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Item 2. Management’s Discussion and Analysis

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 
 
 MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
 Period Ended September 30, 2022 
 
 The following discussion analyzes the consolidated financial condition of Community Bancorp. and its wholly-owned subsidiary, Community National Bank, as of September 30, 2022 and December 31, 2021, and its consolidated results of operations for the three- and nine-month interim periods and one year period presented. The Company is considered a “smaller reporting company” and a “non-accelerated filer” under the disclosure rules of the SEC. Accordingly, the Company has elected to provide its 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.
 
 The following discussion should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in its 2021 Annual Report on Form 10-K filed with the SEC. 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.
 
 Certain amounts presented below pertaining to the 2021 comparison periods have been reclassified to conform to current year presentation.
 
 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 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.
 
 Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities: 
 
 · 
 interest rates change in such a way as to negatively affect loan demand, the local economy or the Company's net income, asset valuations or margins; 
 
 · 
 general economic or business conditions, either nationally, regionally or locally, deteriorate, resulting in a decline in credit quality or a diminished demand for the Company's products and services; 
 
 · 
 the impact of inflation on the Company’s customers and on its financial results and performance; 
 
 · 
 changes in the United States monetary and fiscal policies, including the interest rate policies of the FRB and its regulation of the money supply; 
 
 · 
 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; 
 
 · 
 the geographic concentration of the Company’s loan portfolio and deposit base; 
 
 · 
 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%; 
 
 · 
 reductions in deposit levels, which necessitate increased borrowings to fund loans and investments; 
 
 · 
 changes in the level of nonperforming assets and charge-offs; 
 
 · 
 changes in federal or state tax laws or policy; 
 
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 · 
 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; 
 
 · 
 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; 
 
 · 
 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 consumer and business spending, borrowing and savings habits; 
 
 · 
 the continuing 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; 
 
 · 
 the continuing effects of government and regulatory responses to the COVID-19 pandemic; 
 
 · 
 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 ongoing challenges to find qualified workers to maintain a stable workforce; 
 
 · 
 losses due to the fraudulent or negligent conduct of third parties, including the Company’s service providers, customers and employees; and 
 
 · 
 adverse changes in the credit rating of U.S. government debt. 
 
 Readers are cautioned not to place undue reliance on such statements as they speak only as of the date they are made. The Company does not undertake, and disclaims any obligation, to revise or update any forward-looking statements to reflect the occurrence or anticipated occurrence of events or circumstances after the date of this Report, except as required by applicable law. The Company claims the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995.
 
 NON-GAAP FINANCIAL MEASURES 
 
 Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, three non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled Interest Income Versus Interest Expense (NII)) and core earnings (as defined and discussed in the Results of Operations section), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G.
 
 Management believes that these non-GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.
 
 OVERVIEW 
 
 The Company’s consolidated assets on September 30, 2022 were $1,026,884,950 compared to $1,019,105,799 at December 31, 2021, an increase of 0.8%. Significant changes in the asset base were due to an increase in net loans of $34.0 million, or 5.0%, and an increase in the available-for-sale investment portfolio of $4.9 million, or 2.7%, which was partially offset by a decrease of $36.5 million, or 33.0%, in cash and cash equivalents. This demonstrates the Company’s efforts to deploy cash into higher earning assets. The increase in the loan portfolio was primarily attributable to an increase of $20.0 million in commercial & industrial loans and $23.3 million in CRE loans, which was partially offset by an $11.1 million decrease in PPP loans and $7.8 million in municipal loan balances. 
 
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 Total deposits on September 30, 2022 were $903,041,149 compared to $879,399,953 on December 31, 2021, an increase of $23.6 million, or 2.7%. Savings accounts increased $11.5 million, or 6.8%, followed by money market funds with an increase of $7.9 million, or 6.1%. 
 
 Consolidated net income for the third quarter of 2022 decreased $88,696, or 2.4% to $3.6 million compared to $3.7 million in the third quarter of 2021. Income for the first nine months of 2022 decreased $734,109 to $9.0 million compared to $9.7 million in the same period of 2021. Year over year, a $3.2 million decrease in PPP loan processing fees from the SBA and an increase of $700,835 in provision for loan losses was partially offset by an increase of $1.4 million in interest income from the Company’s debt securities portfolio and an increase in interest income from loans totaling $1.58 million, which includes interest adjustments of approximately $286 thousand for loans coming out of non-accrual status. Also contributing to the offset was a decrease of $74,979 in interest expense on savings and money market deposits, and a decrease of $226,062 in interest expense on time deposits. These changes and other significant changes are discussed in the appropriate income sections of this MD&A. 
 
 Total interest income increased $221,392 or 2.4%, for the third quarter of 2022, compared to the same quarter in 2021, and increased $166,388, or 0.6%, year over year, due to the changes discussed in the previous paragraph related to PPP loan processing fees and investment and loan income. The investment portfolio has increased considerably year over year, accounting for the increase in investment income. Negatively impacting interest income for the three- and nine-month comparison periods was the amortization of the SBA PPP fees in the amount of $36,182 for the third quarter of 2022, compared to $1.6 million for the same quarter in 2021, and $469,929 for the first nine months of 2022, compared to $3.7 million for the same period in 2021.
 
 Total interest expense increased $329,895, or 45.3%, for the third quarter of 2022, compared to the same quarter in 2021, and increased $153,139, or 6.5%, for the first nine months of 2022 compared to the same period in 2021. The recent increases in the fed funds rate have put more pressure on deposit pricing, resulting in an increase in the Company’s money market and time deposit 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 the actions of the FRB’s FOMC in regulating interest rates, and changes in the yield curve, could have on net interest income.
 
 The provision for loan losses for the third quarter of 2022 was $125,000 compared to $89,167 for the same quarter of 2021, resulting in an increase of $35,833, or 40.2%, between periods. The provision for loan losses for the first nine months of 2022 was $1.3 million compared to $624,165 for the same period in 2021, resulting in an increase of $700,835, or 112.3%, between periods. This increase to the provision was driven primarily by a write-down on a non-performing CRE loan totaling $667,474 during March 2022, as well as increases to the reserve due to the increase in the commercial loan portfolios, both secured and unsecured. Please refer to the ALL and provisions discussion in the Credit Risk section for more information.
 
 Equity capital decreased to $69.5 million, with a book value per share of $12.56 as of September 30, 2022, compared to $84.8 million and a book value of $15.48 as of December 31, 2021. This decrease in equity capital is directly related to the increase of unrealized losses in the investment portfolio, reflecting rising bond rates, which resulted in an increase of $21.4 million, net of tax, in the accumulated other comprehensive loss in the shareholders’ equity portion of the balance sheet. This position is considered temporary and does not impact the Company’s regulatory capital ratios. 
 
 On September 7, 2022, the Company's Board of Directors declared a quarterly cash dividend of $0.23 per common share, payable on November 1, 2022 to shareholders of record on October 15, 2022.
 
 As of September 30, 2022, all of the Company’s capital ratios, and those of our subsidiary Bank, were in excess of applicable 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, deteriorating economic conditions, or government monetary policy.
 
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 CRITICAL ACCOUNTING POLICIES 
 
 The Company’s consolidated financial statements are prepared according to U.S. GAAP. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities in the consolidated financial statements and related notes. The SEC has defined a company’s critical accounting policies as those that are most important to the portrayal of the Company’s financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often 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, and communicates all evaluations with the Company’s Audit Committee.
 
 The Company’s critical accounting policies govern:
 
 · 
 the ALL; 
 · 
 OREO; 
 · 
 OTTI of debt securities; 
 · 
 valuation of residential MSRs; and 
 · 
 the carrying value of goodwill. 
 
 These policies are described in the Company’s 2021 Annual Report on Form 10-K in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” and in Note 1 (Significant Accounting Policies) to the audited consolidated financial statements. There were no material changes during the first nine months of 2022 in the Company’s critical accounting policies.
 
 RESULTS OF OPERATIONS 
 
 Net income for the third quarter of 2022 was $3,610,506 or $0.66 per common share compared to $3,699,202 or $0.69 per common share for the same quarter of 2021. Net income for the first nine months of 2022 was $9,037,200 or $1.67 per common share, compared to $9,771,309 or $1.82 per common share for the same period of 2021. Core earnings (NII) for the third quarter of 2022 were $8.37 million compared to $8.48 million for the same quarter in 2021 and $23.77 million for the first nine months of 2022 compared to $23.76 million for the same period in 2021. As noted in the Overview, the moderate changes in NII in both periods primarily reflect the decrease in the amortization of fees from administering PPP loans, which enhanced NII in 2021. Over the past year, the portfolio of PPP loans has decreased, as these loans are forgiven and paid in full by the SBA. The PPP loan portfolio balance decreased from $92.6 million at the end of February 2021 to $12.2 million at December 31, 2021 and then to $1.1 million as of September 30, 2022. As these loans are paid in full, the unamortized fees are taken into income, resulting in a decrease in income year over year. Interest paid on deposits, which is the major component of total interest expense, increased $243,656, or 41.0% between the third quarter comparison periods and $44,737, or 2.3%, year over year, driven primarily by the increases in the fed funds rate during 2022.
 
 Return on average assets, which is net income divided by average total assets, measures how effectively a corporation uses its assets to produce earnings. Return on average equity, which is net income divided by average shareholders' equity, measures how effectively a corporation uses its equity capital to produce earnings. 
 
 The following tables show these ratios annualized, as well as other equity ratios monitored by management, for the comparison periods presented.
 
 Three Months Ended September 30, 
 
 2022 
 
 2021 
 
 Return on average assets
 
 1.41 % 
 
 1.54 % 
 Return on average equity
 
 19.06 % 
 
 17.87 % 
 Dividend payout ratio (1)
 
 34.85 % 
 
 31.88 % 
 Average equity to average assets 
 
 7.38 % 
 
 8.64 % 
 
 Nine Months Ended September 30, 
 
 2022 
 
 2021 
 
 Return on average assets
 
 1.19 % 
 
 1.40 % 
 Return on average equity
 
 15.55 % 
 
 16.39 % 
 Dividend payout ratio (1)
 
 41.32 % 
 
 36.26 % 
 Average equity to average assets 
 
 7.68 % 
 
 8.52 % 
 
 (1)
 Dividends declared per common share divided by earnings per common share.
 
 INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST INCOME) 
 
 The largest component of the Company’s operating income is NII, which is the difference between interest earned on loans and investments and the interest paid on deposits and other sources of funds (i.e., borrowings). The Company’s level of net interest income can fluctuate over time due to changes in the level and mix of earning assets and sources of funds (volume), and changes in the yield earned and costs of funds (rate). A portion of the Company’s income from loans to local municipalities is not subject to income taxes. Because the proportion of tax-exempt items in the Company's balance sheet varies from year-to-year, to improve comparability of information, the non-taxable income shown in the tables below has been converted to a tax equivalent basis. The Company’s corporate tax rate is 21%; therefore, to equalize tax-free and taxable income in the comparison, we divide the tax-free income by 79%, with the result that every tax-free dollar is equivalent to $1.27 in taxable income for the periods presented.
 
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 The Company’s tax-exempt interest income of $284,618 and $246,627 for the three months ended September 30, 2022 and 2021, respectively, and $777,314 and $759,855 for the nine months ended September 30, 2022 and 2021, respectively, was derived from loans to local municipalities of $40.2 million and $53.8 million, and tax-exempt municipal investments of $10.3 million and $0, at September 30, 2022 and 2021, respectively.
 
 The following tables show the reconciliation between reported NII and tax equivalent NII for the comparison periods presented.
 
 Three Months Ended September 30, 
 
 2022 
 
 2021 
 
 Net interest income as presented
 
 $ 8,373,566 
 
 $ 8,482,069 
 
 Effect of tax-exempt income
 
 75,658 
 
 65,559 
 
 Net interest income, tax equivalent
 
 $ 8,449,224 
 
 $ 8,547,628 
 
 Nine Months Ended September 30, 
 
 2022 
 
 2021 
 
 Net interest income as presented
 
 $ 23,768,980 
 
 $ 23,755,731 
 
 Effect of tax-exempt income
 
 206,628 
 
 201,987 
 
 Net interest income, tax equivalent
 
 $ 23,975,608 
 
 $ 23,957,718 
 
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 The following tables present the daily average interest-earning assets and the daily average interest-bearing liabilities supporting earning assets 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.
 
 Three Months Ended September 30, 
 
 2022 
 
 2021 
 
 Average 
 
 Average 
 
 Average 
 
 Income/ 
 
 Yield/ 
 
 Average 
 
 Income/ 
 
 Yield/ 
 
 Balance 
 
 Expense 
 
 Rate 
 
 Balance 
 
 Expense 
 
 Rate 
 
 Interest-Earning Assets 
 
 Loans (1)
 
 $ 717,692,703 
 
 $ 8,239,751 
 
 4.55 % 
 $ 705,990,188 
 
 $ 8,843,732 
 
 4.97 % 
 Taxable investment securities
 
 182,586,203 
 
 799,856 
 
 1.74 % 
 
 91,309,182 
 
 325,002 
 
 1.41 % 
 Tax-exempt investment securities
 
 9,135,697 
 
 86,271 
 
 3.75 % 
 
 0 
 
 0 
 
 0.00 % 
 Sweep and interest-earning accounts
 
 58,264,306 
 
 358,907 
 
 2.44 % 
 
 80,330,844 
 
 92,923 
 
 0.46 % 
 Other investments (2)
 
 1,777,950 
 
 23,029 
 
 5.14 % 
 
 1,834,150 
 
 14,666 
 
 3.17 % 
 Total
 
 $ 969,456,859 
 
 $ 9,507,814 
 
 3.89 % 
 $ 879,464,364 
 
 $ 9,276,323 
 
 4.18 % 
 
 Interest-Bearing Liabilities 
 
 Interest-bearing transaction accounts
 
 $ 252,413,763 
 
 $ 382,833 
 
 0.60 % 
 $ 217,633,391 
 
 $ 134,246 
 
 0.24 % 
 Money market funds
 
 138,497,037 
 
 197,849 
 
 0.57 % 
 
 126,691,975 
 
 148,962 
 
 0.47 % 
 Savings deposits
 
 181,818,265 
 
 27,930 
 
 0.06 % 
 
 167,577,792 
 
 43,705 
 
 0.10 % 
 Time deposits
 
 105,915,323 
 
 229,371 
 
 0.86 % 
 
 107,239,980 
 
 267,414 
 
 0.99 % 
 Borrowed funds
 
 1,301,120 
 
 8 
 
 0.00 % 
 
 2,301,326 
 
 12 
 
 0.00 % 
 Repurchase agreements
 
 33,402,748 
 
 45,153 
 
 0.54 % 
 
 23,644,148 
 
 16,871 
 
 0.28 % 
 Finance lease obligations
 
 3,716,571 
 
 21,355 
 
 2.30 % 
 
 2,385,977 
 
 19,709 
 
 3.30 % 
 Junior subordinated debentures
 
 12,887,000 
 
 154,091 
 
 4.74 % 
 
 12,887,000 
 
 97,776 
 
 3.01 % 
 Total
 
 $ 729,951,827 
 
 $ 1,058,590 
 
 0.58 % 
 $ 660,361,589 
 
 $ 728,695 
 
 0.44 % 
 
 Net interest income
 
 $ 8,449,224 
 
 $ 8,547,628 
 
 Net interest spread (3)
 
 3.31 % 
 
 3.74 % 
 Net interest margin (4)
 
 3.46 % 
 
 3.86 % 
 
 1.
 Included in gross loans are non-accrual loans with average balances of $7,337,588 and $3,803,807 for the three months ended September 30, 2022 and 2021, 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 $39,007,717 and $52,546,634 for the three months ended September 30, 2022 and 2021, respectively.
 
 2.
 Included in other investments is the Company’s FHLBB Stock with average balances of $712,800 and $769,000 for the three months ended September 30, 2022 and 2021, respectively, with a dividend rate of approximately 3.72% and 1.52%, respectively, per quarter.
 
 3.
 Net interest spread is the difference between the average yield on average interest-earning assets and the average rate paid on average interest-bearing liabilities.
 
 4.
 Net interest margin is net interest income divided by average earning assets.
 
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 Nine Months Ended September 30, 
 
 2022 
 
 2021 
 
 Average 
 
 Average 
 
 Average 
 
 Income/ 
 
 Yield/ 
 
 Average 
 
 Income/ 
 
 Yield/ 
 
 Balance 
 
 Expense 
 
 Rate 
 
 Balance 
 
 Expense 
 
 Rate 
 
 Interest-Earning Assets 
 
 Loans (1)
 
 $ 704,673,950 
 
 $ 23,476,738 
 
 4.45 % 
 $ 718,366,424 
 
 $ 25,121,879 
 
 4.68 % 
 Taxable investment securities
 
 183,417,294 
 
 2,192,540 
 
 1.60 % 
 
 86,274,774 
 
 883,846 
 
 1.37 % 
 Tax-exempt investment securities
 
 5,628,689 
 
 142,899 
 
 3.39 % 
 
 0 
 
 0 
 
 0.00 % 
 Sweep and interest-earning accounts
 
 68,303,360 
 
 609,532 
 
 1.19 % 
 
 74,020,149 
 
 260,811 
 
 0.47 % 
 Other investments (2)
 
 1,778,428 
 
 56,121 
 
 4.22 % 
 
 1,833,884 
 
 40,265 
 
 2.94 % 
 Total
 
 $ 963,801,721 
 
 $ 26,477,830 
 
 3.67 % 
 $ 880,495,231 
 
 $ 26,306,801 
 
 3.99 % 
 
 Interest-Bearing Liabilities 
 
 Interest-bearing transaction accounts
 
 $ 256,909,959 
 
 $ 754,189 
 
 0.39 % 
 $ 216,136,557 
 
 $ 408,410 
 
 0.25 % 
 Money market funds
 
 132,391,636 
 
 446,751 
 
 0.45 % 
 
 123,955,268 
 
 477,355 
 
 0.51 % 
 Savings deposits
 
 178,709,726 
 
 77,373 
 
 0.06 % 
 
 156,816,309 
 
 121,748 
 
 0.10 % 
 Time deposits
 
 106,235,079 
 
 697,088 
 
 0.88 % 
 
 109,049,139 
 
 923,151 
 
 1.13 % 
 Borrowed funds
 
 1,301,132 
 
 14 
 
 0.00 % 
 
 2,376,974 
 
 36 
 
 0.00 % 
 Repurchase agreements
 
 30,752,887 
 
 88,322 
 
 0.38 % 
 
 29,997,106 
 
 72,822 
 
 0.32 % 
 Finance lease obligations
 
 3,769,459 
 
 64,979 
 
 2.30 % 
 
 2,156,173 
 
 49,075 
 
 3.03 % 
 Junior subordinated debentures
 
 12,887,000 
 
 373,506 
 
 3.88 % 
 
 12,887,000 
 
 296,486 
 
 3.08 % 
 Total
 
 $ 722,956,878 
 
 $ 2,502,222 
 
 0.46 % 
 $ 653,374,526 
 
 $ 2,349,083 
 
 0.48 % 
 
 Net interest income
 
 $ 23,975,608 
 
 $ 23,957,718 
 
 Net interest spread (3)
 
 3.21 % 
 
 3.51 % 
 Net interest margin (4)
 
 3.33 % 
 
 3.64 % 
 
 1.
 Included in gross loans are non-accrual loans with average balances of $5,375,840 and $3,945,577 for the nine months ended September 30, 2022 and 2021, 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 $45,161,639 and $52,105,647 for the nine months ended September 30, 2022 and 2021, respectively.
 
 2.
 Included in other investments is the Company’s FHLBB Stock with average balances of $713,278 and $768,734, respectively, with a dividend rate of approximately 3.38% and 1.52%, respectively, for the nine months ended September 30, 2022 and 2021, respectively.
 
 3.
 Net interest spread is the difference between the average yield on average interest-earning assets and the average rate paid on average interest-bearing liabilities.
 
 4.
 Net interest margin is net interest income divided by average earning assets.
 
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 The average volume of interest-earning assets for the three- and nine-month periods ended September 30, 2022 increased 10.2% and 9.5%, respectively, compared to the same periods last year, while the average yield on interest-earning assets decreased 29 bps and 32 bps, respectively.
 
 The average volume of loans increased 1.7% over the three-month comparison period and decreased 1.9% over the nine-month comparison period of 2022 versus 2021, while the average yield on loans decreased 42 bp and 23 bps, respectively. The $286 thousand in income for loans coming out of non-accrual status, discussed in the Overview, translates to an increase of five bps in the nine-month comparison period for 2022. Loans accounted for 74.0% and 73.1%, respectively, of the average interest-earning asset portfolio for the three- and nine-month periods ended September 30, 2022 compared to 80.3% and 81.6%, respectively, for the same periods last year. Interest earned on the loan portfolio as a percentage of total interest income was 86.7% and 88.7%, respectively for the three- and nine-month periods in 2022 compared to 95.3% and 95.5%, respectively for the same periods in 2021.
 
 The average volume of the taxable investment portfolio (classified as AFS) increased 100.0% and 112.6% during the three- and nine-month periods ended September 30, 2022, compared to the same periods last year, and the average yield increased 33 bps and 23 bps, respectively, between periods. The increase in average volume is due primarily to management’s 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 the tax-exempt investment portfolio (classified as AFS) for the three- and nine-month periods ended September 30, 2022 was $9.1 million and $5.6 million, respectively, with a tax equivalent yield of 3.75% and 3.39%, respectively. The Company began investing in these tax-exempt bonds during December 2021.
 
 The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing account at the FRBB, decreased 27.5% and 7.7%, respectively, for the three- and nine-month comparison periods ended September 30, 2022 compared to the same period in 2021. The decrease in average volume is attributable to the funding of investment and loan growth. The average yield on these funds increased 198 bps and 72 bps for the three- and nine-month periods ended September 30, 2022 versus the same periods in 2021.
 
 The average volume of interest-bearing liabilities for the three- and nine-month periods ended September 30, 2022 increased 10.7% in both periods, compared to the same periods in 2021, while the average rate paid on interest-bearing liabilities increased 14 bps and decreased two bps, respectively. 
 
 The average volume of interest-bearing transaction accounts increased 16.0% and 18.9%, respectively for the three- and nine-month periods ended September 30, 2022 compared to the same periods of 2021. The average rate paid on these accounts increased 36 bps and 14 bps, respectively, between comparison periods. 
 
 The average volume of money market accounts increased 9.3% and 6.8%, respectively for the three- and nine-month periods ended September 30, 2022 compared to the same periods of 2021, while the average rate paid on these deposits increased 10 bps and decreased six bps, respectively.
 
 The average volume of savings accounts increased 8.5% and 14.0%, respectively, for the three- and nine-month periods ended September 30, 2022 compared to the same periods in 2021, while the average rate paid on these accounts decreased four bps in both comparison periods. 
 
 The average volume of time deposits decreased 1.2% and 2.6%, respectively, for the three- and nine-month periods ended September 30, 2022 compared to the same periods in 2021, and the average rate paid decreased 13 bps and 25 bps, respectively. Interest paid on time deposits as a percentage of total interest expense was 21.7% and 27.9%, respectively, for the three and nine-month periods ended September 30, 2022, compared to 36.7% and 39.3%, respectively, for the same comparison periods in 2021. The decrease in the average volume of time deposits between periods reflects the maturity of brokered deposits in January and April of 2021 that had not been replaced as of September 30, 2022. 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 43.5% and 45.3% for the three- and nine-month periods ended September 30, 2022 compared to the same periods in 2021 and, for all periods, consisted of only JNE funds at zero percent interest. 
 
 The average volume of repurchase agreements increased 41.3% and 2.5%, respectively, for the three- and nine-month periods ended September 30, 2022 compared to the same periods in 2021 and the average rate paid increased 26 bps and six bps, respectively, between comparison periods.
 
 37 
 
 Table of Contents 
 
 In summary, between the three- and nine-month periods ended September 30, 2022 and 2021, the average yield on interest-earning assets decreased 29 bps and 32 bps, respectively, and the average rate paid on interest-bearing liabilities increased 14 bps and decreased two bps, respectively. Net interest spread decreased 43 bps and 30 bps for the three- and nine-month periods of 2022 versus 2021 and net interest margin decreased 40 and 31 bps, respectively, between periods.
 
 The following table summarizes the variances in interest income and interest expense on a fully tax-equivalent basis for the interim periods presented for 2022 and 2021 resulting from volume changes in daily average assets and daily average liabilities and fluctuations in average rates earned and paid.
 
 Three Months Ended September 30, 
 
 Nine Months Ended September 30, 
 
 Variance 
 
 Variance 
 
 Variance 
 
 Variance 
 
 Due to 
 
 Due to 
 
 Total 
 
 Due to 
 
 Due to 
 
 Total 
 
 Rate (1) 
 
 Volume (1) 
 
 Variance 
 
 Rate (1) 
 
 Volume (1) 
 
 Variance 
 
 Average Interest-Earning Assets 
 
 Loans
 
 $ (750,580 ) 
 $ 146,599 
 
 $ (603,981 ) 
 $ (1,189,407 ) 
 $ (455,734 ) 
 $ (1,645,141 ) 
 Taxable investment securities
 
 150,458 
 
 324,396 
 
 474,854 
 
 313,289 
 
 995,405 
 
 1,308,694 
 
 Tax-exempt investment securities
 
 86,271 
 
 0 
 
 86,271 
 
 142,899 
 
 0 
 
 142,899 
 
 Sweep and interest-earning accounts
 
 401,696 
 
 (135,712 ) 
 
 265,984 
 
 399,604 
 
 (50,883 ) 
 
 348,721 
 
 Other investments
 
 9,091 
 
 (728 ) 
 
 8,363 
 
 17,606 
 
 (1,750 ) 
 
 15,856 
 
 Total
 
 $ (103,064 ) 
 $ 334,555 
 
 $ 231,491 
 
 $ (316,009 ) 
 $ 487,038 
 
 $ 171,029 
 
 Average Interest-Bearing Liabilities 
 
 Interest-bearing transaction accounts
 
 $ 227,547 
 
 $ 21,040 
 
 $ 248,587 
 
 $ 269,538 
 
 $ 76,241 
 
 $ 345,779 
 
 Money market funds
 
 34,902 
 
 13,985 
 
 48,887 
 
 (62,785 ) 
 
 32,181 
 
 (30,604 ) 
 Savings deposits
 
 (19,364 ) 
 
 3,589 
 
 (15,775 ) 
 
 (60,750 ) 
 
 16,375 
 
 (44,375 ) 
 Time deposits
 
 (35,172 ) 
 
 (2,871 ) 
 
 (38,043 ) 
 
 (207,541 ) 
 
 (18,522 ) 
 
 (226,063 ) 
 Borrowed funds
 
 (4 ) 
 
 0 
 
 (4 ) 
 
 (22 ) 
 
 0 
 
 (22 ) 
 Repurchase agreements
 
 21,395 
 
 6,887 
 
 28,282 
 
 13,691 
 
 1,809 
 
 15,500 
 
 Finance lease obligations
 
 (9,422 ) 
 
 11,068 
 
 1,646 
 
 (20,657 ) 
 
 36,561 
 
 15,904 
 
 Junior subordinated debentures
 
 56,315 
 
 0 
 
 56,315 
 
 77,020 
 
 0 
 
 77,020 
 
 Total
 
 $ 276,197 
 
 $ 53,698 
 
 $ 329,895 
 
 $ 8,494 
 
 $ 144,645 
 
 $ 153,139 
 
 Changes in net interest income
 
 $ (379,261 ) 
 $ 280,857 
 
 $ (98,404 ) 
 $ (324,503 ) 
 $ 342,393 
 
 $ 17,890 
 
 (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
 
 38 
 
 Table of Contents 
 
 NON-INTEREST INCOME AND NON-INTEREST EXPENSE 
 
 Non-interest Income 
 
 The components of non-interest income for the periods presented were as follows:
 
 Three Months Ended 
 
 Nine Months Ended 
 
 September 30, 
 
 Change 
 
 September 30, 
 
 Change 
 
 2022 
 
 2021 
 
 Income 
 
 Percent 
 
 2022 
 
 2021 
 
 Income 
 
 Percent 
 
 Service fees
 
 $ 939,807 
 
 $ 882,688 
 
 $ 57,119 
 
 6.47 % 
 $ 2,739,076 
 
 $ 2,527,943 
 
 $ 211,133 
 
 8.35 % 
 Income from sold loans
 
 109,411 
 
 242,560 
 
 (133,149 ) 
 
 -54.89 % 
 
 508,795 
 
 704,627 
 
 (195,832 ) 
 
 -27.79 % 
 Other income from loans
 
 301,710 
 
 223,388 
 
 78,322 
 
 35.06 % 
 
 895,884 
 
 653,377 
 
 242,507 
 
 37.12 % 
 Other income
 
 Income from CFS Partners
 
 87,386 
 
 240,723 
 
 (153,337 ) 
 
 -63.70 % 
 
 386,217 
 
 834,781 
 
 (448,564 ) 
 
 -53.73 % 
 Other miscellaneous income
 
 93,289 
 
 111,227 
 
 (17,938 ) 
 
 -16.13 % 
 
 322,357 
 
 320,624 
 
 1,733 
 
 0.54 % 
 Total non-interest income
 
 $ 1,531,603 
 
 $ 1,700,586 
 
 $ (168,983 ) 
 
 -9.94 % 
 $ 4,852,329 
 
 $ 5,041,352 
 
 $ (189,023 ) 
 
 -3.75 % 
 
 Total non-interest income decreased $168,983, or 9.9% for the third quarter of 2022 and $189,023, or 3.8%, for the first nine months of 2022 compared to the same periods in 2021, with significant changes noted in the following:
 
 · 
 The increase in service fees during the comparison period is mostly due to an increase in overdraft charges of $31,752, or 39.9%, between the third quarter comparison periods and $162,459, or 27.8%, year over year. 
 
 · 
 The decrease in income from sold loans is due in part to a lower volume of loans sold into the secondary market during the first nine months of 2022 versus 2021, as well as lower points and premiums on these loans in 2022. 
 
 · 
 An increase in CRE loan volume in 2022 resulted in a significant increase in documentation fees collected at origination as well as commercial rate lock fees collected accounting for the increase in other income from loans when comparing both comparison periods. 
 
 · 
 Income from CFS Partners decreased between periods due in part to the impact of mark-to-market adjustments to CFS Partners equity portfolio during 2022, reflecting general stock market conditions. 
 
 · 
 Included in Other miscellaneous income for 2022 is income totaling $23,400 associated with a renegotiated contract with the Company’s check printing vendor, helping to offset decreases in other components of this category. 
 
 39 
 
 Table of Contents 
 
 Non-interest Expense 
 
 The components of non-interest expense for the periods presented were as follows:
 
 Three Months Ended 
 
 Nine Months Ended 
 
 September 30, 
 
 Change 
 
 September 30, 
 
 Change 
 
 2022 
 
 2021 
 
 Expense 
 
 Percent 
 
 2022 
 
 2021 
 
 Expense 
 
 Percent 
 
 Salaries and wages
 
 $ 1,984,000 
 
 $ 2,002,999 
 
 $ (18,999 ) 
 
 -0.95 % 
 $ 6,058,000 
 
 $ 5,923,001 
 
 $ 134,999 
 
 2.28 % 
 Employee benefits
 
 629,681 
 
 811,817 
 
 (182,136 ) 
 
 -22.44 % 
 
 2,106,356 
 
 2,467,237 
 
 (360,881 ) 
 
 -14.63 % 
 Occupancy expenses, net
 
 677,805 
 
 743,219 
 
 (65,414 ) 
 
 -8.80 % 
 
 2,104,346 
 
 2,140,141 
 
 (35,795 ) 
 
 -1.67 % 
 Other expenses
 
 Service contracts - administrative
 
 142,081 
 
 124,252 
 
 17,829 
 
 14.35 % 
 
 428,254 
 
 385,792 
 
 42,462 
 
 11.01 % 
 Directors fees
 
 144,357 
 
 128,604 
 
 15,753 
 
 12.25 % 
 
 432,571 
 
 386,312 
 
 46,259 
 
 11.97 % 
 Audit fees
 
 122,034 
 
 105,200 
 
 16,834 
 
 16.00 % 
 
 337,790 
 
 294,614 
 
 43,176 
 
 14.66 % 
 FDIC insurance
 
 90,637 
 
 111,087 
 
 (20,450 ) 
 
 -18.41 % 
 
 277,047 
 
 272,652 
 
 4,395 
 
 1.61 % 
 Collection & non-accruing loan expense
 
 (14,000 ) 
 
 19,069 
 
 (33,069 ) 
 
 -173.42 % 
 
 33,000 
 
 42,269 
 
 (9,269 ) 
 
 -21.93 % 
 ATM fees
 
 162,032 
 
 143,993 
 
 18,039 
 
 12.53 % 
 
 456,223 
 
 414,288 
 
 41,935 
 
 10.12 % 
 Electronic banking expense
 
 69,623 
 
 64,423 
 
 5,200 
 
 8.07 % 
 
 202,682 
 
 169,788 
 
 32,894 
 
 19.37 % 
 State deposit tax
 
 250,994 
 
 225,912 
 
 25,082 
 
 11.10 % 
 
 737,570 
 
 651,173 
 
 86,397 
 
 13.27 % 
 Other miscellaneous expenses
 
 1,081,665 
 
 1,051,282 
 
 30,383 
 
 2.89 % 
 
 3,055,122 
 
 3,019,037 
 
 36,085 
 
 1.20 % 
 Total non-interest expense
 
 $ 5,340,909 
 
 $ 5,531,857 
 
 $ (190,948 ) 
 
 -3.45 % 
 $ 16,228,961 
 
 $ 16,166,304 
 
 $ 62,657 
 
 0.39 % 
 
 Total non-interest expense decreased $190,948, or 3.5% for the third quarter of 2022 and increased $62,657, or 0.4%, for the first nine months of 2022 compared to the same periods in 2021, with significant changes noted in the following:
 
 · 
 The increase in salaries and wages in the nine month comparison period is due to normal salary increases. 
 
 · 
 The decrease in employee benefits was attributable to a decrease in health insurance claims year over year under the Company’s self-funded health insurance plan. 
 
 · 
 The decrease in occupancy expenses is primarily attributable to a write down of $63,125 at maturity of a capital lease during the third quarter of 2021. 
 
 · 
 The increase in service contracts - administrative is due to a combination of an increase in pricing for contracts that are based on asset size and inflationary adjustment factors that are higher than historical increase adjustments. 
 
 · 
 The increase in directors’ fees is attributable to a change to the Director’s fee schedule as well as an additional Director for 2022. 
 
 · 
 The increase in audit fees reflects increased audit services due to the Company surpassing the $1.0 billion asset size. 
 
 · 
 FDIC insurance decreased for the third quarter due to a decrease in the assessment multiplier, while the modest increase year over year is due primarily to an increase in assets. 
 
 · 
 Collection & non-accruing loan expense is lower in both periods due to the recoupment of expenses associated with properties in the Company’s non-accruing loan portfolio. 
 
 · 
 ATM fees increased due to the ongoing cost to support the upgraded and enhanced technology utilized for deposit automation. The use of deposit automation replaces a manual process for required monitoring of cash deposits as well as providing fraud detection measures at ATMs. 
 
 · 
 The increase in electronic banking expense is attributable to a new mobile banking platform which includes security enhancements and other technical upgrades. 
 
 · 
 State deposit tax increased year over year due primarily to the increase in deposits throughout 2021. The calculation is based on an average of month-end deposit totals over a 12 month period. 
 
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 Table of Contents 
 
 APPLICABLE INCOME TAXES 
 
 The provision for income taxes decreased $33,675, or 3.9%, for the third quarter of 2022 compared to the same quarter in 2021, and decreased $205,157, or 9.2%, for the first nine months of 2022 compared to the same period in 2021 and is proportional to the decrease in income before income taxes totaling $122,371 for the third quarter of 2022 versus 2021 and $939,266 year over year. Tax credits related to limited partnership investments amounted to $99,958 and $117,015, respectively, for the third quarter of 2022 and 2021, and $292,437 and $351,045, respectively, for the first nine months of 2022 and 2021.
 
 Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $67,353 and $90,762, respectively, for the third quarters of 2022 and 2021, and $201,537 and $272,286, respectively, for the first nine months of 2022 and 2021. These investments provide tax benefits, including tax credits, and are designed to provide a targeted effective annual yield between 7% and 10%.
 
 CHANGES IN FINANCIAL CONDITION 
 
 The following table reflects the composition of the Company's major categories of assets and liabilities as a percentage of total assets or liabilities and shareholders’ equity, as the case may be, as of the balance sheet dates:
 
 September 30, 2022 
 
 December 31, 2021 
 
 Assets 
 
 Loans
 
 $ 724,194,001 
 
 70.52 % 
 $ 689,988,533 
 
 67.71 % 
 AFS securities
 
 187,227,320 
 
 18.23 % 
 
 182,342,459 
 
 17.89 % 
 
 Liabilities 
 
 Demand deposits
 
 210,463,414 
 
 20.50 % 
 
 209,465,151 
 
 20.55 % 
 Interest-bearing transaction accounts
 
 269,907,036 
 
 26.28 % 
 
 265,513,937 
 
 26.05 % 
 Money market funds
 
 137,639,793 
 
 13.40 % 
 
 129,728,954 
 
 12.73 % 
 Savings deposits
 
 179,853,917 
 
 17.51 % 
 
 168,390,905 
 
 16.52 % 
 Time deposits
 
 105,176,989 
 
 10.24 % 
 
 106,301,006 
 
 10.43 % 
 Long-term advances
 
 1,300,000 
 
 0.13 % 
 
 1,300,000 
 
 0.13 % 
 
 The following table reflects the changes in the composition of the Company's major categories of assets and liabilities between the balance sheet dates, as disclosed in the table above:
 
 Change in Volume 
 
 Percentage Change 
 
 Assets 
 
 Loans
 
 $ 34,205,468 
 
 4.96 % 
 AFS securities
 
 4,884,861 
 
 2.68 % 
 
 Liabilities 
 
 Demand deposits
 
 998,263 
 
 0.48 % 
 Interest-bearing transaction accounts
 
 4,393,099 
 
 1.65 % 
 Money market funds
 
 7,910,839 
 
 6.10 % 
 Savings deposits
 
 11,463,012 
 
 6.81 % 
 Time deposits
 
 (1,124,017 ) 
 
 -1.06 % 
 
 The increase in the loan portfolio during the first nine months of 2022 was attributable to increases totaling $43.3 million in commercial & industrial and CRE loans, which was partially offset by payoffs of certain PPP loans through SBA’s forgiveness program totaling $11.1 million and maturities of certain municipal loans totaling $7.8 million. The SBA PPP program ended during the second quarter of 2021, so this portfolio will continue to decrease throughout the remainder of 2022 either through pay downs or payoffs initiated on behalf of SBA’s forgiveness program, or by regular amortization as borrowers begin to make scheduled monthly payments. The maturities within the municipal loan portfolio are cyclical, generally occurring on June 30. As a result of competition from area financial institutions, the Company lost the bids on renewal of a portion of the matured municipal loans.
 
 The increase in the securities AFS portfolio is attributable to the purchase of $47.5 million in securities AFS during the first nine months of 2022, consisting of $9.1 million in US treasury securities, $10.9 million in tax-exempt municipal bonds, $1.6 million in ABS, $7.4 million in CMO, and $18.5 million in MBS. These purchases were reduced in part by maturities and calls exercised amounting to $3.0 million, as well as principal payments on various portfolios totaling $12.0 million, and by an increase of $27.1 million in unrealized losses arising during the first nine months of 2022, which is reflected in OCI. In management’s view, the size of the securities AFS portfolio is appropriate and proportional to the overall asset base, as this portfolio serves an important role in the Company’s liquidity position. 
 
 41 
 
 Table of Contents 
 
 The increase in interest-bearing transaction accounts consists of an increase of $11.7 million, or 9.9%, in consumer interest-bearing transaction accounts, which includes Health Savings Accounts and the deposit account of the Company’s trust and asset management affiliate, CFSG. This was partially offset by a decrease of $3.2 million, or 7.6%, in municipal deposit accounts and a decrease of $4.1 million, or 5.8% in the ICS deposit accounts. The increase in savings deposits of $11.5 million, or 6.8%, is likely attributable in part to parked funds as customers await more favorable rates for time deposits, as well as deposits of stimulus payments and tax credits from the U.S. Government. 
 
 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 the current rising rate environment will have a positive impact to the Company’s NII for the remainder of 2022. 
 
 The following table summarizes the estimated impact on the Company's NII over a twelve month period, assuming a gradual parallel shift of the yield curve beginning September 30, 2022:
 
 Rate Change 
 
 Percent Change in NII 
 
 Down 100 bps
 
 -1.2 % 
 Up 200 bps
 
 0.1 % 
 
 The estimated amounts shown in the table above are within the ALCO Policy limits. However, those amounts do not represent a forecast and should not be relied upon as indicative of future results. The ALCO model also provides alternate scenarios including a sustained flat, or inverted yield curve. While assumptions used in the ALCO process, including the interest rate simulation analyses, are developed based upon current economic and local market conditions, and expected future conditions, the Company cannot provide any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change. As 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-term rates.
 
 42 
 
 Table of Contents 
 
 As of September 30, 2022, 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%. As previously announced by the Financial Conduct Authority in the United Kingdom, the entity that administers LIBOR, 3-month LIBOR for U.S. dollar denominated deposits will be phased out as of June 30, 2023. The Indenture governing the terms of the Company’s Debentures contains detailed fallback provisions in the event 3-month LIBOR is not available, empowering the Trustee to obtain substitute quotations from other leading banks. However, under the federal Adjustable Interest Rate (LIBOR) Act enacted in March 2022 (the “LIBOR Act”), fallback provisions like those in the Company’s Indenture that are based on a “determining person” (such as an indenture trustee) obtaining quotations of interbank lending or deposit rates are deemed “ineffective” and will be replaced as a matter of law, without need to amend contract documents, with a benchmark interest rate that will be identified in final regulations to be promulgated by the Federal Reserve. The Federal Reserve has issued proposed regulations and has indicated that it will issue final regulations prior to the June 30, 2023 LIBOR phase out date. As required under the LIBOR Act, any Federal Reserve-identified benchmark rate specified in the final regulations will be based on the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York and will include an appropriate “tenor spread adjustment” to reflect historical spreads between LIBOR and SOFR. The replacement rate for ineffective fallback provisions will take effect on the first London banking day after June 30, 2023. The Indenture Trustee has indicated informally that it views the fallback provisions in the Indenture as ineffective under the LIBOR Act, and that it intends to provide written guidance on the transition from LIBOR prior to June 30, 2023, following the Federal Reserve’s adoption of final regulations. 
 
 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 with certainty 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 interests, loans to industry segments, and the geographic distribution of commercial real estate loans. Loans are reviewed periodically by an independent loan review firm to help ensure accuracy of the Company's internal risk ratings and compliance with various internal policies, procedures and regulatory guidance.
 
 Residential mortgages represented 31.3% of the Company’s loan balances as of September 30, 2022 and December 31, 2021. 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-value ratios exceeding 80% are generally covered by PMI. A 90% loan-to-value residential mortgage product without PMI is only available to borrowers with excellent credit and low debt-to-income ratios and has not been widely originated. As of September 30, 2022, junior lien home equity products made up 14.9% 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 & industrial and CRE loan portfolios have seen solid growth over recent years. Commercial & industrial and CRE loans together comprised 67.1% of the Company’s loan portfolio at September 30, 2022, compared to 68.1% at December 31, 2021. Those percentages included the Company’s portfolio of PPP loans, which has been steadily decreasing, and totaled $1.1 million at September 30, 2022, compared to $12.2 million at December 31, 2021.
 
 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 who 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 $324.3 million CRE portfolio at September 30, 2022 were $102.4 million in owner-occupied CRE and $124.9 million in non-owner occupied CRE.
 
 43 
 
 Table of Contents 
 
 Risk in the Company’s commercial & industrial and CRE loan portfolios is mitigated in part by government guarantees issued by federal agencies such as the SBA and RD. At September 30, 2022, the Company had $31.9 million in guaranteed loans with guaranteed balances of $23.8 million, compared to $42.9 million in guaranteed loans with guaranteed balances of $35.4 million at December 31, 2021. PPP loans are included in these totals, all of which carry a 100% guarantee through the SBA, subject to borrower eligibility requirements.
 
 The Company works actively with customers early in the delinquency process to help them to avoid default and foreclosure. Commercial & industrial and CRE loans are generally placed on non-accrual status when there is deterioration in the financial position of the borrower, payment in full of principal and interest is not expected, and/or principal or interest has been in default for 90 days or more. However, such a loan need not be placed on non-accrual status if it is both well secured and in the process of collection. Residential mortgages and home equity loans are considered for non-accrual status at 90 days past due and are evaluated on a case-by-case basis. The Company obtains current property appraisals or market value analyses and considers the cost 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 below the current market rate. 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. 
 
 The following table shows the Company’s TDRs that were past due 90 days or more or in non-accrual status as of the balance sheet dates:
 
 September 30, 2022 
 
 December 31, 2021 
 
 Number of 
 
 Principal 
 
 Number of 
 
 Principal 
 
 Loans 
 
 Balance 
 
 Loans 
 
 Balance 
 
 Commercial & industrial
 
 5 
 
 $ 48,751 
 
 6 
 
 $ 71,128 
 
 Commercial real estate
 
 5 
 
 2,911,544 
 
 5 
 
 3,642,073 
 
 Residential real estate - 1st lien
 
 9 
 
 901,669 
 
 12 
 
 977,961 
 
 Residential real estate - Jr lien
 
 1 
 
 36,985 
 
 1 
 
 41,901 
 
 Total
 
 20 
 
 $ 3,898,949 
 
 24 
 
 $ 4,733,063 
 
 The remaining TDRs were performing in accordance with their modified terms as of the balance sheet dates and consisted of the following:
 
 September 30, 2022 
 
 December 31, 2021 
 
 Number of 
 
 Principal 
 
 Number of 
 
 Principal 
 
 Loans 
 
 Balance 
 
 Loans 
 
 Balance 
 
 Commercial real estate
 
 1 
 
 $ 1,782 
 
 2 
 
 $ 41,228 
 
 Residential real estate - 1st lien
 
 31 
 
 2,439,393 
 
 31 
 
 2,473,767 
 
 Residential real estate - Jr lien
 
 1 
 
 2,529 
 
 1 
 
 3,537 
 
 Total
 
 33 
 
 $ 2,443,704 
 
 34 
 
 $ 2,518,532 
 
 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 on one SBA guaranteed line of credit to a borrower whose lending relationship was previously restructured.
 
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 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 unaudited interim 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 to most loan segments, including residential first and junior lien mortgages, CRE, commercial & industrial, and consumer loan portfolios, but excluding the municipal loan and purchased loan portfolios as there has never been a loss recorded in either of those loan segments. 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 reviews 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 unaudited interim consolidated financial statements for information on the recorded investment in impaired loans and their related allocations. 
 
 The following table summarizes the Company’s credit risk ratios for the balance sheet dates presented:
 
 September 30, 
 
 December 31, 
 
 2022 
 
 2021 
 
 ALL to total loans outstanding
 
 1.16 % 
 
 1.12 % 
 ALL
 
 $ 8,432,086 
 
 $ 7,710,256 
 
 Loans outstanding
 
 $ 724,194,001 
 
 $ 689,988,533 
 
 Non-accruing loans to loans outstanding
 
 1.19 % 
 
 0.86 % 
 Non-accruing loans
 
 $ 8,602,731 
 
 $ 5,940,629 
 
 Loans outstanding
 
 $ 724,194,001 
 
 $ 689,988,533 
 
 ALL to non-accruing loans
 
 98.02 % 
 
 129.79 % 
 ALL
 
 $ 8,432,086 
 
 $ 7,710,256 
 
 Non-accruing loans
 
 $ 8,602,731 
 
 $ 5,940,629 
 
 The provision for loan losses for the nine months ended September 30, 2022 was $1.3 million, compared to $624,165 for the same period in 2021. The $700,835 year over year increase was driven in part by an increase in the commercial loan volume as well as a write-down totaling $667,474, on a single non-performing loan, currently in foreclosure. The increase of $2.7 million in non-accruing loans is attributable to one business relationship, which the Company is monitoring closely.
 
 The third quarter ALL analysis indicates that the reserve balance of $8.4 million at September 30, 2022 is sufficient to cover losses that are probable and estimable as of the measurement date, with an unallocated reserve of $258,555. Management believes the reserve balance continues 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. 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. 
 
 As stated in Note 2 of the accompanying notes to the Company’s unaudited interim consolidated financial statements, effective January 1, 2023, the Company will be required to recognize credit losses under the guidance of ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , 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 over the life of the loans. Any adjustments from the adoption of CECL will be recorded as an adjustment to retained earnings and will affect calculation of regulatory capital ratios. Based on a parallel calculation as of September 30, 2022 the required adjustment would have an immaterial impact to retained earnings and regulatory capital. Changes in forecasts used in the model could produce different results, quarter to quarter, including as of the January 1, 2023 effective date for the transition to CECL.
 
 45 
 
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 Net charge-offs during the periods presented to average loan outstanding were as follows:
 
 For the Nine Months Ended September 30, 
 
 2022 
 
 2021 
 
 Net charge-offs during the period to average loan outstanding:
 
 Commercial & industrial
 
 -0.03 % 
 
 -0.01 % 
 Net charge-offs during the period
 
 $ (34,638 ) 
 $ (14,086 ) 
 Average amount outstanding
 
 $ 115,489,717 
 
 $ 160,565,446 
 
 Purchased loans
 
 0.00 % 
 
 0.00 % 
 Net charge-offs during the period
 
 $ 0 
 
 $ 0 
 
 Average amount outstanding
 
 $ 8,782,234 
 
 $ 10,788,989 
 
 Commercial real estate
 
 -0.21 % 
 
 0.01 % 
 Net (charge-offs) recoveries during the period
 
 $ (667,474 ) 
 $ 27,160 
 
 Average amount outstanding
 
 $ 313,919,164 
 
 $ 283,812,722 
 
 Municipal
 
 0.00 % 
 
 0.00 % 
 Net charge-offs during the period
 
 $ 0 
 
 $ 0 
 
 Average amount outstanding
 
 $ 45,161,639 
 
 $ 52,105,647 
 
 Residential real estate - 1st lien
 
 0.06 % 
 
 0.00 % 
 Net recoveries during the period
 
 $ 111,163 
 
 $ 4,602 
 
 Average amount outstanding
 
 $ 184,548,015 
 
 $ 170,620,859 
 
 Residential real estate - Jr lien
 
 0.01 % 
 
 0.03 % 
 Net recoveries during the period
 
 $ 3,728 
 
 $ 9,601 
 
 Average amount outstanding
 
 $ 33,260,177 
 
 $ 36,625,381 
 
 Consumer
 
 -0.45 % 
 
 -1.06 % 
 Net charge-offs during the period
 
 $ (15,949 ) 
 $ (40,620 ) 
 Average amount outstanding
 
 $ 3,513,004 
 
 $ 3,847,380 
 
 Total loans
 
 -0.09 % 
 
 0.00 % 
 Net charge-offs during the period
 
 $ (603,170 ) 
 $ (13,343 ) 
 Average amount outstanding
 
 $ 704,673,950 
 
 $ 718,366,424 
 
 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. 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. 
 
 46 
 
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 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 the first nine months of 2022, the Company did not engage in any activity that created any additional types of off-balance sheet risk.
 
 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 rollover risk on deposits and limits reliance on volatile short-term borrowed funds. Short-term funding needs arise from declines in deposits or other funding sources and from funding requirements for loan commitments. The Company’s strategy is to fund assets to the maximum extent possible with core deposits that provide a sizable source of relatively stable and lower-cost funds.
 
 The Company recognizes that, at times, when loan demand exceeds deposit growth or the Company has other liquidity demands, 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. At September 30, 2022 and December 31, 2021, the Company had no one-way CDARS outstanding. In addition, two-way (reciprocal) CDARS deposits, as well as reciprocal ICS money market and demand deposits, enhance the Company’s ability to retain larger deposit balances by allowing the Company to provide FDIC deposit insurance to its customers in excess of account coverage limits through the exchange of deposits with other participating FDIC-insured financial institutions. At September 30, 2022 and December 31, 2021, the Company reported $3.1 million and $3.6 million, respectively, in reciprocal CDARS deposits. The balance in ICS reciprocal money market deposits was $15.6 million at September 30, 2022, compared to $15.3 million at December 31, 2021, and the balance in ICS reciprocal demand deposits as of those dates was $66.7 million and $70.8 million, respectively.
 
 The Company had two blocks of DTC Brokered CDs totaling $2.3 million and $1.4 million with maturities in January, 2021 and April, 2021, respectively. These blocks were not replaced, leaving no DTC Brokered CDs outstanding at the balance sheet dates presented in this quarterly report. Although wholesale deposit funding through DTC is an important supplemental source of liquidity that has proven efficient, flexible and cost-effective when compared with other borrowing methods, the growth in deposits during 2021 and 2022 has reduced the Company’s need for supplementary funding sources in the near term.
 
 At September 30, 2022 and December 31, 2021, borrowing capacity of $112.8 million and $100.2 million, respectively, was available through the FHLBB, secured by the Company's qualifying loan portfolio (generally, residential mortgage and commercial loans), reduced by outstanding advances and by collateral pledges securing FHLBB letters of credit collateralizing public unit deposits. The Company also has an unsecured Federal Funds credit line with the FHLBB with an available balance of $500,000 and no outstanding advances during any of the respective comparison periods. Interest is chargeable at a rate determined daily, approximately 25 bps higher than the rate paid on federal funds sold.
 
 The Company has a BIC arrangement with the FRBB secured by eligible commercial & industrial loans, CRE loans and home equity loans, resulting in an available credit line of $62.6 million and $52.3 million, respectively, at September 30, 2022 and December 31, 2021. Credit advances under this FRBB lending program are overnight advances with interest chargeable at the primary credit rate (generally referred to as the discount rate), currently 400 bps. The Company had no outstanding advances through this facility at September 30, 2022 or December 31, 2021.
 
 47 
 
 Table of Contents 
 
 The following table reflects the Company’s outstanding FHLBB and FRBB advances against the respective lines as of the dates indicated:
 
 September 30, 
 
 December 31, 
 
 2022 
 
 2021 
 
 Long-Term Advances(1) 
 
 FHLBB term advance, 0.00%, due September 22, 2023
 
 $ 200,000 
 
 $ 200,000 
 
 FHLBB term advance, 0.00%, due November 12, 2025
 
 300,000 
 
 300,000 
 
 FHLBB term advance, 0.00%, due November 13, 2028
 
 800,000 
 
 800,000 
 
 $ 1,300,000 
 
 $ 1,300,000 
 
 (1)
 All long-term advances are pursuant to the JNE program, through which the FHLBB provides a subsidy, funded by the FHLBB’s earnings, to write down interest rates to zero percent on advances that finance qualifying loans to small businesses. JNE advances must support small business in New England that create and/or retain jobs, or otherwise contribute to overall economic development activities.
 
 The Company has unsecured lines of credit with two correspondent banks with aggregate available borrowing capacity totaling $20.5 million as of the balance sheet dates presented in this quarterly report. The Company had no outstanding advances against these credit lines as of the balance sheet dates presented.
 
 The following table illustrates the changes in shareholders' equity from December 31, 2021 to September 30, 2022:
 
 Balance at December 31, 2021 (book value $15.48 per common share)
 
 $ 84,760,268 
 
 Net income
 
 9,037,200 
 
 Issuance of common stock through the DRIP
 
 897,974 
 
 Dividends declared on common stock
 
 (3,720,116 ) 
 Dividends declared on preferred stock
 
 (43,125 ) 
 Change in AOCI on AFS securities, net of tax
 
 (21,392,376 ) 
 Balance at September 30, 2022 (book value $12.56 per common share)
 
 $ 69,539,825 
 
 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.
 
 As described in more detail in Note 23 to the audited consolidated financial statements contained in the Company’s 2021 Annual Report on Form 10-K and under the caption “LIQUIDITY AND CAPITAL RESOURCES” in the MD&A section of that report, the Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies pursuant to which they must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
 
 As of September 30, 2022, the Bank was considered well capitalized under the standard regulatory capital framework for Prompt Corrective Action and the Company exceeded currently applicable consolidated regulatory guidelines for capital adequacy. While we believe that the Company has sufficient capital to withstand an extended economic downturn, our regulatory capital ratios could be adversely impacted by future credit losses and other operational impacts of deteriorating economic conditions and inflation. 
 
 48 
 
 Table of Contents 
 
 The following table shows the Company’s actual capital ratios and those of its subsidiary, as well as currently applicable regulatory capital requirements, as of the dates indicated.
 
 Minimum 
 
 Minimum 
 
 Minimum 
 
 For Capital 
 
 To Be Well 
 
 For Capital 
 
 Adequacy Purposes 
 
 Capitalized Under 
 
 Adequacy 
 
 with Conservation 
 
 Prompt Corrective 
 
 Actual 
 
 Purposes 
 
 Buffer(1) 
 
 Action Provisions(2) 
 
 Amount 
 
 Ratio 
 
 Amount 
 
 Ratio 
 
 Amount 
 
 Ratio 
 
 Amount 
 
 Ratio 
 
 (Dollars in Thousands) 
 
 September 30, 2022 
 
 Common equity tier 1 capital
 
 (to risk-weighted assets)
 
 Company
 
 $ 79,025 
 
 11.75 % 
 $ 30,254 
 
 4.50 % 
 $ 47,062 
 
 7.00 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 92,724 
 
 13.80 % 
 $ 30,230 
 
 4.50 % 
 $ 47,024 
 
 7.00 % 
 $ 43,665 
 
 6.50 % 
 Tier 1 capital (to risk-weighted assets)
 
 Company
 
 $ 93,412 
 
 13.89 % 
 $ 40,339 
 
 6.00 % 
 $ 57,147 
 
 8.50 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 92,724 
 
 13.80 % 
 $ 40,306 
 
 6.00 % 
 $ 57,100 
 
 8.50 % 
 $ 53,742 
 
 8.00 % 
 Total capital (to risk-weighted assets)
 
 Company
 
 $ 101,817 
 
 15.14 % 
 $ 53,785 
 
 8.00 % 
 $ 70,593 
 
 10.50 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 101,123 
 
 15.05 % 
 $ 53,742 
 
 8.00 % 
 $ 70,536 
 
 10.50 % 
 $ 67,177 
 
 10.00 % 
 Tier 1 capital (to average assets)
 
 Company
 
 $ 93,412 
 
 9.14 % 
 $ 40,884 
 
 4.00 % 
 
 N/A 
 
 N/A 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 92,724 
 
 9.08 % 
 $ 40,865 
 
 4.00 % 
 
 N/A 
 
 N/A 
 
 $ 51,081 
 
 5.00 % 
 
 December 31, 2021: 
 
 Common equity tier 1 capital
 
 (to risk-weighted assets)
 
 Company(3)
 
 $ 72,853 
 
 11.90 % 
 $ 27,548 
 
 4.50 % 
 $ 42,853 
 
 7.00 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 86,654 
 
 14.17 % 
 $ 27,522 
 
 4.50 % 
 $ 42,812 
 
 7.00 % 
 $ 39,754 
 
 6.50 % 
 Tier 1 capital (to risk-weighted assets)
 
 Company
 
 $ 87,240 
 
 14.25 % 
 $ 36,731 
 
 6.00 % 
 $ 52,036 
 
 8.50 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 86,654 
 
 14.17 % 
 $ 36,696 
 
 6.00 % 
 $ 51,986 
 
 8.50 % 
 $ 48,928 
 
 8.00 % 
 Total capital (to risk-weighted assets)
 
 Company
 
 $ 94,894 
 
 15.50 % 
 $ 48,975 
 
 8.00 % 
 $ 64,279 
 
 10.50 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 94,301 
 
 15.42 % 
 $ 48,928 
 
 8.00 % 
 $ 64,218 
 
 10.50 % 
 $ 61,160 
 
 10.00 % 
 Tier 1 capital (to average assets)
 
 Company
 
 $ 87,240 
 
 8.79 % 
 $ 39,719 
 
 4.00 % 
 
 N/A 
 
 N/A 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 86,654 
 
 8.73 % 
 $ 39,698 
 
 4.00 % 
 
 N/A 
 
 N/A 
 
 $ 49,622 
 
 5.00 % 
 
 (1)
 Conservation Buffer is calculated based on risk-weighted assets and does not apply to calculations of average assets.
 
 (2)
 Applicable to banks, but not bank holding companies.
 
 (3)
 Reflects recalculation of the Company’s previously reported common equity tier I capital ratio. The previously reported calculation for December 31, 2021 and prior annual and interim periods incorrectly included the Company’s outstanding preferred stock and trust preferred securities in the equity component of the calculation.
 
 The Company's ability to pay dividends to its shareholders is largely dependent on the Bank's ability to pay dividends to the Company. In general, a national bank may not pay dividends that exceed net income for the current and preceding two years. Regardless of statutory restrictions, as a matter of regulatory policy, banks and bank holding companies should pay dividends only out of current earnings and only if, after paying such dividends, they remain adequately capitalized.
 
 49 
 
 Table of Contents 
 
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 
 
 Omitted, in accordance with the regulatory relief available to smaller reporting companies in SEC Release Nos. 33-10513 and 34-83550.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
COMMUNITY BANCORP /VT 10-Q

Item 2. Management’s Discussion and Analysis
