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, 2026 The following discussion analyzes the consolidated financial condition of Community Bancorp. and its wholly owned subsidiary, Community National Bank, as of March 31, 2026 and December 31, 2025, 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 2025 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 the rate of 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; · the impact on our customers of government shutdowns and federal, state and local budgetary cutbacks; · 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 sales 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, may 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; 29 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, 2026, were $1.24 billion compared to $1.29 billion as of December 31, 2025, a decrease of 4.1%. Changes in the asset base included an increase in loans of $18.6 million, which was more than offset by a decrease in overnight deposits of $61.2 million, or 52.6%. The increase in the loan portfolio was primarily attributable to increases of $4.3 million in residential first and Jr. lien loans, $6.0 million in CRE loans, $2.0 million in municipal loans and $7.0 million in C&I loans. While cash funded the increase in the loan portfolio, the decrease in overnight deposits reflects typical and expected first quarter deposit runoff, particularly in government agency and non arbitrage accounts. Total deposits as of March 31, 2026, were $1.02 billion compared to $1.07 billion as of December 31, 2025, a decrease of $52.9 million, or 4.9%. Year to date, time deposits increased $7.9 million, or 3.6% and savings accounts increased $5.4 million, or 3.8%, while demand and interest-bearing transaction accounts collectively decreased $28.1 million, or 5.4%, and money market funds decreased $38.2 million, or 20.4%. Borrowed funds remained level from December 31, 2025. Total interest income increased $1.5 million, or 10.3%, for the first quarter of 2026, compared to the same period in 2025. 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 increase in interest income in the comparison period. Total interest expense decreased $7 thousand, or 0.1%, for the first quarter of 2026, compared to the same period in 2025. The year-over-year increase of $15 thousand, or 4%, in interest expense on the Company’s borrowed funds was more than offset by a decrease of $21 thousand, or 8.5% in interest expense on junior subordinated debentures due to a decrease in the floating rate associated with these funds. Please refer to the interest rate sensitivity discussion in the Interest Rate Risk and Asset and Liability Management section of this Management’s Discussion and Analysis 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. 30 Table of Contents The credit loss expense for the first quarter of 2026 was $391,505 compared to $325,054 for the same period in 2025, resulting in an increase of $66,451, or 20.4%, between periods. In determining the current period credit loss expense management 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 rates and various qualitative factors, which management reviews and adjusts, as appropriate, in its ACL calculation 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 quarter of 2026 increased $844 thousand, or 23.9%, to $4.4 million compared to $3.5 million for the same period in 2025, primarily due to the increase in net interest income of $1.4 million after credit loss expense. This change, along with significant changes in non-interest income and non-interest expense, are discussed in the appropriate sections of this Management’s Discussion and Analysis. Equity capital increased to $116.8 million, with a book value per share of $20.88 as of March 31, 2026, compared to $113.7 million and a book value per share of $20.36 as of December 31, 2025. 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, 2026. On March 18, 2026, the Company's Board of Directors declared a quarterly cash dividend of $0.25 per common share, payable on May 1, 2026, to shareholders of record on April 26, 2026 (as adjusted on April 15, 2026). As described in more detail below under “LIQUIDITY AND CAPITAL RESOURCES” as of March 31, 2026, the Company’s capital ratios, and those of our subsidiary Bank, were in excess of applicable regulatory requirements. Effective July 31, 2025, the Company’s affiliate, CFS Partners, redeemed the one third limited liability company membership and distributional interests of Guaranty Bancorp, Inc. (“Guaranty”), immediately prior to consummation of Guaranty’s merger with and into Bar Harbor Bankshares. Under the terms of the redemption agreement, beginning March 1, 2025, Guaranty Bancorp 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, increased from one-third to 50%, and effective on July 31, 2025, the Company’s non-economic membership (governance) interest in CFS Partners likewise increased to 50%. The Company does not have a controlling interest in CFS Partners and accounts for its investment using the equity method. CRITICAL ACCOUNTING POLICIES The Company’s consolidated financial statements are prepared according to U.S. GAAP. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities in the consolidated financial statements and related notes. The SEC has defined a company’s critical accounting policies as those that are most important to the portrayal of the Company’s financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often because of the need to make estimates of matters that are inherently uncertain. Because of the significance of these estimates and assumptions, there is a high likelihood that materially different amounts would be reported for the Company under different conditions or using different assumptions or estimates. Management evaluates on an ongoing basis its judgment as to which policies are considered to be critical and communicates all evaluations with the Company’s Audit Committee. The Company’s critical accounting policies govern: · the ACL; · OREO; · valuation of residential MSRs; and · the carrying value of goodwill. These policies are described in the Company’s 2025 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. Aside from adjustments in qualitative factors and other economic indicators in the calculation of the ACL, there were no material changes during the first three months of 2026 in the Company’s critical accounting policies. 31 Table of Contents 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 quarter of 2026 was $4.4 million, or $0.78 per common share, compared to $3.5 million, or $0.62 per common share, for the same period in 2025. Core earnings (NII) before credit loss expense were $10.9 million for the first three months of 2026, compared to $9.4 million for the same period in 2025. Interest and fees on loans, the major component of interest income, increased $1.2 million, or 9.2% for the first quarter of 2026 compared to the same period in 2025. Interest paid on deposits, which is the major component of total interest expense, decreased $9 thousand, or 0.2% for the first quarter of 2026 compared to the same period in 2025, driven primarily by adjustments to relationship pricing on deposits. Interest on borrowed funds increased $15 thousand, or 4.0%, for the first quarter of 2026 compared to the same quarter of 2025, due to an increase in the average volume of borrowed funds between periods despite a decrease in the average rate paid. 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, 2026 2025 Return on average assets 1.42 % 1.20 % Return on average equity 15.31 % 14.35 % Dividend payout ratio (1) 32.05 % 38.71 % Average equity to average assets 9.26 % 8.38 % (1) Dividends declared per common share divided by earnings per common share. INTEREST INCOME VERSUS INTEREST EXPENSE (NII) 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 $718,134 and $727,753 for the three months ended March 31, 2026 and 2025, respectively, was derived from loans to local municipalities of $64.1 million and $70.4 million, and tax-exempt municipal investment securities of $10.2 million and $10.1 million, as of March 31, 2026 and 2025, respectively. The following table shows the reconciliation between reported NII and tax equivalent NII for the comparison periods presented. Three Months Ended March 31, 2026 2025 Net interest income as presented $ 10,947,880 $ 9,438,324 Effect of tax-exempt income 190,896 217,539 Net interest income, tax equivalent $ 11,138,776 $ 9,655,863 32 Table of Contents The following tables present the daily average assets and the daily average liabilities, including the average yields on interest-earning assets and average expense on 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, 2026 2025 Average Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Average Assets Loans, net (1) $ 965,738,376 $ 14,602,142 6.13 % $ 929,855,663 $ 13,411,196 5.85 % Taxable investment securities 131,609,725 804,751 2.48 % 149,766,292 859,231 2.33 % Tax-exempt investment securities 10,384,325 101,786 3.98 % 10,221,261 101,786 4.04 % Federal funds sold and overnight deposits 73,138,455 657,098 3.64 % 30,281,514 321,948 4.31 % Other investments (2) 3,291,150 51,958 6.40 % 2,890,037 47,890 6.72 % Total interest-earning assets 1,184,162,031 $ 16,217,735 5.55 % $ 1,123,014,767 $ 14,742,051 5.32 % Cash and due from banks 9,593,514 10,103,399 Premises and equipment 12,046,131 12,045,058 BOLI 5,404,176 5,325,319 Goodwill 11,574,269 11,574,269 Other assets 27,065,199 27,718,101 Total assets $ 1,249,845,320 $ 1,189,780,913 Average Liabilities and Shareholders' Equity Interest-bearing transaction accounts $ 296,082,035 1,356,417 1.86 % $ 296,303,191 1,382,843 1.89 % Money market funds 163,868,329 882,881 2.19 % 166,327,792 1,069,531 2.61 % Savings deposits 145,951,206 28,140 0.08 % 142,921,994 28,876 0.08 % Time deposits 226,878,587 1,909,194 3.41 % 189,536,621 1,704,657 3.65 % Repurchase agreements 41,842,386 293,730 2.85 % 45,903,122 285,959 2.53 % Borrowed funds 35,975,044 369,125 4.16 % 32,733,356 352,806 4.37 % Finance lease obligations 2,924,810 16,825 2.30 % 3,160,528 18,171 2.30 % Junior subordinated debentures 12,887,000 222,647 7.01 % 12,887,000 243,345 7.66 % Total interest-bearing liabilities 926,409,397 $ 5,078,959 2.22 % 889,773,604 $ 5,086,188 2.32 % Non-interest bearing deposits 198,193,813 190,729,805 Other liabilities 9,534,297 9,608,658 Total liabilities 1,134,137,507 1,090,112,067 Shareholders' equity 115,707,813 99,668,846 Total liabilities and shareholders' equity $ 1,249,845,320 $ 1,189,780,913 Net interest income $ 11,138,776 $ 9,655,863 Net interest spread (3) 3.33 % 3.00 % Net interest margin (4) 3.81 % 3.49 % (1) Included in net loans are non-accrual loans with average balances of $6,683,288 and $8,730,643 for the three months ended March 31, 2026 and 2025, respectively. Loans are stated net of unearned discount and ACL, and include loans held-for-sale and include tax-exempt loans to local municipalities with average balances of $64,263,585 and $68,300,830 for the three months ended March 31, 2026 and 2025, respectively. (2) Included in other investments is the Company’s FHLBB Stock with average balances of $2,226,000 and $2,217,295 for the three months ended March 31, 2026 and 2025, respectively, with a dividend rate of approximately 7.05% and 8.41%, respectively, per quarter. (3) Net interest spread is the difference between the average yield on average interest-earning assets and the average rate paid on average interest-bearing liabilities. (4) Net interest margin is net interest income divided by average earning assets. 33 Table of Contents The average volume of interest-earning assets for the three-month period ended March 31, 2026 increased 5.4% compared to the same period last year, and the average yield on interest-earning assets increased 23 bps. The average volume of loans increased over the three-month comparison period of 2026 versus 2025 by 3.9%, and the average yield on loans increased 28 bps. Loans accounted for 81.6% of the average interest-earning asset portfolio for the three-month period ended March 31, 2026, compared to 82.8% for the same period last year. Interest earned on the loan portfolio as a percentage of total interest income was 90.0% for the three-month period in 2026 compared to 91.0% for the same period in 2025. The average volume of the taxable investment portfolio (classified as AFS) decreased 12.1% during the three-month period ended March 31, 2026, compared to the same period last year, while the average yield increased 15 bps between periods. The average volume of the tax-exempt investment portfolio (classified as AFS) for the three-month period ended March 31, 2025 increased 0.1% and the tax equivalent yield decreased six bps. There were no tax-exempt bond purchases during the first three months of 2026, however the fair value of the portfolio has increased, accounting for the increase 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 141.5% for the three-month period ended March 31, 2026, compared to the same period in 2025. The average volume grew steadily throughout 2025 with the influx of customer deposit accounts, primarily municipal deposit accounts. The average yield on these funds decreased 67 bps for the three-month period ended March 31, 2026, versus the same period in 2025. The average volume of interest-bearing liabilities for the three-month period ended March 31, 2026 increased 4.1% compared to the same period in 2025, and the average rate paid on interest-bearing liabilities decreased 10 bps. The average volume of interest-bearing transaction accounts decreased 0.1% for the three-month period ended March 31, 2026, compared to the same period in 2025, while the average rate paid on these accounts decreased three bps between comparison periods. Interest-bearing transaction accounts comprised 31.9% of the average interest-bearing liabilities portfolio for the three-month period ended March 31, 2026, compared to 33.3% for the same period last year. Interest paid on these funds accounted for 26.7% of total interest expense for the three-month period of 2026 compared to 27.2% for the same period in 2025. The average volume of money market accounts decreased 1.5% for the three-month period ended March 31, 2026, compared to the same period in 2025, and the average rate paid on these deposits decreased 42 bps. The decrease in average volume was driven primarily by cyclical decreases in the average volume of municipal deposit accounts during the third and fourth quarters of 2025. The average volume of savings accounts increased 2.1% for the three-month period ended March 31, 2026, compared to the same period in 2025, with no change in the average rate paid on these accounts. The average volume of time deposits increased 19.7% for the three-month period ended March 31, 2026, compared to the same period in 2025, and the average rate paid decreased 24 bps. The increase in the average volume is attributable to CD promotional products offered throughout 2025 and into 2026. The average volume of repurchase agreements decreased 8.9% for the three-month period ended March 31, 2026, compared to the same period in 2025, and the average rate paid increased 32 bps between comparison periods. As deposit accounts decreased during 2025, the need for borrowed funds increased, accounting for the 9.9% increase in average volume of borrowed funds during the three-month period ended March 31, 2026, compared to the same period in 2025. The average rate paid on borrowed funds decreased by 21 bps for the three-month period ended March 31, 2026, compared to the same period in 2025. In summary, between the three-month periods ended March 31, 2026 and 2025, the average yield on interest-earning assets increased 23 bps and the average rate paid on interest-bearing liabilities decreased 10 bps. Net interest spread increased 33 bps for the three-month period ended March 31, 2026 versus the same period in 2025, and the net interest margin increased 32 bps between comparison periods. The following table summarizes the variances in interest income and interest expense on a fully tax-equivalent basis for the interim periods presented for 2026 and 2025 resulting from volume changes in daily average assets and daily average liabilities and fluctuations in average rates earned and paid. 34 Table of Contents Three Months Ended March 31, 2026 Compared to Three Months Ended March 31, 2025 Variance Variance Due to Due to Total Rate (1) Volume (1) Variance Average Interest-Earning Assets Loans, net $ 673,350 $ 517,596 $ 1,190,946 Taxable investment securities 56,549 (111,029 ) (54,480 ) Tax-exempt investment securities (1,624 ) 1,624 0 Federal funds sold and overnight deposits (120,308 ) 455,458 335,150 Other investments (2,578 ) 6,646 4,068 Total $ 605,389 $ 870,295 $ 1,475,684 Average Interest-Bearing Liabilities Interest-bearing transaction accounts ($25,412) ($1,014) ($26,426) Money market funds (173,369 ) (13,281 ) (186,650 ) Savings deposits (1,334 ) 598 (736 ) Time deposits (131,541 ) 336,078 204,537 Repurchase agreements 36,307 (28,536 ) 7,771 Borrowed funds (18,611 ) 34,930 16,319 Finance lease obligations (9 ) (1,337 ) (1,346 ) Junior subordinated debentures (20,698 ) 0 (20,698 ) Total $ (334,667 ) $ 327,438 $ (7,229 ) Changes in net interest income $ 940,056 $ 542,857 $ 1,482,913 (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 2026 2025 Income Percent Service fees $ 936,477 $ 886,782 $ 49,695 5.60 % Income from sold loans 69,546 69,377 169 0.24 % Other income from loans 350,194 270,167 80,027 29.62 % Other income Income from CFS Partners 242,438 249,350 (6,912 ) -2.77 % Other miscellaneous income 146,685 102,933 43,752 42.51 % Total non-interest income $ 1,745,340 $ 1,578,609 $ 166,731 10.56 % Total non-interest income increased $166,731, or 10.6%, for the three months ended March 31, 2026, compared to the same period in 2025, with significant changes noted in the following: · Increases in debit card usage resulting in approximately $22 thousand in VISA check interchange income as well as increases in ATM usage fees and wire fees primarily accounts for the $50 thousand increase in service fees. · Increases in commercial loan documentation fees, totaling $97 thousand, primarily accounts for the increase in other income from loans year over year, partially offset by a decrease in commercial rate lock fees of $10 thousand and home equity documentation fees of $5 thousand. · Income from CFS Partners decreased between periods due in part to a large negative mark-to-market adjustment to their investment portfolio due to the decline in the equity markets at quarter end. · A gain on a sold OREO property of $37 thousand largely accounts for the increase in Other miscellaneous income. 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 2026 2025 Expense Percent Salaries and wages $ 2,578,836 $ 2,320,066 $ 258,770 11.15 % Employee benefits 1,111,276 1,017,974 93,302 9.17 % Occupancy expenses, net 774,981 781,856 (6,875 ) -0.88 % Other expenses Directors fees 155,101 158,057 (2,956 ) -1.87 % Charged-off checks 14,241 (45,513 ) 59,754 -131.29 % Outsourcing expense 102,401 116,629 (14,228 ) -12.20 % Service contracts - administrative 273,417 222,071 51,346 23.12 % Audit fees 133,693 138,314 (4,621 ) -3.34 % Consultant services 92,417 91,749 668 0.73 % Collection & non-accruing loan expense (10,000 ) 2,000 (12,000 ) -600.00 % ATM & debit card expense 210,345 181,408 28,937 15.95 % State deposit tax 285,771 263,574 22,197 8.42 % Printing and supplies 57,225 46,461 10,764 23.17 % Marketing expense 131,250 118,749 12,501 10.53 % Other miscellaneous expenses 1,146,406 1,090,217 56,189 5.15 % Total non-interest expense $ 7,057,360 $ 6,503,612 $ 553,748 8.51 % Total non-interest expense increased $553,748, or 8.5% for the three months ended March 31, 2026, compared to the same period in 2025, with significant changes noted in the following: · The increases in salaries and wages during the three-month period of 2026 reflects normal salary increases as well as newly filled positions. · The increase in employee benefits in the three-month period is attributable to increased health insurance claims in 2026 compared to 2025 under the Company’s self-insured health plan. · The increase in charged-off checks is related to a recovery during the first quarter of 2025. · The decrease in outsourcing expense is attributable to a renegotiated contract from the Company’s core processing provider. · The year over year 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. · Collection & non-accruing loan expenses were lower year over year due to the recovery of expenses associated with properties in foreclosure that were resolved. · ATM & debit card expenses are transaction-based and reflect increased customer activity year over year, as well as annual contractual price adjustments. · The increase in state deposit tax is attributable to an increase in average deposits which is used in the calculation of taxes due. · The increase in printing and supplies is due to an adjustment made for the disposal of debit card stock in the migration to tap to pay cards. · Marketing expense increased due to marketing promotions relating to the Bank’s 175 th anniversary celebration year. 37 Table of Contents APPLICABLE INCOME TAXES The provision for income taxes increased $212,441, or 32.1%, for the first quarter of 2026 compared to the same period in 2025, which is the 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 for the first quarter of 2026 and 2025. Amortization expense related to the affordable housing investments and NMTC is included as a component of income tax expense and amounted to $257,433 and $148,890, respectively, for the first quarter of 2026 and 2025. 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, 2026 December 31, 2025 Assets Loans $ 983,876,487 79.65 % $ 965,285,662 74.97 % AFS securities 137,784,382 11.15 % 144,528,758 11.23 % Liabilities Demand deposits 199,316,812 16.14 % 218,842,543 17.00 % Interest-bearing transaction accounts 291,067,383 23.56 % 299,636,739 23.27 % Money market funds 148,980,329 12.06 % 187,132,921 14.53 % Savings deposits 147,941,226 11.98 % 142,543,291 11.07 % Time deposits 230,461,007 18.66 % 222,512,507 17.28 % Long-term advances 35,975,022 2.91 % 35,975,022 2.79 % 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 $ 18,590,825 1.93 % AFS securities (6,744,376 ) -4.67 % Liabilities Demand deposits (19,525,731 ) -8.92 % Interest-bearing transaction accounts (8,569,356 ) -2.86 % Money market funds (38,152,592 ) -20.39 % Savings deposits 5,397,935 3.79 % Time deposits 7,948,500 3.57 % The increase in the loan portfolio during the first three months of 2026 was primarily attributable to increases in CRE loans, residential real estate 1 st lien loans, as well as municipal loans. The decrease in the securities AFS portfolio at March 31, 2026 is attributable to the combined effect during the first three months of the year of an increase of $208 thousand in unrealized losses reflected in OCI, as well as maturities of $2.1 million and principal payments on MBS, ABS and CMO investments totaling $4.5 million. The cash flow resulting from maturities and other principal payments was used to fund loan growth. 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 at March 31, 2026 from year end 2025 is attributable to a decrease of $5.9 million, or 13.9% in a CFSG deposit account, and a decrease of $4.9 million or 4.0%, in ICS accounts. The decrease in money market accounts was primarily driven by a decrease of $20.8 million, or 42.7% in ICS accounts. 38 Table of Contents Uninsured Deposits Estimated deposits in excess of the FDIC insurance level amounted to $234.5 million as of March 31, 2026 and $261.7 million as of December 31, 2025. The estimated balance of $51.9 million of uninsured time deposits as of March 31, 2026 was made up of time CDs of $47.7 million and retirement accounts of $4.2 million. Increments of maturity of these time deposits are summarized as follows: 3 months or less $ 23,937,484 Over 3 through 6 months 6,198,740 Over 6 through 12 months 19,781,880 Over 12 months 1,956,025 Total $ 51,874,130 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 sustain 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 200 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. 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, 2026: Rate Change Percent Change in NII Down 200 bps -0.4 % Up 200 bps -1.3 % 39 Table of Contents 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, 2026, 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 6.83% for the March 2026 payment, compared to a floating rate of 7.47% for the March 2025 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 29.2% of the Company’s loan balances as of March 31, 2026, compared to 29.3% as of December 31, 2025. 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, 2026, junior lien home equity products made up 15.9% 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 maturities within the Company’s loan portfolio as of March 31, 2026. Fixed Rate Loans Within 2 - 5 6 - 15 Over 1 Year Years Years 15 Years Total Commercial & industrial $ 1,812,137 $ 28,586,805 $ 18,343,598 $ 0 $ 48,742,540 Purchased (1) 75,428 3,626,129 5,471,205 0 9,172,762 Commercial real estate 8,443,458 4,116,044 16,588,340 1,319,654 30,467,496 Municipal 41,859,641 4,129,407 5,123,585 1,000,000 52,112,633 Residential real estate - 1st lien 29,603 4,883,883 21,970,406 54,568,133 81,452,025 Residential real estate - Jr lien 304,902 441,182 4,911,702 93,675 5,751,461 Consumer 1,025,800 1,787,822 24,045 0 2,837,667 Total Loans $ 53,550,969 $ 47,571,273 $ 72,432,881 $ 56,981,462 $ 230,536,585 Variable Rate Loans Within 2 - 5 6 - 15 Over 1 Year Years Years 15 Years Total Commercial & industrial $ 27,985,969 $ 20,880,271 $ 8,911,130 $ 7,912,381 $ 65,689,751 Commercial real estate 2,418,783 13,958,796 112,315,953 346,497,904 475,191,436 Municipal 0 0 8,863,656 3,129,596 11,993,252 Residential real estate - 1st lien 1,713,856 3,360,734 17,369,285 137,854,177 160,298,052 Residential real estate - Jr lien 192,152 1,388,077 13,277,700 24,992,178 39,850,107 Consumer 39,505 139,196 138,604 0 317,305 Total Loans $ 32,350,265 $ 39,727,074 $ 160,876,445 $ 520,386,236 $ 753,340,020 (1) Consists of commercial loans totaling $75 thousand within 1 year, $2.7 million in 2 – 5 years and $0 in 6 – 15 years; and consumer loans of $0, $929 thousand and $1.5 million in those maturity categories, respectively. The Company experienced solid growth in the CRE loan portfolio, which is consistent with its strategic focus on commercial lending. Commercial & industrial, purchased, CRE and municipal loans collectively comprised 69.3% of the Company’s loan portfolio as of March 31, 2026, compared to 71.7% as of December 31, 2025. The largest components of the CRE portfolio were $142.0 million in owner-occupied CRE and $181.9 million in non-owner occupied CRE as of March 31, 2026, compared to $125.5 million and $154.6 million, respectively, as of December 31, 2025. 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, 2026, the Company had $24.4 million in guaranteed loans with guaranteed balances of $16.9 million, compared to $24.2 million in guaranteed loans with guaranteed balances of $16.7 million as of December 31, 2025. PPP loans with outstanding balances of $0 as of March 31, 2026, and $8 thousand as of December 31, 2025, are included in these totals, which carried 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 2026 2025 $ % Credit loss expense – loans $ 426,984 $ 418,874 $ 8,110 1.94 % Credit loss reversal - OBS credit exposure (35,479 ) (93,820 ) 58,341 62.18 % Credit loss expense $ 391,505 $ 325,054 $ 66,451 20.44 % The increase in the credit loss expense on loans in the first months of 2026 compared to the same period in 2025, 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, 2026 2025 ACL to total loans outstanding 1.15 % 1.13 % ACL $ 11,280,241 $ 10,864,983 Loans outstanding $ 983,876,487 $ 965,285,662 Non-accruing loans to loans outstanding 0.73 % 0.73 % Non-accruing loans $ 7,181,174 $ 7,009,631 Loans outstanding $ 983,876,487 $ 965,285,662 ACL to non-accruing loans 157.08 % 155.00 % ACL $ 11,280,241 $ 10,864,983 Non-accruing loans $ 7,181,174 $ 7,009,631 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, 2026 December 31, 2025 Amount Percent Amount Percent Commercial & industrial $ 659,892 11.64 % $ 627,062 11.13 % Purchased 27,847 0.93 % 30,221 1.04 % Commercial real estate 6,641,815 51.39 % 6,303,378 51.76 % Municipal 160,265 6.52 % 155,196 6.43 % Residential real estate - 1st lien 3,170,615 24.57 % 3,120,462 24.51 % Residential real estate - Jr lien 591,510 4.63 % 600,940 4.81 % Consumer 28,297 0.32 % 27,724 0.32 % Total $ 11,280,241 100.00 % $ 10,864,983 100.00 % The first quarter ACL analysis indicated that the reserve balance of $11.3 million as of March 31, 2026, was sufficient to cover expected credit losses that are probable and estimable as of the measurement date. As discussed in Note 5 of the accompanying unaudited interim consolidated financial statements, included in the ACL calculation for the first quarter of 2026 was an adjustment made by management to increase the risk status of the qualitative factor for criticized & classified in the commercial and CRE segments to reflect increases in criticized & classified loans in these segments. 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, 2026 2025 Commercial & industrial 0.00 % -0.27 % Net recoveries (charge-offs) during the period $ 158 $ (337,433 ) Average amount outstanding $ 110,431,398 $ 122,780,745 Purchased 0.00 % 0.00 % Net charge-offs during the period $ 0 $ 0 Average amount outstanding $ 6,782,419 $ 10,093,245 Commercial real estate 0.00 % 0.00 % Net charge-offs during the period $ 0 $ 0 Average amount outstanding $ 504,730,654 $ 484,575,956 Municipal 0.00 % 0.00 % Net charge-offs during the period $ 0 $ 0 Average amount outstanding $ 64,263,585 $ 66,623,605 Residential real estate - 1st lien 0.00 % 0.00 % Net recoveries during the period $ 3,822 $ 610 Average amount outstanding $ 238,481,154 $ 226,986,996 Residential real estate - Jr lien 0.00 % 0.00 % Net charge-offs during the period $ 0 $ 0 Average amount outstanding $ 45,384,421 $ 39,429,849 Consumer -0.27 % -2.03 % Net charge-offs during the period $ (15,706 ) $ (57,388 ) Average amount outstanding $ 5,802,642 $ 2,823,232 Total loans 0.00 % -0.04 % Net charge-offs during the period $ (11,726 ) $ (394,211 ) Average amount outstanding $ 975,876,273 $ 953,313,628 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 2026, 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, 2026, and December 31, 2025, the Company had no 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, 2026 and December 31, 2025, the Company reported $4.8 million and $4.7 million, respectively, in reciprocal CDARS deposits. The balance in ICS reciprocal money market deposits was $27.9 million as of March 31, 2026, compared to $48.8 million as of December 31, 2025, and the balance in ICS reciprocal demand deposits as of those dates was $117.2 million and $122.0 million, respectively. Additionally, the Company had brokered deposits from other sources totaling approximately $29.8 million as of March 31, 2026 and $30.5 million as of December 31, 2025. These relationships have 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, 2026 and December 31, 2025, borrowing capacity of $140.2 million and $137.6 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 $35.9 million for both periods. The following table reflects the Company’s outstanding advances with FHLBB as of the dates indicated: March 31, December 31, 2026 2025 FHLBB Long-Term Advances 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, 4.27%, due June 07, 2027 10,000,000 10,000,000 FHLBB option advance, 3.66%, due March 26, 2027 5,000,000 5,000,000 FHLBB option advance, 3.51%, due March 27, 2028 5,000,000 5,000,000 FHLB term advance, 0.00%, due September 24, 2030 (1) 175,022 175,022 Total Long-Term Advances $ 35,975,022 $ 35,975,022 (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 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 $61.6 million and $62.6 million, respectively, as of March 31, 2026, and December 31, 2025. 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 375 bps. The Company had no outstanding advances through this facility as of March 31, 2026, or December 31, 2025. 45 Table of Contents As of March 31, 2026, and December 31, 2025, the Company had an unsecured line of credit of $12.5 million with a 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, as Management deems appropriate. The repurchase authorization expires in July, 2029 unless extended, or earlier terminated, by the Board. Notwithstanding the program’s five-year term, the Board reviews and re-evaluates 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. In addition, management will confer with the FRBB regarding the program, as appropriate in the circumstances. As of March 31, 2026, 90,308 shares had been repurchased since the inception of the program, for an aggregate purchase price of $1.9 million, including 1,070 shares at an average purchase price of $24.89 and an aggregate purchase price of $26,633 during the first quarter of 2026. The following table illustrates the changes in shareholders' equity from December 31, 2025, to March 31, 2026: Balance as of December 31, 2025 (book value $20.36 per common share) $ 113,686,978 Net income 4,369,102 Issuance of common stock through the DRIP 370,726 Dividends declared on common stock (1,393,291 ) Repurchase of shares through the stock buyback program (26,633 ) Change in AOCI on AFS securities, net of tax (164,132 ) Balance as of March 31, 2026 (book value $20.88 per common share) $ 116,842,750 As described in more detail in Note 22 to the audited consolidated financial statements contained in the Company’s 2025 Annual Report on Form 10-K and under the caption “LIQUIDITY AND CAPITAL RESOURCES” in the MD&A section of that report, the Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies pursuant to which they must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As of March 31, 2026, 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. 46 Table of Contents The following table shows the Company’s actual capital ratios and those of its subsidiary, as well as currently applicable regulatory capital requirements, as of the balance sheet dates: 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, 2026: Common equity tier 1 capital (to risk-weighted assets) Company $ 115,044 13.00 % $ 39,831 4.50 % $ 61,959 7.00 % N/A N/A Bank $ 127,069 14.36 % $ 39,809 4.50 % $ 61,925 7.00 % $ 57,502 6.50 % Tier 1 capital (to risk-weighted assets) Company $ 127,931 14.45 % $ 53,108 6.00 % $ 75,236 8.50 % N/A N/A Bank $ 127,069 14.36 % $ 53,079 6.00 % $ 75,195 8.50 % $ 70,771 8.00 % Total capital (to risk-weighted assets) Company $ 139,005 15.70 % $ 70,810 8.00 % $ 92,939 10.50 % N/A N/A Bank $ 138,137 15.62 % $ 70,771 8.00 % $ 92,888 10.50 % $ 88,464 10.00 % Tier 1 capital (to average assets) Company $ 127,931 10.25 % $ 49,904 4.00 % N/A N/A N/A N/A Bank $ 127,069 10.19 % $ 49,884 4.00 % N/A N/A $ 62,355 5.00 % December 31, 2025: Common equity tier 1 capital (to risk-weighted assets) Company $ 111,724 12.77 % $ 39,377 4.50 % $ 61,253 7.00 % N/A N/A Bank $ 123,559 14.13 % $ 39,345 4.50 % $ 61,203 7.00 % $ 56,831 6.50 % Tier 1 capital (to risk-weighted assets) Company $ 124,611 14.24 % $ 52,503 6.00 % $ 74,379 8.50 % N/A N/A Bank $ 123,559 14.13 % $ 52,459 6.00 % $ 74,318 8.50 % $ 69,946 8.00 % Total capital (to risk-weighted assets) Company $ 135,556 15.49 % $ 70,003 8.00 % $ 91,879 10.50 % N/A N/A Bank $ 134,495 15.38 % $ 69,946 8.00 % $ 91,804 10.50 % $ 87,432 10.00 % Tier 1 capital (to average assets) Company $ 124,611 10.00 % $ 49,832 4.00 % N/A N/A N/A N/A Bank $ 123,559 9.92 % $ 49,807 4.00 % N/A N/A $ 62,258 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.