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Equibles

10-Q

Community Bancorp /Vt (CMTV)

10-Q 2024-11-14 For: 2024-09-30
View Original
Added on April 11, 2026

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM 10-Q

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2024

OR

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to

Commission File Number 000-16435

cmtv_10qimg1.jpg

Community Bancorp./VT
(Exact name of Registrant as Specified in its Charter)
Vermont 03-0284070
--- ---
(State of Incorporation) (IRS Employer Identification Number)
4811 US Route 5, Derby, Vermont 05829
(Address of Principal Executive Offices) (zip code)
Registrant's Telephone Number:  (802) 334-7915

Securities registered pursuant to Section 12(b) of the Act: NONE

Title of Each Class Trading Symbol(s) Name of each exchange on which registered
(Not Applicable)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file for such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒     No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒     NO ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐     NO ☒

At November 04, 2024, there were 5,577,794 shares outstanding of the Corporation's common stock.

FORM 10-Q

Index
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements 3
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
Item 3 Quantitative and Qualitative Disclosures About Market Risk 51
Item 4 Controls and Procedures 51
PART II OTHER INFORMATION
Item 1 Legal Proceedings 52
Item 1A Risk Factors 52
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 52
Item 6 Exhibits 52
Signatures 53
Exhibit Index 54
2
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PART I.  FINANCIAL INFORMATION

ITEM 1.  Financial Statements (Unaudited)

The following are the unaudited consolidated financial statements for the Company.

Community Bancorp. and Subsidiary

Consolidated Balance Sheets

December 31,
2023
Assets
Cash and due from banks 15,922,872 $ 15,001,122
Federal funds sold and overnight deposits 33,898,144 5,433,391
Total cash and cash equivalents 49,821,016 20,434,513
Securities available-for-sale 170,477,527 190,706,019
Restricted equity securities, at cost 2,791,250 1,642,350
Loans 912,716,917 845,429,854
Allowance for credit losses (9,540,452 ) (9,842,725 )
Deferred net loan costs 632,346 573,169
Net loans 903,808,811 836,160,298
Bank premises and equipment, net 12,324,290 12,371,371
Accrued interest receivable 4,353,182 4,246,798
Bank owned life insurance 5,296,956 5,232,703
Goodwill 11,574,269 11,574,269
Other real estate owned 275,000 0
Other assets 16,565,178 16,976,613
Total assets 1,177,287,479 $ 1,099,344,934
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing 202,741,979 $ 202,969,957
Interest-bearing transaction accounts 296,865,607 297,030,893
Money market funds 111,117,868 121,375,419
Savings 144,173,873 151,570,686
Time deposits, 250,000 and over 35,505,173 24,676,853
Other time deposits 139,175,589 99,343,974
Total deposits 929,580,089 896,967,782
Repurchase agreements 32,604,118 36,255,920
Borrowed funds 93,600,000 54,600,000
Junior subordinated debentures 12,887,000 12,887,000
Accrued interest and other liabilities 10,267,817 9,605,418
Total liabilities 1,078,939,024 1,010,316,120
Shareholders' Equity
Preferred stock, 1,000,000 shares authorized, 15 shares issued and outstanding at 09/30/24 and 12/31/23 (100,000 liquidation value, per share) 1,500,000 1,500,000
Common stock - 2.50 par value; 15,000,000 shares authorized, 5,788,590 shares issued at 09/30/24 and 5,724,151 shares issued at 12/31/23 14,471,475 14,310,378
Additional paid-in capital 38,471,953 37,574,578
Retained earnings 58,948,585 54,198,230
Accumulated other comprehensive loss (12,420,781 ) (15,931,595 )
Less: treasury stock, at cost; 210,101 shares at 09/30/24 and 12/31/23 (2,622,777 ) (2,622,777 )
Total shareholders' equity 98,348,455 89,028,814
Total liabilities and shareholders' equity 1,177,287,479 $ 1,099,344,934
Book value per common share outstanding 17.36 $ 15.87

All values are in US Dollars.

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Community Bancorp. and Subsidiary

Consolidated Statements of Income

(Unaudited)

Three Months Ended September 30,
2024 2023
Interest income
Interest and fees on loans $ 12,739,224 $ 10,919,330
Interest on taxable debt securities 881,822 941,956
Interest on tax-exempt debt securities 80,411 90,659
Dividends 64,051 39,904
Interest on federal funds sold and overnight deposits 201,959 94,515
Total interest income 13,967,467 12,086,364
Interest expense
Interest on deposits 3,676,889 2,501,243
Interest on borrowed funds 1,159,214 676,837
Interest on repurchase agreements 194,151 201,518
Interest on junior subordinated debentures 275,290 276,707
Total interest expense 5,305,544 3,656,305
Net interest income 8,661,923 8,430,059
Credit loss expense 460,745 240,889
Net interest income after credit loss expense 8,201,178 8,189,170
Non-interest income
Service fees 972,338 937,890
Income from sold loans 96,294 144,747
Other income from loans 381,170 310,645
Other income 556,872 318,309
Total non-interest income 2,006,674 1,711,591
Non-interest expense
Salaries and wages 2,358,000 2,164,760
Employee benefits 986,804 797,304
Occupancy expenses, net 683,980 662,277
Other expenses 2,479,874 2,190,203
Total non-interest expense 6,508,658 5,814,544
Income before income taxes 3,699,194 4,086,217
Income tax expense 584,943 723,708
Net income $ 3,114,251 $ 3,362,509
Earnings per common share $ 0.55 $ 0.61
Weighted average number of common shares used in computing earnings per share 5,563,774 5,478,960
Dividends declared per common share $ 0.24 $ 0.23

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Community Bancorp. and Subsidiary

Consolidated Statements of Income

(Unaudited)

Nine Months Ended September 30,
2024 2023
Interest income
Interest and fees on loans $ 36,484,552 $ 30,310,324
Interest on taxable debt securities 2,786,379 2,815,397
Interest on tax-exempt debt securities 241,234 271,975
Dividends 169,706 104,556
Interest on federal funds sold and overnight deposits 342,343 568,803
Total interest income 40,024,214 34,071,055
Interest expense
Interest on deposits 10,116,896 6,570,373
Interest on borrowed funds 3,379,454 953,799
Interest on repurchase agreements 570,913 548,300
Interest on junior subordinated debentures 836,089 776,296
Total interest expense 14,903,352 8,848,768
Net interest income 25,120,862 25,222,287
Credit loss expense 1,105,906 808,557
Net interest income after credit loss expense 24,014,956 24,413,730
Non-interest income
Service fees 2,834,439 2,757,629
Income from sold loans 273,867 358,942
Other income from loans 913,994 1,081,093
Other income 1,390,698 1,111,136
Total non-interest income 5,412,998 5,308,800
Non-interest expense
Salaries and wages 7,104,000 6,718,280
Employee benefits 2,840,194 2,363,444
Occupancy expenses, net 2,100,714 2,133,492
Other expenses 7,035,466 6,342,955
Total non-interest expense 19,080,374 17,558,171
Income before income taxes 10,347,580 12,164,359
Income tax expense 1,682,242 2,266,751
Net income $ 8,665,338 $ 9,897,608
Earnings per common share $ 1.55 $ 1.80
Weighted average number of common shares used in computing earnings per share 5,542,353 5,461,660
Dividends declared per common share $ 0.70 $ 0.69

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Community Bancorp. and Subsidiary

Consolidated Statements of Comprehensive Income

(Unaudited)

Three Months Ended September 30,
2024 2023
Net income $ 3,114,251 $ 3,362,509
Other comprehensive income (loss)
Unrealized holding income (loss) on securities AFS arising during the period 6,150,345 (5,155,445 )
Tax effect (1,291,573 ) 1,082,645
Other comprehensive income (loss), net of tax 4,858,772 (4,072,800 )
Total comprehensive income (loss) $ 7,973,023 $ (710,291 )
Nine Months Ended September 30,
--- --- --- --- --- --- ---
2024 2023
Net income $ 8,665,338 $ 9,897,608
Other comprehensive income (loss), net of tax:
Unrealized holding income (loss) on securities AFS arising during the period 4,444,072 (3,615,720 )
Tax effect (933,258 ) 759,302
Other comprehensive income (loss), net of tax 3,510,814 (2,856,418 )
Total comprehensive income $ 12,176,152 $ 7,041,190

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Community Bancorp. and Subsidiary

Consolidated Statements of Changes in Shareholders' Equity

(Unaudited)

Nine Months Ended September 30, 2024
Additional Total
Common Preferred paid-in Retained Treasury shareholders'
Stock Stock capital earnings AOCI* stock equity
January 1, 2024 $ 14,310,378 $ 1,500,000 $ 37,574,578 $ 54,198,230 $ (15,931,595 ) $ (2,622,777 ) $ 89,028,814
Issuance of common stock 52,890 307,561 360,451
Cash dividends declared
Common stock (1,268,320 ) (1,268,320 )
Preferred stock (31,875 ) (31,875 )
Comprehensive income
Net income 2,822,901 2,822,901
Other comprehensive loss (1,508,008 ) (1,508,008 )
March 31, 2024 $ 14,363,268 $ 1,500,000 $ 37,882,139 $ 55,720,936 $ (17,439,603 ) $ (2,622,777 ) $ 89,403,963
Issuance of common stock 50,000 291,418 341,418
Cash dividends declared
Common stock (1,273,008 ) (1,273,008 )
Preferred stock (31,875 ) (31,875 )
Comprehensive income
Net income 2,728,186 2,728,186
Other comprehensive income 160,050 160,050
June 30, 2024 $ 14,413,268 $ 1,500,000 $ 38,173,557 $ 57,144,239 $ (17,279,553 ) $ (2,622,777 ) $ 91,328,734
Issuance of common stock 58,207 298,396 356,603
Cash dividends declared
Common stock (1,278,030 ) (1,278,030 )
Preferred stock (31,875 ) (31,875 )
Comprehensive income
Net income 3,114,251 3,114,251
Other comprehensive income 4,858,772 4,858,772
September 30, 2024 $ 14,471,475 $ 1,500,000 $ 38,471,953 $ 58,948,585 $ (12,420,781 ) $ (2,622,777 ) $ 98,348,455

*Accumulated other comprehensive loss

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Community Bancorp. and Subsidiary

Consolidated Statements of Changes in Shareholders' Equity

(Unaudited)

Nine Months Ended September 30, 2023
Additional Total
Common Preferred paid-in Retained Treasury shareholders'
Stock Stock capital earnings AOCI* stock equity
January 1, 2023 $ 14,119,275 $ 1,500,000 $ 36,383,235 $ 46,464,447 $ (20,667,817 ) $ (2,622,777 ) $ 75,176,363
Cumulative change in accounting principle (549,113 ) (549,113 )
Balance at January 1, 2023 (as adjusted for change in accounting principle) 45,915,334 74,627,250
Issuance of common stock 43,693 276,184 319,877
Cash dividends declared
Common stock (1,250,794 ) (1,250,794 )
Preferred stock (28,125 ) (28,125 )
Comprehensive income
Net income 3,338,761 3,338,761
Other comprehensive income 2,672,818 2,672,818
March 31, 2023 $ 14,162,968 $ 1,500,000 $ 36,659,419 $ 47,975,176 $ (17,994,999 ) $ (2,622,777 ) $ 79,679,787
Issuance of common stock 45,720 336,527 382,247
Cash dividends declared
Common stock (1,254,835 ) (1,254,835 )
Preferred stock (30,000 ) (30,000 )
Comprehensive income
Net income 3,196,339 3,196,339
Other comprehensive loss (1,456,436 ) (1,456,436 )
June 30, 2023 $ 14,208,688 $ 1,500,000 $ 36,995,946 $ 49,886,680 $ (19,451,435 ) $ (2,622,777 ) $ 80,517,102
Issuance of common stock 43,382 246,293 289,675
Cash dividends declared
Common stock (1,258,852 ) (1,258,852 )
Preferred stock (30,938 ) (30,938 )
Comprehensive income
Net income 3,362,509 3,362,509
Other comprehensive loss (4,072,800 ) (4,072,800 )
September 30, 2023 $ 14,252,070 $ 1,500,000 $ 37,242,239 $ 51,959,399 $ (23,524,235 ) $ (2,622,777 ) $ 78,806,696

*Accumulated other comprehensive loss

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Community Bancorp. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended September 30,
2024 2023
Cash Flows from Operating Activities:
Net income $ 8,665,338 $ 9,897,608
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, bank premises and equipment 780,718 809,560
Credit loss expense 1,105,906 808,557
Deferred income tax 352,399 (269,192 )
Gain on sale of loans (66,682 ) (114,912 )
(Gain) loss on sale of bank premises and equipment (13,981 ) 449
Income from CFS Partners (979,747 ) (705,342 )
Amortization of bond premium, net 158,121 201,050
Proceeds from sales of loans held for sale 3,972,232 5,597,777
Originations of loans held for sale (3,905,550 ) (5,539,565 )
Decrease in taxes payable (388,763 ) (271,441 )
Increase in interest receivable (106,384 ) (615,797 )
Decrease in mortgage servicing rights 66,093 48,123
Decrease in right-of-use assets 144,684 150,971
Decrease in operating lease liabilities (18,220 ) (161,271 )
Increase in other assets (19,409 ) (71,207 )
Increase in cash surrender value of BOLI (64,253 ) (59,235 )
Amortization of limited partnerships 447,606 201,384
Change in net deferred loan fees and costs (59,177 ) (56,955 )
Increase in interest payable 1,355,993 720,343
Decrease in accrued expenses (492,340 ) (310,304 )
(Decrease) increase in other liabilities (58,875 ) 369,059
Net cash provided by operating activities 10,875,709 10,629,660
Cash Flows from Investing Activities:
Investments - AFS
Maturities, calls, pay downs and sales 24,514,443 11,164,002
Purchases 0 (3,991,124 )
Proceeds from redemption of restricted equity securities 4,152,400 3,516,500
Purchases of restricted equity securities (5,301,300 ) (3,528,300 )
Decrease in limited partnership contributions payable 0 (1,823,301 )
Investments in limited liability entities 0 (282,000 )
Increase in loans, net (69,016,918 ) (90,497,664 )
Capital expenditures net of proceeds from sales of bank premises and equipment (864,341 ) (516,267 )
Recoveries of loans charged off 75,906 159,827
Net cash used in investing activities (46,439,810 ) (85,798,327 )
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2024 2023
--- --- --- --- --- --- ---
Cash Flows from Financing Activities:
Net decrease in demand and interest-bearing transaction accounts (393,264 ) (20,211,447 )
Net decrease in money market and savings accounts (17,654,364 ) (14,587,675 )
Net increase in time deposits 50,659,935 13,031,762
Net decrease in repurchase agreements (3,651,802 ) (1,497,403 )
Net increase in short-term borrowings 9,000,000 3,550,000
Proceeds from long-term borrowings 30,000,000 44,500,000
Repayments on long-term borrowings 0 (200,000 )
Decrease in finance lease obligations (169,659 ) (164,420 )
Dividends paid on preferred stock (95,625 ) (89,063 )
Dividends paid on common stock (2,744,617 ) (2,771,073 )
Net cash provided by financing activities 64,950,604 21,560,681
Net increase (decrease) in cash and cash equivalents 29,386,503 (53,607,986 )
Cash and cash equivalents:
Beginning 20,434,513 71,140,328
Ending $ 49,821,016 $ 17,532,342
Supplemental Schedule of Cash Paid During the Period:
Interest $ 13,547,359 $ 8,128,425
Income taxes, net of refunds $ 1,271,000 $ 2,606,000
Supplemental Schedule of Noncash Investing and Financing Activities:
Change in unrealized gain (loss) on securities AFS $ 4,444,072 $ (3,615,720 )
Loans transferred to OREO $ 275,000 $ 0
Additions to operating lease liabilities $ 138,058 $ 0
Common Shares Dividends Paid:
Dividends declared $ 3,819,358 $ 3,764,480
Increase in dividends payable attributable to dividends declared (16,269 ) (1,608 )
Dividends reinvested (1,058,472 ) (991,799 )
Total dividends paid $ 2,744,617 $ 2,771,073

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Notes to Consolidated Financial Statements

Note 1.  Basis of Presentation and Consolidation and Certain Definitions

Basis of Presentation and Consolidation. The interim consolidated financial statements of Community Bancorp. and Subsidiary are unaudited.  All significant intercompany balances and transactions have been eliminated in consolidation.  In the opinion of management, all adjustments necessary for the fair presentation of the consolidated financial condition and results of operations of the Company and its subsidiary, Community National Bank (the Bank), contained herein have been made.  The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2023, contained in the Company's Annual Report on Form 10-K.  The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full annual period ending December 31, 2024.

The Company is considered a “smaller reporting company” and a “non-accelerated filer” under the disclosure rules of the SEC.  Accordingly, the Company has elected to provide smaller reporting company scaled disclosures where management deems it appropriate, and to provide its audited consolidated statements of income, comprehensive income, cash flows and changes in shareholders’ equity for a two year, rather than a three year, period.is considered a “smaller reporting company” under the disclosure rules of the SEC, as amended in 2018.

In addition to the definitions provided elsewhere in this quarterly report, the definitions, acronyms and abbreviations identified below are used throughout this report, including in Part I. “Financial Information” and Part II. “Other Information” and are intended to aid the reader and provide a reference page when reviewing this report.

ABS: Asset backed security FASB: Financial Accounting Standards Board
ACL: Allowance for Credit Losses FDIC: Federal Deposit Insurance Corporation
AFS: Available-for-sale FDICIA: Federal Deposit Insurance Corporation
Agency MBS: MBS issued by a US government agency Improvement Act of 1991
or GSE FHLBB: Federal Home Loan Bank of Boston
ALCO: Asset Liability Committee FHLMC: Federal Home Loan Mortgage Corporation
ALL: Allowance for Loan Losses FOMC: Federal Open Market Committee
AOCI: Accumulated other comprehensive income FRB: Federal Reserve Board
ASC: Accounting Standards Codification FRBB: Federal Reserve Bank of Boston
ASU: Accounting Standards Update GAAP: Generally Accepted Accounting Principles
Bancorp: Community Bancorp. in the United States
Bank: Community National Bank GSE: Government sponsored enterprise
BHG: Bankers Healthcare Group HTM: Held-to-maturity
BIC: Borrower-in-Custody ICS: Insured Cash Sweeps of the IntraFi Network
Board: Board of Directors IRS: Internal Revenue Service
BOLI: Bank owned life insurance JNE: Jobs for New England
bp or bps: Basis point(s) Jr: Junior
BTFP: Bank Term Funding Program MBS: Mortgage-backed security
CDARS: Certificate of Deposit Accounts Registry MSRs: Mortgage servicing rights
Service of the IntraFi Network NII: Net interest income
CDs: Certificates of deposit OAS: Other amortizing security
CECL: Current Expected Credit Loss OBS: Off-balance sheet
CFSG: Community Financial Services Group, LLC OCI: Other comprehensive income (loss)
CFS Partners: Community Financial Services Partners, OREO: Other real estate owned
LLC OTTI: Other-than-temporary impairment
CME: CME Group Benchmark Administration Ltd. PMI: Private mortgage insurance
CMO: Collateralized Mortgage Obligations PPP: Paycheck Protection Program
Company: Community Bancorp. and Subsidiary RD: USDA Rural Development
CRE: Commercial Real Estate SBA: U.S. Small Business Administration
DCF: Discounted cash flow SEC: U.S. Securities and Exchange Commission
DDA or DDAs: Demand Deposit Account(s) SOFR: Secured Overnight Financing Rate
DTC: Depository Trust Company USDA: U.S. Department of Agriculture
DRIP: Dividend Reinvestment Plan VA: U.S. Veterans Administration
Exchange Act: Securities Exchange Act of 1934
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Note 2.  Recent Accounting Developments

In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures. The ASU provides more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information, such as requiring the disclosure of specific categories in the rate reconciliation and the disaggregation of income tax expense and income taxes paid by federal, state, and foreign taxes. The ASU is effective for annual periods beginning after December 15, 2024. The Company does not believe the ASU will have a material impact on the Company's consolidated financial statements.

Note 3.  Earnings per Common Share

Earnings per common share amounts are computed based on the weighted average number of shares of common stock issued during the period (retroactively adjusted for stock splits and stock dividends, if any), including Dividend Reinvestment Plan shares issuable upon reinvestment of dividends declared, and reduced for shares held in treasury.

The following tables illustrate the calculation of earnings per common share for the periods presented, as adjusted for the cash dividends declared on the preferred stock:

Three Months Ended September 30, 2024 2023
Net income, as reported $ 3,114,251 $ 3,362,509
Less: dividends to preferred shareholders 31,875 30,938
Net income available to common shareholders $ 3,082,376 $ 3,331,571
Weighted average number of common shares
used in calculating earnings per share 5,563,774 5,478,960
Earnings per common share $ 0.55 $ 0.61
Nine Months Ended September 30, 2024 2023
--- --- --- --- ---
Net income, as reported $ 8,665,338 $ 9,897,608
Less: dividends to preferred shareholders 95,625 89,063
Net income available to common shareholders $ 8,569,713 $ 9,808,545
Weighted average number of common shares
used in calculating earnings per share 5,542,353 5,461,660
Earnings per common share $ 1.55 $ 1.80

Note 4.  Investment Securities

Debt securities AFS as of the balance sheet dates consisted of the following:

Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
September 30, 2024
U.S. GSE debt securities $ 12,000,000 $ 0 $ 824,636 $ 11,175,364
U.S. Government securities 30,605,171 0 926,727 29,678,444
Taxable Municipal securities 300,000 0 40,395 259,605
Tax-exempt Municipal securities 10,787,598 188,260 505,176 10,470,682
Agency MBS 122,653,012 368,015 13,768,390 109,252,637
ABS and OAS 2,098,117 0 92,570 2,005,547
CMO 7,260,135 0 96,557 7,163,578
Other investments 496,000 0 24,330 471,670
Total $ 186,200,033 $ 556,275 $ 16,278,781 $ 170,477,527
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Gross Gross
--- --- --- --- --- --- --- --- ---
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2023
U.S. GSE debt securities $ 12,000,000 $ 0 $ 1,172,426 $ 10,827,574
U.S. Government securities 41,207,049 0 1,943,800 39,263,249
Taxable Municipal securities 300,000 0 53,035 246,965
Tax-exempt Municipal securities 10,832,494 158,982 517,691 10,473,785
Agency MBS 132,043,238 321,880 16,502,319 115,862,799
ABS and OAS 2,533,872 0 186,251 2,347,621
CMO 10,963,942 0 226,346 10,737,596
Other investments 992,000 0 45,570 946,430
Total $ 210,872,595 $ 480,862 $ 20,647,438 $ 190,706,019

The Company had investments in Agency MBS exceeding 10% of shareholders’ equity with a book value of $122.7 million and $132.0 million, respectively, and a fair value of $109.3 million and $115.9 million, respectively, as of September 30, 2024 and December 31, 2023.

Investment securities pledged as collateral for repurchase agreements consisted of certain U.S. GSE debt securities, Agency MBS, ABS and OAS, and CMO.  These repurchase agreements mature daily.  The aggregate amortized cost and fair value of these pledged investments as of the balance sheet dates were as follows:

Amortized Fair
Cost Value
September 30, 2024 $ 55,287,171 $ 49,272,350
December 31, 2023 59,300,089 52,107,148

Investment securities pledged as collateral for BTFP borrowings consisted of U.S. Government securities and U.S. GSE debt securities with an aggregate amortized cost and fair value of these pledged investments as of the balance sheet dates as follows:

Amortized Fair
Cost Value
September 30, 2024 $ 59,475,278 $ 54,660,881
December 31, 2023 49,232,069 43,795,542

There were no sales of debt securities during the first nine months of 2024 or 2023.

The scheduled maturities of debt securities as of the balance sheet dates were as follows:

Amortized Fair
Cost Value
September 30, 2024
Due in one year or less $ 21,463,669 $ 21,128,521
Due from one to five years 28,637,966 27,205,804
Due from five to ten years 1,625,056 1,428,846
Due after ten years 11,820,330 11,461,719
Agency MBS 122,653,012 109,252,637
Total $ 186,200,033 $ 170,477,527
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Amortized Fair
--- --- --- --- ---
Cost Value
December 31, 2023
Due in one year or less $ 17,366,548 $ 17,061,882
Due from one to five years 43,976,469 41,245,991
Due from five to ten years 4,485,724 4,141,301
Due after ten years 13,000,616 12,394,046
Agency MBS 132,043,238 115,862,799
Total $ 210,872,595 $ 190,706,019

Agency MBS are not due at a single maturity date and have not been allocated to maturity groupings for purposes of the maturity table.

Debt securities with unrealized losses as of the balance sheet dates are presented in the table below.

Less than 12 months 12 months or more Totals
Fair Unrealized Fair Unrealized Number of Fair Unrealized
Value Loss Value Loss Securities Value Loss
September 30, 2024
U.S. GSE debt securities $ 0 $ 0 $ 11,175,364 $ 824,636 11 $ 11,175,364 $ 824,636
U.S. Government securities 0 0 29,678,444 926,727 44 29,678,444 926,727
Taxable Municipal securities 0 0 259,605 40,395 1 259,605 40,395
Tax-exempt Municipal securities 1,054,262 8,790 4,036,628 496,386 11 5,090,890 505,176
Agency MBS 0 0 97,490,581 13,768,390 116 97,490,581 13,768,390
ABS and OAS 0 0 2,005,547 92,570 4 2,005,547 92,570
CMO 0 0 7,163,578 96,557 8 7,163,578 96,557
Other investments 0 0 471,670 24,330 2 471,670 24,330
Total $ 1,054,262 $ 8,790 $ 152,281,417 $ 16,269,991 197 $ 153,335,679 $ 16,278,781
December 31, 2023
U.S. GSE debt securities $ 0 $ 0 $ 10,827,574 $ 1,172,426 11 $ 10,827,574 $ 1,172,426
U.S. Government securities 0 0 39,263,249 1,943,800 54 39,263,249 1,943,800
Taxable Municipal securities 0 0 246,965 53,035 1 246,965 53,035
Tax-exempt Municipal securities 529,571 9,468 4,058,155 508,223 10 4,587,726 517,691
Agency MBS 1,328,433 9,218 103,000,706 16,493,101 119 104,329,139 16,502,319
ABS and OAS 0 0 2,347,621 186,251 4 2,347,621 186,251
CMO 3,309,165 18,554 7,428,431 207,792 10 10,737,596 226,346
Other investments 0 0 946,430 45,570 4 946,430 45,570
Total $ 5,167,169 $ 37,240 $ 168,119,131 $ 20,610,198 213 $ 173,286,300 $ 20,647,438

The Company adopted ASU No. 2016-13 effective January 1, 2023, which requires credit losses on debt securities AFS to be recorded in an allowance for credit losses and eliminates the concept of OTTI for debt securities AFS. Under the ASU, if the Company intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, then the credit loss is recorded through an allowance rather than as a write-down of the security as under prior GAAP. As of September 30, 2024 and December 31, 2023, the Company did not have the intent to sell, nor was it more likely than not that we would be required to sell, any of the debt securities AFS in an unrealized loss position as of such dates prior to recovery and determined that no individual debt securities in an unrealized loss position represented credit losses that would require an allowance for credit losses. The Company concluded that the unrealized losses as of the balance sheet dates were primarily attributed to increases in market interest rates since these securities were purchased under other market conditions.  Accordingly, there was no ACL on AFS debt securities as of September 30, 2024 or December 31, 2023.

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Note 5.  Loans, Allowance for Credit Losses, Credit Quality and Off-Balance Sheet Credit Exposures

The composition of net loans as of the balance sheet dates was as follows:

September 30, 2024 December 31, 2023
Commercial & industrial $ 126,769,226 13.89 % $ 121,705,707 14.40 %
Purchased (1) 8,415,438 0.92 % 10,568,922 1.25 %
Commercial real estate 460,121,749 50.41 % 414,880,621 49.07 %
Municipal 65,503,481 7.18 % 54,466,988 6.44 %
Residential real estate - 1st lien 215,935,553 23.66 % 208,824,888 24.70 %
Residential real estate - Jr lien 32,942,086 3.61 % 31,668,811 3.75 %
Consumer 3,029,384 0.33 % 3,313,917 0.39 %
Total loans 912,716,917 100.00 % 845,429,854 100.00 %
ACL (9,540,452 ) (9,842,725 )
Deferred net loan costs 632,346 573,169
Net loans $ 903,808,811 $ 836,160,298
(1) As of September 30, 2024, purchased loans consisted of $4,220,549 in commercial loans and $4,194,889 in consumer loans, compared to $5,705,659 and $4,863,263, respectively, as of December 31, 2023.
--- ---

Accrued interest receivable on loans totaled $3.8 million and $3.6 million as of September 30, 2024 and December 31, 2023, respectively, and was reported in accrued interest receivable on the consolidated balance sheets and is excluded from the estimate of credit losses.

Three Months Ended September 30, 2024 2023
Credit loss expense - loans $ 406,955 $ 264,009
Credit loss expense (reversal) - OBS credit exposure 53,790 (23,120 )
Credit loss expense $ 460,745 $ 240,889
Nine Months Ended September 30, 2024 2023
Credit loss expense - loans $ 1,076,676 $ 849,549
Credit loss expense (reversal) - OBS credit exposure 29,230 (40,992 )
Credit loss expense $ 1,105,906 $ 808,557

The following tables present the activity in the ACL on loans for the periods presented.

As of or for the three months ended September 30, 2024

Balance Credit Loss Balance
June 30, Expense September 30,
2024 Charge-offs Recoveries (Reversal) 2024
Commercial & Industrial $ 1,087,079 $ (1,097,922 ) $ 1,731 $ 1,013,020 $ 1,003,908
Purchased 32,061 0 0 (6,444 ) 25,617
Commercial Real Estate 5,986,039 (81,000 ) 0 (339,428 ) 5,565,611
Municipal 85,253 0 0 78,505 163,758
Residential Real Estate - 1st Lien 2,694,655 0 0 (295,978 ) 2,398,677
Residential Real Estate - Jr Lien 425,623 0 13,122 (77,893 ) 360,852
Consumer 25,005 (45,512 ) 7,363 35,173 22,029
Totals $ 10,335,715 $ (1,224,434 ) $ 22,216 $ 406,955 $ 9,540,452
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As of or for the nine months ended September 30, 2024

Balance Credit Loss Balance
December 31, Expense September 30,
2023 Charge-offs Recoveries (Reversal) 2024
Commercial & Industrial $ 1,100,688 $ (1,249,441 ) 45,800 1,106,861 $ 1,003,908
Purchased 37,065 0 0 (11,448 ) 25,617
Commercial Real Estate 5,522,082 (126,393 ) 0 169,922 5,565,611
Municipal 136,167 0 0 27,591 163,758
Residential Real Estate - 1st Lien 2,590,926 0 0 (192,249 ) 2,398,677
Residential Real Estate - Jr Lien 431,007 0 15,537 (85,692 ) 360,852
Consumer 24,790 (79,021 ) 14,569 61,691 22,029
Totals $ 9,842,725 $ (1,454,855 ) $ 75,906 $ 1,076,676 $ 9,540,452

As of or for the year ended December 31, 2023

Impact of Credit
Balance Adoption of Loss Balance
December 31, ASU No. Expense December 31,
2022 2016-13 Charge- offs Recoveries (Reversal) 2023
Commercial & Industrial $ 1,116,322 $ (164,115 ) $ (386,578 ) $ 10,237 $ 524,822 $ 1,100,688
Purchased 53,090 (29,196 ) 0 0 13,171 37,065
Commercial Real Estate 5,061,813 (22,467 ) 0 22,058 460,678 5,522,082
Municipal 62,339 24,243 0 0 49,585 136,167
Residential Real Estate - 1st Lien 2,001,836 273,167 (1,625 ) 72,588 244,960 2,590,926
Residential Real Estate - Jr Lien 241,950 297,746 0 29,240 (137,929 ) 431,007
Consumer 69,686 (33,813 ) (131,332 ) 44,657 75,592 24,790
Unallocated 102,189 (102,189 ) 0 0 0 0
Totals $ 8,709,225 $ 243,376 $ (519,535 ) $ 178,780 $ 1,230,879 $ 9,842,725

As of or for the three months ended September 30, 2023

Balance Credit Loss Balance
June 30, Expense September 30,
2023 Charge-offs Recoveries (Reversal) 2023
Commercial & Industrial $ 1,054,342 $ 0 $ 1,585 $ 9,401 $ 1,065,328
Purchased 18,337 0 0 (170 ) 18,167
Commercial Real Estate 5,271,521 0 0 43,638 5,315,159
Municipal 69,360 0 0 77,508 146,868
Residential Real Estate - 1st Lien 2,314,554 0 0 122,263 2,436,817
Residential Real Estate - Jr Lien 493,236 0 1,237 (17,723 ) 476,750
Consumer 34,151 (42,985 ) 8,626 29,092 28,884
Totals $ 9,255,501 $ (42,985 ) $ 11,448 $ 264,009 $ 9,487,973
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As of or for the nine months ended September 30, 2023

Impact of Credit
Balance Adoption of Loss Balance
December 31, ASU No. Expense September 30,
2022 2016-13 Charge- offs Recoveries (Reversal) 2023
Commercial & Industrial $ 1,116,322 $ (164,115 ) $ (361,578 ) $ 3,935 $ 470,764 $ 1,065,328
Purchased 53,090 (29,196 ) 0 0 (5,727 ) 18,167
Commercial Real Estate 5,061,813 (22,467 ) 0 22,058 253,755 5,315,159
Municipal 62,339 24,243 0 0 60,286 146,868
Residential Real Estate - 1st Lien 2,001,836 273,167 0 72,588 89,226 2,436,817
Residential Real Estate - Jr Lien 241,950 297,746 0 28,015 (90,961 ) 476,750
Consumer 69,686 (33,813 ) (112,426 ) 33,231 72,206 28,884
Unallocated 102,189 (102,189 ) 0 0 0 0
Totals $ 8,709,225 $ 243,376 $ (474,004 ) $ 159,827 $ 849,549 $ 9,487,973

Credit Quality Grouping

In developing the ACL, management uses credit quality groupings to help evaluate trends in credit quality.  The Company groups credit risk into Groups A, B and C.  The manner the Company utilizes to assign risk grouping is driven by loan purpose.  Commercial purpose loans are individually risk graded while the retail portion of the portfolio is generally grouped by delinquency pool.

Group A loans - Pass **** – are loans that are expected to perform as agreed under their respective terms.  Such loans carry a normal level of risk that does not require management attention beyond that warranted by the loan or loan relationship characteristics, such as loan size or relationship size.  Group A loans include commercial purpose loans that are individually risk rated, including purchased and retail loans that are rated by pool.  Group A retail loans include performing consumer and residential real estate loans.  Residential real estate loans are loans to individuals secured by 1-4 family homes, including first mortgages, home equity and home improvement loans. Loan balances fully secured by deposit accounts or that are fully guaranteed by the federal government are considered acceptable risk.

Group B loans – Special Mention - are loans that require greater attention than the acceptable risk loans in Group A. Characteristics of such loans may include, but are not limited to, borrowers that are experiencing negative operating trends such as reduced sales or margins, borrowers that have exposure to adverse market conditions such as increased competition or regulatory burden, or borrowers that have had unexpected or adverse changes in management.  These loans have a greater likelihood of migrating to an unacceptable risk level if these characteristics are left unchecked.  Group B is limited to commercial purpose loans that are individually risk rated.

Group C loans – Substandard/Doubtful – are loans that have distinct shortcomings that require a greater degree of management attention.  Examples of these shortcomings include a borrower's inadequate capacity to service debt, poor operating performance, or insolvency.  These loans are more likely to result in repayment through collateral liquidation. Group C loans range from those that are likely to sustain some loss if the shortcomings are not corrected, to those for which loss is imminent and non-accrual treatment is warranted.  Group C loans include individually rated commercial purpose loans and retail loans adversely rated in accordance with the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification Policy.  Group C retail loans include 1-4 family residential real estate loans and home equity loans past due 90 days or more with loan-to-value ratios greater than 60%, home equity loans 90 days or more past due where the Bank does not hold first mortgage, irrespective of loan-to-value, loans in bankruptcy where repayment is likely but not yet established, and lastly consumer loans that are 90 days or more past due.

Commercial purpose loan ratings are assigned by the commercial account officer; for larger and more complex commercial loans, the credit rating is a collaborative assignment by the lender and the credit analyst.  The credit risk rating is based on the borrower's expected performance, i.e., the likelihood that the borrower will be able to service its obligations in accordance with the loan terms.  Credit risk ratings are meant to measure risk versus simply record history.  Assessment of expected future payment performance requires consideration of numerous factors.  While past performance is part of the overall evaluation, expected performance is based on an analysis of the borrower's financial strength, and historical and projected factors such as size and financing alternatives, capacity and cash flow, balance sheet and income statement trends, the quality and timeliness of financial reporting, and the quality of the borrower’s management.  Other factors influencing the credit risk rating to a lesser degree include collateral coverage and control, guarantor strength and commitment, documentation, structure and covenants and industry conditions.  There are uncertainties inherent in this process.

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Credit risk ratings are dynamic and require updating whenever relevant information is received.  Risk ratings are assessed on an ongoing basis and at various points, including delinquency or at the time of other adverse events.  For larger, more complex or adversely rated loans, risk ratings are also assessed at the time of annual or periodic review.  Lenders are required to make immediate disclosure to the Senior Lender of any known increase in loan risk, even if considered temporary in nature.

The risk ratings within the loan portfolio and current period gross charge-offs, by loan segment and origination year, were as follows:

As of or for the nine months ended, Revolving Revolving
September 30, 2024 Loans Loans
Term Loans Amortized Cost Basis by Origination Year Amortized Converted
(In thousands) 2024 2023 2022 2021 2020 Prior Cost Basis to Term Total
Commercial & Industrial:
Pass $ 9,974 $ 13,756 $ 15,801 $ 10,175 $ 1,934 $ 5,396 $ 59,431 $ 0 $ 116,467
Special mention 0 50 34 183 0 0 429 0 696
Substandard/Doubtful 0 306 1,284 576 358 1,898 5,185 0 9,607
Total $ 9,974 $ 14,112 $ 17,119 $ 10,934 $ 2,292 $ 7,294 $ 65,045 $ 0 $ 126,770
Purchased:
Pass $ 0 $ 4,477 $ 84 $ 944 $ 1,066 $ 1,844 $ 0 $ 0 $ 8,415
Total $ 0 $ 4,477 $ 84 $ 944 $ 1,066 $ 1,844 $ 0 $ 0 $ 8,415
Commercial real estate:
Pass $ 43,650 $ 68,733 $ 86,761 $ 34,419 $ 41,397 $ 108,151 $ 69,184 $ 0 $ 452,295
Special mention 0 0 0 2,037 0 805 0 0 2,842
Substandard/Doubtful 0 0 0 0 2,922 2,063 0 0 4,985
Total $ 43,650 $ 68,733 $ 86,761 $ 36,456 $ 44,319 $ 111,019 $ 69,184 $ 0 $ 460,122
Municipal:
Pass $ 38,311 $ 185 $ 608 $ 2,899 $ 4,157 $ 9,745 $ 9,598 $ 0 $ 65,503
Total $ 38,311 $ 185 $ 608 $ 2,899 $ 4,157 $ 9,745 $ 9,598 $ 0 $ 65,503
Residential real estate - 1st lien:
Pass $ 21,854 $ 29,281 $ 36,075 $ 38,654 $ 30,716 $ 53,903 $ 2,645 $ 0 $ 213,128
Special mention 0 161 0 0 0 215 0 0 376
Substandard/Doubtful 0 0 298 125 1,790 219 0 0 2,432
Total $ 21,854 $ 29,442 $ 36,373 $ 38,779 $ 32,506 $ 54,337 $ 2,645 $ 0 $ 215,936
Residential real estate - Jr lien:
Pass $ 2,103 $ 1,982 $ 1,879 $ 318 $ 557 $ 1,289 $ 23,233 $ 1,556 $ 32,917
Substandard/Doubtful 0 0 0 0 0 25 0 0 25
Total $ 2,103 $ 1,982 $ 1,879 $ 318 $ 557 $ 1,314 $ 23,233 $ 1,556 $ 32,942
Consumer
Pass $ 1,204 $ 861 $ 519 $ 216 $ 103 $ 126 $ 0 $ 0 $ 3,029
Total $ 1,204 $ 861 $ 519 $ 216 $ 103 $ 126 $ 0 $ 0 $ 3,029
Total Loans $ 117,096 $ 119,792 $ 143,343 $ 90,546 $ 85,000 $ 185,679 $ 169,705 $ 1,556 $ 912,717
Current period gross charge-offs
Commercial & Industrial $ 0 $ 14 $ 0 $ 5 $ 0 $ 1,231 $ 0 $ 0 $ 1,250
Commercial real estate 0 0 0 0 45 81 0 0 126
Consumer 1 30 3 3 0 42 0 0 79
Total current period gross charge-offs $ 1 $ 44 $ 3 $ 8 $ 45 $ 1,354 $ 0 $ 0 $ 1,455
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As of or for the nine months ended September 30, 2024, there were (i) no current period gross charge-offs within the Purchased, Municipal, Residential real estate 1st lien and Residential real estate Jr lien loan segments, (ii) no Special mention loans within the Purchased, Municipal, Residential real estate Jr lien and Consumer loan segments, and (iii) no Substandard/Doubtful loans within the Purchased, Municipal and Consumer loan segments.

The Company did not purchase any loans during the nine months ended September 30, 2024.

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more and still accruing as of the dates presented.  There were no nonaccrual loans with an ACL as of September 30, 2024 or December 31, 2023.

90 Days or
Nonaccrual Total More and
September 30, 2024 with No ACL Nonaccrual Accruing
Commercial & industrial $ 2,301,934 $ 2,301,934 $ 7,390
Commercial real estate 1,387,849 1,387,849 0
Residential real estate - 1st lien 771,607 771,607 729,327
Residential real estate - Jr lien 24,951 24,951 137,560
Totals $ 4,486,341 $ 4,486,341 $ 874,277
December 31, 2023
--- --- --- --- --- --- ---
Commercial & industrial $ 3,632,659 $ 3,632,659 $ 0
Commercial real estate 2,818,283 2,818,283 38,779
Residential real estate - 1st lien 415,074 415,074 446,395
Residential real estate - Jr lien 89,030 89,030 0
Totals $ 6,955,046 $ 6,955,046 $ 485,174

The following is an age analysis of past due loans (including non-accrual) as of the balance sheet dates, by portfolio segment:

90 Days Total
September 30, 2024 30-89 Days or More Past Due Current Total Loans
Commercial & industrial $ 0 $ 1,805,734 $ 1,805,734 $ 124,963,492 $ 126,769,226
Purchased 0 0 0 8,415,438 8,415,438
Commercial real estate 625,341 155,032 780,373 459,341,376 460,121,749
Municipal 0 0 0 65,503,481 65,503,481
Residential real estate - 1st lien 85,078 1,230,810 1,315,888 214,619,665 215,935,553
Residential real estate - Jr lien 54,236 137,560 191,796 32,750,290 32,942,086
Consumer 7,415 0 7,415 3,021,969 3,029,384
Totals $ 772,070 $ 3,329,136 $ 4,101,206 $ 908,615,711 $ 912,716,917
December 31, 2023
--- --- --- --- --- --- --- --- --- --- ---
Commercial & industrial $ 253,974 $ 3,068,578 $ 3,322,552 $ 118,383,155 $ 121,705,707
Purchased 0 0 0 10,568,922 10,568,922
Commercial real estate 178,083 944,669 1,122,752 413,757,869 414,880,621
Municipal 0 0 0 54,466,988 54,466,988
Residential real estate - 1st lien 1,856,944 646,980 2,503,924 206,320,964 208,824,888
Residential real estate - Jr lien 245,856 25,007 270,863 31,397,948 31,668,811
Consumer 14,728 0 14,728 3,299,189 3,313,917
Totals $ 2,549,585 $ 4,685,234 $ 7,234,819 $ 838,195,035 $ 845,429,854

For all loan segments, loans over 30 days past due are considered delinquent.

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The following table presents the amortized cost basis of collateral-dependent loans (e.g. repayment expected through underlying collateral, no other expected sources of repayment) as of the balance sheet dates, by collateral type:

Business
Assets (1) Real Estate
September 30, 2024
Commercial & industrial $ 132,264 $ 0
Commercial real estate 0 129,982
Residential real estate - 1st lien 0 605,030
Totals $ 132,264 $ 735,012
December 31, 2023
Commercial & industrial $ 1,298,717 $ 0
Commercial real estate 0 1,263,495
Residential real estate - 1st lien 0 167,363
Totals $ 1,298,717 $ 1,430,858

(1) Including, but not limited to, inventory, equipment, and accounts receivable, but excluding real estate.

Residential real estate loans in process of foreclosure as of the balance sheet dates were comprised of the following:

Number of loans Balance
September 30, 2024 2 $ 126,151
December 31, 2023 0 $ 0

Allowance for credit losses

Effective January 1, 2023, with the adoption of CECL, the Company established the ACL through a provision for credit losses charged to earnings. Credit losses are charged against the allowance when management believes that future payments of a loan balance are unlikely. Subsequent recoveries, if any, are credited to the allowance.

Unsecured loans are charged off when they become uncollectible and no later than 120 days past due.  Unsecured loans to customers who subsequently file bankruptcy, are charged off within 30 days of receipt of the notification of filing or by the end of the month in which the loans become 120 days past due, whichever occurs first.  For secured loans, both residential and commercial, the potential loss on impaired loans is carried as a loan loss reserve specific allocation; the loss portion is charged off when collection of the full loan appears unlikely.  The unsecured portion of a real estate loan is that portion of the loan exceeding the "fair value" of the collateral less the estimated cost to sell.  The value of the collateral is determined in accordance with the Company’s appraisal policy.  The unsecured portion of an impaired real estate secured loan is charged off by the end of the month in which the loan becomes 180 days past due.

As described below, the allowance consists of general and specific components.  However, the entire allowance is available to absorb losses in the loan portfolio, regardless of general or specific components considered in determining the amount of the allowance.

General component

The general component of the ACL is based on methodologies, inputs, and assumptions utilized to estimate lifetime credit losses when applied to the following loan segments: commercial and industrial, purchased loans, CRE, municipal, residential real estate 1st lien, residential real estate Jr lien and consumer loans. The Company does not disaggregate its portfolio segments further into classes.

The Company utilizes a DCF approach to calculate the expected loss for each portfolio segment. Within the DCF model, probability of default (PD) and loss given default (LGD) assumptions are applied to calculate the expected loss for each segment. PD is management’s estimate of the probability the asset will default within a given timeframe and LGD is management’s estimate of the percentage of assets not expected to be collected due to default. The Company's PD and LGD assumptions may be derived from internal historical default and loss experience or from external data where there are not statistically meaningful loss events for a loan segment, or it does not have default and loss data that covers a full economic cycle.

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As of September 30, 2024, the primary macroeconomic drivers used within the DCF model included forecasts of civilian unemployment and changes in national gross domestic product (GDP).  Management monitors and assesses its macroeconomic drivers at least annually (generally in the fourth quarter, or more frequently as circumstances warrant) to determine whether they continue to be the most predictive indicator of losses within the Company's loan portfolio, and these macroeconomic drivers may change from time to time.

To determine its reasonable and supportable forecast, management may leverage macroeconomic forecasts obtained from various reputable sources, which may include, but are not limited to, the FOMC forecast and other publicly available forecasts from well recognized, leading economists or firms. The Company's reasonable and supportable forecast period generally ranges from one to three years, depending on the facts and circumstances of the current state of the economy, portfolio segment, and management's judgment of what can be reasonably supported. The model reversion period generally ranges from one to six years, and it also depends on the current state of the economy and management's judgments of such. Management monitors and assesses the forecast and reversion period at least annually, or more frequently as circumstances warrant.  The Company used a one-year forecast and reversion period to calculate the ACL on loans as of September 30, 2024.

When the DCF method is used to determine the ACL, management does not adjust the effective interest rate used to discount expected cash flows to incorporate expected prepayments.

Expected credit losses are estimated over the contractual term of the loans. For term loans, the contractual life is calculated based on the maturity date. For commercial revolving loans with no stated maturity date, the contractual life is calculated based on the internal review date. For all other revolving loans, the contractual life is based on either the estimated maturity date or a default date. The contractual term excludes expected extensions, renewals, and modifications.

In calculating the ACL on loans, the contractual life of a loan must be adjusted for prepayments in order to arrive at expected cash flows. The Company models term loans using an annualized prepayment. When the Company has a specific expectation of differing payment behavior for a given loan, the loan may be evaluated individually. For revolving loans that do not have a principal payment schedule, a curtailment rate is factored into the expected cash flow.

Management has elected to use loss rate methodologies appropriate for each loan segment.  The DCF method was chosen for the commercial and industrial, CRE, residential real estate 1^st^ lien, residential real estate Jr Lien and consumer loans. The DCF model, being periodic in nature, allows for effective incorporation of a reasonable and supportable forecast in a directionally consistent and objective manner.  For the purchased loans segment, a long-term average loss rate is calculated and applied on a quarterly basis for the remaining life of the pool.  Due to the lack of any historical loss data, a manual entry methodology was chosen for the municipal loans given the immaterial nature of the pool when considering prior loss history as well as the inability to reasonably forecast a PD or LGD for the pool.

Qualitative factors are also applied to include the levels of and trends in delinquencies and non-performing loans, levels of and trends in loan risk groups, trends in volumes and terms of loans, effects of any changes in loan related policies, experience, ability and the depth of management, documentation and credit data exception levels, national and local economic trends, external factors such as competition and regulation and lastly, concentrations of credit risk in a variety of areas, including portfolio product mix, the level of loans to individual borrowers and their related interests, loans to industry segments, and the geographic distribution of CRE loans. This evaluation is inherently subjective as it requires estimates that are susceptible to revision as more information becomes available. During the third quarter of 2024, after review and analysis, management adjusted the qualitative factors for economic trends in all portfolios to reflect improving trends. The qualitative factors for volume and terms in the commercial and industrial, CRE, and residential portfolios were adjusted to reflect the absence of new or changed risks in those portfolios from new or increasing types of loans, industries, or collateral. The qualitative factors for concentrations in the commercial and industrial, CRE, and residential portfolios were adjusted to reflect concentrations within policy as well adjust to the appropriate level for the residential portfolios where the concentration policy does not apply. The qualitative factor for delinquencies and non-performing loans in the consumer and residential portfolios was adjusted to reflect low past due levels and a decrease year to date.

The qualitative factors are reviewed periodically and determined by management based on the various risk characteristics of each loan segment.  The Company has policies, procedures, and internal controls that management believes are commensurate with the risk profile of each of these segments.  Major risk characteristics relevant to each portfolio segment are as follows:

Commercial & Industrial – Loans in this segment include commercial and industrial loans and to a lesser extent loans to finance agricultural production.  Commercial loans are made to businesses and are generally secured by assets of the business, including trade assets and equipment. While not the primary collateral, in many cases these loans may also be secured by the real estate of the business. Repayment is expected from the cash flows of the business.  A weakened economy, soft consumer spending, unfavorable foreign trade conditions and the rising cost of labor or raw materials are examples of issues that can impact credit quality in this segment.

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Purchased – Loans in this segment are loans purchased through a loan purchasing program with BHG.  BHG originates commercial loans to medical professionals and consumer loans to other professionals nationwide and sells them individually to a secondary market, primarily banks, through a bid process.  The Bank has established conservative credit parameters and expects a low risk of default in this portfolio.

Commercial Real Estate – Loans in this segment are principally made to businesses and are generally secured by either owner-occupied, or non-owner occupied CRE.  A relatively small portion of this segment includes farm loans secured by farmland and buildings.  As with commercial and industrial loans, repayment of owner-occupied CRE loans is expected from the cash flows of the business and the segment would be impacted by the same risk factors as commercial and industrial loans.  The non-owner occupied CRE portion includes both residential and commercial construction loans, vacant land and real estate development loans, multi-family dwelling loans and commercial rental property loans.  Repayment of construction loans is expected from permanent financing takeout; the Company generally requires a commitment or eligibility for the take-out financing prior to construction loan origination.  Real estate development loans are generally repaid from the sale of the subject real property as the project progresses.  Construction and development lending entail additional risks, including the project exceeding budget, not being constructed according to plans, not receiving permits, or the pre-leasing or occupancy rate not meeting expectations.  Repayment of multi-family loans and commercial rental property loans is expected from the cash flow generated by rental payments received from the individuals or businesses occupying the real estate.  CRE loans are impacted by factors such as competitive market forces, vacancy rates, cap rates, net operating incomes, lease renewals and overall economic demand. In addition, loans in the recreational and tourism sector can be affected by weather conditions, such as unseasonably low winter snowfalls.  CRE lending also carries a higher degree of environmental risk than other real estate lending.

Municipal – Loans in this segment are made to local municipalities, attributable to municipal financing transactions and backed by the full faith and credit of town governments or dedicated governmental revenue sources, with no historical losses recognized by the Company.  Qualitative factors are not utilized in the manual entry method for municipal loans.

Residential Real Estate - 1^st^ Lien – Loans in this segment are collateralized by first mortgages on 1 – 4 family owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower.  The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.

Residential Real Estate – Jr Lien – Loans in this segment are collateralized by junior lien mortgages on 1 – 4 family residential real estate and repayment is primarily dependent on the credit quality of the individual borrower.  The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.

Consumer – Loans in this segment are made to individuals for consumer and household purposes.  This segment includes both loans secured by automobiles and other consumer goods, as well as loans that are unsecured.  This segment also includes overdrafts, which are extensions of credit made to both individuals and businesses to cover temporary shortages in their deposit accounts and are generally unsecured.  The Company maintains policies restricting the size and term of these extensions of credit.  The overall health of the economy, including unemployment rates, has an impact on the credit quality of this segment.

Specific component

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are also not included in the collective evaluation. In general, loans individually evaluated for estimated credit losses include those (i) greater than $100,000 with a nonaccrual status or (ii) have other unique characteristics differing from the portfolio segment. Specific reserves are established when appropriate for such loans based on the present value of expected future cash flows of the loan. However, when management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

For all loan segments, the accrual of interest is discontinued when a loan is specifically determined to be impaired or when the loan is delinquent 90 days and management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is considered by management to be doubtful.  Any unpaid interest previously accrued on those loans is reversed from income.  Interest income is generally not recognized on specific impaired loans unless the likelihood of further loss is considered by management to be remote.  Interest payments received on impaired loans are generally applied as a reduction of the loan principal balance.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and a satisfactory payment performance of six or more months has occurred.

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Modifications of Loans

A loan is considered modified if, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider.  Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off.  Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the ACL is adjusted by the same amount.

The Company is deemed to have granted such a concession if it has modified a loan in any of the following ways:

· Reduced accrued interest;
· Reduced the original contractual interest rate to a rate that is below the current market rate for the borrower;
· Converted a variable-rate loan to a fixed-rate loan;
· Extended the term of the loan beyond an insignificant delay;
· Deferred or forgiven principal in an amount greater than three months of payments;
· Performed a refinancing and deferred or forgiven principal on the original loan;
· Capitalized protective advance to pay delinquent real estate taxes; or
· Capitalized delinquent accrued interest.

An insignificant delay or insignificant shortfall in the number of payments typically would not require the loan to be accounted for as modified.  However, pursuant to regulatory guidance, any payment delays longer than three months is generally not considered insignificant. Management’s assessment of whether a concession has been granted also takes into consideration payments expected to be received from third parties, including third-party guarantors, provided the third party has the ability to perform on the guarantee.

The Company’s modified loans are principally a result of extending loan repayment terms to relieve cash flow difficulties. The Company has only, on a limited basis, reduced accrued interest or reduced interest rates for borrowers below the current market rate for the borrower.  The Company has not generally forgiven principal within the terms of original restructurings, nor converted variable rate terms to fixed rate terms.  However, the Company evaluates each potential loan modification on its own merits and does not foreclose the granting of any particular type of concession.  In connection with modifications, the Company considers applicable regulatory guidance, including a 2023 Interagency Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts.

The following table presents the amortized cost basis of loans as of September 30, 2024, that were both experiencing financial difficulty and modified during the nine months ended September 30, 2024, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below.

Total Class
Payment Term of Financing
Delay Extension Receivable
Commercial & Industrial $ 1,634,720 $ 107,135 1.37 %

As of the balance sheet dates, the Company had committed to lend additional amounts totaling $250,000 to the borrower whose loans are included in the table above.

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the nine months ended September 30, 2024.

Weighted-
Average
Term Extension
(months/years)
Commercial & Industrial 3 months

There were no loan modifications that were past due as of September 30, 2024, or that had a payment default since modification.

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Off-Balance Sheet Credit Exposures

In the ordinary course of business, the Company enters into commitments to extend credit, including commercial letters of credit and standby letters of credit. Such financial instruments are recorded as loans when they are funded.

Allowance for Credit Losses on OBS Credit Exposures

Effective January 1, 2023, with the adoption of ASU No. 2016-13 (CECL), the Company estimates expected credit losses on OBS credit exposures over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.  The ACL on OBS credit exposures is adjusted through credit loss expense.  To appropriately measure expected credit losses, management disaggregates the loan portfolio into similar risk characteristics, identical to those determined for the loan portfolio.  An estimated funding rate is then applied to the qualifying unfunded loan commitments and letters of credit using the Company's own historical experience to estimate the expected funded amount for each loan segment as of the reporting date.  Once the expected funded amount for each loan segment is determined, the loss rate, which is the calculated expected loan loss as a percent of the amortized cost basis for each loan segment, is applied to calculate the ACL on OBS credit exposures as of the reporting date.  The ACL on OBS credit exposures is presented within accrued interest and other liabilities on the consolidated balance sheets.  As of September 30, 2024 and December 31, 2023, the ACL on OBS credit exposures totaled $835,402 and $806,172, respectively.

Note 6.  Goodwill and Other Intangible Assets

As a result of a merger with LyndonBank on December 31, 2007, the Company recorded goodwill amounting to $11,574,269.  Goodwill is not amortizable and is not deductible for tax purposes.

As of December 31, 2023, the most recent evaluation, management concluded that no impairment existed.  Management evaluates its goodwill intangible for impairment at least annually, or more frequently as circumstances warrant.

Note 7.  Loan Servicing

The following table shows the changes in the carrying amount of the MSRs, included in other assets in the consolidated balance sheets, for the periods indicated:

Nine Months Ended September 30, 2024
Balance at beginning of year $ 787,013
MSRs capitalized 31,228
MSRs amortized (97,321 )
Balance at end of period $ 720,920
Year Ended December 31, 2023
Balance at beginning of year $ 862,593
MSRs capitalized 68,297
MSRs amortized (143,877 )
Balance at end of period $ 787,013
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Note 8.  Fair Value

Certain assets and liabilities are recorded at fair value to provide additional insight into the Company’s quality of earnings and comprehensive income.  The fair values of some of these assets and liabilities are measured on a recurring basis while others are measured on a non-recurring basis, with the determination based upon applicable existing accounting pronouncements.  For example, securities available-for-sale are recorded at fair value on a recurring basis.  Other assets, such as MSRs, loans held-for-sale, impaired loans, and OREO are recorded at fair value on a non-recurring basis using the lower of cost or market methodology to determine impairment of individual assets.  The Company groups assets and liabilities which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value.  The level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with Level 1 considered highest and Level 3 considered lowest).  A brief description of each level follows.

Level 1 Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasury and other U.S. Government debt securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes MSRs, individually analyzed loans, loans held-for-sale, and OREO.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The following methods and assumptions were used by the Company in estimating its fair value measurements:

Debt Securities AFS:  Fair value measurement is based upon quoted prices for similar assets, if available.  If quoted prices are not available, fair values are measured using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curves, prepayment speeds and default rates, net of any related credit allowance.  Level 1 securities would include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets.  Level 2 securities include federal agency securities, municipal securities and other asset-backed securities.

Individually analyzed loans: Individually analyzed loans are reported based on one of three measures: the present value of expected future cash flows discounted at the loan’s effective interest rate; the loan’s observable market price; or the fair value of the collateral if the loan is collateral dependent.  If the fair value is less than an impaired loan’s recorded investment, an impairment loss is recognized as part of the ACL.  Accordingly, certain individually analyzed loans may be subject to measurement at fair value on a non-recurring basis.  Management has estimated the fair value of collateral-dependent loans using Level 2 inputs, such as the fair value of collateral based on independent third-party appraisals.

Loans held-for-sale:  The fair value of loans held-for-sale is based upon an actual purchase and sale agreement between the Company and an independent market participant.  The sale is executed within a reasonable period following quarter-end at the stated fair value.

*MSRs:*MSRs represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method and compared to fair value for impairment. In evaluating the carrying values of MSRs, the Company obtains third party valuations based on loan level data including note rate, and the type and term of the underlying loans.  The Company classifies MSRs as non-recurring Level 2.

OREO:  Real estate acquired through or in lieu of foreclosure and bank properties no longer used as bank premises are initially recorded at fair value. The fair value of OREO is based on property appraisals and an analysis of similar properties currently available. The Company records OREO as non-recurring Level 2.

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Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis and reflected in the consolidated balance sheets at the dates presented, segregated by fair value hierarchy, are summarized below.  There were no Level 3 assets or liabilities measured on a recurring basis as of the balance sheet dates presented, nor were there any transfers of assets between Levels during either of the periods presented for 2024 or 2023.

September 30, December 31,
Assets: (market approach) 2024 2023
Level 1
U.S. Government securities $ 29,678,444 $ 39,263,249
Level 2
U.S. GSE debt securities $ 11,175,364 $ 10,827,574
Taxable Municipal securities 259,605 246,965
Tax-exempt Municipal securities 10,470,682 10,473,785
Agency MBS 109,252,637 115,862,799
ABS and OAS 2,005,547 2,347,621
CMO 7,163,578 10,737,596
Other investments 471,670 946,430
Level 2 Total $ 140,799,083 $ 151,442,770
Grand Total $ 170,477,527 $ 190,706,019

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

The following table includes assets measured at fair value on a non-recurring basis that have had a fair value adjustment since their initial recognition.  Individually analyzed loans measured at fair value only include those loans with a partial write-down or with a related specific ACL and are presented net of the specific allowances as disclosed in Note 5.  Assets measured at fair value on a non-recurring basis and reflected in the consolidated balance sheets at the dates presented, segregated by fair value hierarchy level, are summarized below.  There were no Level 1 or Level 3 assets or liabilities measured on a non-recurring basis as of the balance sheet dates presented, nor were there any transfers of assets between levels during either of the periods presented for 2024 or 2023.

September 30, December 31,
Level 2 2024 2023
Assets: (market approach)
Individually analyzed loans, net of related allowance $ 1,940,021 $ 709,487
MSRs (1) 720,920 787,013
OREO 275,000 0

(1) Represents MSRs at lower of cost or fair value.

FASB ASC Topic 825, “Financial Instruments”, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, if the fair values can be reasonably determined.  Fair value is best determined based upon quoted market prices.  However, in many instances, there are no quoted market prices for the Company’s various financial instruments.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques using observable inputs when available.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  Accordingly, fair value estimates may not be realized in an immediate settlement of the instrument.  Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

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The estimated fair values of commitments to extend credit and letters of credit were immaterial as of the dates presented in the tables below.  The estimated fair values of the Company's financial instruments as of the balance sheet dates were as follows:

September 30, 2024 Fair Fair Fair Fair
Carrying Value Value Value Value
Amount Level 1 Level 2 Level 3 Total
(Dollars in Thousands)
Financial assets:
Cash and cash equivalents $ 49,821 $ 49,821 $ 0 $ 0 $ 49,821
Debt securities AFS 170,477 29,678 140,799 0 170,477
Restricted equity securities 2,791 0 2,791 0 2,791
Loans and loans held-for-sale, net of ACL
Commercial & industrial 125,755 0 1,810 121,426 123,236
Purchased 8,390 0 0 8,069 8,069
Commercial real estate 454,533 0 130 432,257 432,387
Municipal 65,340 0 0 62,656 62,656
Residential real estate - 1st lien 214,203 0 0 200,291 200,291
Residential real estate - Jr lien 32,581 0 0 32,197 32,197
Consumer 3,007 0 0 3,035 3,035
MSRs (1) 721 0 1,146 0 1,146
Accrued interest receivable 4,353 0 4,353 0 4,353
Financial liabilities:
Deposits
Other deposits 915,701 0 914,594 0 914,594
Brokered deposits 13,879 0 14,031 0 14,031
Short-term advances 62,500 0 62,527 0 62,527
Long-term advances 31,100 0 31,370 0 31,370
Repurchase agreements 32,604 0 32,604 0 32,604
Operating lease obligations 425 0 425 0 425
Finance lease obligations 3,255 0 3,255 0 3,255
Subordinated debentures 12,887 0 12,748 0 12,748
Accrued interest payable 2,438 0 2,438 0 2,438

(1) Reported fair value represents all MSRs for loans serviced by the Company, regardless of carrying amount.

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December 31, 2023 Fair Fair Fair Fair
--- --- --- --- --- --- --- --- --- --- ---
Carrying Value Value Value Value
Amount Level 1 Level 2 Level 3 Total
(Dollars in Thousands)
Financial assets:
Cash and cash equivalents $ 20,435 $ 20,435 $ 0 $ 0 $ 20,435
Debt securities AFS 190,706 39,263 151,443 0 190,706
Restricted equity securities 1,642 0 1,642 0 1,642
Loans and loans held-for-sale, net of ACL
Commercial & industrial 120,589 0 709 116,287 116,996
Purchased 10,532 0 0 10,055 10,055
Commercial real estate 409,332 0 0 382,045 382,045
Municipal 54,331 0 0 51,791 51,791
Residential real estate – 1^st^ lien 206,849 0 0 188,650 188,650
Residential real estate – Jr lien 31,238 0 0 30,745 30,745
Consumer 3,289 0 0 3,295 3,295
MSRs (1) 787 0 1,262 0 1,262
Accrued interest receivable 4,247 0 4,247 0 4,247
Financial liabilities:
Deposits
Other deposits 896,968 0 894,823 0 894,823
Overnight borrowings 9,000 0 9,000 0 9,000
Short-term advances 44,500 0 44,484 0 44,484
Long-term advances 1,100 0 931 0 931
Repurchase agreements 36,256 0 36,256 0 36,256
Operating lease obligations 443 0 443 0 443
Finance lease obligations 3,425 0 3,425 0 3,425
Subordinated debentures 12,887 0 12,719 0 12,719
Accrued interest payable 1,082 0 1,082 0 1,082

(1) Reported fair value represents all MSRs for loans serviced by the Company, regardless of carrying amount.

Note 9.  Legal Proceedings

In the normal course of business, the Company is involved in litigation that is considered incidental to its business.  Management does not expect that any such litigation will be material to the Company's consolidated financial condition or results of operations.

Note 10.  Subsequent Events

The Company has evaluated events and transactions through the date that the financial statements were issued for potential recognition or disclosure in these financial statements, as required by GAAP.  On September 11, 2024, the Company’s Board declared a cash dividend of $0.24 per common share, payable November 1, 2024, to shareholders of record as of October 15, 2024.  This dividend has been recorded in the Company’s consolidated financial statements as of the declaration date, including shares issuable under the DRIP.

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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 September 30, 2024

The following discussion analyzes the consolidated financial condition of Community Bancorp. and its wholly owned subsidiary, Community National Bank, as of September 30, 2024 and December 31, 2023, and its consolidated results of operations for the three-month and nine-month interim periods and one year period presented.  The Company is considered a “smaller reporting company” and a “non-accelerated filer” under the disclosure rules of the SEC. Accordingly, the Company has elected to provide its statements of income, comprehensive income, cash flows and changes in shareholders’ equity for a two-year, rather than a three-year, period and provide certain other smaller reporting company scaled disclosures where management deems it appropriate.

The following discussion should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in its 2023 Annual Report on Form 10-K filed with the SEC.  Please refer to Note 1 in the accompanying consolidated financial statements for a listing of acronyms and defined terms used throughout the following discussion.

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the results of operations, financial condition and business of the Company and its subsidiary. Words used in the discussion below such as "believes," "expects," "anticipates," "intends," "estimates," “projects”, "plans," “assumes”, "predicts," “may”, “might”, “will”, “could”, “should” and similar expressions, indicate that management of the Company is making forward-looking statements.

Forward-looking statements are not guarantees of future performance.  They necessarily involve risks, uncertainties and assumptions.  Examples of forward looking statements included in this discussion include, but are not limited to, statements regarding the estimated contingent liability related to assumptions made within the asset/liability management process; management's expectations as to the future interest rate environment and the Company's related liquidity level; credit risk expectations relating to the Company's loan portfolio and off-balance sheet commitments; and management's general outlook for the future performance of the Company and the local or national economy. Although forward-looking statements are based on management's expectations and estimates as of the date they are made, many of the factors that could influence or determine actual results are unpredictable and not within the Company's control.

Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities:

· interest rates change in such a way as to negatively affect loan demand, the local economy or the Company's net income, asset valuations or margins;
· general economic or business conditions, either nationally, regionally or locally, deteriorate, resulting in a decline in credit quality or a diminished demand for the Company's products and services;
· the impact of inflation and slowing economic growth on the Company’s customers and on its financial results and performance;
· the effect of United States monetary and fiscal policies, including deficit spending and the interest rate policies of the FRB and its regulation of the money supply;
· changes in applicable accounting policies, practices and standards;
· the geographic concentration of the Company’s loan portfolio and deposit base;
· reductions in deposit levels, which necessitate increased borrowings to fund loans and sale of investment securities;
· increases in the level of nonperforming assets and charge-offs;
· changes in federal or state tax laws or policy;
· changes in laws or government rules, including the rules of the federal Consumer Financial Protection Bureau, or the way in which courts or government agencies interpret or implement those laws or rules, increase our costs of doing business, causing us to limit or change our product offerings or pricing, or otherwise adversely affect the Company's business;
· regulatory responses to 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);
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· 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;
--- ---
· 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 September 30, 2024, were $1.18 billion compared to $1.10 billion as of December 31, 2023, an increase of 7.1%.  Changes in the asset base included an increase in loans of $67.3 million, or 8.0%, and an increase in cash of $29.4 million, or 143.8%, which was partially offset by a decrease of $20.2 million, or 10.6%, in investment securities.  The increase in the loan portfolio was primarily attributable to an increase of $6.2 million in commercial & industrial loans, $45.2 million in CRE loans, $11.1 million in municipal loans, and $8.4 million in residential first and Jr. lien loans, which was minimally offset by a decrease of $2.2 million in purchased loans.  The decrease in the investment portfolio was due in part to maturities in the U.S. Government securities portfolio and paydowns in the MBS and CMO portfolios.  In addition, cash flows from the investment portfolio were used to fund loan growth and other liquidity needs, rather than to purchase new investment securities.

Total deposits as of September 30, 2024, were $929.6 million compared to $897.0 million as of December 31, 2023, an increase of $32.6 million, or 3.6%.  Year to date, time deposits increased $50.7 million, or 40.9% while money market funds decreased $10.3 million, or 8.5%, and savings accounts decreased $7.4 million, or 4.9%.  The Company has been offering competitive interest rates for retail time deposits, and accessing the brokered deposit market, accounting for the increase in these funds.  An increase in deposit balances is typical in the third and fourth quarters of the calendar year, with balances increasing through year end due in part to municipal accounts collecting tax payments. The increase in deposit balances was less than the loan growth, requiring the continued use of borrowed funds as a supplemental funding source.

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Total interest income increased approximately $1.9 million, or 15.6%, for the third quarter of 2024, compared to the same quarter in 2023, and $6.0 million, or 17.5%, for the first nine months of 2024, compared to the same period in 2023.  The growth of the loan portfolio originated at higher interest rates, as well as adjustable-rate loans repricing to current market rates, helped to support the year-over-year increase in interest income.

These increases in total interest income were offset by significant increases in total interest expense, which increased $1.6 million, or 45.1%, for the third quarter of 2024, compared to the same quarter of 2023 and $6.1 million, or 68.4%, for the first nine months of 2024, compared to the same period in 2023.  The higher rate environment and the reliance on wholesale funding has increased borrowing costs and 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. However, the 50 bps FRB rate cut late in the third quarter of 2024 could possibly have a moderate influence in future periods.  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 nine months ended September 30, 2024 and 2023, was determined under ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, commonly referenced as the Current Expected Credit Losses, or CECL, which the Company adopted effective January 1, 2023.  The credit loss expense for the third quarter of 2024 was $460,745 compared to $240,889 for the same quarter of 2023 and $1.1 million for the first nine months of 2024 compared to $808,557 for the same period in 2023, resulting in increases of $219,856, or 91.3%, and $297,349, or 36.8%, respectively, between periods.  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 third quarter of 2024, 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 third quarter of 2024 decreased $248,258 to $3.1 million compared to $3.4 million for the same quarter of 2023, and for the first nine months of 2024 consolidated net income decreased $1.2 million to $8.7 million compared to $9.9 million for the same period of 2023.  Year over year, the $6.1 million increase in interest expense, despite a $6.0 million increase in interest income, was a contributing factor to the decrease in net income, along with a $1.5 million increase in non-interest expense.  These changes, along with other significant changes in non-interest income and non-interest expense are discussed in the appropriate sections of this MD&A.

Equity capital increased to $98.3 million, with a book value per share of $17.36 as of September 30, 2024, compared to $89.0 million and a book value per share of $15.87 as of December 31, 2023.  The increase in equity capital between periods reflected the combined effect of net income of $8.7 million for the first nine months of 2024, along with a decrease in unrealized losses in the investment portfolio of $3.5 million, net of tax, reflected in accumulated other comprehensive loss, which was offset in part by dividends paid totaling $3.8 million.  The unrealized loss position in the investment portfolio is considered by management as temporary and does not impact the Company’s regulatory capital ratios.

During the month of July sections of northern Vermont were hit with catastrophic flash flooding following heavy rainfall from two separate storms, leading to significant road washouts and flooding homes and businesses. The portions of the Company’s service area most impacted were Lamoille, Caledonia, Essex and Orleans counties.  None of the Company’s branches sustained any flood damage. The impact to the Bank’s customers appears to be manageable.

On September 11, 2024, the Company's Board of Directors declared a quarterly cash dividend of $0.24 per common share, an increase of $0.01 or 4.3% from the previous level, payable on November 1, 2024, to shareholders of record on October 15, 2024.

As of September 30, 2024, the Company’s capital ratios, and those of our subsidiary Bank, were in excess of applicable regulatory requirements.  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 September 30, 2024, no shares had been repurchased.

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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 2023 Annual Report on Form 10-K in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” and in Note 1 (Significant Accounting Policies) to the audited consolidated financial statements.  There were no material changes during the first nine months of 2024 in the Company’s critical accounting policies.

ACL - Management believes that the calculation of the ACL is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements.  In estimating the ACL, management has adopted a methodology consistent with ASU No. 2016-13 that requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses over the life of the loans at the measurement date.  Further consideration is given to qualitative factors, including changes in current economic indicators and their probable impact on borrowers and collateral, trends in delinquent and non-performing loans, trends in criticized and classified assets, levels of exceptions, the impact of competition in the market, concentrations of credit risk in a variety of areas, including portfolio product mix, the level of loans to individual borrowers and their related interests, loans to industry segments and the geographic distribution of CRE loans. Management’s estimates used in calculating the ACL may increase or decrease based on changes in these factors, which in turn will affect the amount of the Company’s provision for credit losses charged against current period income.  This evaluation is inherently subjective and actual results could differ significantly from these estimates under different assumptions, judgments or conditions.  The Company estimates expected credit losses on OBS credit exposures over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company.  The ACL on OBS credit exposures is 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 third quarter of 2024 was $3.1 million, or $0.55 per common share, compared to $3.4 million, or $0.61 per common share for the same quarter of 2023, and for the first nine months of 2024 was $8.7 million, or $1.55 per common share, compared to $9.9 million, or $1.80 per common share, for the same period in 2023.  Core earnings (NII) were $8.7 million for the third quarter of 2024 compared to $8.4 million for the same period of 2023, and $25.1 million for the first nine months of 2024 compared to $25.2 million for the same period in 2023.  Interest and fees on loans, the major component of interest income, increased $1.8 million, or 16.7% for the third quarter of 2024 compared to the same quarter of 2023, and $6.2 million, or 20.4%, for the first nine months of 2024 compared to the same period in 2023.  Interest paid on deposits, which is the major component of total interest expense, increased $1.2 million, or 47.0% for the third quarter of 2024 compared to the same quarter of 2023 and increased $3.5 million, or 54.0%, year over year, driven primarily by the increases in the fed funds rate during 2022 and into the third quarter of 2023. A shift from lower yielding interest-bearing accounts and savings accounts to higher yielding money market and certificate of deposit accounts has contributed to the higher interest expense year over year. Interest on borrowed funds increased $482 thousand, or 71.3% for the third quarter of 2024 compared to the same period in 2023 and increased $2.4 million, or 254.3%, for the first nine months of 2024 compared to the same period in 2023.  Market pressures on deposit rates along with an increased use of wholesale funding are driving up the Company’s cost of funds and compressing the net interest margin and net interest spread.  The FOMC’s recent 50 bps decrease in the federal funds rate occurred late in the third quarter and did not reduce the Company’s funding costs for the three- and nine-month periods of 2024.

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.

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The following table shows these ratios annualized, as well as other equity ratios monitored by management, for the comparison periods presented.

Three Months Ended September 30, 2024 2023
Return on average assets 1.09 % 1.24 %
Return on average equity 13.13 % 16.48 %
Dividend payout ratio (1) 43.64 % 37.70 %
Average equity to average assets 8.32 % 7.55 %
Nine Months Ended September 30, 2024 2023
--- --- --- --- --- --- ---
Return on average assets 1.04 % 1.27 %
Return on average equity 12.71 % 16.68 %
Dividend payout ratio (1) 45.16 % 38.33 %
Average equity to average assets 8.16 % 7.60 %

(1) Dividends declared per common share divided by earnings per common share.

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 $762,126 and $559,985 for the three months ended September 30, 2024 and 2023, respectively, and $2.0 million and $1.2 million for the nine months ended September 30, 2024 and 2023, respectively, was derived from loans to local municipalities of $65.5 million and $58.7 million, and tax-exempt municipal investment securities of $10.5 million and $10.6 million as of September 30, 2024 and 2023, respectively.

The following table shows the reconciliation between reported NII and tax equivalent NII for the comparison periods presented.

Three Months Ended September 30, 2024 2023
Net interest income as presented $ 8,661,923 $ 8,430,059
Effect of tax-exempt income 202,590 148,857
Net interest income, tax equivalent $ 8,864,513 $ 8,578,916
Nine Months Ended September 30, 2024 2023
--- --- --- --- ---
Net interest income as presented $ 25,120,862 $ 25,222,287
Effect of tax-exempt income 519,800 306,315
Net interest income, tax equivalent $ 25,640,662 $ 25,528,602
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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.  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 September 30,
2024 2023
Average Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Average Assets
Loans, net (1) $ 881,349,804 $ 12,920,439 5.83 % $ 813,431,805 $ 11,044,088 5.39 %
Taxable investment securities 161,647,230 881,822 2.17 % 176,104,770 941,956 2.12 %
Tax-exempt investment securities 10,341,406 101,786 3.92 % 11,353,244 114,758 4.01 %
Sweep and interest-earning accounts 15,181,231 201,959 5.29 % 7,796,502 94,515 4.81 %
Other investments (2) 3,282,445 64,051 7.76 % 2,074,630 39,904 7.63 %
Total interest-earning assets $ 1,071,802,116 $ 14,170,057 5.26 % $ 1,010,760,951 $ 12,235,221 4.80 %
Cash and due from banks 11,407,655 10,653,464
Premises and equipment 12,429,713 12,655,076
BOLI 5,282,687 5,199,896
Goodwill 11,574,269 11,574,269
Other assets 21,240,156 21,142,242
Total assets $ 1,133,736,596 $ 1,071,985,898
Average Liabilities and Shareholders' Equity
Interest-bearing transaction accounts $ 277,433,721 $ 1,395,412 2.00 % $ 263,787,094 $ 1,116,811 1.68 %
Money market funds 107,723,330 606,141 2.24 % 136,210,933 695,234 2.02 %
Savings deposits 145,326,193 32,699 0.09 % 164,695,504 34,076 0.08 %
Time deposits 166,484,878 1,642,637 3.93 % 109,526,390 655,122 2.37 %
Repurchase agreements 31,344,813 194,151 2.46 % 34,056,695 201,518 2.35 %
Borrowed funds 96,225,022 1,140,386 4.71 % 51,964,152 656,726 5.01 %
Finance lease obligations 3,274,915 18,828 2.30 % 3,499,404 20,111 2.30 %
Junior subordinated debentures 12,887,000 275,290 8.50 % 12,887,000 276,707 8.52 %
Total interest-bearing liabilities $ 840,699,872 $ 5,305,544 2.51 % $ 776,627,172 $ 3,656,305 1.87 %
Noninterest bearing deposits 192,053,702 207,879,544
Other liabilities 6,360,779 6,519,520
Total liabilities 1,039,114,353 991,026,236
Shareholders' equity 94,622,243 80,959,662
Total liabilities and shareholders' equity $ 1,133,736,596 $ 1,071,985,898
Net interest income $ 8,864,513 $ 8,578,916
Net interest spread (3) 2.75 % 2.93 %
Net interest margin (4) 3.29 % 3.37 %
(1) Included in net loans are non-accrual loans with average balances of $5,324,960 and $7,344,200 for the three months ended September 30, 2024 and 2023, respectively. Loans are stated net of unearned discount and ACL, plus loans held-for-sale and include tax-exempt loans to local municipalities with average balances of $62,393,304 and $56,085,091 for the three months ended September 30, 2024 and 2023, respectively.
--- ---
(2) Included in other investments is the Company’s FHLBB Stock with average balances of $2,217,295 and $1,009,480 for the three months ended September 30, 2024 and 2023, respectively, with a dividend rate of approximately 8.41% and 8.04%, 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.
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Nine Months Ended September 30,
--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
2024 2023
Average Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Average Assets
Loans, net (1) $ 864,456,129 $ 36,940,227 5.71 % $ 774,050,459 $ 30,544,342 5.28 %
Taxable investment securities 167,804,100 2,786,379 2.22 % 178,750,212 2,815,397 2.11 %
Tax-exempt investment securities 10,323,589 305,359 3.95 % 11,456,678 344,272 4.02 %
Sweep and interest-earning accounts 8,684,825 342,343 5.27 % 16,880,174 568,803 4.51 %
Other investments (2) 2,905,351 169,706 7.80 % 1,912,446 104,556 7.31 %
Total interest-earning assets 1,054,173,994 $ 40,544,014 5.14 % $ 983,049,969 $ 34,377,370 4.68 %
Cash and due from banks 10,676,192 10,584,558
Premises and equipment 12,463,916 12,798,118
BOLI 5,261,241 5,180,070
Goodwill 11,574,269 11,574,269
Other assets 21,663,721 20,013,956
Total assets $ 1,115,813,333 $ 1,043,200,940
Average Liabilities and Shareholders' Equity
Interest-bearing transaction accounts $ 278,254,672 $ 4,030,826 1.94 % $ 271,528,726 $ 3,254,644 1.60 %
Money market funds 117,715,164 1,972,978 2.24 % 130,690,426 1,699,425 1.74 %
Savings deposits 147,738,676 96,754 0.09 % 168,151,363 98,104 0.08 %
Time deposits 147,656,997 4,016,337 3.63 % 106,178,078 1,518,200 1.91 %
Repurchase agreements 31,298,729 570,913 2.44 % 35,611,331 548,300 2.06 %
Borrowed funds 92,516,088 3,321,999 4.80 % 24,875,392 892,522 4.80 %
Finance lease obligations 3,331,163 57,456 2.30 % 3,553,782 61,277 2.30 %
Junior subordinated debentures 12,887,000 836,089 8.67 % 12,887,000 776,296 8.05 %
Total interest-bearing liabilities 831,398,489 $ 14,903,352 2.39 % 753,476,098 $ 8,848,768 1.57 %
Noninterest bearing deposits 187,634,795 203,639,925
Other liabilities 5,706,198 6,766,501
Total liabilities 1,024,739,482 963,882,524
Shareholders' equity 91,073,851 79,318,416
Total liabilities and shareholders' equity $ 1,115,813,333 $ 1,043,200,940
Net interest income $ 25,640,662 $ 25,528,602
Net interest spread (3) 2.75 % 3.11 %
Net interest margin (4) 3.25 % 3.47 %
(1) Included in net loans are non-accrual loans with average balances of $6,075,373 and $7,873,201 for the nine months ended September 30, 2024 and 2023, respectively. Loans are stated net of unearned discount and ACL, and include loans held-for-sale and tax-exempt loans to local municipalities with average balances of $59,218,512 and $42,203,207 for the nine months ended September 30, 2024 and 2023, respectively.
--- ---
(2) Included in other investments is the Company’s FHLBB Stock with average balances of $1,840,201 and $847,296, respectively, with a dividend rate of approximately 8.52% and 8.5%, respectively, for the nine months ended September 30, 2024 and 2023, respectively.
(3) Net interest spread is the difference between the average yield on average interest-earning assets and the average rate paid on average interest-bearing liabilities.
(4) Net interest margin is net interest income divided by average earning assets.
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The average volume of interest-earning assets for the three- and nine-month periods ended September 30, 2024 increased 6.0% and 7.2%, respectively, compared to the same periods last year, and the average yield on interest-earning assets increased 46 bps in both comparison periods.

The average volume of loans increased over the three- and nine-month comparison periods of 2024 versus 2023 by 8.4% and 11.7%, respectively, and the average yield on loans increased 44 bps and 43 bps, respectively.  Loans accounted for 82.2% and 82.0% of the average interest-earning asset portfolio for the three- and nine-month periods ended September 30, 2024, compared to 80.5% and 78.7%, respectively, for the same periods last year.  Interest earned on the loan portfolio as a percentage of total interest income was 91.2% and 91.1%, respectively, for the three- and nine-month periods in 2024 compared to 90.3% and 88.9%, respectively, for the same periods in 2023.

The average volume of the taxable investment portfolio (classified as AFS) decreased 8.2% and 6.1%, respectively, during the three- and nine-month periods ended September 30, 2024, compared to the same periods last year, while the average yield increased five bps and 11 bps, respectively, between periods.  There were no purchases of taxable AFS investment securities during the first nine months of 2024, 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- and nine-month periods ended September 30, 2024 decreased 0.6% in both periods, and the tax equivalent yield decreased nine bps and seven bps, respectively.  There were no tax-exempt bond purchases during the first nine months of 2024, 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 94.7%, but decreased 48.6%, respectively, for the three- and nine-months ended September 30, 2024, compared to the same periods in 2023.  The decrease in average volume for the nine-month period year over year is attributable to the funding of loan growth, and to a decrease in customer deposit accounts.  The average yield on these funds increased 48 bps and 76 bps, respectively, for the three- and nine-month periods ended September 30, 2024, versus the same periods in 2023, directly related to the increases in the fed funds rate throughout 2022 and into 2023.

The average volume of interest-bearing liabilities for the three- and nine-month periods ended September 30, 2024 increased 8.5% and 10.3%, respectively, compared to the same periods in 2023, and the average rate paid on interest-bearing liabilities increased 64 bps and 82 bps, respectively.

The average volume of interest-bearing transaction accounts increased 5.2% and 2.5%, respectively, for the three- and nine-month periods ended September 30, 2024, compared to the same periods of 2023, reflecting moderate growth year over year. The average rate paid on these accounts increased 32 bps and 34 bps, respectively, between comparison periods.  Interest-bearing transaction accounts comprised 33.0% and 33.5% of the average interest-bearing liabilities portfolio for the three- and nine-month periods ended September 30, 2024, compared to 34.0% and 36.0%, respectively, for the same periods last year.  Interest paid on these funds accounted for 26.3% and 27.1%, respectively, of total interest expense for the three- and nine-month periods of 2024 compared to 30.5% and 36.8%, respectively, for the same periods in 2023.

The average volume of money market accounts decreased 20.9% and 9.9%, respectively, for the three- and nine-month periods ended September 30, 2024, compared to the same periods in 2023, while the average rate paid on these deposits increased 22 bps and 50 bps, respectively.

The average volume of savings accounts decreased 11.8% and 12.1%, respectively, for the three- and nine-month periods ended September 30, 2024, compared to the same periods in 2023, while the average rate paid on these accounts increased one bp in both comparison periods.

The average volume of time deposits increased 52.0% and 39.1%, respectively, for the three- and nine-month periods ended September 30, 2024, compared to the same periods in 2023, and the average rate paid increased 156 bps and 172 bps, respectively.

The average volume of repurchase agreements decreased 8.0% and 12.1%, respectively, for the three- and nine-month periods ended September 30, 2024, compared to the same periods in 2023, while the average rate paid increased 11 bps and 38 bps, respectively, between comparison periods.

The Company has utilized borrowed funds to fund loan growth and cover deposit outflows, particularly during the second and third quarters of 2023, and continuing into 2024, accounting for the increases of $44.3 million and $67.6 million in the average volume of borrowed funds, respectively, for the three- and nine-month periods ended September 30, 2024, compared to the same periods in 2023.  The average rate paid on borrowed funds decreased 30 bps for the three-month period but remained the same for the nine-month period ended September 30, 2024, compared to the same periods in 2023.

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In summary, between the three- and nine-month periods ended September 30, 2024 and 2023, the average yield on interest-earning assets increased 46 bps in both periods, and the average rate paid on interest-bearing liabilities increased 64 bps and 82 bps, respectively.  Net interest spread decreased 18 bps and 36 bps, respectively, for the three- and nine-month periods ended September 30, 2024 versus the same periods in 2023, and the net interest margin decreased eight bps and 22 bps, respectively, 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 2024 and 2023 resulting from volume changes in daily average assets and daily average liabilities and fluctuations in average rates earned and paid.

Three Months Ended<br><br>September 30, 2024 Nine Months Ended<br><br>September 30, 2024
Compared to Compared to
Three Months Ended<br><br>September 30, 2023 Nine Months Ended<br><br>September 30, 2023
Variance Variance Variance Variance
Due to Due to Total Due to Due to Total
Rate (1) Volume (1) Variance Rate (1) Volume (1) Variance
Average Interest-Earning Assets
Loans, net $ 953,634 $ 922,717 $ 1,876,351 $ 2,825,629 $ 3,570,256 $ 6,395,885
Taxable investment securities 18,727 (78,861 ) (60,134 ) 152,903 (181,921 ) (29,018 )
Tax-exempt investment securities (3,002 ) (9,970 ) (12,972 ) (5,406 ) (33,507 ) (38,913 )
Sweep and interest-earning accounts 17,913 89,531 107,444 96,871 (323,331 ) (226,460 )
Other investments 919 23,228 24,147 10,863 54,287 65,150
Total $ 988,191 $ 946,645 $ 1,934,836 $ 3,080,860 $ 3,085,784 $ 6,166,644
Average Interest-Bearing Liabilities
Interest-bearing transaction accounts $ 220,814 $ 57,787 $ 278,601 $ 695,692 $ 80,490 $ 776,182
Money market funds 71,309 (160,402 ) (89,093 ) 491,140 (217,587 ) 273,553
Savings deposits 3,005 (4,382 ) (1,377 ) 12,403 (13,753 ) (1,350 )
Time deposits 647,262 340,253 987,515 1,905,579 592,558 2,498,137
Repurchase agreements 9,402 (16,769 ) (7,367 ) 101,390 (78,777 ) 22,613
Borrowed funds (75,264 ) 558,924 483,660 1,083 2,428,394 2,429,477
Finance lease obligations 15 (1,298 ) (1,283 ) 12 (3,833 ) (3,821 )
Junior subordinated debentures (1,417 ) 0 (1,417 ) 59,793 0 59,793
Total $ 875,126 $ 774,113 $ 1,649,239 $ 3,267,092 $ 2,787,492 $ 6,054,584
Changes in net interest income $ 113,065 $ 172,532 $ 285,597 $ (186,232 ) $ 298,292 $ 112,060
(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
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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 Nine Months Ended
September 30, Change September 30, Change
2024 2023 Income Percent 2024 2023 Income Percent
Service fees $ 972,338 $ 937,890 $ 34,448 3.67 % $ 2,834,439 $ 2,757,629 $ 76,810 2.79 %
Income from sold loans 96,294 144,747 (48,453 ) -33.47 % 273,867 358,942 (85,075 ) -23.70 %
Other income from loans 381,170 310,645 70,525 22.70 % 913,994 1,081,093 (167,099 ) -15.46 %
Other income
Income from CFS Partners 356,822 150,140 206,682 137.66 % 979,747 705,343 274,404 38.90 %
Other miscellaneous income 200,050 168,169 31,881 18.96 % 410,951 405,793 5,158 1.27 %
Total non-interest income $ 2,006,674 $ 1,711,591 $ 295,083 17.24 % $ 5,412,998 $ 5,308,800 $ 104,198 1.96 %

Total non-interest income increased $295,083, or 17.2% and $104,198, or 2.0%, respectively, for the three and nine months ended September 30, 2024, compared to the same periods in 2023, with significant changes noted in the following:

· The volume of loans sold into the secondary market for the three- and nine-month periods of 2024 decreased by $724 thousand and $1.6 million, respectively, compared to the same periods last year, accounting for the decrease in income from sold loans in both periods. ****
· Although loan volume increased during the first nine months of 2024, a complex CRE project that closed during the first three months of 2023 generated approximately $126 thousand in documentation fees, accounting for some of the decrease in other income from loans for the nine-month period of 2024 versus 2023.
· Income from CFS Partners increased between periods due in part to an equity market rally during the first nine months of 2024 and successful retention in managed accounts. CFS Partners has a small portion of its equity capital invested in the stock market, and as a result is sensitive to general stock market conditions.
· Other miscellaneous income is made up of many individual line items that in the aggregate represent approximately 7% of total non-interest income.
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Non-interest Expense

The components of non-interest expense for the periods presented were as follows:

Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2024 2023 Expense Percent 2024 2023 Expense Percent
Salaries and wages $ 2,358,000 $ 2,164,760 $ 193,240 8.93 % $ 7,104,000 $ 6,718,280 $ 385,720 5.74 %
Employee benefits 986,804 797,304 189,500 23.77 % 2,840,194 2,363,444 476,750 20.17 %
Occupancy expenses, net 683,980 662,277 21,703 3.28 % 2,100,714 2,133,492 (32,778 ) -1.54 %
Other expenses
Charged-off checks 2,049 19,551 (17,502 ) -89.52 % 41,576 22,404 19,172 85.57 %
Service contracts - administrative 209,409 159,437 49,972 31.34 % 594,048 467,926 126,122 26.95 %
FDIC insurance 168,442 104,000 64,442 61.96 % 465,079 360,343 104,736 29.07 %
Collection & non-accruing loan expense 103,775 25,500 78,275 306.96 % 242,275 61,500 180,775 293.94 %
Electronic banking expense 116,799 69,313 47,486 68.51 % 339,819 204,948 134,871 65.81 %
ATM fees 186,842 170,947 15,895 9.30 % 526,175 482,417 43,758 9.07 %
Other miscellaneous expenses 1,692,558 1,641,455 51,103 3.11 % 4,826,494 4,743,417 83,077 1.75 %
Total non-interest expense $ 6,508,658 $ 5,814,544 $ 694,114 11.94 % $ 19,080,374 $ 17,558,171 $ 1,522,203 8.67 %

Total non-interest expense increased $694,114, or 11.9% and $1.5 million, or 8.7%, respectively, for the three and nine months ended September 30, 2024, compared to the same periods in 2023, with significant changes noted in the following:

· The increases in salaries and wages during the three and nine month periods of 2024 reflect normal salary increases and new hires and promotions in the areas of operations and commercial lending in the latter part of 2023, although the amounts and percentages of such increases were moderated by the effect of several unfilled positions during the first part of 2024.
· The increase in employee benefits is attributable to an increase in health insurance claims year over year under the Company’s self-insured health insurance plan.
· The decrease in occupancy expense year over year is due to a combination of lower building maintenance costs as more repairs are done by staff rather than relying on outside vendors, and 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, resulting in a capital gain on equipment.
· An increase in check fraud activity resulted in an increase in charged-off checks.
· The increase in service contracts - administrative is due to a combination of new contracts, an increase in transaction-based pricing for certain contracts, and contractual inflationary adjustment factors that are higher than historical increase adjustments.
· The increase in FDIC insurance is attributable in part to an increase in the assessment multiplier.
· Collection & non-accruing loan expenses were higher year over year due primarily to an increase in legal fees and insurance expenses associated with a commercial property in the Company’s non-accruing loan portfolio.
· The increase in electronic banking expense is attributable to an upgrade of the Company’s electronic banking platform.
· ATM fees are transaction-based and reflect increased customer activity year over year, as well as annual contractual price adjustments.
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APPLICABLE INCOME TAXES

The provision for income taxes decreased $138,765, or 19.2% for the third quarter of 2024 and $584,509, or 25.8% for the first nine months of 2024 compared to the same periods in 2023, which is consistent with the decrease in income before income taxes but is also partially attributable to an increase in tax-exempt income associated with municipal loans and investments and an increase in tax credits year over year.  Tax credits related to low-income housing limited partnership investments amounted to $174,612 and $80,529 for the third quarter of 2024 and 2023, respectively, and $523,836 and $241,587, respectively for the first nine months of 2024 and 2023.  The Company’s investment in two new limited partnerships were fully funded by year-end 2023 accounting for the increase in tax credits.

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $149,202 and $67,128 for the third quarter of 2024 and 2023, respectively and $447,606 and $201,384, respectively, for the first nine months of 2024 and 2023.  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:

September 30, 2024 December 31, 2023
Assets
Loans $ 912,716,917 77.53 % $ 845,429,854 76.90 %
AFS securities 170,477,527 14.48 % 190,706,019 17.35 %
Liabilities
Demand deposits 202,741,979 17.22 % 202,969,957 18.46 %
Interest-bearing transaction accounts 296,865,607 25.22 % 297,030,893 27.02 %
Money market funds 111,117,868 9.44 % 121,375,419 11.04 %
Savings deposits 144,173,873 12.25 % 151,570,686 13.79 %
Time deposits 174,680,762 14.84 % 124,020,827 11.28 %
Overnight borrowings 0 0.00 % 9,000,000 0.82 %
Short-term advances 62,500,000 5.31 % 44,500,000 4.05 %
Long-term advances 31,100,000 2.64 % 1,100,000 0.10 %

The following table reflects the changes in the composition of the Company's major categories of assets and liabilities between the balance sheet dates, as disclosed in the table above:

Volume Change Percentage
Assets
Loans $ 67,287,063 7.96 %
AFS securities (20,228,492 ) -10.61 %
Liabilities
Demand deposits (227,978 ) -0.11 %
Interest-bearing transaction accounts (165,286 ) -0.06 %
Money market funds (10,257,551 ) -8.45 %
Savings deposits (7,396,813 ) -4.88 %
Time deposits 50,659,935 40.85 %
Overnight borrowings (9,000,000 ) -100.00 %
Short-term advances 18,000,000 40.45 %
Long-term advances 30,000,000 2727.27 %

The increase in the loan portfolio during the first nine months of 2024 was primarily attributable to increases in CRE loans, commercial & industrial loans, municipal loans and residential real estate 1^st^ lien loans.

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The decrease in the securities AFS portfolio at September 30, 2024 is attributable to the combined effect during the first nine months of the year of maturities amounting to $11.0 million and principal payments on MBS, ABS and CMO investments totaling $13.5 million, which was partially offset by a decrease of $4.4 million in unrealized losses, which is reflected in OCI.  In management’s view, the size of the AFS securities portfolio is appropriate and proportional to the overall asset base, as this portfolio serves a significant role in the Company’s liquidity position.

The decrease in money market funds was driven by a decrease of $9.1 million, or 9.3%, in retail money market funds and a decrease in municipal deposits of $1.4 million, or 14.3%.  The decrease in savings deposits is primarily due to a shift of funds between savings and time deposits, resulting from customer response to periodic certificate of deposit specials that have been offered throughout 2024.  The increase in time deposits is also due to an increase in brokered deposits, as the Company looks to alternate sources of funding to support loan growth.  As a result of the fluctuation in aggregate deposits during 2024, in addition to utilizing brokered deposits the Company utilized funding lines of credit with the FHLBB and FRB, including long-term advances, as a supplemental funding source, accounting for the significant increase in these funds.

UNINSURED DEPOSITS

Estimated deposits in excess of the FDIC insurance level amounted to $219.3 million as of September 30, 2024 and $217.3 million at December 31, 2023.  The estimated balance of $35.5 million of uninsured time deposits as of September 30, 2024 was made up of time CDs of $31.4 million and retirement accounts of $4.1 million.  Increments of maturity of these time deposits are summarized as follows:

3 months or less $ 13,224,330
Over 3 through 6 months 13,961,310
Over 6 through 12 months 6,754,289
Over 12 months 1,565,244
Total $ 35,505,173

Interest Rate Risk and Asset and Liability Management - Management actively monitors and manages the Company’s interest rate risk exposure and attempts to structure the balance sheet to maximize net interest income while controlling its exposure to interest rate risk.  The Company's ALCO is made up of the Executive Officers and certain Vice Presidents of the Bank representing major business lines.  The ALCO formulates strategies to manage interest rate risk by evaluating the impact on earnings and capital of such factors as current interest rate forecasts and economic indicators, potential changes in such forecasts and indicators, liquidity and various business strategies.  The ALCO meets at least quarterly to review financial statements, liquidity levels, yields and spreads to better understand, measure, monitor and control the Company’s interest rate risk.  In the ALCO process, the committee members apply policy limits set forth in the Asset Liability, Liquidity and Investment policies approved and periodically reviewed by the Company’s Board of Directors.  The ALCO's methods for evaluating interest rate risk include an analysis of the effects of interest rate changes on net interest income and an analysis of the Company's interest rate sensitivity "gap", which provides a static analysis of the maturity and repricing characteristics of the entire balance sheet.  The ALCO Policy also includes a contingency funding plan to help management prepare for unforeseen liquidity restrictions, including hypothetical severe liquidity crises.

Interest rate risk represents the sensitivity of earnings to changes in market interest rates.  As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change, thereby impacting NII, the primary component of the Company’s earnings.  Fluctuations in interest rates can also have an impact on liquidity.  The ALCO uses an outside consultant to perform rate shock simulations to the Company's net interest income, as well as a variety of other analyses.  It is ALCO’s function to provide the assumptions used in the modeling process.  Assumptions used in prior period simulation models are regularly tested by comparing projected NII with actual NII.  The ALCO utilizes the results of the simulation model to quantify the estimated exposure of NII and liquidity to sustained interest rate changes.  The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on the Company’s balance sheet.  The model also simulates the balance sheet’s sensitivity to a prolonged flat rate environment. All rate scenarios are simulated assuming a parallel shift of the yield curve; however further simulations are performed utilizing non-parallel changes in the yield curve, including an inverted yield curve.  The results of this sensitivity analysis are compared to the ALCO policy limits which specify a maximum tolerance level for NII exposure over a 1-year horizon, assuming no balance sheet growth, given a 200 bp shift upward and a 100 bp shift downward in interest rates.

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 cycle upward while the retail funding base (deposits) lags the market.  If rates paid on deposits must be increased more and/or more quickly than projected due to competitive pressures, the expected benefit of rising rates would be reduced.  In a falling rate environment, NII is expected to trend slightly downward compared with the current rate environment scenario for the first year of the simulation as asset yield erosion is not fully offset by decreasing funding costs.  Thereafter, net interest income is projected to experience sustained downward pressure as funding costs reach their assumed floors and asset yields continue to reprice into the lower rate environment.  The prolonged inverted yield curve and an increased need for higher cost funding has resulted in a more liability sensitive balance sheet because in the rising rate environment there may be an initial delay in relief from deposit pricing.

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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 September 30, 2024:

Rate Change Percent Change in NII
Down 100 bps 0.2%
Up 200 bps -3.6%

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 September 30, 2024, the Company had outstanding $12,887,000 in principal amount of Junior Subordinated Debentures due December 15, 2037, which bear interest at a quarterly floating rate equal to 3-month CME SOFR, as adjusted by a spread adjustment factor of 0.26161, plus 2.85%.  The quarterly floating rate in effect on the debentures was 8.496% for the March 2024 payment, 8.441% for the June 2024 payment, and 8.451% for the September 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 27.3% of the Company’s loan balances as of September 30, 2024, compared to 28.5% as of December 31, 2023.  The Company maintains a residential mortgage loan portfolio of traditional mortgage products and does not offer higher risk loan products, such as option adjustable-rate mortgage products, high loan-to-value products, interest only mortgages, subprime loans and products with deeply discounted teaser rates.  Residential mortgages with loan-to-value ratios exceeding 80% are generally covered by PMI.  A 90% loan-to-value residential mortgage product without PMI is only available to borrowers with excellent credit and low debt-to-income ratios and has not been widely originated.  As of September 30, 2024, junior lien home equity products made up 13.2% 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.

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The following tables show the estimated maturity of the Company’s loan portfolio as of September 30, 2024.

Fixed Rate Loans
Within 2 - 5 6 - 15 Over
1 Year Years Years 15 Years Total
Commercial & industrial $ 2,830,527 $ 28,012,513 $ 17,485,381 $ 0 $ 48,328,421
Purchased 31,714 2,641,794 5,741,930 0 8,415,438
Commercial real estate 7,298,589 10,128,003 18,115,028 883,068 36,424,688
Municipal 44,707,806 4,325,987 5,161,665 0 54,195,458
Residential real estate - 1st lien 40,085 3,532,367 24,377,073 61,751,696 89,701,221
Residential real estate - Jr lien 14,303 251,142 3,737,194 0 4,002,639
Consumer 412,166 2,043,260 86,617 0 2,542,043
Total Loans $ 55,335,190 $ 50,935,066 $ 74,704,888 $ 62,634,764 $ 243,609,908
Variable Rate Loans
--- --- --- --- --- --- --- --- --- --- ---
Within 2 - 5 6 - 15 Over
1 Year Years Years 15 Years Total
Commercial & industrial $ 32,993,269 $ 30,189,438 $ 9,708,438 $ 5,549,659 $ 78,440,804
Commercial real estate 3,631,785 5,552,615 108,951,277 305,761,385 423,897,062
Municipal 0 0 10,208,023 1,100,000 11,308,023
Residential real estate - 1st lien 877,158 2,358,351 18,171,220 104,827,603 126,234,332
Residential real estate - Jr lien 391,983 878,238 12,224,422 15,444,804 28,939,447
Consumer 31,540 211,707 244,094 0 487,341
Total Loans $ 37,925,735 $ 39,190,349 $ 159,507,474 $ 432,683,451 $ 669,307,009

The Company continues to experience solid growth in the commercial & industrial and CRE loan portfolios, which is consistent with its strategic focus on commercial lending.  The commercial lending portfolio consists of commercial & industrial, purchased, CRE and municipal loans, which collectively comprised 72.4% of the Company’s loan portfolio as of September 30, 2024, compared to 71.2% as of December 31, 2023.  As of September 30, 2024, the largest components of the CRE portfolio were $124.6 million in owner-occupied CRE and $154.3 million in non-owner occupied CRE.

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 September 30, 2024, the Company had $20.2 million in guaranteed loans with guaranteed balances of $12.7 million, compared to $26.5 million in guaranteed loans with guaranteed balances of $17.6 million as of December 31, 2023.  PPP loans with outstanding balances of $54 thousand as of September 30, 2024, and $84 thousand as of December 31, 2023, are included in these totals, all of which carry a 100% guarantee through the SBA, subject to borrower eligibility requirements.

The Company works actively with customers early in the delinquency process to help them to avoid default and foreclosure.  Commercial & industrial and CRE loans are generally placed on non-accrual status when there is deterioration in the financial position of the borrower, payment in full of principal and interest is not expected, and/or principal or interest has been in default for 90 days or more.  However, such a loan need not be placed on non-accrual status if it is both well secured and in the process of collection.  Residential mortgages and home equity loans are considered for non-accrual status at 90 days past due and are evaluated on a case-by-case basis.  The Company obtains current property appraisals or market value analyses and considers the cost of carrying and selling collateral in order to assess the level of specific allocations required.  Consumer loans are generally not placed in non-accrual but are charged off by the time they reach 120 days past due.  When a loan is placed in non-accrual status, the Company reverses the accrued interest against current period income and discontinues the accrual of interest until the borrower clearly demonstrates the ability and intention to resume normal payments, typically demonstrated by regular timely payments for a period of not less than six months.  Interest payments received on non-accrual or impaired loans are generally applied as a reduction of the loan book balance.

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Credit loss expense

The credit loss expense was made up of the following components for the periods indicated:

Three Months Ended September 30, Change
2024 2023 %
Credit loss expense - loans $ 406,955 $ 264,009 54.14 %
Credit loss expense (reversal) - OBS credit exposure 53,790 (23,120 ) -332.66 %
Credit loss expense $ 460,745 $ 240,889 91.27 %

All values are in US Dollars.

Nine Months Ended September 30, Change
2024 2023 %
Credit loss expense – loans $ 1,076,676 $ 849,549 26.74 %
Credit loss expense (reversal) - OBS credit exposure 29,230 (40,992 ) -171.31 %
Credit loss expense $ 1,105,906 $ 808,557 36.78 %

All values are in US Dollars.

The increases in the credit loss expense on loans in both comparison periods of 2024 compared to the same period in 2023, was due in part to an increase in charge-offs as well as an increase in the volume of the loan portfolio.  The increases in the OBS credit exposure during both the three-month and nine-month comparison periods are attributable to increases in unfunded loan commitments under contract.

ACL and provisions – Effective January 1, 2023, the Company was required to recognize credit losses under the guidance of ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, rather than under the incurred loss model.  The guidance, which is referred to as the current expected credit loss, or CECL model, requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses over the life of the loans. The adjustment from the adoption of CECL in 2023 amounted to $549,113, net of tax and was recorded as an adjustment to retained earnings, which affected calculation of regulatory capital ratios.  Changes in forecasts used in the CECL model could produce different results, quarter to quarter.

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 incurred losses.

The Company maintains an ACL at a level that management believes is appropriate to absorb losses inherent in the loan portfolio as of the measurement date (See Note 5 of the accompanying unaudited interim consolidated financial statements).  Although the Company, in establishing the ACL, considers the 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.

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The following table summarizes the Company’s credit risk ratios for the balance sheet dates presented:

September 30, December 31,
2024 2023
ACL to total loans outstanding 1.05 % 1.16 %
ACL $ 9,540,452 $ 9,842,725
Loans outstanding $ 912,716,917 $ 845,429,854
Non-accruing loans to loans outstanding 0.49 % 0.82 %
Non-accruing loans $ 4,486,341 $ 6,955,046
Loans outstanding $ 912,716,917 $ 845,429,854
ACL to non-accruing loans 212.66 % 141.52 %
ACL $ 9,540,452 $ 9,842,725
Non-accruing loans $ 4,486,341 $ 6,955,046

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:

September 30, 2024 December 31, 2023
Amount Percent Amount Percent
Commercial & industrial $ 1,003,908 13.89 % $ 1,100,688 14.40 %
Purchased 25,617 0.92 % 37,065 1.25 %
Commercial real estate 5,565,611 50.41 % 5,522,082 49.07 %
Municipal 163,758 7.18 % 136,167 6.44 %
Residential real estate - 1st lien 2,398,677 23.66 % 2,590,926 24.70 %
Residential real estate - Jr lien 360,852 3.61 % 431,007 3.75 %
Consumer 22,029 0.33 % 24,790 0.39 %
Total $ 9,540,452 100.00 % $ 9,842,725 100.00 %

The third quarter ACL analysis indicated that the reserve balance of $9.5 million as of September 30, 2024, is sufficient to cover expected credit losses that are probable and estimable as of the measurement date. Included in the ACL calculation for September 30, 2024, is the completion of a workout of a commercial loan that was in non-accrual status which required a write down of approximately $1.0 million, which is also reflected in the net charge-offs and recoveries table on the next page. Also included in the ACL calculation are adjustments to several qualitative factors made by management during the third quarter of 2024, including a decrease to the qualitative factors for economic trends in all portfolios to reflect an improving economic environment. The qualitative factors for volume and terms in the commercial and industrial, CRE, and residential portfolios were decreased to reflect the absence of new or changed risks in those portfolios from new or increasing types of loans, industries, or collateral. The qualitative factors for concentrations in the commercial and industrial, CRE, and residential portfolios were decreased to reflect concentrations that are within policy as well adjust to the appropriate level for the residential portfolios where the concentration policy does not apply. The qualitative factor for delinquencies and non-performing loans in the consumer and residential portfolios was decreased to reflect low past due levels and a decrease year to date. 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.

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Net (charge-offs) recoveries during the periods presented to average loans outstanding were as follows:

For the Nine Months Ended September 30, 2024 2023
Commercial & industrial -0.95 % -0.29 %
Net charge-offs during the period $ (1,203,641 ) $ (357,643 )
Average amount outstanding $ 126,240,870 $ 121,805,882
Purchased 0.00 % 0.00 %
Net charge-offs during the period $ 0 $ 0
Average amount outstanding $ 9,521,419 $ 6,503,285
Commercial real estate -0.03 % 0.01 %
Net (charge-offs) recoveries during the period $ (126,393 ) $ 22,058
Average amount outstanding $ 433,341,367 $ 376,591,108
Municipal 0.00 % 0.00 %
Net charge-offs during the period $ 0 $ 0
Average amount outstanding $ 59,218,512 $ 42,203,207
Residential real estate - 1st lien 0.00 % 0.04 %
Net recoveries during the period $ 0 $ 72,588
Average amount outstanding $ 210,534,364 $ 199,778,580
Residential real estate - Jr lien 0.05 % 0.09 %
Net recoveries during the period $ 15,537 $ 28,015
Average amount outstanding $ 31,908,746 $ 32,110,911
Consumer -2.02 % -2.16 %
Net charge-offs during the period $ (64,452 ) $ (79,195 )
Average amount outstanding $ 3,192,650 $ 3,674,543
Total loans -0.16 % -0.04 %
Net charge-offs during the period $ (1,378,949 ) $ (314,177 )
Average amount outstanding $ 873,957,928 $ 782,667,516

In addition to credit risk in the Company’s loan and investment portfolios and its off-balance sheet commitments, and liquidity risk in its loan and deposit-taking operations, the Company’s business activities also generate market risk.  Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices.  Declining capital markets and changes in interest rates can result in fair value adjustments to asset valuations or the need to create a related reserve or allowance.  The Company does not have any market risk sensitive instruments acquired for trading purposes.  The Company’s market risk arises primarily from interest rate risk inherent in its lending, deposit taking and investment activities.  During recessionary periods, a declining housing market can result in an increase in loan loss reserves or ultimately an increase in foreclosures.  Interest rate risk is directly related to the different maturities and repricing characteristics of interest-bearing assets and liabilities, as well as to loan prepayment risks, early withdrawal of time deposits, and the fact that the speed and magnitude of responses to interest rate changes vary by product.  Rapid changes in prevailing interest rates, particularly after a long period of relative stability, create a challenging interest rate environment. As discussed above under "Interest Rate Risk and Asset and Liability Management", the Company actively monitors and manages its interest rate risk through the ALCO process.

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COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET ARRANGEMENTS

The Company is a party to financial instruments with OBS risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit, standby letters of credit and risk-sharing commitments on certain sold loans.  Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.  The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. During the first nine months of 2024, the Company did not engage in any activity that created any additional types of OBS risk.

With the adoption of ASU 2016-13 (CECL), the Company is required to establish an allowance for expected credit losses on OBS credit exposures.  Expected credit losses are estimated by management over the contractual period during which the Company is exposed to credit risk under a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over the estimated lives of such commitments. Upon adoption of ASU 2016-13 in 2023, the Company recorded a negative adjustment to retained earnings of $451,704 to reflect an allowance for credit losses for unfunded commitments. The allowance for credit losses for OBS credit exposures is presented in the "Accrued interest and other liabilities" line of the consolidated balance sheets. There was an increase of $53,790 and a decrease of $23,120, respectively, to the allowance for credit losses for OBS credit exposures during the three months ended September 30, 2024 and 2023, and an increase of $29,230 and a decrease of $40,992, respectively, during the nine months ended September 30, 2024 and 2023.

LIQUIDITY AND CAPITAL RESOURCES

Managing liquidity risk is essential to maintaining both depositor confidence and stability in earnings.  Liquidity management refers to the ability of the Company to adequately cover fluctuations in assets and liabilities.  Meeting loan demand (assets) and covering the withdrawal of deposit funds (liabilities) are two key components of the liquidity management process.  The Company’s principal sources of funds are deposits, amortization and prepayment of loans and securities, maturities of investment securities, sales of loans available-for-sale, and earnings and funds provided from operations.  These sources are supplemented by short-term and long-term borrowings as needed.  Maintaining a relatively stable funding base, which is achieved by diversifying funding sources, competitively pricing deposit products, and extending the contractual maturity of liabilities, reduces the Company’s exposure to rollover risk on deposits and limits reliance on volatile short-term borrowed funds.  Short-term funding needs arise from declines in deposits or other funding sources and from funding requirements for loan commitments.  The Company’s strategy is to fund assets to the maximum extent possible with core deposits that provide a sizable source of relatively stable and lower-cost funds.

The Company recognizes that, at times, when loan demand exceeds deposit growth or the Company has other liquidity demands, 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 September 30, 2024, and December 31, 2023, the Company had $0.5 million and $0, respectively, 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 September 30, 2024 and December 31, 2023, the Company reported $2.5 million and $2.4 million, respectively, in reciprocal CDARS deposits.  The balance in ICS reciprocal money market deposits was $22.8 million as of September 30, 2024, compared to $13.2 million as of December 31, 2023, and the balance in ICS reciprocal demand deposits as of those dates was $95.0 million and $87.1 million, respectively.

Additionally, the Company had brokered deposits from another source totaling approximately $13.9 million as of September 30, 2024 and $0 at December 31, 2023.  This relationship has provided increased access to short-term funding that is easily accessible without any detrimental effect on the pricing of the core deposit base.

As of September 30, 2024 and December 31, 2023, borrowing capacity of $110.0 million and $107.9 million, respectively, was available through the FHLBB, secured by the Company's qualifying loan portfolio (generally, residential mortgage and commercial loans), reduced by outstanding advances and by collateral pledges securing FHLBB letters of credit collateralizing public unit deposits in the aggregate amount of $150 thousand and $23.1 million, respectively.

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The following table reflects the Company’s outstanding advances with FHLBB as of the dates indicated:

September 30, December 31,
2024 2023
FHLBB Short-Term Advances
FHLBB term advance, 5.06%, due October 29, 2024 $ 5,000,000 $ 0
FHLBB Long-Term Advances
FHLBB term advance, 0.00%, due November 12, 2025 (1) 300,000 300,000
FHLBB term advance, 0.00%, due November 13, 2028 (1) 800,000 800,000
FHLBB option advance, 4.54%, due May 15, 2026 10,000,000 0
FHLBB option advance, 4.74%, due May 26, 2026 5,000,000 0
FHLBB option advance, 3.89%, due February 01, 2027 5,000,000 0
FHLBB option advance, 4.27%, due June 07, 2027 10,000,000 0
Total Long-Term Advances 31,100,000 1,100,000
Overnight Borrowings at 5.54% 0 9,000,000
Total Advances and Overnight Borrowings $ 36,100,000 $ 10,100,000
(1) Under the JNE program, the FHLBB provides a subsidy, funded by the FHLBB’s earnings, to write down interest rates to zero percent on advances that finance qualifying loans to small businesses. JNE advances must support small business in New England that create and/or retain jobs, or otherwise contribute to overall economic development activities.
--- ---

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 Company’s advances under the BTFP as of the balance sheet dates were as follows:

September 30, December 31,
2024 2023
FRB BTFP Advances
FRB BTFP term advance, 4.92%, due April 26, 2024 $ 0 $ 10,000,000
FRB BTFP term advance, 4.71%, due May 13, 2024 0 10,000,000
FRB BTFP term advance, 4.91%, due May 17, 2024 0 6,500,000
FRB BTFP term advance, 4.93%, due December 16, 2024 0 18,000,000
FRB BTFP term advance, 4.76%, due January 16, 2025 16,000,000 0
FRB BTFP term advance, 4.83%, due January 17, 2025 41,500,000 0
Total BTFP Advances $ 57,500,000 $ 44,500,000

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 $61.2 million and $49.9 million, respectively, as of September 30, 2024 and December 31, 2023.  Credit advances under this FRBB lending program are overnight advances with interest chargeable at the primary credit rate (generally referred to as the discount rate), currently 500 bps.  The Company had no outstanding advances through this facility as of September 30, 2024 or December 31, 2023.

As of September 30, 2024 and December 31, 2023 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.

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Management believes that the combination of high levels of potentially liquid assets, unencumbered securities, cash flows from operations, and additional borrowing capacity are sufficient to meet the Company’s liquidity and capital needs.

The following table illustrates the changes in shareholders' equity from December 31, 2023 to September 30, 2024:

Balance as of December 31, 2023 (book value $15.87 per common share) $ 89,028,814
Net income 8,665,338
Issuance of common stock through the DRIP 1,058,472
Dividends declared on common stock (3,819,358 )
Dividends declared on preferred stock (95,625 )
Change in AOCI on AFS securities, net of tax 3,510,814
Balance as of September 30, 2024 (book value $17.36 per common share) $ 98,348,455

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.

Consistent with these capital planning considerations, 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 described in more detail in Note 22 to the audited consolidated financial statements contained in the Company’s 2023 Annual Report on Form 10-K and under the caption “LIQUIDITY AND CAPITAL RESOURCES” in the MD&A section of that report, the Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies pursuant to which they must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items.  Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

As of September 30, 2024, the Bank was considered well capitalized under the standard regulatory capital framework for Prompt Corrective Action and the Company exceeded currently applicable consolidated regulatory guidelines for capital adequacy.

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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)
September 30, 2024
Common equity tier 1 capital
(to risk-weighted assets)
Company $ 97,695 11.86 % $ 37,063 4.50 % $ 57,653 7.00 % N/A N/A
Bank $ 111,237 13.52 % $ 37,034 4.50 % $ 57,609 7.00 % $ 53,494 6.50 %
Tier 1 capital (to risk-weighted assets)
Company $ 112,082 13.61 % $ 49,417 6.00 % $ 70,007 8.50 % N/A N/A
Bank $ 111,237 13.52 % $ 49,379 6.00 % $ 69,953 8.50 % $ 65,839 8.00 %
Total capital (to risk-weighted assets)
Company $ 122,378 14.86 % $ 65,889 8.00 % $ 86,480 10.50 % N/A N/A
Bank $ 121,525 14.77 % $ 65,839 8.00 % $ 86,413 10.50 % $ 82,298 10.00 %
Tier 1 capital (to average assets)
Company $ 112,082 9.85 % $ 45,507 4.00 % N/A N/A N/A N/A
Bank $ 111,237 9.78 % $ 45,485 4.00 % N/A N/A $ 56,856 5.00 %
December 31, 2023:
Common equity tier 1 capital
(to risk-weighted assets)
Company $ 91,886 11.89 % $ 34,770 4.50 % $ 54,086 7.00 % N/A N/A
Bank $ 105,390 13.65 % $ 34,737 4.50 % $ 54,036 7.00 % $ 50,176 6.50 %
Tier 1 capital (to risk-weighted assets)
Company $ 106,273 13.75 % $ 46,360 6.00 % $ 65,676 8.50 % N/A N/A
Bank $ 105,390 13.65 % $ 46,317 6.00 % $ 65,615 8.50 % $ 61,755 8.00 %
Total capital (to risk-weighted assets)
Company $ 115,944 15.01 % $ 61,813 8.00 % $ 81,130 10.50 % N/A N/A
Bank $ 115,051 14.90 % $ 61,755 8.00 % $ 81,054 10.50 % $ 77,194 10.00 %
Tier 1 capital (to average assets)
Company $ 106,273 9.57 % $ 44,401 4.00 % N/A N/A N/A N/A
Bank $ 105,390 9.50 % $ 44,376 4.00 % N/A N/A $ 55,470 5.00 %

(1) Conservation Buffer is calculated based on risk-weighted assets and does not apply to calculations of average assets.

(2) Applicable to banks, but not bank holding companies.

The Company's ability to pay dividends to its shareholders is largely dependent on the Bank's ability to pay dividends to the Company.  In general, a national bank may not pay dividends that exceed net income for the current and preceding two years.  Regardless of statutory restrictions, as a matter of regulatory policy, banks and bank holding companies should pay dividends only out of current earnings and only if, after paying such dividends, they remain adequately capitalized.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Omitted, in accordance with the regulatory relief available to smaller reporting companies in SEC Release Nos. 33-10513 and 34-83550.

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act).  As of September 30, 2024, an evaluation was performed under the supervision and with the participation of management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based on that evaluation, management concluded that its disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports it files with the Commission under the Exchange Act was recorded, processed, summarized, and reported on a timely basis.

For this purpose, the term “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

In the normal course of business, the Company is involved in litigation that is considered incidental to its business.  Management does not expect that any such litigation will be material to the Company's consolidated financial condition or results of operations.

ITEM 1A. Risk Factors

In management’s view, the Risk Factors identified in our Annual Report on Form 10-K for the year ended December 31, 2023 represent the most significant risks to the Company's future results of operations and financial condition as of the date of this quarterly report.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information as to the purchases of the Company’s common stock during the three months ended September 30, 2024, by the Company or by any affiliated purchaser (as defined in SEC Rule 10b-18).  During the monthly periods presented, the Company did not have any publicly announced repurchase plans or programs.

Total Number Average
of Shares Price Paid
For the period: Purchased (1) Per Share
July 1 - July 31 0 $ 0.00
August 1 - August 31 0 0.00
September 1 - September 30 10,000 16.25
Total 10,000 $ 16.25
(1) All 10,000 shares were purchased for the account of participants invested in the Company Stock Fund under the Company’s Retirement Savings Plan by or on behalf of the Plan Trustee, the Human Resources Committee of the Bank. Such share purchases were facilitated through CFSG, which provides certain investment advisory services to the Plan. Both the Plan Trustee and CFSG may be considered affiliates of the Company under Rule 10b-18.
--- ---

ITEM 6. Exhibits

The following exhibits are filed with, or incorporated by reference in, this report:

Exhibit 31.1 Certification from the Chief Executive Officer (Principal Executive Officer) of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification from the Treasurer (Principal Financial Officer) of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification from the Chief Executive Officer (Principal Executive Officer) of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*
Exhibit 32.2 Certification from the Treasurer (Principal Financial Officer) of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*
Exhibit 101 The following materials from the Company’s Quarterly Report on Form 10-Q for the nine-months ended September 30, 2024 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three- and nine-month interim periods ended September 30, 2024 and 2023, (iii) the unaudited consolidated statements of comprehensive income, (iv) the unaudited consolidated statements of cash flows and (v) related notes.
Exhibit 104 Cover page Interactive Data File (formatted in iXBRL and contained in Exhibit 101)

*This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act.

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SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COMMUNITY BANCORP.

DATED:  November 14, 2024 /s/Kathryn M. Austin
Kathryn M. Austin, President
& Chief Executive Officer
(Principal Executive Officer)
DATED:  November 14, 2024 /s/Louise M. Bonvechio
Louise M. Bonvechio, Corporate
Secretary & Treasurer
(Principal Financial Officer)
53
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SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM 10-Q

☐  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2024

COMMUNITY BANCORP.

EXHIBITS

EXHIBIT INDEX

Exhibit 31.1 Certification from the Chief Executive Officer (Principal Executive Officer) of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification from the Treasurer (Principal Financial Officer) of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification from the Chief Executive Officer (Principal Executive Officer) of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*
Exhibit 32.2 Certification from the Treasurer (Principal Financial Officer) of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*
Exhibit 101 The following materials from the Company’s Quarterly Report on Form 10-Q for the nine-months ended September 30, 2024 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three- and nine-month interim periods ended September 30, 2024 and 2023, (iii) the unaudited consolidated statements of comprehensive income, (iv) the unaudited consolidated statements of cash flows and (v) related notes.
Exhibit 104 Cover page Interactive Data File (formatted in iXBRL and contained in Exhibit 101)

*  This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act.

54

cmtv_ex311.htm EXHIBIT 31.1

CERTIFICATION

I, Kathryn M. Austin, President and Chief Executive Officer (Principal Executive Officer), certify that:

1. I have reviewed this quarterly report on Form 10-Q of Community Bancorp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Community Bancorp.
November 14, 2024 /s/ Kathryn M. Austin

| | Kathryn M. Austin |

| | President & Chief Executive Officer |

| | (Principal Executive Officer) |

cmtv_ex312.htm EXHIBIT 31.2

CERTIFICATION

I, Louise M. Bonvechio, Corporate Secretary and Treasurer (Principal Financial Officer), certify that:

1. I have reviewed this quarterly report on Form 10-Q of Community Bancorp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Community Bancorp.
November 14, 2024 /s/ Louise M. Bonvechio

| | Louise M. Bonvechio |

| | Corporate Secretary and Treasurer |

| | (Principal Financial Officer) |

cmtv_ex321.htm EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U. S. C. SECTION 1350 AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Community Bancorp. (the "Company") on Form 10-Q for the period ended September 30, 2024, filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Chief Executive Officer of the Company hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.

A signed original of this written statement required by Section 906 has been provided to Community Bancorp. and will be retained by Community Bancorp. and furnished to the Securities and Exchange Commission or its staff upon request.

Community Bancorp.
November 14, 2024 /s/ Kathryn M. Austin

| | Kathryn M. Austin |

| | President & Chief Executive Officer |

| | (Principal Executive Officer) |

cmtv_ex322.htm EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U. S. C. SECTION 1350 AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Community Bancorp. (the "Company") on Form 10-Q for the period ended September 30, 2024 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Chief Financial Officer of the Company hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:  1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.

A signed original of this written statement required by Section 906 has been provided to Community Bancorp. and will be retained by Community Bancorp. and furnished to the Securities and Exchange Commission or its staff upon request.

Community Bancorp.
November 14, 2024 /s/Louise M. Bonvechio

| | Louise M. Bonvechio |

| | Corporate Secretary and Treasurer |

| | (Principal Financial Officer) |

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