assessing the potential risk to the local economy. Canada is Vermont’s largest international trading partner; many businesses who rely on trade with Canada are now at risk of experiencing increased costs, reduced sales, and a sense of uncertainty about the future. Management is evaluating the impact on the bank’s customers, however the impact on profits for many of these businesses remains uncertain. In light of these challenges, the Company’s own strategic focus will be to safeguard its balance sheet while supporting clients. 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. 30 Table of Contents The Company’s critical accounting policies govern: · the ACL; · OREO; · valuation of residential MSRs; and · the carrying value of goodwill. These policies are described in the Company’s 2024 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 2025 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 recorded as a liability on the balance sheet within Accrued interest and other liabilities, with adjustments made 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 2025 was $3.5 million, or $0.62 per common share, compared to $2.8 million, or $0.51 per common share, for the same period in 2024. Core earnings (NII) were $9.4 million for the first three months of 2025 compared to $8.4 million for the same period in 2024. Interest and fees on loans, the major component of interest income, increased $1.5 million, or 13.2% for the first three months of 2025 compared to the same period in 2024. Interest paid on deposits, which is the major component of total interest expense, increased $1.1 million, or 35.9% for the first three months of 2025 compared to the same period in 2024, driven primarily by the increases in the fed funds rate. Interest on borrowed funds decreased $575 thousand, or 60.8%, for the first three months of 2025 compared to the same period in 2024. Market pressures on deposit rates have stabilized and a decrease in wholesale funding has resulted in an improved net interest margin and net interest spread. 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, 2025 2024 Return on average assets 1.20 % 1.03 % Return on average equity 14.35 % 12.74 % Dividend payout ratio (1) 38.71 % 45.10 % Average equity to average assets 8.38 % 8.09 % (1) Dividends declared per common share divided by earnings per common share. 31 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 and from tax-exempt municipal investment securities 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 $818,363 and $575,470 for the three months ended March 31, 2025 and 2024, respectively, was derived from loans to local municipalities of $70.4 million and $56.9 million, and tax-exempt municipal investment securities of $10.0 million and $10.4 million as of March 31, 2025 and 2024, respectively. The following table shows the reconciliation between reported NII and tax equivalent NII for the comparison periods presented. Three Months Ended March 31, 2025 2024 Net interest income as presented $ 9,438,324 $ 8,357,645 Effect of tax-exempt income 217,539 152,973 Net interest income, tax equivalent $ 9,655,863 $ 8,510,618 32 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 periods presented. 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, 2025 2024 Average Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Average Assets Loans, net (1) $ 929,855,663 $ 13,411,196 5.85 % $ 846,950,757 $ 11,809,815 5.61 % Taxable investment securities 149,766,292 859,231 2.33 % 175,344,669 972,349 2.23 % Tax-exempt investment securities 10,221,261 101,786 4.04 % 10,362,046 101,786 3.95 % Sweep and interest-earning accounts 30,281,514 321,948 4.31 % 6,458,150 85,933 5.35 % Other investments (2) 2,890,037 47,890 6.72 % 2,250,212 42,384 7.58 % Total interest-earning assets 1,123,014,767 $ 14,742,051 5.32 % $ 1,041,365,834 $ 13,012,267 5.03 % Cash and due from banks 10,103,399 9,979,149 Premises and equipment 12,045,058 12,384,217 BOLI 5,325,319 5,239,847 Goodwill 11,574,269 11,574,269 Other assets 27,718,101 21,175,349 Total assets $ 1,189,780,913 $ 1,101,718,665 Average Liabilities and Shareholders' Equity Interest-bearing transaction accounts $ 296,303,191 $ 1,382,843 1.89 % $ 288,005,914 $ 1,368,880 1.91 % Money market funds 166,327,792 1,069,531 2.61 % 121,278,322 628,966 2.09 % Savings deposits 142,921,994 28,876 0.08 % 150,752,183 31,607 0.08 % Time deposits 189,536,621 1,704,657 3.65 % 130,879,679 1,050,719 3.23 % Repurchase agreements 45,903,122 285,959 2.53 % 33,422,054 198,892 2.39 % Borrowed funds 32,733,356 352,806 4.37 % 77,648,374 926,340 4.80 % Finance lease obligations 3,160,528 18,171 2.30 % 3,387,714 19,476 2.30 % Junior subordinated debentures 12,887,000 243,345 7.66 % 12,887,000 276,769 8.64 % Total interest-bearing liabilities 889,773,604 $ 5,086,188 2.32 % 818,261,240 $ 4,501,649 2.21 % Noninterest bearing deposits 190,729,805 189,356,459 Other liabilities 9,608,658 4,957,458 Total liabilities 1,090,112,067 1,012,575,157 Shareholders' equity 99,668,846 89,143,508 Total liabilities and shareholders' equity $ 1,189,780,913 $ 1,101,718,665 Net interest income $ 9,655,863 $ 8,510,618 Net interest spread (3) 3.00 % 2.82 % Net interest margin (4) 3.49 % 3.29 % (1) Included in net loans are non-accrual loans with average balances of $8,730,643 and $6,524,051 for the three months ended March 31, 2025 and 2024, 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 $68,300,830 and $56,602,242 for the three months ended March 31, 2025 and 2024, respectively. (2) Included in other investments is the Company’s FHLBB Stock with average balances of $1,824,887 and $1,185,062, respectively, with a dividend rate of approximately 6.96% and 8.56%, respectively, for the three months ended March 31, 2025 and 2024, 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. 33 Table of Contents The average volume of interest-earning assets for the three-month period ended March 31, 2025 increased 7.8% compared to the same period last year, and the average yield on interest-earning assets increased 29 bps. The average volume of loans increased over the three-month comparison period of 2025 versus 2024 by 9.8%, and the average yield on loans increased 24 bps. Loans accounted for 82.8% of the average interest-earning asset portfolio for the three-month period ended March 31, 2025, compared to 81.3% for the same period last year. Interest earned on the loan portfolio as a percentage of total interest income was 91.0% for the three-month period in 2025 compared to 90.8% for the same period in 2024. The average volume of the taxable investment portfolio (classified as AFS) decreased 14.6% during the three-month period ended March 31, 2025, compared to the same period last year, while the average yield increased 10 bps between periods. There were purchases of taxable AFS investment securities during the first three months of 2025, however maturities and paydowns on this portfolio in 2024 and into 2025 outweighed purchases during the same time period, accounting for the decrease in average volume year over year. The average volume of the tax-exempt investment portfolio (classified as AFS) for the three-month period ended March 31, 2025 decreased 0.1% and the tax equivalent yield increased nine bps. There were no tax-exempt bond purchases during the first three months of 2025, accounting for the decrease in average volume in this portfolio. The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing account at the FRBB, increased 368.9% for the three-month period ended March 31, 2025, compared to the same periods in 2024. The average volume grew steadily throughout 2024 with the influx of customer deposit accounts, primarily municipal deposit accounts. The average yield on these funds decreased 104 bps for the three-month period ended March 31, 2025, versus the same period in 2024. The average volume of interest-bearing liabilities for the three-month period ended March 31, 2025 increased 8.7% compared to the same period in 2024, and the average rate paid on interest-bearing liabilities increased 11 bps. The average volume of interest-bearing transaction accounts increased 2.9% for the three-month period ended March 31, 2025, compared to the same period in 2024, reflecting moderate growth year over year, while the average rate paid on these accounts decreased two bps between comparison periods. Interest-bearing transaction accounts comprised 33.3% of the average interest-bearing liabilities portfolio for the three-month period ended March 31, 2025, compared to 35.2% for the same period last year. Interest paid on these funds accounted for 27.2% of total interest expense for the three-month period of 2025 compared to 30.4% for the same period in 2024. The average volume of money market accounts increased 37.2% for the three-month period ended March 31, 2025, compared to the same period in 2024, and the average rate paid on these deposits increased 52 bps. The increase was driven primarily by increases in the average volume of municipal deposit accounts during the third and fourth quarter of 2024. The average volume of savings accounts decreased 5.2% for the three-month period ended March 31, 2025, compared to the same period in 2024, with no change in the average rate paid on these accounts. The average volume of time deposits increased 44.8% for the three-month period ended March 31, 2025, compared to the same period in 2024, and the average rate paid increased 42 bps. The increase in both the average volume and average rate paid are attributable to CD promotional rates offered throughout 2024 and into 2025. The average volume of repurchase agreements increased 37.3% for the three-month period ended March 31, 2025, compared to the same period in 2024, and the average rate paid increased 14 bps between comparison periods. The Company utilized borrowed funds to fund loan growth and cover deposit outflows during 2023 and into the first and second quarters of 2024, but as deposit accounts began to increase, the need for these funds decreased, accounting for the 57.8% decrease in average volume of borrowed funds during the three-month period ended March 31, 2025, compared to the same period in 2024. The average rate paid on borrowed funds decreased as well by 43 bps for the three-month period ended March 31, 2025, compared to the same period in 2024. In summary, between the three-month periods ended March 31, 2025 and 2024, the average yield on interest-earning assets increased 29 bps and the average rate paid on interest-bearing liabilities increased 11 bps. Net interest spread increased 18 bps for the three-month period ended March 31, 2025 versus the same period in 2024, and the net interest margin increased 20 bps between comparison periods. 34 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 2025 and 2024 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, 2025 Compared to Three Months Ended March 31, 2024 Variance Variance Due to Due to Total Rate (1) Volume (1) Variance Average Interest-Earning Assets Loans, net $ 444,993 $ 1,156,388 $ 1,601,381 Taxable investment securities 33,835 (146,953 ) (113,118 ) Tax-exempt investment securities 1,402 (1,402 ) 0 Sweep and interest-earning accounts (80,881 ) 316,896 236,015 Other investments (6,552 ) 12,058 5,506 Total $ 392,797 $ 1,336,987 $ 1,729,784 Average Interest-Bearing Liabilities Interest-bearing transaction accounts $ (25,440 ) $ 39,403 $ 13,963 Money market funds 206,468 234,097 440,565 Savings deposits (1,186 ) (1,545 ) (2,731 ) Time deposits 182,871 471,067 653,938 Repurchase agreements 12,900 74,167 87,067 Borrowed funds (89,559 ) (483,975 ) (573,534 ) Finance lease obligations (17 ) (1,288 ) (1,305 ) Junior subordinated debentures (33,424 ) 0 (33,424 ) Total $ 252,613 $ 331,926 $ 584,539 Changes in net interest income $ 140,184 $ 1,005,061 $ 1,145,245 (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 35 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 2025 2024 Income Percent Service fees $ 886,782 $ 897,920 $ (11,138 ) -1.24 % Income from sold loans 69,377 79,104 (9,727 ) -12.30 % Other income from loans 270,167 254,601 15,566 6.11 % Other income Income from CFS Partners 249,350 294,327 (44,977 ) -15.28 % Other miscellaneous income 102,933 107,955 (5,022 ) -4.65 % Total non-interest income $ 1,578,609 $ 1,633,907 $ (55,298 ) -3.38 % Total non-interest income decreased $55,298, or 3.4%, for the three months ended March 31, 2025, compared to the same period in 2024, with significant changes noted in the following: · The volume of loans sold into the secondary market during the first three months of 2025 decreased by $274 thousand compared to the same period last year, accounting for the decrease in income from sold loans year over year. · Although loan volume increased during the first three months of 2025, the increase was primarily in the 1 – 4 family residential loan portfolio with moderate growth in the CRE portfolio, generating documentation fees totaling $154 thousand for the first three months of 2025 compared to $175 thousand for the same period in 2024, offset by increases in Commercial LOC annual renewal fees and residential doc fees, accounting for the moderate increase in other income from loans year over year. · Income from CFS Partners decreased between periods due to realized losses from an equity portfolio. 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. 36 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 2025 2024 Expense Percent Salaries and wages $ 2,320,066 $ 2,458,000 $ (137,934 ) -5.61 % Employee benefits 1,017,974 899,236 118,738 13.20 % Occupancy expenses, net 781,856 722,503 59,353 8.21 % Other expenses Charged-off checks (45,513 ) 34,056 (79,569 ) -233.64 % Outsourcing expense 116,629 140,386 (23,757 ) -16.92 % Service contracts - administrative 222,071 182,764 39,307 21.51 % Consultant services 91,749 59,709 32,040 53.66 % FDIC insurance 197,960 156,106 41,854 26.81 % Collection & non-accruing loan expense 2,000 48,000 (46,000 ) -95.83 % ATM & debit card expense 181,408 164,606 16,802 10.21 % Other miscellaneous expenses 1,617,412 1,434,778 182,634 12.73 % Total non-interest expense $ 6,503,612 $ 6,300,144 $ 203,468 3.23 % Total non-interest expense increased $203,468, or 3.2% for the three months ended March 31, 2025, compared to the same period in 2024, with significant changes noted in the following: · The decrease in salaries and wages during the first quarter of 2025 reflects changes in senior leadership as well as unfilled positions during the quarter. · The increase in employee benefits is attributable to an increase in health insurance claims year over year under the Company’s self-insured health insurance plan. · The increase in occupancy expense year over year is primarily due to normal increases in contracted services including increased expenses for plowing and sanding during the winter months. In addition, the settlement of a flood insurance claim received in the first quarter of 2024 where the replacement value received exceeded the depreciated value of equipment, resulted in a capital gain on equipment, accounting for a portion of the year over year increase. · The Company received a recovery for a $53 thousand fraudulent check that was charged off in 2024, accounting for most of the decrease in charged-off checks . · The decrease in outsourcing expense is attributable to a renegotiated contract from the Company’s core provider. · 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 FDIC insurance is attributable in part to an increase in the assessment multiplier, as well as an increase in total assets. · The increase in consultant services is attributable to an increased utilization of these services for branch network and technology projects during 2025. · Collection & non-accruing loan expenses were lower during the first three months of 2025 due to the recovery of expenses associated with properties in foreclosure that were resolved. · ATM & debit card expense are transaction-based and reflect increased customer activity year over year, as well as annual contractual price adjustments. 37 Table of Contents APPLICABLE INCOME TAXES The provision for income taxes increased $107,884, or 19.4%, for the first three months of 2025 compared to the same period in 2024, which is consistent with the increase in income before income taxes. Tax credits, which consist of credits from affordable housing investments and NMTC, amounted to $249,612 and $174,612, respectively for the first three months of 2025 and 2024. The Company’s investment in a project during the last quarter of 2024 generated NMTC for the first quarter of 2025, accounting for the increase in tax credits between comparison periods. Amortization expense related to the affordable housing investments and NMTC is included as a component of income tax expense and amounted to $212,868 and $149,202, respectively for the first three months of 2025 and 2024. These investments provide tax benefits, including tax credits, and are designed to provide a targeted effective annual yield between 5% and 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, 2025 December 31, 2024 Assets Loans $ 940,274,201 79.16 % $ 927,940,805 74.30 % AFS securities 168,286,294 14.17 % 159,697,420 12.79 % Liabilities Demand deposits 197,500,239 16.63 % 197,697,470 15.83 % Interest-bearing transaction accounts 286,292,106 24.10 % 304,212,085 24.36 % Money market funds 162,755,508 13.70 % 169,533,067 13.57 % Savings deposits 143,312,558 12.06 % 142,925,828 11.44 % Time deposits 189,795,551 15.98 % 187,276,308 14.99 % Long-term advances 36,100,000 3.04 % 72,600,000 5.81 % 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 $ 12,333,396 1.33 % AFS securities 8,588,874 5.38 % Liabilities Demand deposits (197,231 ) -0.10 % Interest-bearing transaction accounts (17,919,979 ) -5.89 % Money market funds (6,777,559 ) -4.00 % Savings deposits 386,730 0.27 % Time deposits 2,519,243 1.35 % Long-term advances (36,500,000 ) -50.28 % The increase in the loan portfolio during the first three months of 2025 was primarily attributable to increases in CRE loans, municipal loans and residential real estate 1 st lien loans. The increase in the securities AFS portfolio at March 31, 2025 is attributable to the combined effect during the first three months of the year of purchases totaling $15.0 million and a decrease of $3.0 million in unrealized losses reflected in OCI, which was partially offset by maturities of $5.5 million and principal payments on MBS, ABS and CMO investments totaling $3.9 million. In management’s view, the size of the AFS securities portfolio is appropriate and proportional to the overall asset base, as this portfolio serves a significant role in the Company’s liquidity position. The decrease in interest-bearing transactions accounts is attributable to a decrease of $12.9 million, or 29.9% in government agency accounts for our municipal customers, and a decrease of $4.7 million, or 4.5% in retail deposit accounts. The decrease in money market funds was driven by a decrease of $12.5 million, or 28.2%, in ICS accounts, which was partially offset by an increase in retail money market funds of $2.8 million, or 2.3%, and an increase in municipal deposits of $3.0 million, or 71.7%. The increase in time deposits is attributable to an increase in retail time deposits. The Company used overnight deposits to cover maturities in borrowed funds during the first three months of 2025 and used those funds to cover fluctuations in aggregate deposits during the same period, enabling the Company to rely less on other sources of funding, including brokered deposits. 38 Table of Contents UNINSURED DEPOSITS Estimated deposits in excess of the FDIC insurance level amounted to $244.6 million as of March 31, 2025 and $258.0 million as of December 31, 2024. The estimated balance of $40.5 million of uninsured time deposits as of March 31, 2025 was made up of time CDs of $37.2 million and retirement accounts of $3.3 million. Increments of maturity of these time deposits are summarized as follows: 3 months or less $ 20,384,249 Over 3 through 6 months 15,033,994 Over 6 through 12 months 3,966,671 Over 12 months 1,127,038 Total $ 40,511,952 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 (together the ”ALCO Policy”). 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. Under the Company’s interest rate sensitivity modeling, in a rising rate environment NII initially trends upward as the short-term asset base (cash and adjustable-rate loans) quickly cycles 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. 39 Table of Contents The following table summarizes the estimated impact on the Company's NII over a twelve-month period, assuming a gradual parallel shift of the yield curve beginning March 31, 2025: Rate Change Percent Change in NII Down 100 bps 0.1 % Up 200 bps -3.5 % 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, 2025, the Company had $12,887,000 in principal amount of Junior Subordinated Debentures due December 15, 2037, which bear interest at a quarterly floating rate equal to 3-month CME SOFR, as adjusted by a spread adjustment factor of 0.26161, plus 2.85%. The quarterly floating rate in effect on the debentures was 7.47% for the March 2025 payment, compared to a floating rate of 8.50% for the March 2024 payment. 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 27.8% of the Company’s loan balances as of March 31, 2025, compared to 27.4% as of December 31, 2024. 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, 2025, junior lien home equity products made up 13.8% of the residential mortgage portfolio with maximum loan-to-value ratios (including prior liens) of 80%. The Company also originates some home equity loans with loan-to-value ratios greater than 80% under an insured loan program with stringent underwriting criteria. 40 Table of Contents The following tables show the estimated maturity of the Company’s loan portfolio as of March 31, 2025. Fixed Rate Loans Within 2 - 5 6 - 15 Over 1 Year Years Years 15 Years Total Commercial & industrial $ 3,826,325 $ 26,518,268 $ 30,633,774 $ 0 $ 60,978,367 Purchased (1) 12,655 3,086,327 4,143,167 0 7,242,149 Commercial real estate 13,110,250 8,913,248 16,862,521 747,764 39,633,783 Municipal 50,102,276 4,157,428 5,556,165 0 59,815,869 Residential real estate - 1st lien 16,153 3,006,107 23,054,283 60,175,131 86,251,674 Residential real estate - Jr lien 57,228 349,938 4,039,207 40,000 4,486,373 Consumer 386,172 2,232,014 26,209 0 2,644,395 Total Loans $ 67,511,059 $ 48,263,330 $ 84,315,326 $ 60,962,895 $ 261,052,610 Variable Rate Loans Within 2 - 5 6 - 15 Over 1 Year Years Years 15 Years Total Commercial & industrial $ 22,502,319 $ 22,539,273 $ 8,609,167 $ 6,811,114 $ 60,461,873 Commercial real estate 1,909,585 4,639,393 112,825,146 317,709,367 437,083,491 Municipal 0 0 9,527,441 1,100,000 10,627,441 Residential real estate - 1st lien 649,574 2,443,590 17,138,619 118,827,437 139,059,220 Residential real estate - Jr lien 898,901 543,759 12,454,795 17,662,719 31,560,174 Consumer 68,550 121,675 239,167 0 429,392 Total Loans $ 26,028,929 $ 30,287,690 $ 160,794,335 $ 462,110,637 $ 679,221,591 (1) Consists of commercial loans totaling $13 thousand within 1 year; $2.9 million in 2 – 5 years and $833 thousand in 6 – 15 years and consumer loans of $0, $197 thousand and $3.3 million in those maturity categories, respectively. The Company experienced solid growth in the CRE loan portfolios, which is consistent with its strategic focus on commercial lending. Commercial & industrial, purchased, CRE and municipal loans collectively comprised 71.9% of the Company’s loan portfolio as of March 31, 2025, compared to 72.3% as of December 31, 2024. The largest components of the CRE portfolio were $128.3 million in owner-occupied CRE and $151.9 million in non-owner occupied CRE as of March 31, 2025, compared to $125.5 million and 154.6 million, respectively, as of December 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, 2025, the Company had $25.3 million in guaranteed loans with guaranteed balances of $17.1 million, compared to $25.5 million in guaranteed loans with guaranteed balances of $17.2 million as of December 31, 2024. PPP loans with outstanding balances of $33 thousand as of March 31, 2025, and $43 thousand as of December 31, 2024, 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 to carry and sell collateral 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 loans are generally applied as a reduction of the loan book balance. 41 Table of Contents Credit loss expense The credit loss expense was made up of the following components for the periods indicated: Three Months Ended March 31, Change 2025 2024 $ % Credit loss expense - loans $ 418,874 $ 317,799 $ 101,075 31.80 % Credit loss reversal - OBS credit exposure (93,820 ) (4,220 ) (89,601 ) 2123.25 % Credit loss expense $ 325,054 $ 313,579 $ 11,474 3.66 % The increase in the credit loss expense on loans in the first months of 2025 compared to the same period in 2024, was due in part to an increase in certain qualitative factors as well as an increase in the volume of the loan portfolio. The decrease in the OBS credit exposure between periods is attributable to a decrease in unfunded loan commitments under contract. ACL and provisions –The Company’s ACL policy 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 losses incurred. 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 expected 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, 2025 2024 ACL to total loans outstanding 1.08 % 1.06 % ACL $ 10,173,926 $ 9,810,212 Loans outstanding $ 940,274,201 $ 927,940,805 Non-accruing loans to loans outstanding 0.95 % 0.90 % Non-accruing loans $ 8,907,782 $ 8,338,166 Loans outstanding $ 940,274,201 $ 927,940,805 ACL to non-accruing loans 114.21 % 117.65 % ACL $ 10,173,926 $ 9,810,212 Non-accruing loans $ 8,907,782 $ 8,338,166 42 Table of Contents The following table shows the breakdown of the ACL by loan segment and the percentage of loans in each category to total loans in the respective portfolios at the date indicated: March 31, 2025 December 31, 2024 Amount Percent Amount Percent Commercial & industrial $ 703,236 12.92 % $ 727,488 13.37 % Purchased 20,535 0.77 % 22,415 0.84 % Commercial real estate 6,409,503 50.70 % 6,487,700 50.88 % Municipal 176,109 7.49 % 167,719 7.23 % Residential real estate - 1st lien 2,524,870 23.96 % 2,087,034 23.50 % Residential real estate - Jr lien 313,576 3.83 % 291,239 3.85 % Consumer 26,097 0.33 % 26,617 0.33 % Total $ 10,173,926 100.00 % $ 9,810,212 100.00 % The first quarter ACL analysis indicated that the reserve balance of $10.2 million as of March 31, 2025, was sufficient to cover expected credit losses that are probable and estimable as of the measurement date. Included in the ACL calculation for the first quarter of 2025 are adjustments to several qualitative factors made by management, including an increase in the risk status of the qualitative factors for volumes and terms in the residential portfolios to reflect increasing trends in volumes. The quantitative factor for exceptions in that portfolio was also adjusted by increasing the risk status as an increasing trend was noted. In addition, the risk status for delinquency and non-performing loans was increased to reflect the uncertainty as to how and when inflation or a recession will, or could, affect our consumer customers’ ability to pay. Management believes that the quantitative calculation adequately captures 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. 43 Table of Contents Net charge-offs during the periods presented to average loans outstanding were as follows: For the Three Months Ended March 31, 2025 2024 Commercial & industrial -0.02 % -0.10 % Net charge-offs during the period $ (30,581 ) $ (125,369 ) Average amount outstanding $ 126,564,512 $ 125,426,823 Purchased 0.00 % 0.00 % Net charge-offs during the period $ 0 $ 0 Average amount outstanding $ 7,379,149 $ 10,338,317 Commercial real estate 0.00 % 0.00 % Net charge-offs during the period $ 0 $ 0 Average amount outstanding $ 475,662,950 $ 420,107,132 Municipal 0.00 % 0.00 % Net charge-offs during the period $ 0 $ 0 Average amount outstanding $ 68,300,830 $ 56,602,242 Residential real estate - 1st lien 0.00 % 0.00 % Net charge-offs during the period $ (266 ) $ 0 Average amount outstanding $ 221,894,338 $ 209,083,019 Residential real estate - Jr lien 0.00 % 0.00 % Net recoveries during the period $ 0 $ 1,209 Average amount outstanding $ 36,102,853 $ 31,530,286 Consumer -0.76 % -0.27 % Net charge-offs during the period $ (24,313 ) $ (8,596 ) Average amount outstanding $ 3,203,613 $ 3,159,725 Total loans -0.01 % -0.02 % Net charge-offs during the period $ (55,160 ) $ (132,756 ) Average amount outstanding $ 939,108,245 $ 856,247,544 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 and credit-related losses. Interest rate risk is directly related to the different maturities and repricing characteristics of interest-bearing assets and liabilities, as well as to loan prepayment risks, early withdrawal of time deposits, and the fact that the speed and magnitude of responses to interest rate changes vary by product. Rapid changes in prevailing interest rates, particularly after a long period of relative stability, create a challenging interest rate environment. As discussed above under "Interest Rate Risk and Asset and Liability Management", the Company actively monitors and manages its interest rate risk through the ALCO process. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET ARRANGEMENTS The Company is a party to financial instruments with 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 more than 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 2025, the Company did not engage in any activity that created any additional types of OBS risk. 44 Table of Contents 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, or when the Company experiences deposit outflows; 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, 2025, and December 31, 2024, the Company had $236 thousand in one-way CDARS deposits, and no one-way ICS deposits outstanding at either period end. 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, 2025 and December 31, 2024, the Company reported $1.8 million and $2.5 million, respectively, in reciprocal CDARS deposits. The balance in ICS reciprocal money market deposits was $31.9 million as of March 31, 2025, compared to $44.4 million as of December 31, 2024, and the balance in ICS reciprocal demand deposits as of those dates was $107.0 million and $109.5 million, respectively. Additionally, the Company had brokered deposits from another source totaling approximately $14.0 million as of March 31, 2025 and $13.8 million as of December 31, 2024. This relationship has provided convenient and timely access to short-term funding that is easily accessible without any detrimental effect on the pricing of the core deposit base. As of March 31, 2025 and December 31, 2024, borrowing capacity of $106.8 million and $108.7 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 of $36.1 million and $31.1 million, respectively. The following table reflects the Company’s outstanding advances with FHLBB as of the dates indicated: March 31, December 31, 2025 2024 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, 4.54%, due May 15, 2026 10,000,000 10,000,000 FHLBB option advance, 4.74%, due May 26, 2026 5,000,000 5,000,000 FHLBB option advance, 3.89%, due February 01, 2027 0 5,000,000 FHLBB option advance, 4.27%, due June 07, 2027 10,000,000 10,000,000 FHLBB option advance, 3.66%, due March 26, 2027 5,000,000 0 FHLBB option advance, 3.51%, due March 27, 2028 5,000,000 0 Total Long-Term Advances $ 36,100,000 $ 31,100,000 (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. The Company utilized borrowing capacity during 2023 and the first quarter of 2024 under the BTFP, a temporary loan facility established by the FRB in March 2023 to provide additional liquidity to financial institutions in the wake of several high-profile bank failures. The Company’s BTFP borrowings are collateralized by U.S. Agency and U.S. Government Securities, valued at par. The BTFP ceased extending new loans on March 11, 2024. The BTFP loans matured and were repaid during the first quarter of 2025. 45 Table of Contents The Company’s advances under the BTFP as of the balance sheet dates were as follows: March 31, December 31, 2025 2024 FRB BTFP term advance, 4.83%, due January 17, 2025 $ 0 $ 41,500,000 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 $60.6 million and $60.8 million, respectively, as of March 31, 2025, and December 31, 2024. 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 450 bps. The Company had no outstanding advances through this facility as of March 31, 2025, or December 31, 2024. As of March 31, 2025, and December 31, 2024, the Company had an unsecured line of credit of $12.5 million with one correspondent bank. The Company had no outstanding advances against this credit line as of the balance sheet dates. 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 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, while at the same time satisfying all regulatory capital requirements. To that end, management strives to deploy capital efficiently and monitors capital retention and dividend policies on an ongoing basis. During the third quarter of 2024, the Company adopted a stock repurchase program authorizing the repurchase of up to 275,000 shares of the Company’s common stock, representing approximately 5% of the outstanding common shares. Purchases under the program may be on such terms, including price, as market conditions warrant, and may be made through open market purchases or in privately negotiated transactions. The repurchase authorization expires in five years, unless extended, or earlier terminated, by the Board. Notwithstanding the program’s five-year term, the Board will review and re-evaluate the program annually in light of the Company’s then current capital needs, the number and cost of shares repurchased, the number of shares remaining for repurchase under the authorization, and other relevant factors, and management will confer with the FRBB regarding the program, as appropriate in the circumstances. As of March 31, 2025, 2,000 shares had been repurchased for an aggregate purchase price of $35,380. The following table illustrates the changes in shareholders' equity from December 31, 2024, to March 31, 2025: Balance as of December 31, 2024 (book value $17.24 per common share) $ 98,048,205 Net income 3,525,455 Issuance of common stock through the DRIP 363,539 Dividends declared on common stock (1,343,515 ) Dividends declared on preferred stock (28,125 ) Repurchase of shares through the stock buyback program (35,380 ) Change in AOCI on AFS securities, net of tax 2,374,851 Balance as of March 31, 2025 (book value $18.05 per common share) $ 102,905,030 As described in more detail in Note 22 to the audited consolidated financial statements contained in the Company’s 2024 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. 46 Table of Contents As of March 31, 2025, 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. 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 balance sheet date: 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, 2025 Common equity tier 1 capital (to risk-weighted assets) Company $ 103,233 12.07 % $ 38,485 4.50 % $ 59,866 7.00 % N/A N/A Bank $ 116,998 13.69 % $ 38,464 4.50 % $ 59,834 7.00 % $ 55,560 6.50 % Tier 1 capital (to risk-weighted assets) Company $ 117,620 13.75 % $ 51,314 6.00 % $ 72,695 8.50 % N/A N/A Bank $ 116,998 13.69 % $ 51,286 6.00 % $ 72,655 8.50 % $ 68,381 8.00 % Total capital (to risk-weighted assets) Company $ 128,311 15.00 % $ 68,419 8.00 % $ 89,799 10.50 % N/A N/A Bank $ 127,684 14.94 % $ 68,381 8.00 % $ 89,750 10.50 % $ 85,476 10.00 % Tier 1 capital (to average assets) Company $ 117,620 9.85 % $ 47,744 4.00 % N/A N/A N/A N/A Bank $ 116,998 9.81 % $ 47,725 4.00 % N/A N/A $ 59,657 5.00 % December 31, 2024: Common equity tier 1 capital (to risk-weighted assets) Company $ 100,751 11.90 % $ 38,086 4.50 % $ 59,244 7.00 % N/A N/A Bank $ 114,323 13.52 % $ 38,053 4.50 % $ 59,194 7.00 % $ 54,966 6.50 % Tier 1 capital (to risk-weighted assets) Company $ 115,138 13.60 % $ 50,781 6.00 % $ 71,940 8.50 % N/A N/A Bank $ 114,323 13.52 % $ 50,738 6.00 % $ 71,879 8.50 % $ 67,650 8.00 % Total capital (to risk-weighted assets) Company $ 125,652 14.85 % $ 67,708 8.00 % $ 88,867 10.50 % N/A N/A Bank $ 124,837 14.76 % $ 67,650 8.00 % $ 88,791 10.50 % $ 84,563 10.00 % Tier 1 capital (to average assets) Company $ 115,138 9.46 % $ 48,690 4.00 % N/A N/A N/A N/A Bank $ 114,323 9.40 % $ 48,665 4.00 % N/A N/A $ 60,831 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. 47 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.