Community Bancorp
Annual Report 2021

Plain-text annual report

2021 Annual Report Community Bancorp. and Subsidiary Table of Contents Independent Auditor’s Report………………………………………………………………………...................................... 3 Financial Statements: Consolidated Balance Sheets…………………………………………………………………….................................... 5 Consolidated Statements of Income……………………………………………………………..................................... 6 Consolidated Statements of Comprehensive Income………………………………………….................................... 7 Consolidated Statements of Changes in Shareholders’ Equity……………………………….................................... 8 Consolidated Statements of Cash Flows………………………………………………………. .................................. 10 Notes to the Consolidated Financial Statements………………………………………………….. ............................ 12 Management’s Discussion and Analysis of the Results of Operation…………………………..................................... 53 Common Stock Performance by Quarter…………………………………………………………... ................................. 78 Other Shareholder Information ................................................................................................................................... 79 1 2021 Annual Report Dear Shareholders and Friends: Community Bancorp. and Community National Bank posted excellent results in 2021, as we continued to provide essential banking services during the on-going pandemic. We grew both deposits and loans and improved profitability during an extraordinary time. Our bankers have performed admirably in support of their customers, communities and each other. As of year-end, ratios exceeded all regulatory requirements, and we continue to be considered a “well-capitalized” institution. This designation is important to us, to our regulators and to you. We are very pleased with these results. Thank you to our shareholders and friends whose confidence and support allow us to continue our work. We love this work and are grateful for the opportunity to serve our communities through this organization. Sincerely, Kathryn M. Austin President and Chief Executive Officer Community Bancorp. and Community National Bank 2 Community Bancorp. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Community Bancorp. and Subsidiary Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Community Bancorp. and Subsidiary (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the criticial audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Maine • New Hampshire • Massachusetts • Connecticut • West Virginia • Arizona berrydunn.com 3 2021 Annual Report Board of Directors and Shareholders Community Bancorp. and Subsidiary Page 2 Allowance for Loan Losses As disclosed in Note 5 to the Company’s consolidated financial statements, the Company has a gross loan portfolio of $690 million and related allowance for loan losses of $7.7 million as of December 31, 2021. As disclosed in Note 1, the Company’s allowance for loan losses is a material and complex estimate requiring significant management judgment in the evaluation of the credit quality and the estimation of inherent losses within the loan portfolio. The level of the allowance for loan losses is based on management’s periodic evaluation of the loan portfolio, credit concentrations, trends in historical loss experience, estimated value of any underlying collateral, specific impaired loans and economic conditions. Changes in these assumptions could have a material effect on the Company’s financial results. The allowance for loan losses includes a general reserve which is determined based on the results of a quantitative and a qualitative analysis of all loans not measured for impairment at the reporting date. Impaired loans are loan(s) to a borrower that in the aggregate are greater than $100,000 and that are in non-accrual status or are troubled debt restructurings regardless of amount. In calculating the allowance for loan losses, the Company considers relevant credit quality indicators for each loan segment, stratifies loans by risk rating, and estimates losses for each loan type based upon their nature and risk profile. This process requires significant management judgment in the review of the loan portfolio and assignment of risk ratings based upon the characteristics of loans. In addition, estimation of losses inherent within the portfolio requires significant management judgment. Auditing these complex judgments and assumptions involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed. The primary procedures we performed to address this critical audit matter included: • Evaluating the design of controls relating to management’s review of loans, assignment of risk ratings, and consistency of application of accounting policies. • Evaluating the reasonableness of assumptions and sources of data used by management in forming the qualitative loss factors by performing retrospective review of historic loan loss experience and analyzing historical data used in developing the assumptions, including assessment of whether there were additional qualitative considerations relevant to the portfolio. • Evaluating the appropriateness of inputs and factors that the Company used in forming the qualitative loss factors and assessing whether such inputs and factors were relevant, reliable, and reasonable for the purpose used. • Testing the appropriateness of the Company’s loan rating policy and the consistency of its application. • Evaluating the appropriateness of specific reserves for impaired loans. • Verifying the mathematical accuracy and computation of the allowance for loan losses by re-performing or independently calculating significant elements of the allowance based on relevant source documents. We have served as the Company’s auditor since 2003. Portland, Maine March 24, 2022 Vermont Registration No. 92 0000278 4 Community Bancorp. Community Bancorp. and Subsidiary Consolidated Balance Sheets Assets Cash and due from banks Federal funds sold and overnight deposits Total cash and cash equivalents Securities available-for-sale Restricted equity securities, at cost Loans held-for-sale Loans Allowance for loan losses Deferred net loan fees Net loans Bank premises and equipment, net Accrued interest receivable Bank owned life insurance Goodwill Other assets Total assets Liabilities and Shareholders' Equity Liabilities Deposits: Demand, non-interest bearing Interest-bearing transaction accounts Money market funds Savings Time deposits, $250,000 and over Other time deposits Total deposits Borrowed funds Repurchase agreements Junior subordinated debentures Accrued interest and other liabilities Total liabilities Shareholders' Equity Preferred stock, 1,000,000 shares authorized, 15 shares issued and outstanding at December 31, 2021 and 2020 ($100,000 liquidation value, per share) Common stock - $2.50 par value; 15,000,000 shares authorized, 5,587,939 and 5,527,380 shares issued at December 31, 2021 and 2020, respectively (including 14,337 and 18,128 shares issued February 1, 2022 and 2021, respectively) Additional paid-in capital Retained earnings Accumulated other comprehensive (loss) income Less: treasury stock, at cost; 210,101 shares at December 31, 2021 and 2020 Total shareholders' equity Total liabilities and shareholders' equity December 31, 2021 December 31, 2020 $ 17,839,374 92,519,552 110,358,926 182,342,459 1,434,450 339,000 689,988,533 (7,710,256) (37,972) 682,240,305 13,767,328 2,400,560 5,073,228 11,574,269 9,575,274 $ 1,019,105,799 $ 10,850,787 104,199,133 115,049,920 60,705,178 1,446,550 130,400 709,355,330 (7,208,485) (1,195,741) 700,951,104 10,209,869 2,987,977 4,988,236 11,574,269 10,189,781 $ 918,233,284 $ 209,465,151 265,513,937 129,728,954 168,390,905 17,463,871 88,837,135 879,399,953 1,300,000 32,609,875 12,887,000 8,148,703 934,345,531 $ 185,954,976 228,712,371 115,546,064 138,745,468 16,488,963 96,842,998 782,290,840 2,800,000 38,727,312 12,887,000 4,239,419 840,944,571 1,500,000 1,500,000 13,969,848 35,322,063 37,758,105 (1,166,971) (2,622,777) 84,760,268 $ 1,019,105,799 13,818,450 34,309,646 29,368,046 915,348 (2,622,777) 77,288,713 $ 918,233,284 Book value per common share outstanding $ 15.48 $ 14.25 The accompanying notes are an integral part of these consolidated financial statements. 5 2021 Annual Report Community Bancorp. and Subsidiary Consolidated Statements of Income Interest income Interest and fees on loans Interest on debt securities Dividends Interest on federal funds sold and overnight deposits Total interest income Interest expense Interest on deposits Interest on borrowed funds Interest on repurchase agreements Interest on junior subordinated debentures Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Service fees Income from sold loans Other income from loans Net realized gain on sale of securities AFS Other income Total non-interest income Non-interest expense Salaries and wages Employee benefits Occupancy expenses, net Other expenses Total non-interest expense Income before income taxes Income tax expense Net income Earnings per common share Weighted average number of common shares used in computing earnings per share Dividends declared per common share Years Ended December 31, 2020 2021 $ $ 33,067,230 1,305,175 56,116 362,018 34,790,539 2,568,158 71,375 88,861 393,105 3,121,499 31,669,040 624,165 31,044,875 3,441,607 949,212 982,295 0 1,361,023 6,734,137 8,027,000 3,124,554 2,808,068 7,697,964 21,657,586 16,121,426 2,983,088 13,138,338 2.45 5,345,988 0.88 $ $ $ $ $ $ 31,609,216 1,030,761 81,942 340,375 33,062,294 4,095,985 19,261 254,774 476,666 4,846,686 28,215,608 1,589,000 26,626,608 3,137,956 1,469,863 1,054,562 39,086 1,070,257 6,771,724 7,597,745 3,084,435 2,672,720 7,036,841 20,391,741 13,006,591 2,248,089 10,758,502 2.03 5,274,785 0.76 The accompanying notes are an integral part of these consolidated financial statements. 6 Community Bancorp. Community Bancorp. and Subsidiary Consolidated Statements of Comprehensive Income Net income Other comprehensive (loss) income, net of tax: Unrealized holding (loss) gain on securities AFS arising during the period Reclassification adjustment for gain realized in income Unrealized (loss) gain during the period Tax effect Other comprehensive (loss) income, net of tax Total comprehensive income Years Ended December 31, 2021 2020 $ 13,138,338 $ 10,758,502 (2,635,848) 0 (2,635,848) 553,529 (2,082,319) $ 11,056,019 868,030 (39,086) 828,944 (174,079) 654,865 $ 11,413,367 The accompanying notes are an integral part of these consolidated financial statements. 7 2021 Annual Report Community Bancorp. and Subsidiary Consolidated Statements of Changes in Shareholders’ Equity Years Ended December 31, 2021 and 2020 Common stock Preferred stock Shares Amount Shares Amount Balances, December 31, 2019 5,449,857 $ 13,624,643 15 $ 1,500,000 Comprehensive income Net income Other comprehensive income Total comprehensive income 0 0 0 0 Cash dividends declared - common stock Cash dividends declared - preferred stock Issuance of common stock 0 0 77,523 0 0 193,807 0 0 0 0 0 0 0 0 0 0 Balances, December 31, 2020 5,527,380 13,818,450 15 1,500,000 Comprehensive income Net income Other comprehensive income Total comprehensive income 0 0 0 0 Cash dividends declared - common stock Cash dividends declared - preferred stock Issuance of common stock 0 0 60,559 0 0 151,398 0 0 0 0 0 0 0 0 0 0 Balances, December 31, 2021 5,587,939 $ 13,969,848 15 $ 1,500,000 The accompanying notes are an integral part of these consolidated financial statements. 8 Community Bancorp. Community Bancorp. and Subsidiary Consolidated Statements of Changes in Shareholders’ Equity (continued) Years Ended December 31, 2021 and 2020 Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock Total shareholders’ equity $ 33,464,381 $ 22,667,949 $ 260,483 $ (2,622,777) $ 68,894,679 0 0 10,758,502 0 0 654,865 0 0 845,265 (4,004,030) (54,375) 0 0 0 0 0 0 0 0 0 10,758,502 654,865 11,413,367 (4,004,030) (54,375) 1,039,072 34,309,646 29,368,046 915,348 (2,622,777) 77,288,713 0 0 13,138,338 0 0 (2,082,319) 0 0 1,012,417 (4,699,529) (48,750) 0 0 0 0 0 0 0 0 0 13,138,338 (2,082,319) 11,056,019 (4,699,529) (48,750) 1,163,815 $ 35,322,063 $ 37,758,105 $ (1,166,971) $ (2,622,777) $ 84,760,268 9 2021 Annual Report Community Bancorp. and Subsidiary Consolidated Statements of Cash Flows Cash Flows from Operating Activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization, bank premises and equipment Provision for loan losses Deferred income tax Net realized gain on sale of securities AFS Gain on sale of loans (Gain) loss on sale of bank premises and equipment Gain on sale of OREO Capital loss on leases Income from CFS Partners Amortization of bond premium, net Proceeds from sales of loans held for sale Originations of loans held for sale (Decrease) increase in taxes payable Decrease (increase) in interest receivable Decrease in mortgage servicing rights Decrease in right-of-use assets Decrease in operating lease liabilities Decrease in other assets Increase in cash surrender value of BOLI Amortization of limited partnerships Change in net deferred loan fees and costs Decrease in interest payable Increase in accrued expenses Increase (decrease) in other liabilities Net cash provided by operating activities Cash Flows from Investing Activities: Investments - AFS Maturities, calls, pay downs and sales Purchases Proceeds from redemption of restricted equity securities Purchases of restricted equity securities Decrease in limited partnership contributions payable Proceeds of distribution from CFS Partners Decrease (increase) in loans, net Capital expenditures net of proceeds from sales of bank premises and equipment Proceeds from sales of OREO Recoveries of loans charged off Net cash used in investing activities 10 Years Ended December 31, 2021 2020 $ 13,138,338 $ 10,758,502 1,104,918 624,165 (76,374) 0 (540,540) (7,559) 0 63,125 (951,605) 531,081 18,103,002 (17,771,062) (258,585) 587,417 24,426 196,172 (196,825) 67,126 (84,992) 363,048 (1,157,769) (27,348) 310,996 3,525 14,044,681 894,687 1,589,000 (270,427) (39,086) (1,027,175) 174,470 (55,602) 0 (684,891) 92,662 37,899,464 (37,002,689) 61,285 (651,424) 17,431 132,778 (202,782) 5,728 (85,224) 336,686 1,558,156 (53,109) 174,154 (38,377) 13,584,217 18,851,557 (143,655,767) 141,500 (129,400) (150,000) 2,000,000 19,139,595 (895,739) 0 104,808 (104,593,446) 22,804,241 (36,767,300) 522,400 (537,100) (909,000) 0 (102,746,364) (452,402) 1,022,340 72,965 (116,990,220) Community Bancorp. Community Bancorp. and Subsidiary Consolidated Statements of Cash Flows (continued) Cash Flows from Financing Activities: Net increase in demand and interest-bearing transaction accounts Net increase in money market and savings accounts Net decrease in time deposits Net (decrease) increase in repurchase agreements Net decrease in short-term borrowings Proceeds from long-term borrowings Repayments on long-term borrowings Decrease in finance lease obligations Dividends paid on preferred stock Dividends paid on common stock Net cash provided by financing activities 2021 2020 60,311,741 43,828,327 (7,030,955) (6,117,437) (150,000) 0 (1,350,000) (198,653) (48,750) (3,386,502) 85,857,771 118,665,955 51,469,875 (2,866,358) 5,537,464 0 150,000 0 (61,665) (54,375) (2,947,185) 169,893,711 Net (decrease) increase in cash and cash equivalents (4,690,994) 66,487,708 Cash and cash equivalents: Beginning Ending Supplemental Schedule of Cash Paid During the Period: Interest Income taxes, net of refunds 115,049,920 $ 110,358,926 48,562,212 $ 115,049,920 $ 3,148,847 $ 4,899,795 $ 2,955,000 $ 2,120,542 Supplemental Schedule of Noncash Investing and Financing Activities: Change in unrealized (loss) gain on securities AFS $ (2,635,848) Additions to finance lease obligations Common Shares Dividends Paid: Dividends declared Increase in dividends payable attributable to dividends declared Dividends reinvested Total dividends paid $ 3,955,252 $ 4,699,529 (149,212) (1,163,815) $ 3,386,502 $ $ $ $ 828,944 0 4,004,030 (17,773) (1,039,072) 2,947,185 The accompanying notes are an integral part of these consolidated financial statements. 11 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements Note 1. Significant Accounting Policies The accounting policies of Community Bancorp. and Subsidiary (the Company) are in conformity, in all material respects, with U.S. generally accepted accounting principles (U.S. GAAP) and general practices within the banking industry. The following is a description of the Company’s significant accounting policies. Basis of presentation and consolidation In addition to the definitions provided elsewhere in this Annual Report, the definitions, acronyms and abbreviations identified below are used throughout this Annual Report, including these “Notes to Consolidated Financial Statements” and the section labeled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” immediately following. These definitions are intended to aid the reader and provide a reference page when reviewing this Annual Report. ABS: ACBB: ACBI: ACH: AFS: Agency MBS: MBS issued by a US government agency Asset backed security Atlantic Community Bankers Bank Atlantic Community Bancshares, Inc. Automated Clearing House Available-for-sale ALCO: ALL: AML: AOCI: ASC: ASU: ATMs: ATS: Bancorp: Bank: BHG: BIC: Board: BOLI: bp or bps: BSA: CBLR: CARES ACT: CDARS: or GSE Asset Liability Committee Allowance for loan losses Anti-money laundering laws Accumulated other comprehensive income Accounting Standards Codification Accounting Standards Update Automatic teller machines Automatic transfer service Community Bancorp. Community National Bank Bankers Healthcare Group Borrower-in-Custody Board of Directors Bank owned life insurance Basis point(s) Bank Secrecy Act Community Bank Leverage Ratio Coronavirus Aid Relief and Economic Security Act Certificate of Deposit Accounts Registry Service of the InterFi Network Certificates of deposit Core deposit intangible Current Expected Credit Loss Credit Enhancement Obligation Consumer Financial Protection Bureau Community Financial Services Group, LLC CDs: CDI: CECL: CEO: CFPB: CFSG: CFS Partners: Community Financial Services Partners, LLC CMO Company: COVID-19: CRA: CRE: DDA or DDAs: Demand Deposit Account(s) DIF: DTC: DRIP: Exchange Act: Securities Exchange Act of 1934 FASB: FDIA: FDIC: FDICIA: Collateralized Mortgage Obligation Community Bancorp. and Subsidiary Coronavirus Disease 2019 Community Reinvestment Act Commercial Real Estate Financial Accounting Standards Board Federal Deposit Insurance Act Federal Deposit Insurance Corporation Federal Deposit Insurance Company Improvement Act of 1991 Deposit Insurance Fund Depository Trust Company Dividend Reinvestment Plan FHA: FHLBB: FHLMC : FICO: FLA: FOMC: FRB: FRBB: GAAP: GSE: HMDA: HTM: ICS: IRS: JNE: Jr: LIBOR: LLC: MBS: MPF: MSAs MSRs: NII: OAS: OCI: OFAC: OREO: OTTI: PMI: PPP: PPPLF: Federal Housing Administration Federal Home Loan Bank of Boston Federal Home Loan Mortgage Corporation Financing Corporation First Loss Account Federal Open Market Committee Federal Reserve Board Federal Reserve Bank of Boston Generally Accepted Accounting Principles in the United States Government sponsored enterprise Home Mortgage Disclosure Act Held-to-maturity Insured Cash Sweeps of the InterFi Network Internal Revenue Service Jobs for New England Junior London Interbank Offered Rate Limited liability corporation Mortgage-backed security Mortgage Partnership Finance Metropolitan Statistical Areas Mortgage servicing rights Net interest income Other amortizing security Other comprehensive income (loss) Office of Foreign Asset Control Other real estate owned Other-than-temporary impairment Private mortgage insurance Paycheck Protection Program Paycheck Protection Program Liquidity Facility Qualified Mortgage(s) USDA Rural Development Real Estate Settlement Procedures Act U.S. Small Business Administration U.S. Securities and Exchange Commission Supplemental Employee Retirement Plan Sarbanes-Oxley Act of 2002 Troubled-debt restructuring Truth in Lending Act U.S. Department of Agriculture U.S. Veterans Administration Variable interest entities Economic Growth, Regulatory Relief and QM(s): RD: RESPA: SBA: SEC: SERP: SOX: TDR: TILA: USDA: VA: VIE: 2017 Tax Act: Tax Cut and Jobs Act of 2017 2018 Regulatory Consumer Protection Act of 2018 Relief Act: 12 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) The consolidated financial statements include the accounts of the Bancorp. and its wholly-owned subsidiary, the Bank. All significant intercompany accounts and transactions have been eliminated. 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 audited consolidated statements of income, comprehensive income, cash flows and changes in shareholders’ equity for a two year, rather than a three year, period, and intends to provide smaller reporting company scaled disclosures where management deems it appropriate. FASB ASC Topic 810, “Consolidation,” in part, addresses limited purpose trusts formed to issue trust preferred securities. It also establishes the criteria used to identify VIE, and to determine whether or not to consolidate a VIE. In general, ASC Topic 810 provides that the enterprise with the controlling financial interest, known as the primary beneficiary, consolidates the VIE. In 2007, the Company formed CMTV Statutory Trust I for the purposes of issuing trust preferred securities to unaffiliated parties and investing the proceeds from the issuance thereof and the common securities of the trust in junior subordinated debentures issued by the Company. The Company is not the primary beneficiary of CMTV Statutory Trust I; accordingly, the trust is not consolidated with the Company for financial reporting purposes. CMTV Statutory Trust I is considered an affiliate of the Company (see Note 13). Nature of operations The Company provides a variety of deposit and lending services to individuals, municipalities, and business customers through its branches, ATMs and telephone, mobile and internet banking capabilities in northern and central Vermont, which is primarily a small business and agricultural area. The Company also engages in lending activity outside the area of its branch network, through loan production offices in Burlington, Vermont and Lebanon, New Hampshire. The Company’s primary deposit products are checking and savings accounts and certificates of deposit. Its primary lending products are commercial, real estate, municipal and consumer loans. Concentration of risk The Company’s operations are affected by various risk factors, including interest rate risk, credit risk, and risk from geographic concentration of its deposit taking and lending activities. Management attempts to manage interest rate risk through various asset/liability management techniques designed to match maturities and repricing of assets and liabilities. Loan policies and administration are designed to provide assurance that loans will only be granted to creditworthy borrowers, although credit losses are expected to occur because of subjective factors inherent in management’s estimate of credit risk and factors beyond the control of the Company. While the Company has a diversified loan portfolio by loan type, most of its lending activities are conducted within the geographic area where its banking offices are located. As a result, the Company and its borrowers may be especially vulnerable to the consequences of changes in the local economy in northern and central Vermont or northern New England more generally. In addition, a substantial portion of the Company’s loans are secured by real estate, which is susceptible to a decline in value, especially during times of adverse economic conditions. Use of estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions involve inherent uncertainties. Accordingly, actual results could differ from those estimates and those differences could be material. Material estimates that are particularly susceptible to significant change include those relating to the determination of the ALL and the valuation of OREO. In connection with evaluating loans for impairment or assigning the carrying value of OREO, management generally obtains independent evaluations or appraisals for significant properties. While the ALL and the carrying value of OREO are determined using management’s best estimate of probable loan and OREO losses, respectively, as of the balance sheet date, the ultimate collection of a substantial portion of the Company’s loan portfolio and the recovery of a substantial portion of the fair value of OREO are susceptible 13 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) to uncertainties and changes in a number of factors, especially local real estate market conditions. The amount of the change that is reasonably possible cannot be estimated. While management uses available information to recognize losses on loans and OREO, future additions to the allowance or write-downs of OREO may be necessary based on changes in local economic conditions or other relevant factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for losses on loans and the carrying value of OREO. Such agencies may require the Company to recognize additions to the allowance or write-downs of OREO based on their judgment about information available to them at the time of their examination. MSRs associated with loans originated and sold in the secondary market, where servicing is retained, are capitalized and included in Other assets in the consolidated balance sheets. MSRs are amortized against non-interest income in proportion to, and over the period of, estimated future net servicing income of the underlying loans. The value of capitalized servicing rights represents the present estimated value of the future servicing fees arising from the right to service loans for third parties. The carrying value of the MSRs is periodically reviewed for impairment based on management’s estimate of fair value as compared to amortized cost, and impairment, if any, is recognized through a valuation allowance and is recorded as a write down. Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of estimates, including anticipated principal amortization and prepayments. Events that may significantly affect the estimates used are changes in interest rates and the payment performance of the underlying loans. Management uses a third party consultant to assist in estimating the fair value of the Company’s MSRs. Management evaluates securities for OTTI on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to various factors, including the length of time and the extent to which the fair value has been less than cost; the nature of the issuer and its financial condition and near-term prospects; and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The evaluation of these factors is a subjective process and involves estimates and assumptions about matters that are inherently uncertain. Should actual factors and conditions differ materially from those used by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements. Accounting for a business combination that was completed prior to 2009 requires the application of the purchase method of accounting. Under the purchase method, the Company was required to record the assets and liabilities acquired through the LyndonBank merger in 2007 at fair market value, with the excess of the purchase price over the fair value of the net assets recorded as goodwill and evaluated annually for impairment. Management uses various assumptions in evaluating goodwill for impairment. Management utilizes numerous techniques to estimate the carrying value of various other assets held by the Company, including, but not limited to, bank premises and equipment and deferred taxes. The assumptions considered in making these estimates are based on historical experience and on various other factors that are believed by management to be reasonable under the circumstances. Management acknowledges that the use of different estimates or assumptions could produce different estimates of carrying values. Presentation of cash flows For purposes of presentation in the consolidated statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from banks (including cash items in process of clearing), federal funds sold (generally purchased and sold for one day periods) and overnight deposits. Investment securities Debt securities the Company has purchased with the possible intent to sell before maturity are classified as AFS, and are carried at fair value, with unrealized gains and losses, net of tax and reclassification adjustments, reflected 14 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) as a net amount in the shareholders’ equity section of the consolidated balance sheets and in the statements of changes in shareholders’ equity. Investment securities transactions are accounted for on a trade date basis. The specific identification method is used to determine realized gains and losses on sales of debt securities AFS. Premiums and discounts are recognized in interest income using the interest method over the period to maturity or call date. As of the balance sheet dates, the Company did not hold any securities purchased for the purpose of selling in the near term and classified as trading or any securities purchased with the positive intent and ability to hold to maturity and classified as HTM. For individual debt securities that the Company does not intend to sell and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary decline in the fair value of the debt security related to (1) credit loss is recognized in earnings and (2) other factors is recognized in other comprehensive income or loss. Credit loss is deemed to exist if the present value of expected future cash flows using the interest rates at acquisition is less than the amortized cost basis of the debt security. For individual debt securities where the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost, the OTTI is recognized in earnings equal to the entire difference between the security’s cost basis and its fair value at the balance sheet date. Other investments From time to time, the Company acquires partnership interests in limited partnerships for low income housing projects. New investments in limited partnerships are amortized using the proportional amortization method. All investments made before January 1, 2015 are amortized using the effective yield method. The Company has a one-third ownership interest in CFS Partners, which in turn owns 100% of CFSG, a non- depository trust company (see Note 10). The Company’s investment in CFS Partners is accounted for under the equity method of accounting. Restricted equity securities The Company holds certain restricted equity securities acquired for non-investment purposes, and required as a matter of law or as a condition to the receipt of certain financial products and services. These securities are carried at cost. As a member of the FRBB, the Company is required to invest in FRBB stock in an amount equal to 6% of the Bank’s capital stock and surplus. As a member of the FHLBB, the Company is required to invest in $100 par value stock of the FHLBB in an amount that approximates 1% of unpaid principal balances on qualifying loans, plus an additional amount to satisfy an activity based requirement. The stock is nonmarketable and redeemable at par value, subject to the FHLBB’s right to temporarily suspend such redemptions. Members are subject to capital calls in some circumstances to ensure compliance with the FHLBB’s capital plan. In order to access correspondent banking services from the ACBB, the Company is required to invest in a minimum of 20 shares of the common stock of ACBB’s parent company, ACBI. Loans held-for-sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Loans Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance, adjusted for any charge-offs, the ALL, loan premiums or discounts for acquired loans and any unearned fees or costs on originated loans. 15 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Loan interest income is accrued daily on the outstanding balances. 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 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 non-accrual loans are generally applied as a reduction of the loan principal balance. Loans are returned to accrual status when principal and interest payments are brought current and the customer has demonstrated the intent and ability to make future payments on a timely basis. Loans are written down or charged off when collection of principal is considered doubtful. Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount is amortized as an adjustment of the related loan’s yield. The Company generally amortizes these amounts over the contractual life of the loans. Allowance for loan losses The ALL is established through a provision for loan losses charged to earnings. Loan 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, primarily consumer 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. 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, specific and unallocated components. However, the entire allowance is available to absorb losses in the loan portfolio, regardless of specific, general and unallocated components considered in determining the amount of the allowance. General component The general component of the ALL is based on historical loss experience and various qualitative factors and is stratified by the following loan segments: commercial and industrial, 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. Loss ratios are calculated by loan segment using appropriate look back periods. Management uses an average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment in the current economic climate. During periods of economic stability, a relatively longer period (e.g., five years) may be appropriate. During periods of significant expansion or contraction, the Company may appropriately shorten the historical time period. Due primarily to the effects of COVID-19, beginning in the second quarter of 2020, the Company shortened its look back period from five years to one year. Qualitative factors 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 16 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) 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. The qualitative factors are determined based on the various risk characteristics of each loan segment. During the third quarter of 2020, the Company adjusted its ALL analysis to begin applying qualitative factors to municipal loans and certain purchased commercial loans, for which the Company does not have any historical loss data. Of the third quarter 2020 provision for loan losses of $362,499, $106,821 was attributable to this change. 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 the credit quality in this segment. 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 farm land 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. Residential Real Estate - 1st 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 17 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) 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 The specific component of the ALL relates to loans that are impaired. Impaired loans are loans to a borrower that in the aggregate are greater than $100,000 and that are in non-accrual status or are TDRs regardless of amount. A specific allowance is established for an impaired loan when its estimated fair value or net present value of future cash flows is less than the carrying value of the loan. For all loan segments, except consumer loans, a loan is considered impaired when, based on current information and events, in management’s estimation it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant or temporary payment delays and payment shortfalls generally are not classified as impaired. Management evaluates the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and frequency of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis, by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Impaired loans also include troubled loans that are restructured. A TDR occurs when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that would otherwise not be granted. TDRs may include the transfer of assets to the Company in partial satisfaction of a troubled loan, a modification of a loan’s terms, or a combination of the two. As described in Note 3, under March 2020 guidance from the federal banking agencies and concurrence by the FASB, certain short-term loan accommodations made in good faith for borrowers experiencing financial difficulties due to the COVID-19 health emergency are not considered TDRs. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment evaluation, unless such loans are subject to a restructuring agreement. Unallocated component An unallocated component of the ALL is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component reflects management’s estimate of the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. Bank premises and equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. The cost of assets sold or otherwise disposed of, and the related accumulated depreciation, are eliminated from the accounts and the resulting gains or losses are reflected in the consolidated statements of income. Maintenance and repairs are charged to current expense as incurred and the cost of major renewals and betterments is capitalized. Other real estate owned Real estate properties acquired through or in lieu of loan foreclosure or properties no longer used for bank operations are initially recorded at fair value less estimated selling cost at the date of acquisition, foreclosure or transfer. Fair value is determined, as appropriate, either by obtaining a current appraisal or evaluation prepared 18 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) by an independent, qualified appraiser, by obtaining a broker’s market value analysis, and finally, if the Company has limited exposure and limited risk of loss, by the opinion of management as supported by an inspection of the property and its most recent tax valuation. During periods of declining market values, the Company will generally obtain a new appraisal or evaluation. Any write-down based on the asset’s fair value at the date of acquisition or institution of foreclosure is charged to the ALL. After acquisition through or in lieu of foreclosure, these assets are carried at the lower of their new cost basis or fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding the property are expensed as incurred. Appraisals by an independent, qualified appraiser are performed periodically on properties that management deems significant, or evaluations may be performed by management or a qualified third party on OREO properties in the portfolio that are deemed less significant or less vulnerable to market conditions. Subsequent write-downs are recorded as a charge to other expense. Gains or losses on the sale of such properties are included in income when the properties are sold. Intangible assets Intangible assets include the excess of the purchase price over the fair value of net assets acquired (goodwill) in the Company’s 2007 acquisition of LyndonBank. Goodwill is not amortizable and is reviewed for impairment annually, or more frequently as events or circumstances warrant. Income taxes The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting bases and the tax bases of the Company’s assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. Adjustments to the Company’s deferred tax assets are recognized as deferred income tax expense or benefit based on management’s judgments relating to the outcome of such asset. Mortgage servicing Servicing assets are recognized as separate assets when rights are acquired through purchase or retained upon the sale of loans. Capitalized servicing rights are reported in Other assets and initially recorded at fair value, and are amortized against non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing rights are periodically evaluated for impairment, based upon the estimated fair value of the rights as compared to amortized cost. Impairment is determined by stratifying the rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market- based assumptions. Impairment is recognized through a valuation allowance and is recorded as amortization of Other assets, to the extent that estimated fair value is less than the capitalized amount at the valuation date. Subsequent improvement, if any, in the estimated fair value of impaired MSRs is reflected in a positive valuation adjustment and is recognized in other income up to (but not in excess of) the amount of the prior impairment. Pension costs Pension costs are charged to salaries and employee benefits expense and accrued over the active service period. Advertising costs The Company expenses advertising costs as incurred. Comprehensive income U.S. GAAP generally requires recognized revenue, expenses, gains and losses to be included in net income. Certain changes in assets and liabilities, such as the after-tax effect of unrealized gains and losses on available- for-sale securities, are not reflected in the consolidated statement of income, but the cumulative effect of such items 19 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) from period-to-period is reflected as a separate component of the shareholders’ equity section of the consolidated balance sheet (accumulated other comprehensive income or loss). Other comprehensive income or loss, along with net income, comprises the Company’s total comprehensive income. Preferred stock In December 2007, the Company issued 25 shares of fixed-to-floating rate non-cumulative perpetual preferred stock, without par value and having a liquidation preference of $100,000 per share. There were 15 shares of preferred stock outstanding as of December 31, 2021 and 2020. Under the terms of the preferred stock, the Company pays non-cumulative cash dividends quarterly, when, as and if declared by the Board. Dividends are payable at a variable dividend rate equal to the Wall Street Journal Prime Rate in effect on the first business day of each quarterly dividend period. A variable rate of 4.75% was in effect for the dividend payments due in the first quarter of 2020, followed by two decreases with a rate of 3.25% in effect for the last three quarters of 2020, as well as the four quarters of 2021. Partial redemptions of the Company’s preferred stock began in 2018, and are at the discretion of management and voted on by the Board. Prior to 2020, the Company had redeemed 10 shares of preferred stock at an aggregate redemption price of $1,000,000 plus accrued dividends. The Company chose to not redeem any additional preferred shares during 2020 or 2021, but may consider further redemptions in future periods. Earnings per common share Earnings per common share amounts are computed based on net income, net of dividends to preferred shareholders, and on the weighted average number of shares of common stock issued during the period, including DRIP shares issuable upon reinvestment of dividends (retroactively adjusted for stock splits and stock dividends, if any) and reduced for shares held in treasury. The following table illustrates the calculation of earnings per common share for the periods presented, as adjusted for the cash dividends declared on the preferred stock: Years Ended December 31, 2021 2020 Net income, as reported Less: dividends to preferred shareholders Net income available to common shareholders Weighted average number of common shares used in calculating earnings per share Earnings per common share Off-balance-sheet financial instruments $ 13,138,338 48,750 $ 13,089,588 $ 10,758,502 54,375 $ 10,704,127 5,345,988 2.45 $ 5,274,785 2.03 $ In the ordinary course of business, the Company is a party to off-balance-sheet financial instruments consisting of commitments to extend credit, commercial and municipal letters of credit, standby letters of credit, and risk-sharing commitments on residential mortgage loans sold through the FHLBB’s MPF program. Such financial instruments are recorded in the consolidated financial statements when they are funded (see Note 18). Transfers of financial assets Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. 20 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Note 2. Risks and Uncertainties The economic effects of the COVID-19 global pandemic which was declared by the World Health Organization in March 2020 continue to reverberate throughout the national, regional and local economy. Government actions taken during 2020 and 2021 to help mitigate the spread of COVID-19, including restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses, had significant immediate adverse impacts on the national, regional and local economy. While these restrictions have largely been lifted, the direct and indirect adverse impacts on the local economy in the Company’s market areas persist, particularly with regard to small businesses and their employees, suppliers, vendors and processors. The actions taken by the FOMC in response to the pandemic beginning in March 2020 and throughout the remainder of 2020 and 2021 reducing the targeted federal funds interest rate range to 0% to 0.25% have resulted in a persistent low rate environment. In addition, government actions to provide financial stimulus to mitigate the effects of the pandemic have contributed to an inflationary environment. These government monetary and fiscal policies and other effects of the COVID-19 pandemic adversely affect the Company’s business, financial condition and results of operations and may continue to do so in future periods. It is unknown how long the adverse economic conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company. Due to the inherent economic and other uncertainties related to the COVID-19 pandemic and its after-effects, it is reasonably possible that estimates made in the Company’s consolidated financial statements could be materially and adversely impacted in the near term as a result of the pandemic, including expected credit losses on loan receivables. Note 3. Recent Accounting Developments In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and has issued subsequent amendments thereto, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is assessing ASU No. 2020-04 and its impact on the transition away from LIBOR for its financial instruments. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under the new guidance, which will replace the existing incurred loss model for recognizing credit losses, banks and other lending institutions will be required to recognize the full amount of expected credit losses. The new guidance, which is referred to as the current expected credit loss, or CECL model, requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. A modified version of these requirements also applies to debt securities classified as available for sale, which will require that credit losses on those securities be recorded through an allowance for credit losses rather than a write-down. The ASU may have a material impact on the Company’s consolidated financial statements upon adoption as it will require a change in the Company’s methodology for calculating its ALL and allowance on unused commitments. The Company will transition from an incurred loss model to an expected loss model, which will likely result in an increase in the ALL upon adoption and may negatively impact the Company’s and the Bank’s regulatory capital ratios. The Company has formed a committee to assess the implications of this new pronouncement and transitioned to a software solution for preparing the ALL calculation and related reports that management believes provides the Company with stronger data integrity, ease and efficiency in ALL preparation. The new software solution also provides numerous training opportunities for the appropriate personnel within the Company. The Company has gathered and is continuing to analyze the historical data to serve as a basis for estimating the ALL under CECL and 21 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) continues to evaluate the anticipated impact of the adoption of the ASU on its consolidated financial statements. As initially proposed, the ASU was to be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018, including interim periods within such years. However, on October 16, 2019, the FASB approved an extended effective date for compliance with the ASU by smaller reporting companies, which are now required to comply with the ASU for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company qualifies for this extension and does not intend to early adopt the ASU at this time. Management will continue to evaluate the Company’s CECL compliance and implementation timetable in light of the extension. In March and April, 2020, federal banking regulators issued interagency guidance on accounting for loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term (that is, six months or less) modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant, provided that the loan is less than 30 days past due at the time a modification program is implemented. The banking agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs under ASC No. 310-40, Receivables – Troubled Debt Restructurings by Creditors. Additionally, a provision of the CARES Act enacted in March 2020 provides that COVID-19 related loan modifications (including modifications that are not short-term) made to a loan between March 1, 2020 and the earlier of December 31, 2020 or the sixtieth day after the end of the COVID-19 emergency declared by the President will not require the loan to be treated as a TDR under U.S. GAAP, so long as the modified loan was not past due as of December 31, 2019. On December 27, 2020, the Consolidated Appropriations Act 2021 (CAA) extended the date for COVID-19 related loan modifications from December 31, 2020 to January 1, 2022. 22 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Note 4. Investment Securities Debt securities AFS consist of the following: December 31, 2021 U.S. GSE debt securities U.S. Government securities Taxable municipal securities Tax-exempt municipal securities Agency MBS ABS and OAS CMO Other investments Total December 31, 2020 U.S. GSE debt securities Agency MBS ABS and OAS Other investments Total Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 12,001,978 32,374,935 300,000 830,279 128,291,487 2,131,610 1,451,349 6,438,000 $ 183,819,638 $ 36,024 0 0 1,167 184,002 82,414 0 142,199 $ 445,806 $ 209,504 $ 11,828,498 32,041,041 298,733 831,379 127,132,521 2,214,024 1,420,458 6,575,805 $ 1,922,985 $ 182,342,459 333,894 1,267 67 1,342,968 0 30,891 4,394 $ 8,007,142 40,861,370 2,508,997 8,169,000 $ 59,546,509 $ 165,934 547,930 160,999 318,002 $ 1,192,865 $ $ 3,245 $ 30,951 0 0 8,169,831 41,378,349 2,669,996 8,487,002 34,196 $ 60,705,178 Investments pledged as collateral for larger dollar repurchase agreement accounts and for other purposes as required or permitted by law consisted of U.S. GSE debt securities, Agency MBS, and ABS and OAS. These repurchase agreements mature daily. These investments as of the balance sheet dates were as follows: December 31, 2021 December 31, 2020 Amortized Cost Fair Value $ 63,045,599 59,546,509 $ 62,256,702 60,705,178 23 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Proceeds from sales of debt securities AFS were $884,137 in 2020 with gains of $39,086. There were no sales during 2021 from the investment portfolio. The carrying amount and estimated fair value of securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may call or prepay obligations with or without call or prepayment penalties, pursuant to contractual terms. Because the actual maturities of Agency MBS usually differ from their contractual maturities due to the right of borrowers to prepay the underlying mortgage loans, usually without penalty, those securities are not presented in the following table by contractual maturity date. The scheduled maturities of debt securities AFS at December 31, 2021 were as follows: Due in one year or less Due from one to five years Due from five to ten years Due after ten years Agency MBS Total Amortized Cost Fair Value $ 3,470,000 36,860,731 13,065,163 2,132,257 128,291,487 $ 183,819,638 $ 3,508,582 36,619,130 12,942,726 2,139,500 127,132,521 $ 182,342,459 Debt securities with unrealized losses as of the balance sheet dates are presented in the tables below. Less than 12 months 12 months or more Totals Fair Value Unrealized Loss Fair Value Unrealized Number of Securities Loss Fair Value Unrealized Loss December 31, 2021 U.S. GSE debt securities $ 5,869,117 $ 130,883 $ 1,921,379 $ 78,621 7 $ 7,790,496 $ 209,504 U.S. Government securities 32,041,041 333,894 Taxable municipal securities Tax-exempt municipal securities 298,733 330,212 1,267 67 0 0 0 0 0 0 46 32,041,041 333,894 1 1 298,733 330,212 1,267 67 Agency MBS CMO Other investments Total December 31, 2020 107,061,452 1,128,587 8,809,493 214,381 84 115,870,945 1,342,968 1,420,458 491,606 30,891 4,394 0 0 0 0 3 2 1,420,458 491,606 30,891 4,394 $ 147,512,619 $1,629,983 $ 10,730,872 $ 293,002 144 $ 158,243,491 $ 1,922,985 U.S. GSE debt securities $ 1,999,234 $ 3,245 $ 0 $ 0 2 $ 1,999,234 $ 3,245 Agency MBS Total 2,076,167 19,845 520,546 11,106 6 2,596,713 30,951 $ 4,075,401 $ 23,090 $ 520,546 $ 11,106 8 $ 4,595,947 $ 34,196 Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions, or adverse developments relating to the issuer, warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. 24 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) As the Company has the ability to hold its debt securities until maturity, or for the foreseeable future if classified as AFS, and it is more likely than not that the Company will not have to sell such securities before recovery of their cost basis, no declines in such securities were deemed to be other-than-temporary as of the balance sheet dates presented. The Bank is a member of the FHLBB. The FHLBB is a cooperatively owned wholesale bank for housing and finance in the six New England States. Its mission is to support the residential mortgage and community-development lending activities of its members, which include over 450 financial institutions across New England. The Company obtains much of its wholesale funding from the FHLBB. As a requirement of membership in the FHLBB, the Bank must own a minimum required amount of FHLBB stock, calculated periodically based primarily on the Bank’s level of borrowings from the FHLBB. As a result of the Bank’s level of borrowings during 2021 and 2020, the Bank was required to purchase additional FHLBB stock in aggregate totaling $129,400 and $537,100, respectively. As a member of the FHLBB, the Company is also subject to future capital calls by the FHLBB in order to maintain compliance with its capital plan. During 2021 and 2020, FHLBB exercised capital call options with redemptions totaling $141,500 and $522,400, respectively, on the Company’s portfolio of FHLBB stock. As of December 31, 2021 and 2020, the Company’s investment in FHLBB stock was $756,300 and $768,400, respectively. The Company periodically evaluates its investment in FHLBB stock for impairment based on, among other factors, the capital adequacy of the FHLBB and its overall financial condition. No impairment losses have been recorded through December 31, 2021. The Company’s investment in FRBB Stock was $588,150 at December 31, 2021 and 2020. In 2018, the Company purchased 20 shares of common stock in ACBI at a purchase price of $90,000, for the purpose of obtaining access to correspondent banking services from ABCI subsidiary, ACBB. These shares are subject to contractual resale restrictions and considered by management to be restricted and are recorded in the balance sheet at cost, amounting to $90,000 at December 31, 2021 and 2020. Note 5. Loans, Allowance for Loan Losses and Credit Quality The composition of net loans as of the balance sheet dates was as follows: Commercial & industrial Commercial real estate Municipal Residential real estate - 1st lien Residential real estate - Jr lien Consumer Total loans ALL Deferred net loan fees Net loans December 31, 2021 December 31, 2020 $ 120,933,470 300,958,931 47,955,231 181,316,345 34,359,864 4,464,692 689,988,533 $ 161,067,501 280,544,550 54,807,367 170,507,263 38,147,659 4,280,990 709,355,330 (7,710,256) (37,972) 682,240,305 (7,208,485) (1,195,741) $ 700,951,104 $ 25 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) The following is an age analysis of loans (including non-accrual), as of the balance sheet dates, by portfolio segment: December 31, 2021 30-89 Days 90 Days or More Total Past Due Current Total Loans Non-Accrual Loans 90 Days or More and Accruing Commercial & industrial Commercial real estate Municipal Residential real estate 1st lien Jr lien Consumer Totals $ 833,875 49,450 0 $ 0 $ 833,875 2,449,964 0 $120,099,595 298,508,967 47,955,231 $120,933,470 300,958,931 47,955,231 $ 98,661 4,517,839 0 $ 0 0 0 2,400,514 0 1,190,300 51,837 9,741 506,827 1,799,075 179,517,270 181,316,345 86,476 34,359,864 34,221,551 0 4,464,692 4,454,951 $ 2,135,203 $3,095,765 $ 5,230,968 $684,757,565 $689,988,533 $5,940,629 $ 593,303 1,180,563 143,566 0 608,775 86,476 0 138,313 9,741 December 31, 2020 30-89 Days 90 Days or More Total Past Due Current Total Loans 90 Days or Non-Accrual More and Accruing Loans Commercial & industrial Commercial real estate Municipal Residential real estate 1st lien Jr lien Consumer Totals $ 119,413 $ 127,343 0 0 $ 119,413 $160,948,088 $161,067,501 $ 434,196 $ 567,957 0 695,300 279,849,250 280,544,550 54,807,367 54,807,367 0 1,875,942 0 0 0 0 1,872,439 18,322 14,388 390,288 2,700,783 167,806,480 170,507,263 98,889 38,147,659 37,948,626 0 4,280,990 4,266,602 $ 2,151,905 $1,577,012 $ 3,728,917 $705,626,413 $709,355,330 $4,674,764 $ 489,177 2,173,315 191,311 0 828,344 180,711 0 199,033 14,388 For all loan segments, loans over 30 days past due are considered delinquent. As of the balance sheet dates presented, residential mortgage loans in process of foreclosure consisted of the following: December 31, 2021 December 31, 2020 Number of loans 5 6 Balance $ 195,082 312,807 26 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) A Vermont state-imposed moratorium on residential foreclosure proceedings adopted in April 2020 in response to the COVID-19 pandemic, ended on July 15, 2021. The following summarizes changes in the ALL and select loan information, by portfolio segment: As of or for the year ended December 31, 2021 Commercial & Industrial Commercial Real Estate Municipal Residential Real Estate 1st Lien Residential Real Estate Jr Lien Consumer Unallocated Total ALL beginning balance $ 842,547 $ 3,854,153 $ 82,211 $ 1,735,304 $ 234,896 $ 60,461 $ 398,913 $ 7,208,485 Charge-offs Recoveries Provision (credit) ALL ending balance (18,847) (22,000) 4,761 110,586 27,160 292,447 0 0 (98,704) 7,636 (5,483) 121,656 0 (87,651) 10,821 (63,703) 54,430 28,458 0 0 140,204 (227,202) 104,808 624,165 $ 939,047 $ 4,151,760 $ 76,728 $ 1,765,892 $ 182,014 $ 55,698 $ 539,117 $ 7,710,256 ALL evaluated for impairment Individually Collectively Total $ 0 $ 0 $ 0 $ 79,978 $ 0 $ 0 $ 0 $ 79,978 939,047 4,151,760 76,728 1,685,914 182,014 55,698 539,117 7,630,278 $ 939,047 $ 4,151,760 $ 76,728 $ 1,765,892 $ 182,014 $ 55,698 $ 539,117 $ 7,710,256 Loans evaluated for impairment Individually Collectively Total $ 93,362 $ 4,553,734 $ 0 $ 3,720,503 $ 88,563 $ 0 120,840,108 296,405,197 47,955,231 177,595,842 34,271,301 4,464,692 $ 120,933,470 $ 300,958,931 $ 47,955,231 $181,316,345 $ 34,359,864 $ 4,464,692 $ 8,456,162 681,532,371 $689,988,533 As of or for the year ended December 31, 2020 Commercial & Industrial Commercial Real Estate Municipal Residential Real Estate 1st Lien Residential Real Estate Jr Lien Consumer Unallocated Total ALL beginning balance $ 836,766 $ 3,181,646 $ 0 $ 1,388,564 $ 289,684 $ 51,793 $ 178,038 $ 5,926,491 Charge-offs Recoveries Provision (credit) ALL ending balance (39,148) (34,200) 1,087 43,842 20,000 686,707 0 0 82,211 (203,623) (28,673) (74,327) 12,856 537,507 5,809 (31,924) 33,213 49,782 0 0 (379,971) 72,965 220,875 1,589,000 $ 842,547 $ 3,854,153 $ 82,211 $ 1,735,304 $ 234,896 $ 60,461 $ 398,913 $ 7,208,485 ALL evaluated for impairment Individually Collectively Total $ 0 $ 0 $ 0 $ 108,474 $ 307 $ 0 $ 0 $ 108,781 842,547 3,854,153 82,211 1,626,830 234,589 60,461 398,913 7,099,704 $ 842,547 $ 3,854,153 $ 82,211 $ 1,735,304 $ 234,896 $ 60,461 $ 398,913 $ 7,208,485 Loans evaluated for impairment Individually Collectively Total $ 414,266 $ 1,943,723 $ 0 $ 4,657,050 $ 135,053 $ 0 160,653,235 278,600,827 54,807,367 165,850,213 38,012,606 4,280,990 $161,067,501 $ 280,544,550 $ 54,807,367 $ 170,507,263 $ 38,147,659 $ 4,280,990 $ 7,150,092 702,205,238 $709,355,330 27 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Impaired loans as of the balance sheet dates, by portfolio segment were as follows: As of December 31, 2021 Unpaid Principal Balance Recorded Investment(1) Related Allowance Average Recorded Interest Income Investment(1)(2) Recognized(2) Related allowance recorded Residential real estate 1st lien Jr lien Total with related allowance No related allowance recorded Commercial & industrial Commercial real estate Residential real estate 1st lien Jr lien Total with no related allowance $ 702,586 0 702,586 $ 716,118 0 716,118 $ 79,978 0 79,978 $ 858,124 3,452 861,576 $ 60,769 243 61,012 93,362 4,554,074 115,414 5,108,557 3,050,647 88,570 7,786,653 4,076,352 132,802 9,433,125 290,181 2,747,193 3,331,971 124,803 6,494,148 204 120,996 205,514 186 326,900 Total impaired loans $ 8,489,239 $10,149,243 $ 79,978 $ 7,355,724 $ 387,912 (1) Recorded investment in impaired loans in the table above includes accrued interest receivable and deferred net loan costs of $33,077. (2) For the year ended December 31, 2021. As of December 31, 2020 Unpaid Principal Balance Recorded Investment(1) Related Allowance Related allowance recorded Residential real estate 1st lien Jr lien Total with related allowance $ No related allowance recorded Commercial & industrial Commercial real estate Residential real estate 1st lien Jr lien Total with no related allowance 900,581 $ 950,063 $ 108,474 307 108,781 4,775 954,838 4,777 905,358 414,266 1,944,013 471,405 2,394,284 3,788,965 130,279 6,277,523 4,607,848 169,720 7,643,257 Average Recorded Interest Income Investment(1)(2) Recognized(2) $ 889,262 5,416 894,678 $ 72,713 541 73,254 397,136 1,746,430 3,878,829 163,750 6,186,145 6,396 14,139 230,838 4,524 255,897 Total impaired loans $ 7,182,881 $ 8,598,095 $ 108,781 $ 7,080,823 $ 329,151 (1) Recorded investment in impaired loans in the table above includes accrued interest receivable and deferred net loan costs of $32,789. (2) For the year ended December 31, 2020. 28 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Credit Quality Grouping In developing the ALL, 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 - Acceptable Risk – 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 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 – Management Involved - 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 – Unacceptable Risk – are loans that have distinct shortcomings that require a greater degree of management attention. Examples of these shortcomings include a borrower’s inadequate capacity to service debt, poor operating performance, or insolvency. These loans are more likely to result in repayment through collateral liquidation. Group C loans range from those that are likely to sustain some loss if the shortcomings are not corrected, to those for which loss is imminent and non-accrual treatment is warranted. Group C loans include individually rated commercial purpose loans and retail loans adversely rated in accordance with the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification Policy. Group C retail loans include 1-4 family residential real estate loans and home equity loans past due 90 days or more with loan-to-value ratios greater than 60%, home equity loans 90 days or more past due where the Bank does not hold first mortgage, irrespective of loan-to-value, loans in bankruptcy where repayment is likely but not yet established, and lastly consumer loans that are 90 days or more past due. Commercial purpose loan ratings are assigned by the commercial account officer; for larger and more complex commercial loans, the credit rating is a collaborative assignment by the lender and the credit analyst. The credit risk rating is based on the borrower’s expected performance, i.e., the likelihood that the borrower will be able to service its obligations in accordance with the loan terms. Credit risk ratings are meant to measure risk versus simply record history. Assessment of expected future payment performance requires consideration of numerous factors. While past performance is part of the overall evaluation, expected performance is based on an analysis of the borrower’s financial strength, and historical and projected factors such as size and financing alternatives, capacity and cash flow, balance sheet and income statement trends, the quality and timeliness of financial reporting, and the quality of the borrower’s management. Other factors influencing the credit risk rating to a lesser degree include collateral coverage and control, guarantor strength and commitment, documentation, structure and covenants and industry conditions. There are uncertainties inherent in this process. Credit risk ratings are dynamic and require updating whenever relevant information is received. Risk ratings are assessed on an ongoing basis and at various points, including at 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 Credit Officer of any known increase in loan risk, even if considered temporary in nature. 29 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) The risk ratings within the loan portfolio, by segment, as of the balance sheet dates were as follows: As of December 31, 2021 Commercial Commercial Residential Residential Real Estate Real Estate & Industrial Real Estate Municipal 1st Lien Jr Lien Consumer Total Group A Group B Group C Total $ 117,607,773 $ 285,732,365 $ 47,955,231 $ 177,456,149 $ 34,166,076 $ 4,464,692 $ 667,382,286 693,084 6,550,335 2,632,613 8,676,230 0 0 0 0 3,860,197 193,788 0 0 7,243,419 15,362,828 $ 120,933,470 $ 300,958,930 $ 47,955,231 $ 181,316,346 $ 34,359,864 $ 4,464,692 $ 689,988,533 As of December 31, 2020 Commercial Commercial Residential Residential Real Estate Real Estate & Industrial Real Estate Municipal 1st Lien Jr Lien Consumer Total Group A Group B Group C Total $ 156,748,590 $ 261,932,833 $ 54,807,367 $ 167,478,918 $ 37,850,056 $ 4,280,990 $ 683,098,754 998,641 12,784,078 3,320,270 5,827,639 0 0 0 0 3,028,345 297,603 0 0 13,782,719 12,473,857 $ 161,067,501 $ 280,544,550 $ 54,807,367 $ 170,507,263 $ 38,147,659 $ 4,280,990 $ 709,355,330 Modifications of Loans and TDRs A loan is classified as a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. The Company is deemed to have granted such a concession if it has modified a troubled 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 amount of payments typically would not require the loan to be accounted for as a TDR. However, pursuant to regulatory guidance, any payment delay longer than three months is generally not considered insignificant. Management’s assessment of whether a concession has been granted also takes into account payments expected to be received from third parties, including third-party guarantors, provided that the third party has the ability to perform on the guarantee. 30 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) The Company’s TDRs are principally a result of extending loan repayment terms to relieve cash flow difficulties. The Company has only, on a limited basis, reduced interest rates for borrowers below the current market rate for the borrower. The Company has not forgiven principal or reduced accrued interest within the terms of original restructurings, nor has it converted variable rate terms to fixed rate terms. However, the Company evaluates each TDR situation on its own merits and does not foreclose the granting of any particular type of concession. The Company has adopted the TDR guidance issued by the federal banking agencies in March and April 2020 regarding the treatment of certain short-term loan modifications relating to the COVID-19 pandemic (See Note 3). Under this guidance, qualifying concessions and modifications are not considered TDRs. In total, as of December 31, 2021 the Company had granted short term loan concessions and/or modifications within the terms of this guidance to 595 borrowers. A portion of these modified loans were paid in full during 2021, leaving a total of 370 of such loans having an aggregate principal amount of $104.3 million outstanding as of December 31, 2021. These loans may bear a higher risk of default in future periods. New TDRs, by portfolio segment, for the periods presented were as follows: Year ended December 31, 2021 Pre- Post- Modification Modification Outstanding Outstanding Recorded Recorded Investment Investment Number of Contracts Commercial & industrial Commercial real estate Residential real estate 1st lien Year ended December 31, 2020 Residential real estate 1st lien 1 2 1 4 $ 41,751 3,153,402 $ 41,751 3,153,402 67,007 $ 3,262,160 67,007 $ 3,262,160 Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Number of Contracts 6 $ 591,826 $ 687,751 31 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) The TDRs for which there was a payment default during the twelve month periods presented were as follows: Year ended December 31, 2021 Commercial & industrial Commercial real estate Year ended December 31, 2020 Residential real estate - 1st lien Number of Contracts Recorded Investment 1 2 3 $ 38,001 3,081,810 $ 3,119,811 Number of Contracts Recorded Investment 1 $ 165,168 TDRs are treated as other impaired loans and carry individual specific reserves with respect to the calculation of the ALL. These loans are categorized as non-performing, may be past due, and are generally adversely risk rated. The TDRs that have defaulted under their restructured terms are generally in collection status and their reserve is typically calculated using the fair value of collateral method. The specific allowances related to TDRs as of the balance sheet dates presented were as follows: Specific Allowance 2021 2020 $ 79,978 $ 108,781 As of the balance sheet dates, the Company evaluates whether it is contractually committed to lend additional funds to debtors with impaired, non-accrual or modified loans. The Company is contractually committed to lend under one SBA guaranteed line of credit to a borrower whose lending relationship was previously restructured. Note 6. Loan Servicing Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others were $151,198,760 and $164,610,868 at December 31, 2021 and 2020, respectively. Net gain realized on the sale of loans was $540,540 and $1,027,175 for the years ended December 31, 2021 and 2020, respectively. Most loan sales are with servicing rights retained. The following table summarizes changes in MSRs for the years ended December 31, Balance at beginning of year MSRs capitalized MSRs amortized Change in valuation allowance Balance at end of year 32 2021 2020 $ 922,146 147,328 (225,404) 53,650 $ 897,720 $ 939,577 292,654 (256,435) (53,650) $ 922,146 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Note 7. Bank Premises and Equipment The major classes of bank premises and equipment and accumulated depreciation and amortization at December 31 were as follows: Buildings and improvements Land and land improvements Furniture and equipment Leasehold improvements Finance lease Operating leases Other prepaid assets Less accumulated depreciation and amortization Net bank premises and equipment Note 8. Leases 2021 2020 $ 10,503,322 2,663,549 6,067,181 824,605 4,018,377 1,417,859 102,365 25,597,258 (11,829,930) $ 13,767,328 $ 10,421,580 2,663,549 5,307,533 824,605 588,347 1,417,859 181,627 21,405,100 (11,195,231) $ 10,209,869 The Company has operating and finance leases for some of its bank premises, with remaining lease terms of one year to 19 years. Some of the operating leases have options to renew, which are reflected in the seven years. The Company’s operating lease right-of-use assets and finance lease assets are included in “Bank premises and equipment, net” in the consolidated balance sheet and operating lease liabilities and finance lease liabilities are included in other liabilities in the consolidated balance sheet. The components of lease expense for the periods presented were as follows: Years Ended December 31, Operating lease cost Finance lease cost: Amortization of right-of-use assets Interest on lease liabilities Variable rent expense Total finance lease cost 2021 2020 $ 209,697 $ 259,954 $ $ 188,327 71,337 19,798 279,462 $ $ 38,667 5,396 33,940 78,003 Total rental expense not associated with operating lease costs above amounted to $22,498 and $15,872 for the years ended December 31, 2021 and 2020, respectively. 33 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Supplemental information related to leases as of the balance sheet dates was as follows: December 31, Operating Leases Operating lease right-of-use assets Operating lease liabilities Finance Leases Finance lease right-of-use assets Finance lease liabilities December 31, Weighted Average Remaining Lease Term (in Years) Operating Leases Finance Leases Weighted Average Discount Rate Operating Leases Finance Leases Operating lease obligations 2021 2020 852,514 $ 1,048,686 863,566 $ 1,060,391 3,852,605 $ 85,680 3,857,883 $ 38,159 $ $ $ $ 2021 2020 3.7 16.7 1.28% 2.29% 4.0 0.5 1.28% 7.50% The Company is obligated under non-cancelable operating leases for bank premises expiring in various years through 2026, with options to renew. Minimum future rental payments for these leases with original terms in excess of one year as of December 31, 2021 for each of the next five years and in aggregate are: $ $ 216,180 223,432 199,648 154,659 99,165 893,084 2022 2023 2024 2025 2026 Total 34 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Finance lease obligations The following is a schedule by years of future minimum lease payments under capital leases, together with the present value of the net minimum lease payments as of December 31, 2021: 2022 2023 2024 2025 2026 Subsequent to 2026 Total minimum lease payments Less amount representing interest Present value of net minimum lease payments $ $ 299,083 300,928 302,819 304,758 311,451 3,081,390 4,600,429 (742,546) 3,857,883 A reconciliation of the undiscounted cash flows in the maturity analysis above and the lease liability recognized in the consolidated balance sheet as of December 31, 2021, is shown below: Undiscounted cash flows Discount effect of cash flows Lease liabilities Note 9. Goodwill Operating Leases Finance Leases $ $ 893,084 (29,518) 863,566 $ $ 4,600,429 (742,546) 3,857,883 As a result of the acquisition of LyndonBank on December 31, 2007, the Company recorded goodwill amounting to $11,574,269. The goodwill is not amortizable and is not deductible for tax purposes. Management evaluated goodwill for impairment at December 31, 2021 and 2020 and concluded that no impairment existed as of such dates. Note 10. Other Investments The Company purchases, from time to time, interests in various limited partnerships established to acquire, own and rent residential housing for low and moderate income residents of northeastern and central Vermont. The tax credits from these investments were $468,054 and $433,970 for the years ended December 31, 2021 and 2020, respectively. Expenses related to amortization of the investments in the limited partnerships are recognized as a component of income tax expense, and were $363,048 and $336,686 for 2021 and 2020, respectively. The carrying values of the limited partnership investments were $2,062,673 and $2,425,721 at December 31, 2021 and 2020, respectively, and are included in Other assets. The Bank has a one-third ownership interest in a non-depository trust company, CFSG, based in Newport, Vermont, which is held indirectly through CFS Partners, a Vermont LLC that owns 100% of the LLC equity interests of CFSG. The Bank accounts for its investment in CFS Partners under the equity method of accounting. The Company’s investment in CFS Partners, included in Other assets, amounted to $3,172,023 and $4,220,418 as of December 31, 2021 and 2020, respectively. The Company recognized income of $951,605 and $684,891 for 2021 and 2020, respectively, through CFS Partners from the operations of CFSG. 35 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Note 11. Deposits The following is a maturity distribution of time deposits at December 31, 2021: 2022 2023 2024 2025 2026 Total CDs $ 66,073,863 13,500,136 12,512,065 3,588,515 10,626,427 $ 106,301,006 Total deposits in excess of the FDIC insurance level amounted to $318,591,160 as of December 31, 2021. Note 12. Borrowed Funds Outstanding advances for the Company as of the balance sheet dates presented were as follows: Long-Term Advances(1) FHLBB term advance, 0.00%, due January 07, 2021 FHLBB term advance, 0.00%, due February 26, 2021 FHLBB term advance, 0.00%, due November 22, 2021 FHLBB term advance, 0.00%, due September 22, 2023 FHLBB term advance, 0.00%, due November 12, 2025 FHLBB term advance, 0.00%, due November 13, 2028 2021 2020 $ $ 0 0 0 200,000 300,000 800,000 1,300,000 $ $ 150,000 350,000 1,000,000 200,000 300,000 800,000 2,800,000 (1) The FHLBB is providing a subsidy, funded by the FHLBB’s earnings, to write down interest rates to zero percent on JNE 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. Borrowings from the FHLBB are secured by a blanket lien on qualified collateral consisting primarily of loans with first mortgages secured by 1-4 family residential properties, as well as certain qualifying CRE loans. Qualified collateral for these borrowings totaled $134,211,623 and $132,667,958 as of December 31, 2021 and 2020, respectively, and the Company’s gross potential borrowing capacity under this arrangement was $100,230,091 and $93,052,713, respectively, before reduction for outstanding advances and collateral pledges. Under a separate agreement with the FHLBB, the Company has the authority to collateralize public unit deposits, up to its available borrowing capacity, with letters of credit issued by the FHLBB. At December 31, 2021, $59,875,000 in FHLBB letters of credit was utilized as collateral for these deposits compared to $23,475,000 at December 31, 2020. Total fees paid by the Company in connection with issuance of these letters of credit were $60,606 for 2021 and $46,748 for 2020. The Company also maintained a $500,000 IDEAL Way Line of Credit with the FHLBB at December 31, 2021 and 2020, with no outstanding advances under this line at either year-end date. Interest on these borrowings is at a rate determined daily by the FHLBB and payable monthly. 36 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) The Company also has a line of credit with the FRBB, which is intended to be used as a contingency funding source. For this BIC arrangement, the Company pledged eligible commercial and industrial loans, CRE loans not pledged to FHLBB and home equity loans, resulting in an available line of $52,260,374 and $50,378,933 as of December 31, 2021 and 2020, respectively. Credit advances in the FRBB lending program are overnight advances with interest chargeable at the primary credit rate (generally referred to as the discount rate), which was 25 basis points as of December 31, 2021. As of December 31, 2021 and 2020, the Company had no outstanding advances against this line. The Company has unsecured lines of credit with two correspondent banks at December 31, 2021 with aggregate available borrowing capacity totaling $20,500,000, compared to unsecured lines of credit with three correspondent banks with aggregate available borrowing capacity of $25,500,000 at December 31, 2020. The Company had no outstanding advances against these lines for the periods presented. Note 13. Junior Subordinated Debentures As of December 31, 2021 and 2020, the Company had outstanding $12,887,000 principal amount of Junior Subordinated Debentures due in 2037 (the Debentures). The Debentures bear a floating rate equal to the 3-month LIBOR plus 2.85%. During 2021, the floating rate averaged 3.01% per quarter compared to an average rate of 3.65% per quarter for 2020. The Debentures mature on December 15, 2037 and are subordinated and junior in right of payment to all senior indebtedness of the Company, as defined in the Indenture dated as of October 31, 2007 between the Company and Wilmington Trust Company, as Trustee. The Debentures first became redeemable, in whole or in part, by the Company on December 15, 2012. Interest paid on the Debentures for 2021 and 2020 was $393,105 and $476,666, respectively, and is deductible for tax purposes. The Debentures were issued and sold to CMTV Statutory Trust I (the Trust). The Trust is a special purpose trust funded by a capital contribution of $387,000 from the Company, in exchange for 100% of the Trust’s common equity. The Trust was formed for the purpose of issuing corporation-obligated mandatorily redeemable Capital Securities (Capital Securities) in the principal amount of $12.5 million to third-party investors and using the proceeds from the sale of such Capital Securities and the Company’s initial capital contribution to purchase the Debentures. The Debentures are the sole asset of the Trust. Distributions on the Capital Securities issued by the Trust are payable quarterly at a rate per annum equal to the interest rate being earned by the Trust on the Debentures. The Capital Securities are subject to mandatory redemption, in whole or in part, upon repayment of the Debentures. The Company has entered into an agreement which, taken collectively, fully and unconditionally guarantees the payments on the Capital Securities, subject to the terms of the guarantee. The Debentures are currently includable in the Company’s Tier 1 capital up to 25% of core capital elements (see Note 23). Note 14. Repurchase Agreements Securities sold under agreements to repurchase mature daily and consisted of the following: As of or for the year ended December 31, Current balance Average balance Highest month-end balance Weighted average interest rate Pledged investment (1) Amortized cost Fair value 2021 $ 32,609,875 28,349,896 39,288,875 0.31% 2020 $ 38,727,312 29,687,950 38,727,312 0.86% 63,045,599 62,256,702 59,546,509 60,705,178 (1) U.S. GSE debt securities, Agency MBS, ABS and OAS, were pledged as collateral for the periods presented. 37 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Note 15. Income Taxes The Company prepares its income tax return on a consolidated basis. Income taxes are allocated to members of the consolidated group based on taxable income. The components of the Provision for income taxes for the years ended December 31 were as follows: Currently paid or payable Deferred benefit Total income tax expense 2021 2020 $ 3,059,462 (76,374) $ 2,983,088 $ $ 2,518,516 (270,427) 2,248,089 Total income tax expense differed from the amounts computed at the statutory federal income tax rate of 21% primarily due to the following for the years ended December 31: Computed expense at statutory rates Tax exempt interest and BOLI Disallowed interest Partnership rehabilitation and tax credits Low income housing investment amortization expense Other 2021 2020 $ 3,385,499 (228,773) 6,290 (468,054) 286,808 1,318 $ 2,983,088 $ $ 2,731,384 (309,102) 12,917 (433,970) 265,982 (19,122) 2,248,089 The deferred income tax benefit consisted of the following items for the years ended December 31: 2021 2020 $ $ 66,603 (5,129) 2,246 (105,372) 57,387 35,651 (108,668) (5,384) (13,708) (76,374) $ $ 10,368 (3,661) 3,722 (269,219) (39,430) 13,408 0 11,072 3,313 (270,427) Depreciation Mortgage servicing rights Deferred compensation Bad debts Limited partnership amortization Investment in CFS Partners Deferred SBA PPP fees Prepaid expenses Other Change in deferred tax benefit 38 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Listed below are the significant components of the net deferred tax asset at December 31: Components of the deferred tax asset: Bad debts Deferred compensation Contingent liability - MPF program Finance lease Deferred SBA PPP fees Unrealized loss on debt securities AFS Other Total deferred tax asset Components of the deferred tax liability: Depreciation Limited partnerships Mortgage servicing rights Unrealized gain on debt securities AFS Investment in CFS Partners Operating lease Prepaid expenses Total deferred tax liability Net deferred tax asset 2021 2020 $ $ 1,619,154 6,930 17,838 19,044 108,668 310,208 22,716 2,104,558 461,168 94,952 188,521 0 120,113 3,315 74,426 942,495 1,162,063 $ $ 1,513,782 9,176 17,838 7,101 0 0 20,814 1,568,711 394,564 37,565 193,650 243,321 84,462 3,178 79,810 1,036,550 532,161 U.S. GAAP provides for the recognition and measurement of deductible temporary differences (including general valuation allowances) to the extent that it is more likely than not that the deferred tax asset will be realized. The net deferred tax asset is included in Other assets in the consolidated balance sheets. ASC Topic 740, Income Taxes, defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the consolidated financial statements. The Company has adopted these provisions and there was no material effect on the consolidated financial statements. The Company is currently open to audit under the statute of limitations by the IRS for the years ended December 31, 2018 through 2020. The 2021 tax return has not yet been filed. Note 16. 401(k) and Profit-Sharing Plan The Company has a defined contribution plan covering all employees who meet certain age and service requirements. The pension expense was $692,804 and $648,405 for 2021 and 2020, respectively. These amounts represent discretionary matching contributions of a portion of the voluntary employee salary deferrals under the 401(k) plan and discretionary profit-sharing contributions under the plan. Note 17. Deferred Compensation and Retirement Plan for Directors The Company maintains a directors’ deferred compensation plan and, prior to 2005, maintained a retirement plan for its directors. Participants are general unsecured creditors of the Company with respect to these benefits. The benefits accrued under these plans were $33,000 and $43,694 at December 31, 2021 and 2020, respectively. Expenses associated with these plans were $41 and $274 for the years ended December 31, 2021 and 2020, 39 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) respectively. The balance in the retirement plan was paid out in 2021, and the balance of $33,000 consists of funds in the deferred compensation plan for three directors. These funds do not accrue interest, and will be paid out upon retirement from the Board, therefore there will be no expenses from this plan going forward. Note 18. Financial Instruments with Off-Balance-Sheet Risk The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees, commitments to sell loans 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 maximum extent of involvement the Company has in particular classes of financial instruments. The Company’s maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. The Company applies the same credit policies and underwriting criteria in making commitments and conditional obligations as it does for on-balance- sheet instruments. The Company generally requires collateral or other security to support financial instruments with credit risk. At December 31, the following off-balance-sheet financial instruments representing credit risk were outstanding: Unused portions of home equity lines of credit Residential and commercial construction lines of credit Commercial real estate commitments Commercial and industrial commitments Other commitments to extend credit Standby letters of credit and commercial letters of credit Recourse on sale of credit card portfolio MPF credit enhancement obligation, net (See Note 19) Contract or Notional Amount 2021 2020 $ $ 36,281,001 6,731,575 47,804,534 56,382,838 43,227,424 2,108,050 305,305 552,158 35,217,177 14,843,617 32,888,666 57,848,075 42,140,295 1,585,000 327,855 552,158 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. At December 31, 2021 and 2020, the Company had binding loan commitments to sell residential mortgages at fixed rates totaling $1,906,200 and $1,280,400, respectively. The recourse provision under the terms of the sale of the Company’s credit card portfolio in 2007 is based on total lines, not balances outstanding. Based on historical losses, the Company does not expect any significant losses from this commitment. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit, or a commitment to extend credit, is based on management’s credit evaluation of the counter-party. Collateral or other security held varies but may include real estate, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private 40 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) borrowing arrangements. The credit risk involved in issuing letters of credit or providing reimbursement guarantees for the benefit of the Company’s commercial customers is essentially the same as that involved in extending loans to customers. The fair value of standby letters of credit and reimbursement guarantees on letters of credit has not been included in the balance sheets as the fair value is immaterial. In connection with its 2007 trust preferred securities financing, the Company guaranteed the payment obligations under the $12,500,000 of capital securities of its subsidiary, the Trust. The source of funds for payments by the Trust on its capital trust securities is payments made by the Company on its debentures issued to the Trust. The Company’s obligation under those debentures is fully reflected in the Company’s consolidated balance sheet, in the gross amount of $12,887,000 as of the dates presented, of which $12,500,000 represents external financing through the issuance to investors of capital securities by the Trust (see Note 13). Note 19. Contingent Liability The Company sells first lien 1-4 family residential mortgage loans under the MPF program with the FHLBB. Under this program the Company shares in the credit risk of each mortgage loan, while receiving fee income in return. The Company is responsible for a CEO based on the credit quality of these loans. FHLBB funds a FLA based on the Company’s outstanding MPF mortgage balances. This creates a laddered approach to sharing in any losses. In the event of default, homeowner’s equity and private mortgage insurance, if any, are the first sources of repayment; the FHLBB’s FLA funds are then utilized, followed by the participant’s CEO, with the balance of losses absorbed by FHLBB. These loans must meet specific underwriting standards of the FHLBB. As of December 31, 2021 and 2020, the Company had $22,916,680 and $28,137,890, respectively, in loans sold through the MPF program and on which the Company had a CEO. As of December 31, 2021 and 2020, the notional amount of the maximum CEO related to this program was $637,102, and the accrued contingent liability for this CEO was $84,944. The contingent liability is calculated by management based on the methodology used in calculating the ALL, adjusted to reflect the risk sharing arrangements with the FHLBB. Note 20. Legal Proceedings In the normal course of business, the Company is involved in various claims and legal proceedings. In the opinion of the Company’s management, any liabilities resulting from such proceedings are not expected to be material to the Company’s consolidated financial condition or results of operations. Note 21. Transactions with Related Parties Aggregate loan transactions of the Company with directors, principal officers, their immediate families and affiliated companies in which they are principal owners (commonly referred to as related parties) as of December 31 were as follows: Balance, beginning of year Loans - new Directors New loans to existing Principal Officers/Directors Repayment Balance, end of year 2021 2020 $ 16,774,535 0 1,902,000 (2,604,104) $ 16,072,431 $ 9,127,542 9,769,951 3,330,226 (5,453,184) $ 16,774,535 Total funds of related parties on deposit with the Company were $9,220,641 and $14,251,646 at December 31, 2021 and 2020, respectively. The Company utilizes the services of CFSG as an investment advisor for the Company’s 401(k) plan. The Human Resources committee of the Board of Directors is the Trustee of the plan, and CFSG provides investment advice for the plan. CFSG also acts as custodian of the retirement funds and makes investments on behalf of the plan 41 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) and its participants. The Company pays monthly management fees to CFSG for its services to the 401(k) plan amounting to $65,550 and $48,780, respectively, for the years ended December 31, 2021 and 2020. Note 22. Restrictions on Cash and Due From Banks In the ordinary course of business, the Company may, from time to time, maintain amounts due from correspondent banks that exceed federally insured limits. However, no losses have occurred in these accounts and the Company believes it is not exposed to any significant risk with respect to such accounts. The Company was required to maintain a targeted balance with a correspondent bank of $9.0 million and $30,000 at December 31, 2021 and 2020, respectively. Note 23. Regulatory Capital Requirements The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Additional prompt corrective action capital requirements are applicable to banks, but not to bank holding companies. Under current banking rules governing required regulatory capital, the Company and the Bank are required to maintain minimum amounts and ratios (set forth in the table on the following page) of Common equity tier 1, Tier 1 and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). The Company’s non-cumulative Series A preferred stock ($1.5 million liquidation preference in 2021 and 2020) is includable without limitation in its Common equity tier 1 and Tier 1 capital. The Company is allowed to include in Common equity tier 1 and Tier 1 capital an amount of trust preferred securities equal to no more than 25% of the sum of all core capital elements, which is generally defined as shareholders’ equity, less certain intangibles, including goodwill, net of any related deferred income tax liability, with the balance includable in Tier 2 capital. Management believes that, as of December 31, 2021, the Company and the Bank met all capital adequacy requirements to which they were subject. Under the 2018 Regulatory Relief Act, these capital requirements have been simplified for qualifying community banks and bank holding companies. In September 2019, the OCC and the other federal bank regulators approved a final joint rule that permits a qualifying community banking organization to opt in to a simplified regulatory capital framework. A qualifying institution that elects to utilize the simplified framework must maintain a CBLR in excess of 9%, and will thereby be deemed to have satisfied the generally applicable risk-based and other leverage capital requirements and (if applicable) the FDIC’s prompt corrective action framework. In order to utilize the CBLR framework, in addition to maintaining a CBLR of over 9%, a community banking organization must have less than $10 billion in total consolidated assets and must meet certain other criteria such as limitations on the amount of off-balance sheet exposures and on trading assets and liabilities. The CBLR is calculated by dividing tangible equity capital by average total consolidated assets. The final rule became effective on January 1, 2020 for capital calculations as of March 31, 2020 and thereafter. Beginning in 2016, an additional capital conservation buffer was added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer was fully phased-in on January 1, 2019 at 2.5% of risk-weighted assets. A banking organization with a conservation buffer of less than 2.5% is subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The Company and the Bank were fully compliant as of the periods presented in the table on page 44. 42 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Pursuant to the CARES Act, the federal banking agencies adopted an interim rule temporarily lowering the CBLR benchmark to in excess of 8%, rather than 9%, with a phased increase of the CBLR back to the 9% level by the end of 2021. The Company and Bank qualified to utilize the CBLR framework, but did not elect to do so. As of December 31, 2021, the Bank was considered well capitalized under the regulatory capital framework for Prompt Corrective Action and the Company exceeded currently applicable consolidated regulatory guidelines for capital adequacy. While we believe that the Company has sufficient capital to withstand an extended economic downturn in the wake of the COVID-19 pandemic, our regulatory capital ratios could be adversely impacted by future credit losses and other operational impacts related to COVID-19. 43 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) The following table shows the regulatory capital ratios for the Company and the Bank as of December 31: Minimum Minimum Minimum For Capital To Be Well For Capital Adequacy Purposes Capitalized Under Adequacy Purposes: with Conservation Prompt Corrective Buffer(1): Action Provisions(2): Actual Amount Ratio Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) $ 87,240 14.25% $ 27,548 4.50% $ 42,853 7.00% N/A N/A $ 86,654 14.17% $ 27,522 4.50% $ 42,812 7.00% $ 39,754 6.50% $ 87,240 14.25% $ 36,731 6.00% $ 52,036 8.50% N/A N/A $ 86,654 14.17% $ 36,696 6.00% $ 51,986 8.50% $ 48,928 8.00% $ 94,894 15.50% $ 48,975 8.00% $ 64,279 10.50% N/A N/A $ 94,301 15.42% $ 48,928 8.00% $ 64,218 10.50% $ 61,160 10.00% $ 87,240 8.79% $ 39,719 $ 86,654 8.73% $ 39,698 4.00% 4.00% N/A N/A N/A N/A N/A N/A $ 49,622 5.00% $ 77,594 14.15% $ 24,680 4.50% $ 38,391 7.00% N/A N/A $ 77,017 14.06% $ 24,654 4.50% $ 38,351 7.00% $ 35,611 6.50% $ 77,594 14.15% $ 32,907 6.00% $ 46,618 8.50% N/A N/A $ 77,017 14.06% $ 32,872 6.00% $ 46,569 8.50% $ 43,829 8.00% $ 84,455 15.40% $ 43,876 8.00% $ 57,587 10.50% N/A N/A $ 83,871 15.31% $ 43,829 8.00% $ 57,526 10.50% $ 54,787 10.00% $ 77,594 8.80% $ 35,273 $ 77,017 8.74% $ 35,252 4.00% 4.00% N/A N/A N/A N/A N/A N/A $ 44,065 5.00% December 31, 2021 Common equity tier 1 capital (to risk-weighted assets) Company Bank Tier 1 capital (to risk-weighted assets) Company Bank Total capital (to risk-weighted assets) Company Bank Tier 1 capital (to average assets) Company Bank December 31, 2020: Common equity tier 1 capital (to risk-weighted assets) Company Bank Tier 1 capital (to risk-weighted assets) Company Bank Total capital (to risk-weighted assets) Company Bank Tier 1 capital (to average assets) Company Bank (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. The Bank is restricted by law as to the amount of dividends that can be paid. Dividends declared by national banks that exceed net income for the current and preceding two years must be approved by the Bank’s primary banking regulator, the Office of the Comptroller of the Currency. Regardless of formal regulatory restrictions, the Bank may not pay dividends that would result in its capital levels being reduced below the minimum requirements shown above. 44 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Note 24. Fair Value Certain assets and liabilities are recorded at fair value to provide additional insight into the Company’s quality of earnings. 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, 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, collateral-dependent impaired loans 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. Level 1 securities would include U.S. Government securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 securities include federal agency securities, municipal securities, CMO and ABS and OAS. Impaired loans: Impaired 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 ALL. Accordingly, certain impaired loans may be subject to measurement at fair value on a non-recurring basis. Management has estimated the fair values 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. 45 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) 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. Assets 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 December 31, segregated by fair value hierarchy, are summarized below: Assets: (market approach) Level 1 U.S. Government securities Level 2 U.S. GSE debt securities Taxable municipal securities Tax-exempt municipal securities Agency MBS ABS and OAS CMO Other investments Level 2 Total Grand Total 2021 2020 $ 32,041,041 $ 0 $ 11,828,498 298,733 831,379 127,132,521 2,214,024 1,420,458 6,575,805 $ 150,301,418 $ 8,169,831 0 0 41,378,349 2,669,996 0 8,487,002 $ 60,705,178 $ 182,342,459 $ 60,705,178 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 2021 or 2020. 46 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Assets 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. Impaired loans measured at fair value only include impaired loans with a partial write-down or with a related specific ALL 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 December 31, segregated by fair value hierarchy, are summarized below: Level 2 Assets: (market approach) Impaired loans, net of related allowance Loans held-for-sale MSRs (1) 2021 2020 $ 177,523 339,000 897,720 $ 323,645 130,400 922,146 (1) Represents MSRs at lower of cost or fair value, including MSRs deemed to be impaired and for which a valuation allowance was established to carry at fair value at December 31, 2021 and 2020. 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 2021 or 2020. FASB ASC Topic 825, “Financial Instruments”, requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, if the fair values can be reasonably determined. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques using observable inputs when available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. 47 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) The carrying amounts and estimated fair values of the Company’s financial instruments as of the balance sheet dates were as follows: December 31, 2021 Carrying Amount Fair Value Level 1 Fair Value Level 2 (Dollars in Thousands) Fair Value Level 3 Fair Value Total Financial assets: Cash and cash equivalents Debt securities AFS Restricted equity securities Loans and loans held-for-sale, net of ALL Commercial & industrial Commercial real estate Municipal Residential real estate - 1st lien Residential real estate - Jr lien Consumer MSRs (1) Accrued interest receivable Financial liabilities: Deposits Other deposits Brokered deposits Long-term borrowings Repurchase agreements Operating lease obligations Finance lease obligations Subordinated debentures Accrued interest payable $ 110,359 $ 110,359 $ 0 $ 182,342 1,434 32,041 0 150,301 1,434 0 $ 110,359 182,342 0 1,434 0 119,382 296,528 47,841 180,271 34,151 4,406 898 2,401 879,151 249 1,300 32,610 864 3,858 12,887 59 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 29 0 149 0 0 995 2,401 120,146 297,339 49,419 180,302 34,189 4,436 0 0 120,146 297,368 49,419 180,451 34,189 4,436 995 2,401 879,545 246 1,179 32,610 864 3,858 12,868 59 0 0 0 0 0 0 0 0 879,545 246 1,179 32,610 864 3,858 12,868 59 (1) Reported fair value represents all MSRs for loans serviced by the Company at December 31, 2021, regardless of carrying amount. 48 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) December 31, 2020 Carrying Amount Fair Value Level 1 Fair Value Level 2 (Dollars in Thousands) Fair Value Level 3 Fair Value Total Financial assets: Cash and cash equivalents Debt securities AFS Restricted equity securities Loans and loans held-for-sale, net of ALL Commercial & industrial Commercial real estate Municipal Residential real estate - 1st lien Residential real estate - Jr lien Consumer MSRs (1) Accrued interest receivable Financial liabilities: Deposits Other deposits Brokered deposits Long-term borrowings Repurchase agreements Operating lease obligations Finance lease obligations Subordinated debentures Accrued interest payable $ 115,050 $ 115,050 $ 60,705 1,447 158,601 276,476 54,694 169,201 37,892 4,218 922 2,988 778,085 4,206 2,800 38,727 1,060 38 12,887 86 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 $ 0 60,705 1,447 0 $ 115,050 60,705 0 1,447 0 0 208 0 116 0 0 922 2,988 160,371 279,281 55,601 170,385 37,991 4,238 0 0 160,371 279,489 55,601 170,501 37,991 4,238 922 2,988 779,824 4,208 2,724 38,727 1,060 38 12,876 86 0 0 0 0 0 0 0 0 779,824 4,208 2,724 38,727 1,060 38 12,876 86 (1) Reported fair value represents all MSRs for loans serviced by the Company at December 31, 2020, regardless of carrying amount. The estimated fair values of commitments to extend credit, letters of credit and financial guarantees for the benefit of customers were immaterial at December 31, 2021 and 2020. 49 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Note 25. Condensed Financial Information (Parent Company Only) The following condensed financial statements are for Community Bancorp. (Parent Company Only), and should be read in conjunction with the consolidated financial statements of the Company. Community Bancorp. (Parent Company Only) Balance Sheets December 31, December 31, 2021 2020 Assets Cash Investment in subsidiary - Community National Bank Investment in Capital Trust Income taxes receivable Total assets Liabilities and Shareholders’ Equity Liabilities Junior subordinated debentures Dividends payable Total liabilities Shareholders’ Equity $ 908,042 $ 750,371 89,598,666 387,000 184,973 $ 98,541,777 $ 90,921,010 97,061,296 387,000 185,439 $ 12,887,000 $ 12,887,000 745,297 13,632,297 894,509 13,781,509 Preferred stock, 1,000,000 shares authorized, 15 shares issued and outstanding at December 31, 2021 and 2020,($100,000 liquidation value, per share) Common stock - $2.50 par value; 15,000,000 shares authorized, 5,587,939 and 5,527,380 shares issued at December 31, 2021 and 2020, respectively (including 14,337 and 18,128 shares issued February 1, 2022 and 2021, respectively) Additional paid-in capital Retained earnings Accumulated other comprehensive (loss) income Less: treasury stock, at cost; 210,101 shares at December 31, 2021 and 2020 Total shareholders’ equity Total liabilities and shareholders’ equity 1,500,000 1,500,000 13,969,848 35,322,063 37,758,105 (1,166,971) 13,818,450 34,309,646 29,368,046 915,348 (2,622,777) 84,760,268 (2,622,777) 77,288,713 $ 98,541,777 $ 90,921,010 The investment in the subsidiary bank is carried under the equity method of accounting. The investment and cash, which is on deposit with the Bank, have been eliminated in consolidation. 50 Community Bancorp. Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Community Bancorp. (Parent Company Only) Condensed Statements of Income Years Ended December 31, 2021 2020 Income Bank subsidiary distributions Dividends on Capital Trust Total income Expense Interest on junior subordinated debentures Administrative and other Total expense Income before applicable income tax benefit and equity in undistributed net income of subsidiary Income tax benefit Income before equity in undistributed net income of subsidiary Equity in undistributed net income of subsidiary Net income $ $ 4,291,000 11,805 4,302,805 3,675,000 14,314 3,689,314 393,105 501,749 894,854 476,666 418,474 895,140 3,407,951 185,439 2,794,174 184,973 3,593,390 9,544,948 2,979,147 7,779,355 $ 13,138,338 $ 10,758,502 Community Bancorp. (Parent Company Only) Condensed Statements of Cash Flows Years Ended December 31, 2021 2020 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed net income of subsidiary (Increase) decrease in income taxes receivable Net cash provided by operating activities Cash Flows from Financing Activities Dividends paid on preferred stock Dividends paid on common stock Net cash used in financing activities Net increase in cash Cash Beginning Ending Cash Received for Income Taxes Cash Paid for Interest Dividends paid: Dividends declared Increase in dividends payable attributable to dividends declared Dividends reinvested $ 13,138,338 $ 10,758,502 (9,544,948) (467) 3,592,923 (7,779,355) 28,097 3,007,244 (48,750) (3,386,502) (3,435,252) 157,671 (54,375) (2,947,185) (3,001,560) 5,684 750,371 908,042 184,973 393,105 4,699,529 (149,212) (1,163,815) 3,386,502 $ $ $ $ $ 744,687 750,371 213,071 476,666 4,004,030 (17,773) (1,039,072) 2,947,185 $ $ $ $ $ 51 2021 Annual Report Community Bancorp. and Subsidiary Notes to the Consolidated Financial Statements (continued) Note 26. Other Income and Other Expenses The components of other income and other expenses which are in excess of one percent of total revenues in either of the two years disclosed are as follows: Income Income from investment in CFS Partners Expenses Outsourcing expense Service contracts - administration Marketing State deposit tax ATM fees Note 27. Subsequent Events Declaration of Cash Dividend $ $ 2021 2020 951,605 $ 684,891 $ 506,563 520,310 470,000 884,492 562,779 473,426 506,144 425,000 704,047 486,590 On December 8, 2021, the Company declared a cash dividend of $0.22 per share payable February 1, 2022 to shareholders of record as of January 15, 2022. On March 16, 2022, the Company declared a cash dividend of $0.23 per share payable May 1, 2022 to shareholders of record as of April 15, 2022. These dividends have been recorded as of each declaration date, including shares issuable under the DRIP. For purposes of accrual or disclosure in these financial statements, the Company has evaluated subsequent events through the date of issuance of these financial statements. 52 Community Bancorp. Community Bancorp. and Subsidiary Management’s Discussion and Analysis of Financial Condition and Results of Operations Years Ended December 31, 2021 and 2020 The following discussion analyzes the consolidated financial condition of the Company and its wholly-owned subsidiary, Community National Bank, as of December 31, 2021 and 2020, and its consolidated results of operations for the years then ended. The Company is considered a “smaller reporting company” under the disclosure rules of the SEC. Accordingly, the Company has elected to provide its audited statements of income, comprehensive income, cash flows and changes in shareholders’ equity for a two year, rather than a three year, period and intends to provide smaller reporting company scaled disclosures where management deems it appropriate. Additionally, beginning with the 2020 annual report, the Company is considered a non-accelerated filer under the amended disclosure rules of the SEC. The following discussion should be read in conjunction with the Company’s audited consolidated financial statements and related notes. Please refer to Note 1 in the accompanying audited 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 potential effects of the COVID-19 pandemic on our business, financial condition, results of operations and prospects; 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 its participation in the FHLBB MPF program; and management’s general outlook for the future performance of the Company or 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. 53 2021 Annual Report Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities: • • • • • • • • • • • • • 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; competitive pressures increase among financial service providers in the Company’s northern New England market area or in the financial services industry generally, including competitive pressures from non-bank financial service providers, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems; interest rates change in such a way as to negatively affect the Company’s net income, asset valuations or margins; 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; changes in federal or state tax laws or policy; changes in the level of nonperforming assets and charge-offs; changes in applicable accounting policies, practices and standards, including, without limitation, implementation of pending changes to the measurement of credit losses in financial statements under U.S. GAAP pursuant to the CECL model; changes in consumer and business spending, borrowing and savings habits; reductions in deposit levels, which necessitate increased borrowings to fund loans and investments; the geographic concentration of the Company’s loan portfolio and deposit base; losses due to the fraudulent or negligent conduct of third parties, including the Company’s service providers, customers and employees; cybersecurity risks could adversely affect the Company’s business, financial performance or reputation and could result in financial liability for losses incurred by customers or others due to data breaches or other compromise of the Company’s information security systems; higher-than-expected costs are incurred relating to information technology or difficulties arise in implementing technological enhancements; • management’s risk management measures may not be completely effective; • changes in the United States monetary and fiscal policies, including the interest rate policies of the FRB and its regulation of the money supply; adverse changes in the credit rating of U.S. government debt; the planned phase out of three month LIBOR by June 30, 2023, which could adversely affect the Company’s interest costs in future periods on its $12,887,000 in principal amount of Junior Subordinated Debentures due December 12, 2037, which currently bear interest at a variable rate, adjusted quarterly, equal to 3-month LIBOR, plus 2.85%; continuing the effects of COVID-19 and emerging variants of the virus on our Company, the communities where we have branches and loan production offices, the State of Vermont and the national and global economies and overall stability of the financial markets; government and regulatory responses to the COVID-19 pandemic and emerging threats from variants of the virus; 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 increase usage by customers of online and other remote banking channels; the impact of inflation on the Company’s financial results and performance; and the ongoing challenges to find qualified workers to maintain a stable workforce. • • • • • • • • 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. 54 Community Bancorp. 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 at year-end 2021 were $1.02 billion compared to $918.2 million at year-end 2020, an increase of 11.0%. The asset growth was driven by an increase of $121.6 million, or 200.4%, in AFS securities during 2021 which resulted from the influx of cash during 2020 and into 2021 that the Company invested into higher yielding investments. The influx of cash was largely due to the deposit of government stimulus payments and deposit of PPP loan proceeds. The growth in the AFS securities portfolio was partially offset by a decrease of $19.4 million, or 2.7%, in the loan portfolio. Loan growth during 2020 was primarily due to the origination of $105.0 million in PPP loans, of which $64.3 million remained outstanding at December 31, 2020 compared to $12.2 million at December 31, 2021. Community National Bank, the subsidiary of the Company, participated in the PPP administered by the SBA as part of the CARES Act. Throughout 2020 and 2021, the Company navigated through the new challenges presented by the COVID-19 pandemic. Starting in late March 2020 and throughout the remainder of the year, the Company granted loan payment deferrals to customers impacted by the pandemic to provide temporary debt relief. As of December 31, 2021, only two retail customer portfolio loans, with an aggregate balance of $334,079 remain modified, compared with 514 business and retail customer portfolio loans, with aggregate unpaid principal balances of $119.8 million, which remained modified as of December 31, 2020. These short term concessions were made in accordance with guidance from the federal banking regulators, confirmed by them with the FASB, and are therefore not considered to be impaired under GAAP (see Notes 3 and 5 to the accompanying audited consolidated financial statements for additional information). Total deposits on December 31, 2021 were $879.4 million compared to $782.3 million on December 31, 2020, an increase of $97.1 million, or 12.4%, reflecting the combined effect of increases in core deposits (demand deposit accounts, both interest bearing and non-interest bearing) of $60.3 million, or 14.5%, money market funds of $14.2 million, or 12.3%, and savings accounts of $29.6 million, or 21.4%. The significant increases in core deposits were partly due to monetary and fiscal stimulus at the federal level during the pandemic. Interest income increased $1.7 million, or 5.2%, year over year. The opportunity for an increase in interest income from the loan growth continued to be offset by the impact of the low rate environment on new loan originations and interest rate adjustments on adjustable rate loans, as well as the mandated 1% interest rate on SBA PPP loans. Although the low interest rate environment resulted in a decrease in yields on the investment portfolio, the increase in the investment portfolio helped generate more interest income year over year. As of December 31, 2021, the Company had reviewed and submitted 1,720 PPP loans with total balances of approximately $147.8 million to the SBA for forgiveness consideration, with all but $582,265 meeting the criteria for forgiveness. Participation in the PPP has had a significant impact on our asset mix and net interest margin during 2020 and 2021. The origination of the PPP loans resulted in processing fees from the SBA of approximately $4.7 million, representing 93.8% of the 55 2021 Annual Report total of fees on loans of $5.0 million for the year ended December 31, 2021, compared to total fees on PPP loans of $2.2 million, representing 81.4% of total fees on loans of $2.6 million for the year ended December 31, 2020. These loan fees are amortized over the projected life of the loan, but are recognized in full as the PPP loans payoff. At year-end the balance of deferred PPP fees was $517 thousand. Despite the increase in interest-bearing deposits, interest expense decreased $1.7 million, or 35.6%, for the year ended December 31, 2021 compared to the same period in 2020. The 150 basis point decrease in short-term rates initiated by the FRB in March 2020 in response to the COVID-19 pandemic and sustained since then has resulted in a decrease in most components of interest expense, as rates paid on deposit accounts were reduced to reflect the decreases in market rates. Please refer to the interest rate sensitivity discussion in the Interest Rate Risk and Asset and Liability Management section for more information on the impact that FRB action and changes in the yield curve could have on net interest income. The provision for loan losses for the year ended 2021 was $624,165 compared to $1.6 million for 2020, resulting in a decrease of 60.7% between years. During 2020, the provision was increased due to loan growth early in the year as well as adjustments to the qualitative factors used to estimate the allowance for loan losses, particularly factors related to the economic impact to borrowers from the COVID pandemic. Due to low levels of loan charge offs in 2020 and 2021, the provision for loan losses was decreased accordingly. PPP loans bear a 100% SBA guarantee and therefore had little impact on the calculation of the provision. Please refer to the ALL and provisions discussion in the Credit Risk section for more information on these increases. Consolidated net income in 2021 increased $2.4 million, or 22.1%, from $10.8 million for 2020 to $13.1 million for 2021. Non-interest income decreased $37,587, or 0.6%, while non-interest expense increased $1.3 million, or 6.2%. Despite the pandemic, the low rate environment during 2020 provided for an increase in mortgage business, both in refinancing of existing loans and new home purchases, however in 2021, secondary market activity slowed accounting for the $520,651 decrease in income from sold loans. Loans originated and subsequently sold in the secondary market were $17.6 million for 2021 compared to $37.0 million in 2020. Commercial and residential loan documentation fees made up the biggest portion of other income from loans, with combined figures $725,214 and $795,363, respectively, for 2021 and 2020. The COVID-19 pandemic has impacted some of the Company’s sources of non-interest income differently. For instance in 2020, the unusually high balances maintained in customer deposit accounts resulted in a decrease in overdraft fees. This remained constant in 2021, resulting in fees of $822,442 for 2021 compared to $844,259 for 2020, a 2.6% decrease year over year. Conversely, interchange fee income related to customers’ use of debit cards increased $296,168, or 18.2% between the 2021 and 2020. This customer behavior of choosing to use debit or credit cards as a payment method has also had an impact on the circulation of coin and currency. Total non-interest expenses increased by $1.3 million, or 6.2%, year over year. A portion of the increase is attributable to an increase in wages and benefits of $469,374, or 4.4%. Increases in occupancy expenses were 5.1%. The increase in other expense is made up of several components such as assessments and costs that are calculated based on the Company’s asset size or deposit balances. Examples of these are OCC assessments, FDIC insurance premiums and the State deposit tax that collectively account for $258 thousand, or 39% of the increase in Other non-interest expenses. Please refer to the Non-interest Income and Non-interest Expense sections for more information on these and other changes. Equity capital grew to $84.8 million, with a book value per share of $15.48 as of December 31, 2021, compared to equity capital of $77.3 million and a book value of $14.25 as of December 31, 2020. On December 8, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.22 per common share, payable on February 1, 2022 to shareholders of record on January 15, 2022. Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and the demand for loans and other products and services we offer, which are highly dependent on the business environment in our local banking markets and in the country as a whole. Recent economic reports for the state of Vermont show employment in the hardest hit industries such as leisure and hospitality has risen but still below pre-pandemic levels. The Vermont unemployment rate, 56 Community Bancorp. seasonally adjusted, in December of 2021 was reported at 2.5% compared to the high of 3.2% in January of 2021. As of December 31, 2021, all of the Company’s capital ratios, and those of our subsidiary Bank, were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an economic downturn from any headwinds related to inflation or recessionary periods, should one occur, our equity capital and regulatory capital ratios could be adversely impacted, including as a result of credit losses and other adverse impacts of the pandemic or government monetary policy. CRITICAL ACCOUNTING POLICIES The Company’s consolidated financial statements are prepared according to U.S. GAAP. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities in the consolidated financial statements and related notes. The SEC has defined a company’s critical accounting policies as those that are most important to the portrayal of the Company’s financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result 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. ALL - Management believes that the calculation of the ALL 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 ALL, management considers historical experience as well as other qualitative factors, including the effect of 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 ALL may increase or decrease based on changes in these factors, which in turn will affect the amount of the Company’s provision for loan 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. OREO - Real estate properties acquired through or in lieu of foreclosure or properties no longer used for bank operations, are initially recorded at fair value less estimated selling cost at the date of acquisition, foreclosure or transfer. Fair value is determined, as appropriate, either by obtaining a current appraisal or evaluation prepared by an independent, qualified appraiser, by obtaining a broker’s market value analysis, and finally, if the Company has limited exposure and limited risk of loss, by the opinion of management as supported by an inspection of the property and its most recent tax valuation. During periods of declining market values, the Company will generally obtain a new appraisal or evaluation. The amount, if any, by which the recorded amount of the loan exceeds the fair value, less estimated cost to sell, is a loss which is charged to the allowance for loan losses at the time of foreclosure or repossession. The recorded amount of the loan is the loan balance adjusted for any unamortized premium or discount and unamortized loan fees or costs, less any amount previously charged off, plus recorded accrued interest. After acquisition through or in lieu of foreclosure, these assets are carried at the lower of their new cost basis or fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding the property are expensed as incurred. Appraisals by an independent, qualified appraiser are performed periodically on properties that management deems significant, or evaluations may be performed by management or a qualified third party on properties in the portfolio that are deemed less significant or less vulnerable to market conditions. Subsequent write-downs are recorded as a charge to other expense. Gains or losses on the sale of such properties are included in income when the properties are sold. Investment Securities - Management performs quarterly reviews of individual debt securities in the investment portfolio to determine whether a decline in the fair value of a security is other than temporary. A review of OTTI requires management to make certain judgments regarding the materiality of the decline and the probability, extent and timing of a valuation recovery, the Company’s intent to continue to hold the security and, in the case of debt securities, the likelihood that the Company will not have to sell the security before recovery of its cost basis. Management assesses fair value declines to determine the extent to which such changes are attributable 57 2021 Annual Report to fundamental factors specific to the issuer, such as financial condition and business prospects, or to market- related or other external factors, such as interest rates, and in the case of debt securities, the extent to which the impairment relates to credit losses of the issuer, as compared to other factors. Declines in the fair value of debt securities below their cost that are deemed to be other than temporary, and declines in fair value of debt securities below their cost that are related to credit losses, are recorded in earnings as realized losses, net of tax effect. The non-credit loss portion of an other than temporary decline in the fair value of debt securities below their cost basis (generally, the difference between the fair value and the estimated net present value of expected future cash flows from the debt security) is recognized in other comprehensive income as an unrealized loss, provided that the Company does not intend to sell the security and it is more likely than not that the Company will not have to sell the security before recovery of its reduced basis. MSRs - MSRs associated with loans originated and sold, where servicing is retained, are required to be capitalized and initially recorded at fair value on the acquisition date and are subsequently accounted for using the “amortization method”. Mortgage servicing rights are amortized against non-interest income in proportion to, and over the period of, estimated future net servicing income of the underlying financial assets. The value of capitalized servicing rights represents the estimated present value of the future servicing fees arising from the right to service loans for third parties. The carrying value of the mortgage servicing rights is periodically reviewed for impairment based on a determination of estimated fair value compared to amortized cost, and impairment, if any, is recognized through a valuation allowance and is recorded as a reduction of non-interest income. Subsequent improvement (if any) in the estimated fair value of impaired mortgage servicing rights is reflected in a positive valuation adjustment and is recognized in non-interest income up to (but not in excess of) the amount of the prior impairment. Critical accounting policies for mortgage servicing rights relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of mortgage servicing rights requires the development and use of a number of estimates, including anticipated principal amortization and prepayments. Factors that may significantly affect the estimates used are changes in interest rates and the payment performance of the underlying loans. The Company analyzes and accounts for the value of its servicing rights with the assistance of a third party consultant. Goodwill - Goodwill from an acquisition accounted for under the purchase accounting method, such as the Company’s 2007 acquisition of LyndonBank, is subject to ongoing periodic impairment evaluation, which includes an analysis of the ongoing assets, liabilities and revenues from the acquisition and an estimation of the impact of business conditions. This evaluation is inherently subjective. Other - Management utilizes numerous techniques to estimate the carrying value of various assets held by the Company, including, but not limited to, bank premises and equipment and deferred taxes. The assumptions considered in making these estimates are based on historical experience and on various other factors that are believed by management to be reasonable under the circumstances. The use of different estimates or assumptions could produce different estimates of carrying values and those differences could be material in some circumstances. RESULTS OF OPERATIONS The Company’s net income increased $2.4 million, or 22.1%, from 2020 to 2021, resulting in earnings per common share of $2.45 for 2021 versus $2.03 for 2020. Core earnings (NII) increased $3.5 million, or 12.2%, in 2021 compared to 2020. Interest income was supported with fees generated from administering PPP loans. Of the $7.4 million that the Company received in fee income from the SBA, approximately $4.7 million and $2.2 million was recognized in 2021 and 2020, respectively. These fees have offset a decrease in interest income due to the repricing of loans into the prevailing low interest rate environment, new loans being booked at lower market rates and PPP loans being booked at a mandated 1% annual interest rate. Interest paid on deposits, which is the major component of total interest expense, decreased $1.5 million, or 37.3% in 2021, reflecting the continued low rate environment as decreases in short-term rates initiated by the FRB in March of 2020 in response to the pandemic remained in effect throughout 2021. 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. 58 Community Bancorp. The following table shows these ratios, as well as other equity ratios, for each of the last two fiscal years: December 31, Return on average assets Return on average equity Dividend payout ratio (1) Average equity to average assets ratio 2021 2020 1.38% 16.18% 35.92% 8.51% 1.31% 14.74% 37.44% 8.89% (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 net interest income, which is the difference between interest earned on loans and investments versus the interest paid on deposits and other sources of funds (i.e., other 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 from changes in the yield earned and the cost of funds (rate paid). A portion of the Company’s income from municipal loans is not subject to income taxes. Because the proportion of tax-exempt items in the Company’s portfolio varies from year-to-year, to improve comparability of information across years, 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. Tax-exempt income is derived from municipal loans, amounting to $48.0 million and $54.8 million, at December 31, 2021 and 2020, respectively. The following table provides the reconciliation between net interest income presented in the consolidated statements of income and the non-GAAP tax equivalent net interest income presented in the table immediately following for each of the last two years. Years Ended December 31, Net interest income as presented Effect of tax-exempt income Net interest income, tax equivalent 2021 2020 (Dollars in Thousands) $ $ 31,669 $ 267 31,936 $ 28,216 368 28,584 59 2021 Annual Report The following table presents average interest-earning assets and average interest-bearing liabilities supporting earning assets for each of the last two fiscal years. Interest income (excluding interest on non-accrual loans) and interest expense are both expressed on a tax equivalent basis, both in dollars and as a rate/yield. Years Ended December 31, 2021 Average Balance Income/ Expense Average Rate/ Yield Average Balance (Dollars in Thousands) 2020 Income/ Expense Average Rate/ Yield Interest-Earning Assets Loans (1) Taxable investment securities Sweep and interest-earning accounts Other investments (2) Total $ 712,454 $ 99,075 88,544 1,861 901,934 $ $ 33,334 1,305 362 56 35,057 4.68% $ 1.32% 0.41% 3.01% 3.89% $ 695,491 $ 44,642 33,768 1,843 775,744 $ 31,978 1,031 340 82 33,431 Interest-Bearing Liabilities Interest-bearing transaction accounts $ Money market accounts Savings deposits Time deposits Borrowed funds Repurchase agreements Finance lease obligations Junior subordinated debentures 237,055 $ 125,340 150,311 108,518 2,256 28,350 2,589 12,887 Total $ 667,306 $ 606 622 166 1,174 0 89 71 393 3,121 0.26% $ 0.50% 0.11% 1.08% 0.00% 0.31% 2.74% 3.05% 0.47% $ 192,517 $ 105,280 123,213 112,235 4,930 29,688 67 12,887 580,817 $ 1,123 1,089 160 1,724 14 255 5 477 4,847 Net interest income Net interest spread (3) Net interest margin (4) $ 31,936 $ 28,584 3.42% 3.54% 4.60% 2.31% 1.01% 4.45% 4.31% 0.58% 1.03% 0.13% 1.54% 0.28% 0.86% 7.46% 3.70% 0.83% 3.48% 3.68% (1) Included in gross loans are non-accrual loans with average balances of $4.7 million and $4.6 million for the years ended December 31, 2021 and 2020, respectively. Loans are stated before deduction of unearned discount and ALL, less loans held-for-sale and include tax-exempt loans to local municipalities with average balances of $48.0 million and $56.5 million for the years ended December 31, 2021 and 2020, respectively. (2) Included in other investments is the Company’s FHLBB Stock with average balances of approximately $0.8 million for 2021 and 2020 with a dividend rate of approximately 1.12% and 4.13%, respectively. (3) Net interest spread is the difference between the average yield on average 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. The average volume of interest-earning assets for the year ended December 31, 2021 increased 16.3% compared to December 31, 2020. The average yield on interest-earning assets decreased 42 basis points for 2021 versus 2020. The average volume of loans increased 2.4% for 2021 versus 2020, and the average yield on loans increased eight basis points to 4.68% for 2021, compared to 4.60% for 2020. The increase in the yield in 2021 was due to the $2.6 million increase in PPP fees year over year. The growth in the average volume of loans during each of the last two 60 Community Bancorp. years, along with the changes in average yield on loans, were reflected in increases in interest earned on the loan portfolio of $1.4 million in 2021 compared to 2020. Interest earned on the loan portfolio as a percentage of total interest income was approximately 95.1% and 95.7%, respectively for 2021 and 2020. The average volume of the taxable investment portfolio (classified as AFS) increased 121.9% for 2021 versus 2020. The average yield on the taxable investment portfolio decreased 99 basis points for 2021 versus 2020. The increase in average volume is due primarily to an effort to continue to grow the investment portfolio incrementally as the balance sheet grows in order to provide additional liquidity and pledge quality assets. The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing account at the FRBB and two correspondent banks, increased 162.2% during 2021 compared to 2020. This increase in volume is attributable to a higher balance of cash periodically held on hand in anticipation of funding loan growth and other liquidity needs. The average yield on these funds decreased 60 basis points in 2021 versus 2020, reflecting the continuing effect of decrease in the federal funds rate initiated by the FRB during 2020, which remained in effect throughout 2021. The Company purchased two tax-exempt municipal bonds during December 2021 totaling $825,000, resulting in an average balance of $16,806 during 2021. These bonds are currently carried in other investments. The combined tax-equivalent yield is currently 1.91%. The average volume of interest-bearing liabilities for the year ended December 31, 2021 increased 14.9% compared to the year ended December 31, 2020. The average rate paid on interest-bearing liabilities decreased 36 basis points during 2021 compared to 2020. The deposit of PPP loan proceeds and stimulus funds continued to be contributing factors to the increase in average volume in 2021, while the decrease in the Fed Funds Rate accounts for the decrease in interest expense for all components of interest-bearing liabilities. The average volume of interest-bearing transaction accounts increased 23.1% for 2021 versus 2020 reflecting strong deposit growth during 2021. The average rate paid on these accounts decreased 32 basis points for 2021 versus 2020. The Company reclassified its ATS accounts during the third quarter of 2021, from interest-bearing transactions accounts to savings accounts which had an average balance of $11.4 million during 2020. The average volume of money market accounts increased 19.1% during 2021 compared to 2020, and the average rate paid on these deposits decreased 53 basis points during 2021. The average volume of savings accounts increased 22.0% for 2021 versus 2020, while the average rate paid on these accounts decreased two basis points during 2021. The average volume of time deposits decreased 3.3% for 2021 versus 2020, and the average rate paid decreased 46 basis points during 2021. Interest paid on time deposits as a percentage of total interest expense was 37.6% and 35.6%, respectively for 2021 and 2020. The decrease in the average volume of time deposits between comparison periods reflects the maturity of brokered deposits during 2021 that were not replaced. Management still considers the brokered deposit market to be a beneficial source of funding to help smooth out the fluctuations in core deposit balances without the need to disrupt deposit pricing in the Company’s local markets. These funds can be obtained relatively quickly on an as-needed basis, making them a valuable alternative to traditional term borrowings from the FHLBB. Refer to the “Liquidity and Capital Resources” section for more discussion on this topic. The average volume of borrowed funds decreased $2.7 million, or 54.2% for 2021 versus 2020, and consisted of only JNE funds at zero percent interest. This resulted in decreases in the average rate paid on these funds of 28 basis points during 2021 compared to 2020. The average volume of repurchase agreements decreased 4.5% during 2021 and the average rate paid decreased 55 basis points for 2021 versus 2020. 61 2021 Annual Report In summary, the average yield on interest-earning assets decreased 42 basis points during 2021, while the average rate paid on interest-bearing liabilities decreased 36 basis points. Net interest spread decreased six basis points for 2021 with a net interest spread of 3.42% for 2021 compared to 3.48% for 2020. Net interest margin decreased 14 basis points during 2021 to 3.54% from 3.68% for 2020. The following table summarizes the variances in income between 2021 and 2020, resulting from volume changes in interest-earning assets and interest-bearing liabilities and fluctuations in rates earned and paid between periods. Variance Due to Rate (1) 2021 versus 2020 Variance Due to Volume (1) (Dollars in Thousands) Total Variance Average Interest-Earning Assets Loans Taxable investment securities Sweep and interest-earning accounts Other investments Total Average Interest-Bearing Liabilities Interest-bearing transaction accounts Money market accounts Savings deposits Time deposits Borrowed funds Repurchase agreements Finance lease obligations Junior subordinated debentures Total Changes in net interest income $ $ $ $ $ 576 (983) (531) (27) (965) (775) (674) (29) (510) (14) (162) (122) (84) (2,370) 1,405 $ $ $ $ $ 780 1,257 553 1 2,591 258 207 35 (40) 0 (4) 188 0 644 $ $ $ $ 1,356 274 22 (26) 1,626 (517) (467) 6 (550) (14) (166) 66 (84) (1,726) 1,947 $ 3,352 (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 62 Community Bancorp. NON-INTEREST INCOME AND NON-INTEREST EXPENSE Non-interest Income The components of non-interest income for the annual periods presented are as follows: Year Ended December 31, Change 2021 2020 Income Percent Service fees Income from sold loans Other income from loans Net realized gain on sale of securities AFS Other income Income from CFS Partners Exchange income VISA card commission Other miscellaneous income Total non-interest income $ 3,441,607 $ 3,137,956 1,469,863 1,054,562 39,086 949,212 982,295 0 $ 303,651 (520,651) (72,267) (39,086) 9.68% -35.42% -6.85% -100.00% 951,605 45,100 94,102 270,216 684,891 31,000 77,345 277,021 $ 6,734,137 $ 6,771,724 266,714 14,100 16,757 (6,805) (37,587) $ 38.94% 45.48% 21.67% -2.46% -0.56% Total non-interest income decreased $37,587 for the year ended December 31, 2021 compared to the same period 2020, with significant changes noted in the following: • As noted and discussed in the Overview, overdraft charges, a component of service fees, decreased year over year, which was more than offset by an increase in interchange fees, also a component of service fees. • Income from sold loans decreased year over year as a result of a decrease in secondary market activity, due in part to a lower volume of applications for residential mortgages as well as a strategic decision to hold some 15 and 30 year mortgages in portfolio. • The lower volume of commercial and residential loan activity resulted in a decrease in documentation fees collected at origination accounting for the decrease in other income from loans. • There were no sales from the Company’s securities AFS portfolio during 2021, resulting in no net realized gains on sale of securities AFS during 2021 compared to a gain of $39,086 for 2020. • CFS Partners has a small portion of its equity capital invested in the stock market. While it was necessary to mark-to-market the portfolio to reflect the stock market decline during the first quarter of 2020 at the outset of the COVID-19 pandemic, resulting in a $106,000 mark down, the stock market rebounded somewhat favorably during the third and fourth quarters of 2020 and in to 2021, accounting for the substantial increase year over year. • The periodic shutdowns of the US/Canadian border to all non-essential travel during 2020 and into 2021 created less demand for an exchange of Canadian currency during these periods, accounting for the modest increase in exchange income. • The increase in VISA card commission is attributable to an increase in transaction volume in the VISA card program. 63 2021 Annual Report Non-interest Expense The components of non-interest expense for the annual periods presented are as follows: Salaries and wages Employee benefits Occupancy expenses, net Other expenses Directors Fees Investor relations and shareholder services Outsourcing expense Telephone expense Marketing expense Legal fees Consultant services FDIC insurance Collection & non-accruing loan expense ATM fees Electronic banking expense State deposit tax Other miscellaneous expenses Total non-interest expense Year Ended December 31, Change 2021 2020 Expense Percent $ 8,027,000 3,124,554 2,808,068 $ 7,597,745 3,084,435 2,672,720 $ 429,255 40,119 135,348 514,916 138,016 506,563 133,354 470,000 68,793 306,886 352,056 123,269 562,779 238,108 884,492 3,398,732 $21,657,586 362,900 118,100 473,426 189,700 425,000 101,441 269,444 300,643 31,814 486,590 195,717 704,047 3,378,019 $20,391,741 152,016 19,916 33,137 (56,346) 45,000 (32,648) 37,442 51,413 91,455 76,189 42,391 180,445 20,713 $ 1,265,845 5.65% 1.30% 5.06% 41.89% 16.86% 7.00% -29.70% 10.59% -32.18% 13.90% 17.10% 287.47% 15.66% 21.66% 25.63% 0.61% 6.21% Total non-interest expense increased $1.3 million, or 6.2%, for the year ended December 31, 2021 compared to 2020, with significant changes noted in the following: • Salaries and wages increased primarily due to normal salary increases and an increase in lender commissions related to the strong mortgage business and the PPP loan program. • The increase in Directors fees is attributable to a change to the Director’s fee schedule as well as an additional Director for 2021. • The increase in Investor relations and shareholder services is due to a combination of engaging a new investor relations firm during the second half of 2020 and a new service contract with the vendor that processes the Company’s SEC filings. • Outsourcing expense increased year over year primarily due to a combination of annual increases in contract pricing and an increase in transactions. • The decrease in Telephone expense is due to the renegotiation of carrier contracts for connectivity. • The increase in Marketing expense is attributable to marketing campaigns that were put on hold during 2020, and were resumed in 2021. • The Company had fewer projects in 2021 requiring legal consultation, resulting in a decrease in Legal fees. 64 Community Bancorp. • The increase in Consultant services is partially due to recruitment of a senior management position. • FDIC insurance increased due primarily to an increase in assets as well as an increase in the assessment multiplier year over year. • Collections & non-accruing loan expense increased year over year due to significant expenses during the fourth quarter of 2021 associated with a commercial property in the Company’s non-accruing loan portfolio. • ATM fees increased year over year due to the ongoing cost to support the upgraded and enhanced technology being utilized for deposit automation. Use of deposit automation replaces a manual process for BSA required monitoring of cash deposits as well as providing fraud detection measures at the ATM. • The increase in Electronic banking expense was due to the cost associated with implementing a new mobile banking app as well as increased transactions, along with normal annual increases. • State deposit tax increased year over year due to a significant increase in deposits. • Other miscellaneous expenses is made up of several components, including service contracts – admin totaling $520,310 in 2021 and $506,144 in 2020, but no significant changes are noted in these components. APPLICABLE INCOME TAXES Income before income taxes increased $3.1 million, or 24.0% for 2021 compared to 2020, accounting for the increase in the provision for income taxes of $734,999, or 32.7% between periods from $2.3 million in 2020 to $3.0 million in 2021. Tax credits from affordable housing investments increased $34,090, or 7.9%, from $433,970 in 2020 to $468,054 in 2021. Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $363,048 and $336,686 for 2021 and 2020, respectively. These investments provide tax benefits, including tax credits, and are designed to provide an effective yield between 7% and 10%. 65 2021 Annual Report CHANGES IN FINANCIAL CONDITION The following table provides a visual comparison of the breakdown of the daily average assets and the daily average liabilities as well as the daily average shareholders’ equity for the comparison periods and should be reviewed in conjunction with the table on the following page which provides volume changes and percent of change by category. $ $ $ Years Ended December 31, Average Assets Cash and due from banks Non-interest bearing Federal funds sold and overnight deposits Taxable investment securities Other securities Total investment securities Gross loans ALL and deferred net loan fees Premises and equipment OREO Investment in Capital Trust BOLI Goodwill Other assets Total average assets Average Liabilities Demand deposits Interest-bearing transaction accounts Money market funds Savings accounts Time deposits Total average deposits Borrowed funds Repurchase agreements Junior subordinated debentures Other liabilities Total average liabilities Average Shareholders' Equity Preferred stock Common stock Additional paid-in capital Retained earnings Less: Treasury stock Accumulated other comprehensive income Total average shareholders' equity Total average liabilities and shareholders' equity $ 66 2021 2020 Balance % Balance % (Dollars in Thousands) 18,973 88,544 99,075 1,474 100,549 712,806 (9,280) 12,726 0 387 5,028 11,574 11,889 953,196 201,107 237,055 125,340 150,311 108,519 822,332 2,256 28,350 12,887 6,192 872,017 1,500 13,881 34,711 33,674 (2,623) 36 81,179 953,196 1.99% $ 9.29% 10.39% 0.15% 10.54% 74.78% -0.97% 1.34% 0.00% 0.04% 0.53% 1.21% 1.25% 100% $ 21.10% $ 24.87% 13.15% 15.77% 11.38% 86.27% 0.24% 2.98% 1.35% 0.65% 91.49% 10,372 33,768 44,642 1,456 46,098 697,626 (7,417) 10,614 537 387 4,942 11,574 12,455 820,956 162,631 192,516 105,280 123,214 112,236 695,877 4,930 29,688 12,887 4,592 747,974 0.16% 1.46% 3.64% 3.53% -0.28% 0.00% 8.51% 100% $ 1,500 13,704 33,817 25,810 (2,623) 774 72,982 820,956 1.27% 4.11% 5.44% 0.18% 5.62% 84.98% -0.90% 1.29% 0.07% 0.05% 0.60% 1.40% 1.52% 100% 19.81% 23.45% 12.82% 15.01% 13.67% 84.76% 0.60% 3.62% 1.57% 0.56% 91.11% 0.18% 1.67% 4.12% 3.15% -0.32% 0.09% 8.89% 100% Community Bancorp. The following table provides a breakdown of volume changes and percent of change by category for the table on the preceding page. Please refer to the sections labeled “Interest Income and Interest Expense (Net Interest Income)” and “Liquidity and Capital Resources” for more in-depth discussion of significant changes. Years Ended December 31, Average Assets Cash and due from banks Non-interest bearing Federal funds sold and overnight deposits Taxable investment securities Other securities Total investment securities Gross loans ALL and deferred net loan fees Premises and equipment OREO Investment in Capital Trust BOLI Goodwill Other assets Total average assets Average Liabilities Demand deposits Interest-bearing transaction accounts Money market funds Savings accounts Time deposits Total average deposits Borrowed funds Repurchase agreements Junior subordinated debentures Other liabilities Total average liabilities Average Shareholders' Equity Preferred stock Common stock Additional paid-in capital Retained earnings Less: Treasury stock Accumulated other comprehensive income Total average shareholders' equity Total average liabilities and shareholders' equity 2021 Average Balance 2021 vs 2020 2020 Volume Average Balance Change (Dollars in Thousands) $ $ $ $ 18,973 $ 88,544 99,075 1,474 100,549 712,806 (9,280) 12,726 0 387 5,028 11,574 11,889 953,196 $ 10,372 $ 33,768 44,642 1,456 46,098 697,626 (7,417) 10,614 537 387 4,942 11,574 12,455 820,956 $ 201,107 $ 237,055 125,340 150,311 108,519 822,332 162,631 $ 192,516 105,280 123,214 112,236 695,877 2,256 28,350 12,887 6,192 872,017 4,930 29,688 12,887 4,592 747,974 8,601 54,776 54,433 18 54,451 15,180 (1,863) 2,112 (537) 0 86 0 (566) 132,240 38,476 44,539 20,060 27,097 (3,717) 126,455 (2,674) (1,338) 0 1,600 124,043 1,500 13,881 34,711 33,674 (2,623) 36 81,179 953,196 $ 1,500 13,704 33,817 25,810 (2,623) 774 72,982 820,956 $ 0 177 894 7,864 0 (738) 8,197 132,240 % of Change 82.93% 162.21% 121.93% 1.24% 118.12% 2.18% 25.12% 19.90% -100.00% 0.00% 1.74% 0.00% -4.54% 16.11% 23.66% 23.14% 19.05% 21.99% -3.31% 18.17% -54.24% -4.51% 0.00% 34.84% 16.58% 0.00% 1.29% 2.64% 30.47% 0.00% -95.35% 11.23% 16.11% 67 2021 Annual Report CERTAIN TIME DEPOSITS Increments of maturity of time CDs of $250,000 or more outstanding on December 31, 2021 are summarized as follows: 3 months or less Over 3 through 6 months Over 6 through 12 months Over 12 months Total INVESTMENT SECURITIES $ 3,926,814 3,881,493 3,983,206 5,672,358 $ 17,463,871 The Company maintains an investment portfolio of various securities to diversify its revenue sources, as well as to provide interest rate risk and credit risk diversification and to provide for its liquidity and funding needs. The Company’s portfolio of AFS debt securities increased throughout the reporting periods as deposit growth exceeded loan growth and the Company sought ways to invest the excess cash on hand. Accounting standards require banks to recognize all appreciation or depreciation of investments classified as either trading securities or AFS, either through the income statement or on the balance sheet even though a gain or loss has not been realized. Securities classified as trading securities are marked to market with any gain or loss net of tax effect, charged to income. The Company’s investment policy does not permit the holding of trading securities. Debt securities classified as HTM are recorded at book value, subject to adjustment for OTTI. The Company did not hold any securities HTM during 2021 or 2020. In December 2021, the Company purchased two tax-exempt municipal bonds that are classified as AFS. The Company may, from time to time, purchase additional tax-exempt municipal bonds and will consistently classify them as AFS. Debt securities classified as AFS are marked to market with any gain or loss after taxes charged to shareholders’ equity in the consolidated balance sheets. These adjustments in the AFS portfolio resulted in an accumulated unrealized loss net of taxes of $1.2 million at December 31, 2021, compared to an accumulated unrealized income net of taxes of $915,348 at December 31, 2020. The fluctuations in unrealized gains and losses are due to market interest rate changes, and are not based on any deterioration in credit quality of the underlying issuers. The Company’s investment portfolio includes Agency MBS in order to realize a more favorable yield in the portfolio and diversify the holdings. Although classified as AFS, the Company anticipates holding these securities until maturity. The unrealized loss positions within the investment portfolio as of the balance sheet dates presented are considered by management to be temporary. The restricted equity securities comprise the Company’s membership stock in the FRBB, FHLBB and ACBI. Membership in the FRBB and FHLBB requires the purchase of their stock in specified amounts. On December 31, 2021 and 2020, the Company held $588,150 in FRBB stock and $756,300 and $768,400, respectively, in FHLBB stock, and $90,000 in ACBI stock. The ACBI stock is required for receipt of correspondent banking services from ACBB at more favorable pricing. These restricted securities in the FRBB, FHLBB and ACBI are typically held for an extended period of time and are subject to strict limitations on resales. FRBB stock may only be sold back to the issuer, while FHLBB stock may only be repurchased by the FHLBB or resold to a member institution and ACBI stock may only be resold to other depository institutions or their holding companies or subsidiaries, or to the FDIC. Restricted equity stock is generally sold and redeemed at par. Due to the unique nature of the restricted equity stock, including the non-investment purpose for owning it, the ownership structure and restrictions and the absence of a trading market for the stock, these securities are not marked to market, but carried at par. The FHLBB stock is subject to capital call provisions. Some of the Company’s debt securities have a call feature, meaning that the issuer may call in the investment before maturity, at predetermined call dates and prices. In 2021, there were two call features exercised by the issuer, compared to 14 call features exercised in 2020. 68 Community Bancorp. The Company had investments in Agency MBS exceeding 10% of stockholders equity with a book value of $128.3 million and a fair value of $127.1 million at December 31, 2021. The following is an analysis of the maturities and the daily average yields of the debt securities AFS in the Company’s investment portfolio for each of the last two fiscal years: December 31, U.S. GSE debt securities Due from one to five years Due from five to ten years Due after ten years Total U.S. Government securities Due from one to five years Due from five to ten years Total Taxable municipal securities Due after ten years Tax-exempt municipal securities Due after ten years ABS/AOS Due from five to ten years CMO Due from one to five years Due from five to ten years Total Other Investments Due in one year or less Due from one to five years Total Agency MBS (1) FRBB Stock (2) FHLBB Stock (2) ACBI Stock (2) Fair Value $ 2,976 7,843 1,009 $ 11,828 30,080 1,961 32,041 2021 Weighted Average Yield Fair Value (Dollars in Thousands) 2020 Weighted Average Yield 1.31% 1.73% 2.42% 1.68% 0.87% 1.14% 0.89% $ $ $ $ 0 7,132 1,038 8,170 0 0 0 0 0 0.00% 2.28% 2.41% 2.29% 0.00% 0.00% 0.00% 0.00% 0.00% 299 2.17% $ 831 2.35% $ 2,214 2.84% $ 2,670 2.89% 496 924 1,420 3,509 3,067 6,576 127,133 588 756 90 1.30% 1.01% 1.11% 2.49% 2.75% 2.61% 1.49% 6.00% 1.12% 0.33% $ $ $ $ $ $ $ $ 0 0 0 2,248 6,239 8,487 41,378 588 769 90 0.00% 0.00% 0.00% 2.18% 2.74% 2.59% 1.69% 6.00% 4.13% 0.22% $ $ $ $ $ $ $ $ $ $ $ $ $ (1) Agency MBS are not due at a single maturity date and have not been allocated to maturity groupings for purposes of the maturity table. (2) Required equity purchases for membership in the FRB System and FHLB System and for access to correspondent banking services from ACBB. 69 2021 Annual Report RISK MANAGEMENT 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 the 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. 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, with the continued asset sensitive balance sheet, in a rising rate environment NII is expected to trend 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 have to be increased more and/or more quickly than projected due to competitive pressures, the expected benefit to 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. Management expects that, should the ongoing low rate environment continue, it will have a negative impact to the Company’s NII in 2022. 70 Community Bancorp. 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 December 31, 2021: One Year Horizon Two Year Horizon Rate Change Percent Change in NII Rate Change Percent Change in NII Down 100 basis points Up 200 basis points -1.2% 2.5% Down 100 basis points Up 200 basis points -9.3% 6.0% The estimated amounts shown in the table 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. 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 the market rates continue to increase, the impact of a falling rate environment is more pronounced, and the possibility more plausible than during the last several years of near zero short rates. As of December 31, 2021, the Company had outstanding $12,887,000 in principal amount of Junior Subordinated Debentures due December 15, 2037, which bear a quarterly floating rate of interest equal to the 3-month London Interbank Offered Rate (LIBOR), plus 2.85%. During 2017, the Financial Conduct Authority (FCA) in the United Kingdom that administers LIBOR announced that LIBOR will be phased out, with an expected target date of December 31, 2021 for the phase out. On March 5, 2021, the FCA announced firm target dates for the phase out of various LIBOR settings, including a phase out date of June 30, 2023 for 3-month LIBOR for U.S. dollar deposits. Under the terms of the Indenture, if 3-month LIBOR is not available, the Trustee may obtain substitute quotations from four leading banks in the London interbank market for their offered rate to prime banks in the London market for U.S. dollar deposits having a three month maturity; if at least two such quotations are provided, the quarterly rate on the Debentures will be the arithmetic mean of such quotations. If fewer than two such quotations are received, the Trustee will request substitute quotations from four major New York City banks for their offered rate to leading European banks for loans in U.S. dollars; if at least two such quotations are provided, the quarterly rate on the Debentures will be the arithmetic mean of such quotations. The Debenture Trustee has not yet informed the Company as to how it intends to proceed. Aside from the Debentures, the Company does not have any other exposures to the phase out of LIBOR. The Company has not generally utilized LIBOR as an interest rate benchmark for its variable rate commercial, residential or other loans and does not utilize derivatives or other financial instruments tied to LIBOR for hedging or investment purposes. Accordingly, management expects that the Company’s exposure to the phase out of LIBOR will be limited to the effect on the interest rate paid on its Debentures, but cannot predict the magnitude of the impact on the Company’s interest expense at this time. 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 interest, loans to industry segments, and the geographic distribution of CRE 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. 71 2021 Annual Report Residential mortgages represented 31.3% and 29.4% of the Company’s loan balances at December 31, 2021 and 2020, respectively. The percentage of residential mortgage loans to total loans has been on a gradual decline in recent years, with a strategic shift to commercial lending. The Company maintains a residential mortgage loan portfolio of traditional mortgage products and does not engage in higher risk loans 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-values 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. Junior lien home equity products make up 15.9% of the residential mortgage portfolio with maximum loan-to-value ratios (including prior liens) of 80%. The Company also originates some home equity loans greater than 80% under an insured loan program with stringent underwriting criteria. Consistent with the strategic focus on commercial lending, the commercial and CRE loan portfolios have seen solid growth over recent years. Commercial & industrial, CRE and Municipal loans collectively comprised 68.1% of the Company’s loan portfolio at December 31, 2021, compared to 70.0% at December 31, 2020. The Municipal loan portfolio consists of tax-exempt obligations of local municipalities, and is made up of three types of borrowings; term lending, tax anticipation lending, and non-arbitrage borrowing. The portfolio decreased $6.8 million, or 12.5%, to $48.0 million as of December 31, 2021 compared to $54.8 million at December 31, 2020. During 2021, term lending decreased $3.9 million, or 12.1%, tax anticipation lending decreased $1.1 million, and non-arbitrage borrowing decreased $1.9 million, or 9.4%. The non-arbitrage and tax anticipation loans to municipalities are issued annually on a competitive bid basis; as a result the portfolio can fluctuate considerably from year to year based on changes in competitive pressures. Growth in the CRE portfolio in recent years has been principally driven by new loan volume in Chittenden County and northern Windsor County around the White River Junction, I91-I93 interchange area. Credits in the Chittenden County market are being managed by two commercial lenders out of the Company’s Burlington loan production office that know the area well, while Windsor County is being served by a commercial lender from the St. Johnsbury office with previous lending experience serving the greater White River Junction area. The Company has a loan production office in Lebanon, New Hampshire to provide a presence in the greater White River Junction area including Grafton County, New Hampshire. Larger transactions continue to be centrally underwritten and monitored through the Company’s commercial credit department. The types of CRE transactions driving the growth have been a mix of construction, land and development, multifamily, and other non-owner occupied CRE properties including hotels, retail, office, and industrial properties. The largest components of the $301.0 million CRE portfolio at December 31, 2021 were $105.4 million in owner-occupied CRE and $106.1 million in non-owner occupied CRE. The Company’s home equity and commercial line of credit portfolios contain for the most part variable rate loans with the Wall Street Journal Prime rate as the underlying index and rates repricing monthly. After a series of rate hikes and plummets over the last 10 years, the Wall Street Journal Prime index ended at 3.25% as of December 31, 2020 and remained constant throughout 2021. The home equity portfolio and commercial line of credit portfolio have weathered these fluctuations and continue to perform well. Commercial and industrial term loans are generally written on a fixed rate basis with limited risk associated with rising interest rates. CRE loans generally have included an initial fixed rate period typically of 5 years, then enter a variable rate period, usually tied to Wall Street Prime. Approximately $175.7 million of CRE loans are scheduled to reprice over the next five years. Rates based on the current Prime Rate Index will be subject to increases as the fed funds rate increases. Management expects that those loans that may experience rate increases will ultimately refinance or renegotiate pricing, while the increase may adversely impact the repayment capacity of those CRE loans of lesser credit quality and could ultimately result in higher non-performing loans and losses. 72 Community Bancorp. The following table shows the estimated maturity of the Company’s loan portfolio as of December 31, 2021. Fixed Rate Loans Within 1 Year 2 - 5 Years 6–15 Years Over 15 Years (Dollars in Thousands) Commercial & industrial Commercial real estate Municipal Residential real estate - 1st lien Residential real estate - Jr lien Consumer $ 2,637 9,367 22,644 136 8 909 $ 42,162 8,591 4,539 2,039 308 2,070 $ 20,237 10,324 7,757 29,897 1,604 15 $ 275 362 256 62,897 0 0 $ Total 65,311 28,644 35,196 94,969 1,920 2,994 Total Loans $ 35,701 $ 59,709 $ 69,834 $ 63,790 $ 229,034 $ Commercial & industrial Commercial real estate Municipal Residential real estate - 1st lien Residential real estate - Jr lien Consumer Variable Rate Loans Within 1 Year 2 - 5 Years 6–15 Years Over 15 Years (Dollars in Thousands) 26,942 10,410 0 377 419 486 $ 19,907 8,109 0 1,481 845 662 $ 8,406 84,689 12,759 17,091 10,665 272 $ 367 169,107 0 67,398 20,511 51 $ Total 55,622 272,315 12,759 86,347 32,440 1,471 Total Loans $ 38,634 $ 31,004 $ 133,882 $ 257,434 $ 460,954 Risk in the Company’s commercial and CRE loan portfolios is mitigated in part by government guarantees issued by federal agencies such as the SBA and RD. At December 31, 2021 and 2020, the Company had approximately $42.9 million and $93.4 million, respectively, in guaranteed loans with guaranteed balances of approximately $35.4 million and $86.1 million, respectively. Included in the totals are the PPP loans amounting to $12.2 million and $64.4 million, at December 31, 2021 and 2020, respectively, which carry a 100% SBA guarantee. The Company works actively with customers early in the delinquency process to help them to avoid default and foreclosure. Commercial & industrial and CRE loans are generally placed on non-accrual status when there is deterioration in the financial position of the borrower, payment in full of principal and interest is not expected, and/ or principal or interest has been in default for 90 days or more. However, such a loan need not be placed on non- accrual status if it is both well secured and in the process of collection. Residential mortgages and home equity loans are considered for non-accrual status at 90 days past due and are evaluated on a case-by-case basis. The Company obtains current property appraisals or market value analyses and considers the cost to carry and sell collateral 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. The Company’s TDRs are principally a result of extending loan repayment terms to relieve cash flow difficulties. The Company has only infrequently reduced interest rates for borrowers below the current market rates. The Company has not forgiven principal or reduced accrued interest within the terms of original restructurings. Management evaluates each TDR situation on its own merits and does not foreclose the granting of any particular type of concession. 73 2021 Annual Report The Company’s TDRs that were past due 90 days or more or in non-accrual status as of the dates presented, consisted of the following: Commercial & industrial Commercial real estate Residential real estate - 1st lien Residential real estate - Jr lien Total December 31, 2021 Number of Loans Principal Balance December 31, 2020 Number of Loans Principal Balance 6 5 12 1 24 $ 71,128 3,642,073 977,961 41,901 $ 4,733,063 6 4 18 1 29 $ 270,695 711,816 1,892,695 48,456 $ 2,923,663 The remainder of the Company’s TDRs were performing in accordance with their modified terms as of the date presented and consisted of the following: Commercial real estate Residential real estate - 1st lien Residential real estate - Jr lien Total December 31, 2021 Number of Loans Principal Balance December 31, 2020 Number of Loans Principal Balance 2 31 1 34 $ 1,228 2,473,767 3,537 $ 2,518,532 2 31 1 34 $ 74,757 2,417,563 4,775 $ 2,497,095 ALL and provisions - The Company maintains an ALL at a level that management believes is appropriate to absorb losses inherent in the loan portfolio as of the measurement date (See Note 5 to the accompanying audited consolidated financial statements). Although the Company, in establishing the ALL, considers the inherent losses in individual loans and pools of loans, the ALL is a general reserve available to absorb all credit losses in the loan portfolio. No part of the ALL is segregated to absorb losses from any particular loan or segment of loans. When establishing the ALL each quarter, the Company applies a combination of historical loss factors and qualitative factors to loan segments, including residential first and junior lien mortgages, CRE, commercial & industrial, and consumer loan portfolios. The Company applies numerous qualitative factors to each segment of the loan portfolio. Those factors include the levels of and trends in delinquencies and non-accrual loans, criticized and classified assets, volumes and terms of loans, and the impact of any loan policy changes. Experience, ability and depth of lending personnel, levels of policy and documentation exceptions, national and local economic trends, the competitive environment, and concentrations of credit are also factors considered. Specific allocations to the ALL are made for certain impaired loans. Impaired loans include all troubled debt restructurings regardless of amount, and all loans to a borrower that in aggregate are greater than $100,000 and that are in non-accrual status. A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due, including interest and principal, according to the contractual terms of the loan agreement. The Company will review all the facts and circumstances surrounding non-accrual loans and on a case-by-case basis may consider loans below the threshold as impaired when such treatment is material to the financial statements. See Note 5 to the accompanying audited consolidated financial statements for information on the recorded investment in impaired loans and their related allocations. 74 Community Bancorp. The following table summarizes the Company’s loan loss experience and other credit risk ratios for the dates presented. As of or Years Ended December 31, ALL to total loans outstanding ALL Loans outstanding Non-accruing loans to loans outstanding Non-accruing loans Loans outstanding ALL to non-accruing loans ALL Non-accruing loans Net charge-offs during the period to average loans outstanding: Commercial & industrial Net charge-off during the period Average amount outstanding Commercial real estate Net recovery (charge-off) during the period Average amount outstanding Municipal Net charge-off during the period Average amount outstanding Residential real estate - 1st lien Net charge-off during the period Average amount outstanding Residential real estate - Jr lien Net recovery (charge-off) during the period Average amount outstanding Consumer Net charge-off during the period Average amount outstanding Total loans Net charge-off during the period Average amount outstanding 2021 2020 (Dollars in Thousands) 1.117% 7,710 689,988 0.861% 5,941 689,988 129.776% 7,710 5,941 -0.009% (14) 160,873 0.002% 5 287,100 0.000% 0 52,298 -0.053% (91) 172,145 0.030% 11 36,122 -0.890% (33) 3,706 -0.017% (122) 712,244 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1.016% 7,208 709,355 0.659% 4,675 709,355 154.182% 7,208 4,675 -0.023% (38) 163,915 -0.005% (14) 267,619 0.000% 0 56,527 -0.117% (191) 163,204 -0.057% (23) 40,075 -1.053% (41) 3,895 -0.044% (307) 695,235 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ The increase in non-accruing loans in 2021 is attributable to two large CRE loans being placed on non-accrual status. 75 2021 Annual Report The fourth quarter ALL analysis indicates that the reserve balance of $7.7 million at December 31, 2021 is sufficient to cover losses that are probable and estimable as of the measurement date, with an unallocated reserve of $538 thousand. Management believes the reserve balance and unallocated amount continue to be directionally consistent with the overall risk profile of the Company’s loan portfolio and credit risk appetite. The portion of the ALL termed “unallocated” is established to absorb inherent losses that exist as of the measurement date although not specifically identified through management’s process for estimating credit losses. While the ALL is described as consisting of separate allocated portions, the entire ALL is available to support loan losses, regardless of category. Unallocated reserves are considered by management to be appropriate in light of the unknown impact to borrowers due to COVID-19, the Company’s continued growth strategy and shift in the portfolio from residential loans to commercial and industrial and CRE loans and the risk associated with the relatively new, unseasoned loans in those portfolios. The adequacy of the ALL is reviewed quarterly by the risk management committee of the Board and then presented to the full Board for approval. The following table shows the allocation of the ALL, as well as the percent of each loan category to the total loan portfolio, as of the balance sheet dates for each of the last two years: December 31, Domestic Commercial & industrial Commercial real estate Municipal Residential real estate 1st lien Jr lien Consumer Unallocated 2021 % (Dollars in Thousands) 2020 $ $ 939 4,152 77 1,766 182 56 538 7,710 18% $ 43% 7% 26% 5% 1% 0% 100% $ 843 3,854 82 1,735 235 60 399 7,208 % 23% 39% 8% 24% 5% 1% 0% 100% In addition to credit risk in the Company’s loan portfolio 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 can result in fair value adjustments necessary to record decreases in the value of the investment portfolio for other-than-temporary-impairment. 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 and deposit taking 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. 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. However, sudden and dramatic changes in prevailing interest rates, such as those adopted by the FRB in response to the COVID-19 pandemic, create challenges for the Company’s interest rate risk management, as does the current prolonged low interest rate environment. 76 Community Bancorp. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET ARRANGEMENTS The Company is a party to financial instruments with off-balance-sheet 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 2021, the Company did not engage in any activity that created any additional types of off-balance-sheet risk. The Company generally requires collateral or other security to support financial instruments with credit risk. The Company’s financial instruments whose contract amount represents credit risk are disclosed in Note 18 to the accompanying audited consolidated financial statements. 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. 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 roll over 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 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 low-cost funds. The Company recognizes that, at times, when loan demand exceeds deposit growth or the Company has other liquidity demands, it may be desirable to utilize alternative sources of deposit funding to augment retail deposits and borrowings. One-way deposits acquired through the CDARS program provide an alternative funding source when needed. The Company had no one-way CDARS outstanding at December 31, 2021 and 2020. In addition, two-way (that is, reciprocal) CDARS deposits, as well as reciprocal ICS money market and demand deposits, allow the Company to provide FDIC deposit insurance to its customers in excess of account coverage limits by exchanging deposits with other participating FDIC-insured financial institutions. At December 31, 2021 and 2020, the Company reported $3.6 million and $4.9 million, respectively, in reciprocal CDARS deposits. The balance in ICS reciprocal money market deposits was $15.3 million and $23.1 million at December 31, 2021 and 2020, respectively, and the balance in ICS reciprocal demand deposits as of those dates was $70.8 million and $53.1 million, respectively. At times the Company will use brokered deposits outside of the CDARS program to satisfy a portion of its short-term funding needs. These are typically short term certificates of deposit with maturity less than one year purchased through a prominent broker of public and institutional funds from across the country. At December 31, 2019, the Company had one block of DTC Brokered CDs totaling $6.2 million, with a maturity of January 2020. Upon maturity in January 2020, this block was not replaced. In July, 2020, the Company purchased three blocks with maturities in October 2020, January 2021 and April 2021, leaving two blocks totaling $3.8 million outstanding at December 31, 2020. Upon maturity, these blocks were not replaced leaving no DTC Brokered CDs outstanding at December 31, 2021. Additionally, the Company had brokered deposits from another source totaling approximately $249,000 and $449,000 at December 31, 2021 and 2020, respectively. These relationships have provided increased access to short term funding that is easily accessible without any detrimental effect on the pricing of the core deposit base. In total, the Company had $249,000 and $4.2 million of brokered CDs outstanding at December 31, 2021 and December 31, 2020, respectively. To further manage liquidity, the Company has borrowing capacity through the FHLBB and the FRB secured by the Company’s qualifying loan portfolio, as well as unsecured lines of credit through correspondent banks. (See Note 12 to the accompanying audited consolidated financial statements.) 77 2021 Annual Report The following table illustrates the changes in shareholders’ equity from December 31, 2020 to December 31, 2021: Balance at December 31, 2020 (book value $14.25 per common share) Net income Issuance of common stock through the DRIP Dividends declared on common stock Dividends declared on preferred stock Change in AOCI on AFS securities, net of tax Balance at December 31, 2021 (book value $15.48 per common share) $ 77,288,713 13,138,338 1,163,815 (4,699,529) (48,750) (2,082,319) $ 84,760,268 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 an attractive return on their investment. To that end, management monitors capital retention and dividend policies on an ongoing basis. In December, 2021, the Company’s Board of Directors declared a $0.22 per common share cash dividend, payable February 1, 2022 to shareholders of record as of January 15, 2022, requiring the Company to accrue a liability of $1.2 million for this dividend in the fourth quarter of 2021. In March, 2022, the Board of the Company approved a cash dividend of $0.23 per common share, payable on May 1, 2022 to shareholders of record as of April 15, 2022. The declaration of this dividend required the Company to accrue a liability of $1,236,880 in the first quarter of 2022. The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Additional Prompt Corrective Action capital requirements are applicable to banks, but not bank holding companies. (See Note 23 to the accompanying audited consolidated financial statements.) Common Stock Performance by Quarter* 2021 2020 Trade Price High Low Bid Price High Low Cash Dividends Declared First Second Fourth $ 19.99 $ 22.90 $ 22.60 $ 20.64 $ 16.39 $ 14.00 $ 14.24 $ 15.76 $ 14.50 $ 18.50 $ 18.30 $ 19.00 $ 9.55 $ 10.40 $ 12.60 $ 13.00 Second Fourth Third Third First 2021 2020 First Second Fourth $ 18.18 $ 21.00 $ 21.00 $ 20.20 $ 16.30 $ 13.99 $ 13.50 $ 15.40 $ 14.55 $ 18.50 $ 18.35 $ 19.00 $ 9.55 $ 11.25 $ 12.50 $ 13.15 Second Fourth Third Third First $ 0.19 $ 0.22 $ 0.22 $ 0.22 $ 0.19 $ 0.19 $ 0.19 $ 0.19 *The Company’s common stock is not traded on any exchange. However, the Company’s common stock is included in the OTCQX® marketplace tier maintained by the OTC Markets Group Inc. Trade and bid information for the stock appears in the OTC’s interdealer quotation system, OTC Link ATS®. The trade price and bid information in the table above is based on information reported by participating FINRA-registered brokers in the OTC Link ATS® system and may not represent all trades or high and low bids during the relevant periods. Such price quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and bid prices do not necessarily represent actual transactions. The OTC trading symbol for the Company’s common stock is CMTV. As of February 1, 2022, there were 5,377,740 shares of the Corporation’s common stock ($2.50 par value) outstanding, owned by 801 shareholders of record. 78 Community Bancorp. Form 10-K A copy of the Form 10-K Report filed with the Securities and Exchange Commission may be obtained without charge upon written request to: Kathryn M. Austin, President & CEO Community Bancorp. 4811 US Route 5 Newport, Vermont 05855 Shareholder Services For shareholder services or information contact: Melissa Tinker, Assistant Corporate Secretary Community Bancorp. 4811 US Route 5 Newport, Vermont 05855 (802) 334-7915 Transfer Agent: Computershare Investor Services PO Box 43078 Providence, RI 02940-3078 www.computershare.com Annual Shareholders’ Meeting The 2022 Annual Shareholders’ Meeting, will be a Virtual Annual Meeting to be held on May 17, 2022, at 2:00 PM since the COVID-19 health emergency has not yet been fully resolved. 79 Community Bancorp. Notes _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ 80 2021 Annual ReportBoard of Directors Community Bancorp. and Community National Bank Hope K. Colburn, Vice President and Commercial Loan Officer Robin Coulter, Branch Administration Officer Jennifer J. Daigle, Vice President and Senior Credit Officer Thomas E. Adams, Owner, NPC Realty Co., Inc. Lorilee Drown, Barre and Montpelier Office Manager Kathryn M. Austin, President and Chief Executive Officer, Community Bancorp. and Community National Bank Bruce Baker, Founding Member and Principal, Clarke Demas & Baker PLLC. David Bouffard, Former Co-Owner, Derby Village Store Aminta K. Conant, Part Owner and Special Projects Manager, Caledonia Spirits, Inc. / Barr Hill Jacques R. Couture, Owner, Dairy Farm/Maple Products David P. Laforce, President and Owner, Built by Newport Rosemary Lalime, Owner and Partner, RE/MAX All Seasons Realty Stephen P. Marsh, Board Chair, Community Bancorp. and Community National Bank Carol Martin, VP Finance Americas Region, Weidmann Electrical Technology, Inc. Emma L. Marvin, Co-Owner, Butternut Mountain Farm Dorothy R. Mitchell, Board Chair, Vermont Student Assistance Corporation Janet C. Gratton, Electronic Banking Officer Laurie Gray, Assistant Vice President and Information Security Officer and Security Officer William Hamilton, Vice President and Commercial Loan Officer Regan Howard, Vice President and Commercial Loan Officer Penelope L. Johnson, Assistant Vice President and Residential Lending Officer Cindy L. LaGue, Senior Vice President, Retail Banking Rosemary Lalime, Vice President and Lead Outside Director Shelly Morey, Community Circle Director Theresa B. Morin, Vice President, Senior Loan Operations Officer Candace A. Patenaude, Financial Officer Kelly A. Paul, Vice President ERM, Compliance/BSA Officer, CRA Officer and Audit Committee Liaison Amanda Pepin, Credit Administration Officer Kimico Perry, Vice President, Human Resources Jeffrey L. Moore, President and Owner, Quest Industries, Inc. Brandon Poginy, Vice President and Commercial Loan Officer Fredric Oeschger, President and Principal, Fred’s Energy, Inc. and D&C Transportation, Inc. James G. Wheeler, Jr., Attorney and Principal, Downs Rachlin Martin, PLLC. Tracy D. Roberts, Vice President and Marketing Director Edward Ropple, Vice President and Chief Technology Officer Dave Rubel, Commercial Loan Officer Lori Wells, Barton Office Manager Executive Officers Community Bancorp. and Community National Bank Kathryn M. Austin, President and Chief Executive Officer, Community Bancorp., and Community National Bank Louise M. Bonvechio, Corporate Secretary and Treasurer, Community Bancorp., Executive Vice President, Chief Financial Officer, Cashier and Corporate Secretary, Community National Bank Christopher L. Caldwell, Vice President, Community Bancorp., Executive Vice President and Chief Lending Officer, Community National Bank Other Officers Community National Bank Laura J. Bennett, Derby Office Manager Justin Bourgeois, Regional Vice President and Commercial Loan Officer Nikole B. Brainard, Financial Reporting Officer and Asset Liability Manager Sarah Chadburn, Commercial Loan Officer Michelle Cleveland, Price Chopper Office Manager Mark S. Clough, Vice President and Commercial Loan Officer 4811 US Route 5 • Newport, Vermont 05855 (802) 334-7915 TRADING SYMBOL: CMTV (tradedonthe OTCQX) 81 2021 Annual Report communitynationalbank.com Derby (Main Office): Physical Location: 4811 US Route 5 Derby, Vermont 05829 Mailing Address: 4811 US Route 5 Newport, VT 05855 (802) 334-7915 derby@communitynationalbank.com Barre: 316 North Main Street Barre, Vermont 05641 (802) 476-6565 tellers-barre@communitynationalbank.com Barton: 103 Church Street Barton, Vermont 05822 (802) 525-3524 tellers-barton@communitynationalbank.com Derby Line: 69 Main Street Derby Line, Vermont 05830 (802) 873-3101 tellers-derbyline@communitynationalbank.com Enosburg Falls: 49 Sampsonville Road Enosburg Falls, Vermont 05450 (802) 933-8500 tellers-enosburg@communitynationalbank.com Island Pond: 23 US Route 105 Island Pond, Vermont 05846 (802) 723-4356 tellers-islandpond@communitynationalbank.com Lyndonville: 467 Broad Street Lyndonville, Vermont 05851 (802) 626-1200 tellers-lyndonmemorial@communitynationalbank.com Montpelier: 99 State Street Montpelier, Vermont 05602 (802) 223-0598 tellers-montpelier@communitynationalbank.com Morrisville: 116 VT Rte. 15 West Morrisville, Vermont 05661 (802) 888-4633 tellers-morrisville@communitynationalbank.com Newport: 100 Main Street Newport, Vermont 05855 (802) 334-7915 tellers-newport@communitynationalbank.com St. Johnsbury: 857 Memorial Drive St. Johnsbury, Vermont 05819 (802) 748-3605 tellers-stjpricechopper@communitynationalbank.com Troy: 4245 US Route 101 Troy, Vermont 05868 (802) 744-2287 tellers-troy@communitynationalbank.com 

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