COMMUNITY BANCORP /VT

INTEREST INCOME VERSUS INTEREST EXPENSE (NII)

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 was derived from $67.1 million and $54.5 million of municipal loans, at December 31, 2024 and 2023, respectively, and from $10.2 million and $10.5 million of tax-exempt municipal securities in our investment portfolio, respectively, as of such dates.

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.

The following tables present the daily average assets and the daily average liabilities, including the yields on interest-earning assets and interest-bearing liabilities for the respective comparison periods. Interest income (excluding interest on non-accrual loans) is expressed on a tax equivalent basis, both in dollars and as a yield/rate for the comparison periods presented. Net interest income, net interest spread, and net interest margin are also expressed on a tax equivalent basis.

The average volume of interest-earning assets for the year ended December 31, 2024 increased 8.3% compared to December 31, 2023. The average yield on interest-earning assets increased 41 basis points for 2024 versus 2023.

The average volume of loans increased 11.1% for 2024 versus 2023, and the average yield on loans increased 39 basis points to 5.74% for 2024, compared to 5.35% for 2023. The increase in the yield in 2024, was attributable to the increase in the average loan volume year over year. Interest earned on the loan portfolio as a percentage of total interest income was approximately 90.2% and 89.1%, respectively for 2024 and 2023.

The average volume of the taxable investment portfolio (classified as AFS) decreased 7.1% for 2024 versus 2023, while the average yield increased six basis points for 2024 versus 2023.

The average volume of the tax-exempt municipal investment portfolio (classified as AFS) decreased $878 thousand, and the tax-equivalent yield decreased 14 basis points to 3.94% for 2024 compared to 4.08% for 2023.

The average volume of sweep and interest-earning accounts, which consists primarily of interest-bearing accounts at the FRBB and two correspondent banks, increased 45.4% during 2024 compared to 2023. This increase in volume is attributable to the increase in deposit accounts during 2024. The average yield on these funds increased 31 basis points in 2024 versus 2023, reflecting increases in the federal funds rate initiated by the FRB throughout the first three quarters of 2023, which then stabilized for the fourth quarter of 2023 and into the first three quarters of 2024 before decreasing minimally during the fourth quarter of 2024.

The average volume of interest-bearing liabilities for the year ended December 31, 2024 increased 11.0% compared to the year ended December 31, 2023. The average rate paid on interest-bearing liabilities increased 73 basis points during 2024 compared to 2023. A substantial increase in average borrowed funds and the cost of these funds, along with an increase in average CD balances and an increase in average rates paid on these accounts resulted in an increase in interest expense in these components of interest-bearing liabilities.

The average volume of interest-bearing transaction accounts increased 3.6% for 2024 versus 2023 reflecting moderate deposit growth during 2024. The average rate paid on these accounts increased 30 basis points for 2024 versus 2023. Interest paid on interest-bearing transaction accounts as a percentage of total interest expense was 27.0% and 35.3%, respectively for 2024 and 2023.

The average volume of money market accounts decreased 8.7% during 2024 compared to 2023, while the average rate paid on these deposits increased 45 basis points during 2024.

The average volume of savings accounts decreased 10.9% for 2024 versus 2023, while the average rate paid on these accounts increased one basis points during 2024.

The average volume of time deposits increased 42.8% for 2024 versus 2023, and the average rate paid increased 155 basis points during 2024. The increase in the average rate paid on time deposits between comparison periods reflects competitive pressures in a rising rate environment, which resulted in an increase in the average volume of these funds during 2024. Interest paid on time deposits as a percentage of total interest expense was 28.3% and 18.5%, respectively for 2024 and 2023.

The average volume of repurchase agreements decreased 8.2% during 2024 and the average rate paid increased 34 basis points for 2024 versus 2023.

In summary, the average yield on interest-earning assets increased 41 basis points during 2024, and the average rate paid on interest-bearing liabilities increased 73 basis points. Net interest spread decreased 32 basis points for 2024 with a net interest spread of 2.78% for 2024 compared to 3.10% for 2023. Net interest margin decreased 20 basis points during 2024 to 3.28% from 3.48% for 2023.

The following tables summarize the variances in interest income and interest expense on a fully tax-equivalent basis for the annual periods presented, resulting from volume changes in daily average assets and daily average liabilities and fluctuations in average rates earned and paid.