COMMUNITY BANCORP /VT

Credit loss expense

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

The increase in the credit loss expense on loans for 2025 compared to 2024 was due in part to an increase in charge-offs as well as an increase in the volume of the loan portfolio. The decrease in OBS credit exposure during 2025 compared to 2024 was attributable to a decrease in unfunded loan commitments under contract.

ACL and provisions – The Company’s Board of Directors has approved an ACL policy that provides guidance in maintaining an adequate methodology for establishing, estimating, and maintaining allowances for credit losses under ASC 326. The policy creates a measurement model to establish a proper ACL based on current expected credit losses rather than incurred losses.

The Company maintains an ACL at a level that management believes is appropriate to absorb losses inherent in the loan portfolio as of the measurement date (See Note 1 to the accompanying audited consolidated financial statements). Although the Company, in establishing the ACL, considers the inherent losses in individual loans and pools of loans, the ACL is a general reserve available to absorb credit losses in the loan portfolio, and no part of the ACL is segregated to absorb losses from any particular loan, loan pool or segment of loans.

When establishing the ACL each quarter, the Company applies a combination of significant key assumptions and methodologies, as discussed in the ACL section under Critical Accounting Policies in this MD&A and in Note 1 under the caption “Loans” and presented in Note 4 to the accompanying audited consolidated financial statements.

The following table presents certain credit risk ratios followed by management, and their related components, as of the balance sheet dates:

The following table shows the breakdown of the ACL by loan segment and the percentage of loans in each category to total loans in the respective portfolios at the dates indicated:

The fourth quarter ACL analysis indicated that the reserve balance of $10.9 million as of December 31, 2025 was sufficient to cover expected credit losses that are probable and estimable as of the measurement date. Included in the ACL calculation as of December 31, 2025, were adjustments to several qualitative factors made by management during the fourth quarter of 2025 including a decrease to the qualitative factors for credit management oversight in all portfolios to reflect seasoned personnel. The qualitative factors for criticized and classified loans in the commercial and industrial and CRE portfolios were decreased to reflect a stable level of criticized loans during the fourth quarter. An analysis of the qualitative score card at year end led to management’s determination that several risk weights should be adjusted. The economic factors risk weight was decreased from 20% to 15% on all segments. The quantitative calculation is mainly driven by economic forecasts; therefore the qualitative scorecard does not need to focus as much on the economy and can focus more on factors specific to the Company. In the event that the local economy was to deteriorate compared to the national economy, increasing the risk weight for economic factors would be considered. The management risk weight was increased from 2.5% to 5% on all segments. The delinquency and non-performing loan risk weight was increased from 8% to 10% on the commercial and CRE segments. The external factors risk weight was decreased from 20% to 17% on commercial and CRE segments. The exceptions risk weight was increased from 2.5% to 5% on all segments. The criticized and classified loans risk weight was increased from 2% to 3% on the commercial and CRE segments. These changes were all intended to emphasize factors specific to the Company in the qualitative calculation. Management believes that the qualitative calculation adequately captures the risk in these areas, and that the reserve balance continues to be directionally consistent with the overall risk profile of the Company’s loan portfolio and credit risk appetite. While the ACL is described as consisting of separate allocated portions, the entire ACL is available to support loan losses, regardless of category. Management’s assessment of the adequacy of the ACL is presented to the full Board for approval quarterly.

Net charge-offs during the period to average loans outstanding were as follows:

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