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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, 2023 
 
 The following discussion analyzes the consolidated financial condition of Community Bancorp. and its wholly-owned subsidiary, Community National Bank, as of September 30, 2023 and December 31, 2022, 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 statements of income, comprehensive income, cash flows and changes in shareholders’ equity for a two-year, rather than a three-year, period and provide certain other smaller reporting company scaled disclosures where management deems it appropriate.
 
 The following discussion should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in its 2022 Annual Report on Form 10-K filed with the SEC. Please refer to Note 1 in the accompanying consolidated financial statements for a listing of acronyms and defined terms used throughout the following discussion.
 
 FORWARD-LOOKING STATEMENTS 
 
 This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the results of operations, financial condition and business of the Company and its subsidiary. Words used in the discussion below such as "believes," "expects," "anticipates," "intends," "estimates," “projects”, "plans," “assumes”, "predicts," “may”, “might”, “will”, “could”, “should” and similar expressions, indicate that management of the Company is making forward-looking statements.
 
 Forward-looking statements are not guarantees of future performance. They necessarily involve risks, uncertainties and assumptions. Examples of forward looking statements included in this discussion include, but are not limited to, statements regarding the estimated contingent liability related to assumptions made within the asset/liability management process; management's expectations as to the future interest rate environment and the Company's related liquidity level; credit risk expectations relating to the Company's loan portfolio and off-balance sheet commitments; and management's general outlook for the future performance of the Company and the local or national economy. Although forward-looking statements are based on management's expectations and estimates as of the date they are made, many of the factors that could influence or determine actual results are unpredictable and not within the Company's control.
 
 Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities:
 
 · 
 interest rates change in such a way as to negatively affect loan demand, the local economy or the Company's net income, asset valuations or margins; 
 
 · 
 general economic or business conditions, either nationally, regionally or locally, deteriorate, resulting in a decline in credit quality or a diminished demand for the Company's products and services; 
 
 · 
 the impact of inflation and slowing economic growth on the Company’s customers and on its financial results and performance; 
 
 · 
 the effect of United States monetary and fiscal policies, including deficit spending and the interest rate policies of the FRB and its regulation of the money supply; 
 
 · 
 changes in applicable accounting policies, practices and standards; 
 
 · 
 the geographic concentration of the Company’s loan portfolio and deposit base; 
 
 · 
 reductions in deposit levels, which necessitate increased borrowings to fund loans and sale of investment securities; 
 
 · 
 increases in the level of nonperforming assets and charge-offs; 
 
 · 
 changes in federal or state tax laws or policy; 
 
 · 
 changes in laws or government rules, including the rules of the federal Consumer Financial Protection Bureau, or the way in which courts or government agencies interpret or implement those laws or rules, increase our costs of doing business, causing us to limit or change our product offerings or pricing, or otherwise adversely affect the Company's business; 
 
 · 
 regulatory responses to recent high profile bank failures increase our costs of operation, including through regulatory compliance changes and higher FDIC deposit insurance assessments to replenish the Bank Insurance Fund (BIF); 
 
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 · 
 competitive pressures increase among financial service providers in the Company's northern New England market area or in the financial services industry generally, including competitive pressures from non-bank 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; 
 
 · 
 operational and internal system failures due to changes in normal business practices, including remote working for Company staff; 
 
 · 
 increased cybercrime and payment system risk due to increased usage by customers of online, mobile and other remote banking channels; 
 
 · 
 the ongoing challenges to find qualified workers to maintain a stable workforce; 
 
 · 
 losses due to the fraudulent or negligent conduct of third parties, including the Company’s service providers, customers and employees; and 
 
 · 
 adverse changes in the credit rating of U.S. government debt. 
 
 Readers are cautioned not to place undue reliance on such statements as they speak only as of the date they are made. The Company does not undertake, and disclaims any obligation, to revise or update any forward-looking statements to reflect the occurrence or anticipated occurrence of events or circumstances after the date of this Report, except as required by applicable law. The Company claims the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995.
 
 NON-GAAP FINANCIAL MEASURES 
 
 Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, three non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled Interest Income Versus Interest Expense (NII)) and core earnings (as defined and discussed in the Results of Operations section), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G.
 
 Management believes that these non-GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.
 
 OVERVIEW 
 
 The Company’s consolidated assets at September 30, 2023, were $1.08 billion compared to $1.06 billion at December 31, 2022, an increase of 2.6%. Significant changes in the asset base were due to an increase in loans of $90.0 million, or 12.0%, which was partially offset by a decrease of $53.6 million, or 75.4%, in cash and cash equivalents and a decrease of $11.0 million, or 5.7% in investment securities. This change in the asset base reflects the Company’s efforts to deploy cash into higher earning assets. The increase in the loan portfolio was primarily attributable to an increase of $13.2 million in commercial & industrial loans, $50.1 million in CRE loans, $24.1 million in municipal loans and $7.4 million in residential first lien loans, which was partially offset by a decrease of $2.7 million in residential junior lien loans and $1.6 million in purchased loans.
 
 Total deposits at September 30, 2023, were $901.2 million compared to $923.0 million at December 31, 2022, a decrease of $21.8 million, or 2.4%. Year to date, demand and interest-bearing transaction accounts decreased in total by $20.2 million or 4.0%, followed by a decrease of $11.7 million, or 6.8%, in savings accounts and $2.9 million, or 2.1%, in money market funds. This was partially offset by an increase of $13.0 million, or 12.8%, in time deposits. The Company has been offering some competitive interest rates for retail time deposits, accounting for the increase in these funds. The decrease in deposit balances combined with the loan growth, has required the use of borrowed funds as a supplemental funding source.
 
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 Total interest income increased $2.7 million, or 28.1%, for the third quarter of 2023, and $7.8 million, or 29.7%, for the first nine months of 2023, compared to the same periods in 2022. The growth of the loan portfolio, coupled with increases in the fed funds rate throughout 2022 and into 2023, helped to support the year over year increase in interest income.
 
 Total interest expense increased $2.6 million, or 245.4% for the third quarter of 2023, and $6.3 million, or 253.6%, for the first nine months of 2023, compared to the same periods in 2022. The recent increases in the fed funds rate have increased borrowing costs and have put more pressure on competitive 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 credit losses for the three and nine months ended September 30, 2023, was determined under ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, commonly referenced as the Current Expected Credit Losses, or CECL, which the Company adopted effective January 1, 2023.
 
 The provision for credit losses for the third quarter of 2023 was $240,889 compared to $125,000 for the same quarter in 2022, an increase of $115,889, or 92.7%, and for the first nine months of 2023 was $808,557 compared to $1.3 million for the same period in 2022, a decrease of $516,443, or 39.0%. This decrease to the provision year over year was driven primarily by a write-down on a non-performing CRE loan totaling $667,474 during the first quarter of 2022, which necessitated a substantial provision for that quarter. Please refer to Note 5 of the unaudited consolidated financial statements as well as the ACL and provisions discussion in the Credit Risk section of this MD&A.
 
 Consolidated net income for the third quarter of 2023 decreased $247,997 to $3.4 million compared to $3.6 million for the same quarter of 2022, while an increase of $860,408 is noted for the first nine months of 2023 to $9.9 million compared to $9.0 million in the same period of 2022. Year over year, a $7.8 million increase in interest income was partially offset by an increase of $6.3 million in interest expense and coupled with a decrease of $516,443 in the provision for credit losses between periods, resulted in an increase of $2.0 million in net interest income after provision for credit losses. These changes, along with other significant changes in non-interest income and non-interest expense are discussed in the appropriate sections of this MD&A.
 
 Equity capital increased to $78.8 million, with a book value per share of $14.08 as of September 30, 2023, compared to $75.2 million and a book value per share of $13.55 as of December 31, 2022. Equity capital increased between periods despite a cumulative effect charge to retained earnings of $549,113 upon the transition to CECL effective on January 1, 2023. The increase in equity capital reflects year to date net income, but is partially offset by an increase in unrealized losses in the investment portfolio of $2.9 million, net of tax, reflected in the accumulated other comprehensive loss component of the shareholders’ equity portion of the balance sheet. This position is considered by management as temporary and, unlike the charge to retained earnings in connection with the transition to CECL, does not impact the Company’s regulatory capital ratios.
 
 Heavy rainfall in the month of July caused extensive flooding across much of the state of Vermont leading to Governor Phil Scott declaring a state of emergency. While the impact was considerable, the impact to the Bank’s customers was manageable with many having flood insurance coverage and or qualifying for the various assistance programs offered at the state and federal level. The portion of the Company’s service area most impacted was central Vermont, including one of the Bank’s branches which sustained extensive flooding. The branch was immediately closed for restoration and repairs although night depository and ATM services were restored soon thereafter, and the drive up was reopened with limited hours on October 25, 2023. A full-service opening of the retail branch is anticipated by mid-November.
 
 On September 21, 2023, the Company's Board of Directors declared a quarterly cash dividend of $0.23 per common share, payable on November 1, 2023, to shareholders of record on October 15, 2023.
 
 As of September 30, 2023, all 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 deteriorating economic conditions, or government monetary policy.
 
 CRITICAL ACCOUNTING POLICIES 
 
 The Company’s consolidated financial statements are prepared according to U.S. GAAP. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities in the consolidated financial statements and related notes. The SEC has defined a company’s critical accounting policies as those that are most important to the portrayal of the Company’s financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Because of the significance of these estimates and assumptions, there is a high likelihood that materially different amounts would be reported for the Company under different conditions or using different assumptions or estimates. Management evaluates on an ongoing basis its judgment as to which policies are considered to be critical and communicates all evaluations with the Company’s Audit Committee.
 
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 The Company’s critical accounting policies govern:
 
 · 
 the ACL; 
 · 
 OREO; 
 · 
 credit losses on debt securities; 
 · 
 valuation of residential MSRs; and 
 · 
 the carrying value of goodwill. 
 
 These policies are described in the Company’s 2022 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. With the exception of the ACL policy, there were no material changes during the first nine months of 2023 in the Company’s critical accounting policies.
 
 ACL - Management believes that the calculation of the ACL is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. In estimating the ACL, management has adopted a methodology consistent with ASU No. 2016-13 that requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses over the life of the loans at the measurement date. Further consideration is given to qualitative factors, including changes in current economic indicators and their probable impact on borrowers and collateral, trends in delinquent and non-performing loans, trends in criticized and classified assets, levels of exceptions, the impact of competition in the market, concentrations of credit risk in a variety of areas, including portfolio product mix, the level of loans to individual borrowers and their related interests, loans to industry segments and the geographic distribution of CRE loans. Management’s estimates used in calculating the ACL may increase or decrease based on changes in these factors, which in turn will affect the amount of the Company’s provision for credit losses charged against current period income. This evaluation is inherently subjective and actual results could differ significantly from these estimates under different assumptions, judgments or conditions. The Company estimates expected credit losses on OBS credit exposures over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on OBS credit exposures is adjusted through credit loss expense.
 
 A modified version of these requirements applies to debt securities classified as available for sale, which eliminates OTTI impairment analysis and requires that if a decline in the fair value of debt securities AFS is deemed by management to be the result of credit losses rather than other factors, the credit losses on those securities is recorded through an allowance for credit losses rather than a write-down of the security. The Company’s securities portfolio is evaluated for impairment on a quarterly basis.
 
 RESULTS OF OPERATIONS 
 
 The Company’s net income for the third quarter of 2023 was $3.4 million or $0.61 per common share, compared to $3.6 million or $0.66 per common share for the same quarter of 2022. Net income for the first nine months of 2023 was $9.9 million or $1.80 per common share, compared to $9.0 million or $1.67 per common share for the same period of 2022. Core earnings (NII) were $8.43 million for the third quarter of 2023 compared to $8.37 million for the same quarter of 2022, and $25.2 million for the first nine months of 2023 compared to $23.8 million for the same period in 2022. Interest and fees on loans, the major component of interest income, increased $2.7 million, or 33.5%, for the third quarter of 2023 compared to the same quarter of 2022, and $7.0 million, or 30.1%, for the first nine months of 2023 compared to the same period in 2022. Interest paid on deposits, which is the major component of total interest expense, increased $1.7 million, or 198.5%, for the third quarter of 2023 compared to the same quarter of 2022, and increased $4.6 million, or 232.6%, year over year, driven primarily by the increases in the fed funds rate during 2022 and into the first nine months of 2023. Market pressures on deposit rates along with an increased use of wholesale funding is driving up the cost of funds and compressing the net interest margin.
 
 Return on average assets, which is net income divided by average total assets, measures how effectively a corporation uses its assets to produce earnings. Return on average equity, which is net income divided by average shareholders' equity, measures how effectively a corporation uses its equity capital to produce earnings.
 
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 The following tables show these ratios annualized, as well as other equity ratios monitored by management, for the comparison periods presented.
 
 Three Months Ended September 30, 
 
 2023 
 
 2022 
 
 Return on average assets
 
 1.24 % 
 
 1.41 % 
 Return on average equity
 
 16.48 % 
 
 19.06 % 
 Dividend payout ratio (1)
 
 37.70 % 
 
 34.85 % 
 Average equity to average assets 
 
 7.55 % 
 
 7.38 % 
 
 Nine Months Ended September 30, 
 
 2023 
 
 2022 
 
 Return on average assets
 
 1.27 % 
 
 1.19 % 
 Return on average equity
 
 16.68 % 
 
 15.55 % 
 Dividend payout ratio (1)
 
 38.33 % 
 
 41.32 % 
 Average equity to average assets 
 
 7.60 % 
 
 7.68 % 
 
 (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.
 
 The Company’s tax-exempt interest income of $559,985 and $284,618 for the three months ended September 30, 2023 and 2022, respectively, and $1.2 million and $777,314 for the nine months ended September 30, 2023 and 2022, respectively, was derived from loans to local municipalities of $58.7 million and $40.2 million, and tax-exempt municipal investments of $10.6 million and $10.3 million at September 30, 2023 and 2022, respectively.
 
 The following tables show the reconciliation between reported NII and tax equivalent NII for the comparison periods presented.
 
 Three Months Ended September 30, 
 
 2023 
 
 2022 
 
 Net interest income as presented
 
 $ 8,430,059 
 
 $ 8,373,566 
 
 Effect of tax-exempt income
 
 148,857 
 
 75,658 
 
 Net interest income, tax equivalent
 
 $ 8,578,916 
 
 $ 8,449,224 
 
 Nine Months Ended September 30, 
 
 2023 
 
 2022 
 
 Net interest income as presented
 
 $ 25,222,287 
 
 $ 23,768,980 
 
 Effect of tax-exempt income
 
 306,315 
 
 206,628 
 
 Net interest income, tax equivalent
 
 $ 25,528,602 
 
 $ 23,975,608 
 
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 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.
 
 Three Months Ended September 30, 
 
 2023 
 
 2022 
 
 Average 
 
 Average 
 
 Average 
 
 Income/ 
 
 Yield/ 
 
 Average 
 
 Income/ 
 
 Yield/ 
 
 Balance 
 
 Expense 
 
 Rate 
 
 Balance 
 
 Expense 
 
 Rate 
 
 Average Assets 
 
 Loans, net (1)
 
 $ 813,431,805 
 
 $ 11,044,088 
 
 5.39 % 
 $ 709,936,691 
 
 $ 8,239,751 
 
 4.60 % 
 Taxable investment securities
 
 176,104,770 
 
 941,956 
 
 2.12 % 
 
 182,586,203 
 
 799,856 
 
 1.74 % 
 Tax-exempt investment securities
 
 11,353,244 
 
 114,758 
 
 4.01 % 
 
 9,135,697 
 
 86,271 
 
 3.75 % 
 Sweep and interest-earning accounts
 
 7,796,502 
 
 94,515 
 
 4.81 % 
 
 58,264,306 
 
 358,907 
 
 2.44 % 
 Other investments (2)
 
 2,074,630 
 
 39,904 
 
 7.63 % 
 
 1,777,950 
 
 23,029 
 
 5.14 % 
 Total interest-earning assets
 
 $ 1,010,760,951 
 
 $ 12,235,221 
 
 4.80 % 
 $ 961,700,847 
 
 $ 9,507,814 
 
 3.92 % 
 Cash and due from banks
 
 10,653,464 
 
 11,034,240 
 
 Premises and equipment
 
 12,655,076 
 
 13,217,724 
 
 BOLI
 
 5,199,896 
 
 5,120,380 
 
 Goodwill
 
 11,574,269 
 
 11,574,269 
 
 Other assets
 
 21,142,242 
 
 15,500,345 
 
 Total assets
 
 $ 1,071,985,898 
 
 $ 1,018,147,805 
 
 Average Liabilities and Shareholders' Equity 
 
 Interest-bearing transaction accounts
 
 $ 263,787,094 
 
 $ 1,116,811 
 
 1.68 % 
 $ 252,413,763 
 
 $ 382,833 
 
 0.60 % 
 Money market funds
 
 136,210,933 
 
 695,234 
 
 2.02 % 
 
 138,497,037 
 
 197,849 
 
 0.57 % 
 Savings deposits
 
 164,695,504 
 
 34,076 
 
 0.08 % 
 
 181,818,265 
 
 27,930 
 
 0.06 % 
 Time deposits
 
 109,526,390 
 
 655,122 
 
 2.37 % 
 
 105,915,323 
 
 229,371 
 
 0.86 % 
 Borrowed funds
 
 51,964,152 
 
 656,726 
 
 5.01 % 
 
 1,301,120 
 
 8 
 
 0.00 % 
 Repurchase agreements
 
 34,056,695 
 
 201,518 
 
 2.35 % 
 
 33,402,748 
 
 45,153 
 
 0.54 % 
 Finance lease obligations
 
 3,499,404 
 
 20,111 
 
 2.30 % 
 
 3,716,571 
 
 21,355 
 
 2.30 % 
 Junior subordinated debentures
 
 12,887,000 
 
 276,707 
 
 8.52 % 
 
 12,887,000 
 
 154,091 
 
 4.74 % 
 Total interest-bearing liabilities
 
 $ 776,627,172 
 
 $ 3,656,305 
 
 1.87 % 
 $ 729,951,827 
 
 $ 1,058,590 
 
 0.58 % 
 Noninterest bearing deposits
 
 207,879,544 
 
 208,681,213 
 
 Other liabilities
 
 6,519,520 
 
 4,473,162 
 
 Total liabilities
 
 991,026,236 
 
 943,106,202 
 
 Shareholders' equity
 
 80,959,662 
 
 75,041,603 
 
 Total liabilities and shareholders' equity
 
 $ 1,071,985,898 
 
 $ 1,018,147,805 
 
 Net interest income
 
 $ 8,578,916 
 
 $ 8,449,224 
 
 Net interest spread (3)
 
 2.93 % 
 
 3.34 % 
 Net interest margin (4)
 
 3.37 % 
 
 3.49 % 
 
 (1)
 Included in net loans are non-accrual loans with average balances of $7,344,200 and $7,337,588 for the three months ended September 30, 2023 and 2022, respectively. Loans are stated net of unearned discount and ACL, plus loans held-for-sale and include tax-exempt loans to local municipalities with average balances of $56,085,091 and $39,007,717 for the three months ended September 30, 2023 and 2022, respectively.
 
 (2)
 Included in other investments is the Company’s FHLBB Stock with average balances of $1,009,480 and $712,800 for the three months ended September 30, 2023 and 2022, respectively, with a dividend rate of approximately 8.04% and 3.72%, 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, 
 
 2023 
 
 2022 
 
 Average 
 
 Average 
 
 Average 
 
 Income/ 
 
 Yield/ 
 
 Average 
 
 Income/ 
 
 Yield/ 
 
 Balance 
 
 Expense 
 
 Rate 
 
 Balance 
 
 Expense 
 
 Rate 
 
 Average Assets 
 
 Loans, net (1)
 
 $ 774,050,459 
 
 $ 30,544,342 
 
 5.28 % 
 $ 697,118,020 
 
 $ 23,476,738 
 
 4.50 % 
 Taxable investment securities
 
 178,750,212 
 
 2,815,397 
 
 2.11 % 
 
 183,417,294 
 
 2,192,540 
 
 1.60 % 
 Tax-exempt investment securities
 
 11,456,678 
 
 344,272 
 
 4.02 % 
 
 5,628,689 
 
 142,899 
 
 3.39 % 
 Sweep and interest-earning accounts
 
 16,880,174 
 
 568,803 
 
 4.51 % 
 
 68,303,360 
 
 609,532 
 
 1.19 % 
 Other investments (2)
 
 1,912,446 
 
 104,556 
 
 7.31 % 
 
 1,778,428 
 
 56,121 
 
 4.22 % 
 Total interest-earning assets
 
 983,049,969 
 
 $ 34,377,370 
 
 4.68 % 
 
 956,245,791 
 
 $ 26,477,830 
 
 3.70 % 
 Cash and due from banks
 
 10,584,558 
 
 10,631,909 
 
 Premises and equipment
 
 12,798,118 
 
 13,416,551 
 
 BOLI
 
 5,180,070 
 
 5,100,385 
 
 Goodwill
 
 11,574,269 
 
 11,574,269 
 
 Other assets
 
 20,013,956 
 
 14,177,372 
 
 Total assets
 
 $ 1,043,200,940 
 
 $ 1,011,146,277 
 
 Average Liabilities and Shareholders' Equity 
 
 Interest-bearing transaction accounts
 
 $ 271,528,726 
 
 $ 3,254,644 
 
 1.60 % 
 $ 256,909,959 
 
 $ 754,189 
 
 0.39 % 
 Money market funds
 
 130,690,426 
 
 1,699,425 
 
 1.74 % 
 
 132,391,636 
 
 446,751 
 
 0.45 % 
 Savings deposits
 
 168,151,363 
 
 98,104 
 
 0.08 % 
 
 178,709,726 
 
 77,373 
 
 0.06 % 
 Time deposits
 
 106,178,078 
 
 1,518,200 
 
 1.91 % 
 
 106,235,079 
 
 697,088 
 
 0.88 % 
 Borrowed funds
 
 24,875,392 
 
 892,522 
 
 4.80 % 
 
 1,301,132 
 
 14 
 
 0.00 % 
 Repurchase agreements
 
 35,611,331 
 
 548,300 
 
 2.06 % 
 
 30,752,887 
 
 88,322 
 
 0.38 % 
 Finance lease obligations
 
 3,553,782 
 
 61,277 
 
 2.30 % 
 
 3,769,459 
 
 64,979 
 
 2.30 % 
 Junior subordinated debentures
 
 12,887,000 
 
 776,296 
 
 8.05 % 
 
 12,887,000 
 
 373,506 
 
 3.88 % 
 Total interest-bearing liabilities
 
 753,476,098 
 
 $ 8,848,768 
 
 1.57 % 
 
 722,956,878 
 
 $ 2,502,222 
 
 0.46 % 
 Noninterest bearing deposits
 
 203,639,925 
 
 206,574,381 
 
 Other liabilities
 
 6,766,501 
 
 3,920,106 
 
 Total liabilities
 
 963,882,524 
 
 933,451,365 
 
 Shareholders' equity
 
 79,318,416 
 
 77,694,912 
 
 Total liabilities and shareholders' equity
 
 $ 1,043,200,940 
 
 $ 1,011,146,277 
 
 Net interest income
 
 $ 25,528,602 
 
 $ 23,975,608 
 
 Net interest spread (3)
 
 3.11 % 
 
 3.24 % 
 Net interest margin (4)
 
 3.47 % 
 
 3.35 % 
 
 (1)
 Included in net loans are non-accrual loans with average balances of $7,873,201 and $6,029,756 for the nine months ended September 30, 2023 and 2022, respectively. Loans are stated net of unearned discount and ACL, and include loans held-for-sale and tax-exempt loans to local municipalities with average balances of $42,203,207 and $45,161,639 for the nine months ended September 30, 2023 and 2022, respectively.
 
 (2)
 Included in other investments is the Company’s FHLBB Stock with average balances of $847,296 and $713,278, respectively, with a dividend rate of approximately 8.5% and 3.38%, respectively, for the nine months ended September 30, 2023 and 2022, 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.
 
 38 
 
 Table of Contents 
 
 The average volume of interest-earning assets for the three- and nine-month periods ended September 30, 2023, increased 5.1% and 2.8%, respectively, compared to the same periods last year, and the average yield on interest-earning assets increased 88 bps and 98 bps, respectively.
 
 The average volume of loans increased over the three- and nine-month comparison periods of 2023 versus 2022 by 14.6% and 11.0%, respectively, and the average yield on loans increased 79 bps and 78 bps, respectively. Loans accounted for 80.5% and 78.7%, respectively, of the average interest-earning asset portfolio for the three- and nine- month periods ended September 30, 2023, compared to 73.8% and 72.9%, respectively, for the same periods last year. Interest earned on the loan portfolio as a percentage of total interest income was 90.3% and 88.9%, respectively, for the three- and nine-month periods in 2023 compared to 86.7% and 88.7%, respectively, for the same periods in 2022.
 
 The average volume of the taxable investment portfolio (classified as AFS) decreased 3.6% and 2.5% during the three- and nine-month periods ended September 30, 2023, compared to the same periods last year, while the average yield increased 38 bps and 51 bps, respectively, between periods. There were no purchases of taxable AFS investment securities during the first nine months of 2023, accounting for the decrease year over year.
 
 The average volume of the tax-exempt investment portfolio (classified as AFS) for the three- and nine-month periods ended September 30, 2023, increased $2.2 million and $5.8 million, respectively, and the tax equivalent yield increased 26 bps and 63 bps, respectively. The Company purchased several bonds during 2023, accounting for the increase in this portfolio.
 
 The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing account at the FRBB, decreased 86.6% for the three-months ended September 30, 2023, compared to the same period in 2022, and 75.3% for the nine-months ended September 30, 2023, compared to the same period in 2022. The decrease in average volume year over year is attributable to the funding of loan growth, and to a decrease in customer deposit accounts. The average yield on these funds increased 237 bps and 332 bps for the three- and nine-month periods ended September 30, 2023, versus the same periods in 2022, directly related to the increases in the fed funds rate throughout 2022 and into 2023.
 
 The average volume of interest-bearing liabilities for the three- and nine-month periods ended September 30, 2023 increased 6.5% and 4.2%, respectively, compared to the same periods in 2022, and the average rate paid on interest-bearing liabilities increased 129 bps and 111 bps, respectively.
 
 The average volume of interest-bearing transaction accounts increased 4.5% and 5.7%, respectively for the three- and nine-month periods ended September 30, 2023, compared to the same periods of 2022, reflecting deposit growth year over year. The average rate paid on these accounts increased 108 bps and 121 bps, respectively, between comparison periods. Interest paid on these funds accounted for 30.5% and 36.8% of total interest expense for the three- and nine-month periods of 2023, respectively.
 
 The average volume of money market accounts decreased 1.7% and 1.3%, respectively, for the three- and nine-month periods ended September 30, 2023, compared to the same periods of 2022, while the average rate paid on these deposits increased 145 bps and 129 bps, respectively.
 
 The average volume of savings accounts decreased 9.4% and 5.9%, respectively, for the three- and nine-month periods ended September 30, 2023, compared to the same periods in 2022, while the average rate paid on these accounts increased two bps in both comparison periods.
 
 The average volume of time deposits increased 3.4% and decreased 0.1%, respectively, for the three- and nine-month periods ended September 30, 2023, compared to the same periods in 2022, and the average rate paid increased 151 bps and 103 bps, respectively.
 
 As a result of the decrease in deposits, the Company has had to rely on borrowed funds to fund loan growth during the first nine months of 2023, particularly during the second and third quarters of 2023, accounting for the increase of $50.7 million for the three months ended September 30, 2023, and $23.6 million for the nine months ended September 30, 2023, compared to the respective periods in 2022. The average rate paid on borrowed funds increased by 501 bps and 480 bps for the three- and nine-month periods ended September 30, 2023, respectively.
 
 39 
 
 Table of Contents 
 
 The average volume of repurchase agreements increased 2.0% and 15.8%, respectively, for the three- and nine-month periods ended September 30, 2023, compared to the same periods in 2022 and the average rate paid increased 181 bps and 168 bps, respectively, between comparison periods.
 
 In summary, between the three- and nine-month periods ended September 30, 2023 and 2022, the average yield on interest-earning assets increased 88 bps and 98 bps, respectively, and the average rate paid on interest-bearing liabilities increased 129 and 111 bps, respectively. Net interest spread decreased 41 bps and 13 bps, respectively, for the three- and nine-month period ended September 30, 2023, versus the same periods in 2022. Net interest margins decreased 12 bps for the three-month comparison period while increasing 12 bps for the nine-month comparison period of 2023 versus 2022.
 
 The following table summarizes the variances in interest income and interest expense on a fully tax-equivalent basis for the interim periods presented for 2023 and 2022 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, net
 
 $ 1,604,361 
 
 $ 1,199,976 
 
 $ 2,804,337 
 
 $ 4,478,248 
 
 $ 2,589,356 
 
 $ 7,067,604 
 
 Taxable investment securities
 
 176,734 
 
 (34,634 ) 
 
 142,100 
 
 696,511 
 
 (73,654 ) 
 
 622,857 
 
 Tax-exempt investment securities
 
 7,527 
 
 20,960 
 
 28,487 
 
 53,602 
 
 147,771 
 
 201,373 
 
 Sweep and interest-earning accounts
 
 347,471 
 
 (611,863 ) 
 
 (264,392 ) 
 
 1,693,895 
 
 (1,734,624 ) 
 
 (40,729 ) 
 Other investments
 
 13,031 
 
 3,844 
 
 16,875 
 
 44,205 
 
 4,230 
 
 48,435 
 
 Total
 
 $ 2,149,124 
 
 $ 578,283 
 
 $ 2,727,407 
 
 $ 6,966,461 
 
 $ 933,079 
 
 $ 7,899,540 
 
 Average Interest-Bearing Liabilities 
 
 Interest-bearing transaction accounts
 
 $ 716,778 
 
 $ 17,200 
 
 $ 733,978 
 
 $ 2,457,812 
 
 $ 42,643 
 
 $ 2,500,455 
 
 Money market funds
 
 509,025 
 
 (11,640 ) 
 
 497,385 
 
 1,274,814 
 
 (22,140 ) 
 
 1,252,674 
 
 Savings deposits
 
 9,599 
 
 (3,453 ) 
 
 6,146 
 
 27,049 
 
 (6,318 ) 
 
 20,731 
 
 Time deposits
 
 417,923 
 
 7,828 
 
 425,751 
 
 821,925 
 
 (814 ) 
 
 821,111 
 
 Borrowed funds
 
 656,718 
 
 0 
 
 656,718 
 
 892,509 
 
 0 
 
 892,509 
 
 Repurchase agreements
 
 155,475 
 
 890 
 
 156,365 
 
 446,169 
 
 13,809 
 
 459,978 
 
 Finance lease obligations
 
 15 
 
 (1,259 ) 
 
 (1,244 ) 
 
 8 
 
 (3,710 ) 
 
 (3,702 ) 
 Junior subordinated debentures
 
 122,616 
 
 0 
 
 122,616 
 
 402,790 
 
 0 
 
 402,790 
 
 Total
 
 $ 2,588,149 
 
 $ 9,566 
 
 $ 2,597,715 
 
 $ 6,323,076 
 
 $ 23,470 
 
 $ 6,346,546 
 
 Changes in net interest income
 
 $ (439,025 ) 
 $ 568,717 
 
 $ 129,692 
 
 $ 643,385 
 
 $ 909,609 
 
 $ 1,552,994 
 
 (1) 
 Items which have shown a year-to-year increase in volume have variances allocated as follows:
 
 Variance due to rate = Change in rate x new volume
 
 Variance due to volume = Change in volume x old rate
 
 Items which have shown a year-to-year decrease in volume have variances allocated as follows:
 
 Variance due to rate = Change in rate x old volume
 
 Variances due to volume = Change in volume x new rate
 
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 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 
 
 2023 
 
 2022 
 
 Income 
 
 Percent 
 
 2023 
 
 2022 
 
 Income 
 
 Percent 
 
 Service fees
 
 $ 937,890 
 
 $ 939,807 
 
 $ (1,917 ) 
 
 -0.20 % 
 $ 2,757,629 
 
 $ 2,739,076 
 
 $ 18,553 
 
 0.68 % 
 Income from sold loans
 
 144,747 
 
 109,411 
 
 35,336 
 
 32.30 % 
 
 358,942 
 
 508,795 
 
 (149,853 ) 
 
 -29.45 % 
 Other income from loans
 
 310,645 
 
 301,710 
 
 8,935 
 
 2.96 % 
 
 1,081,093 
 
 895,884 
 
 185,209 
 
 20.67 % 
 Other income
 
 Income from CFS Partners
 
 150,140 
 
 87,386 
 
 62,754 
 
 71.81 % 
 
 705,343 
 
 386,217 
 
 319,126 
 
 82.63 % 
 Exchange income
 
 29,500 
 
 5,000 
 
 24,500 
 
 490.00 % 
 
 63,500 
 
 19,950 
 
 43,550 
 
 218.30 % 
 VISA card commission
 
 73,176 
 
 23,576 
 
 49,600 
 
 210.38 % 
 
 140,841 
 
 70,728 
 
 70,113 
 
 99.13 % 
 Other miscellaneous income
 
 65,493 
 
 64,713 
 
 780 
 
 1.21 % 
 
 201,452 
 
 231,679 
 
 (30,227 ) 
 
 -13.05 % 
 Total non-interest income
 
 $ 1,711,591 
 
 $ 1,531,603 
 
 $ 179,988 
 
 11.75 % 
 $ 5,308,800 
 
 $ 4,852,329 
 
 $ 456,471 
 
 9.41 % 
 
 Total non-interest income increased $179,988, or 11.8%, for the three months ended September 30, 2023, and $456,471, or 9.4% for the nine months ended September 30, 2023, compared to the same periods in 2022, with significant changes noted in the following:
 
 · 
 The volume of loans sold into the secondary market increased during the third quarter of 2023, but not enough to make up for the lower volume during the first two quarters of 2023, thereby accounting for the increase in the three- month comparison periods and the decrease year over year in income from sold loans. 
 
 · 
 Although the volume was lower in the third quarter of 2023, an increase in year to date CRE loan volume in 2023 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 for both comparison periods of 2023 versus 2022. 
 
 · 
 Income from CFS Partners increased between periods due in part to a rebound of market prices during the latter part of the first quarter of 2023 and an increase in managed accounts. CFS Partners has a small portion of its equity capital invested in the stock market, and as a result is sensitive to general stock market conditions. 
 
 · 
 The Company has seen an increase in volume of Canadian funds purchased accounting for the increase in exchange income. 
 
 · 
 The increase in VISA card commission is attributable to additional income from a renegotiated contract in June of 2023, including a renewal incentive payment as well as an increase in the monthly commission beginning in July 2023. 
 
 · 
 Included in other miscellaneous income for 2022 is a one-time credit totaling $23,400 associated with a renegotiated contract with the Company’s check printing vendor, accounting for the decrease year over year. 
 
 41 
 
 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 
 
 2023 
 
 2022 
 
 Expense 
 
 Percent 
 
 2023 
 
 2022 
 
 Expense 
 
 Percent 
 
 Salaries and wages
 
 $ 2,164,760 
 
 $ 1,984,000 
 
 $ 180,760 
 
 9.11 % 
 $ 6,718,280 
 
 $ 6,058,000 
 
 $ 660,280 
 
 10.90 % 
 Employee benefits
 
 797,304 
 
 629,681 
 
 167,623 
 
 26.62 % 
 
 2,363,444 
 
 2,106,356 
 
 257,088 
 
 12.21 % 
 Occupancy expenses, net
 
 662,277 
 
 677,805 
 
 (15,528 ) 
 
 -2.29 % 
 
 2,133,492 
 
 2,104,346 
 
 29,146 
 
 1.39 % 
 Other expenses
 
 Outsourcing expense
 
 157,191 
 
 137,929 
 
 19,262 
 
 13.97 % 
 
 434,541 
 
 402,891 
 
 31,650 
 
 7.86 % 
 Service contracts - administrative
 
 159,437 
 
 142,081 
 
 17,356 
 
 12.22 % 
 
 467,926 
 
 428,254 
 
 39,672 
 
 9.26 % 
 Telephone expense
 
 38,493 
 
 33,039 
 
 5,454 
 
 16.51 % 
 
 110,674 
 
 101,388 
 
 9,286 
 
 9.16 % 
 Travel, entertainment and meals expense
 
 27,363 
 
 26,794 
 
 569 
 
 2.12 % 
 
 97,532 
 
 70,744 
 
 26,788 
 
 37.87 % 
 Audit fees
 
 137,232 
 
 122,034 
 
 15,198 
 
 12.45 % 
 
 382,841 
 
 337,790 
 
 45,051 
 
 13.34 % 
 FDIC insurance
 
 104,000 
 
 90,637 
 
 13,363 
 
 14.74 % 
 
 360,343 
 
 277,047 
 
 83,296 
 
 30.07 % 
 Collection & non-accruing loan expense
 
 25,500 
 
 (14,000 ) 
 
 39,500 
 
 -282.14 % 
 
 61,500 
 
 33,000 
 
 28,500 
 
 86.36 % 
 Other miscellaneous expenses
 
 1,540,987 
 
 1,510,909 
 
 30,078 
 
 1.99 % 
 
 4,427,598 
 
 4,309,145 
 
 118,453 
 
 2.75 % 
 Total non-interest expense
 
 $ 5,814,544 
 
 $ 5,340,909 
 
 $ 473,635 
 
 8.87 % 
 $ 17,558,171 
 
 $ 16,228,961 
 
 $ 1,329,210 
 
 8.19 % 
 
 Total non-interest expense increased $473,635, or 8.9% for the three months ended September 30, 2023, and $1,329,210, or 8.2%, for the nine months ended September 30, 2023, compared to the same periods in 2022, with significant changes noted in the following:
 
 · 
 In addition to normal salary increases, the increase in salaries and wages year over year is attributable to new hires in the area of commercial lending and operations during the last quarter of 2022. Also contributing to the increase was a one-time salary adjustment in November of 2022 of $2,000 to all employees below vice president status that impacted the year over year comparison by $57,500. 
 
 · 
 The increase in employee benefits is attributable to an increase in health insurance claims year over year under the Company’s self-insured health insurance plan. 
 
 · 
 The increase in outsourcing expense is attributable to normal increases in costs associated with these arrangements. 
 
 · 
 The increase in service contracts - administrative is due to a combination of an increase in transaction-based pricing for certain contracts and contractual inflationary adjustment factors that are higher than historical increase adjustments. 
 
 · 
 The increase in telephone expense is attributable to a new phone system with advanced technology. 
 
 · 
 The increase in travel, entertainment and meals expenses is attributable to an increase in travel expenses as more seminars and training sessions return to in-person attendance. 
 
 · 
 The increase in audit fees reflects increased audit services due to additional audit requirements required by FDICIA due to the Company surpassing $1.0 billion asset size. 
 
 · 
 The Company increased the 2023 monthly accrual for FDIC insurance in anticipation of an increase in the assessment multiplier, as announced by the FDIC in late 2022. 
 
 · 
 Collection & non-accruing loan expenses were lower year over year due to a decrease in expenses associated with properties in the Company’s non-accruing loan portfolio. 
 
 42 
 
 Table of Contents 
 
 APPLICABLE INCOME TAXES 
 
 The provision for income taxes decreased $105,046, or 12.7% for the third quarter of 2023 compared to the same quarter of 2022, as a result of the decrease in income before income taxes. An increase of $236,603, or 11.7%, is noted for the first nine months of 2023 compared to the same period in 2022, which is consistent with the increase in income before income taxes. Tax credits related to limited partnership investments amounted to $80,529 and $99,958, respectively, for the third quarter of 2023 compared to the same quarter of 2022, and $241,587 and $292,437 for the first nine months of 2023 and 2022.
 
 Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $67,128 and $67,353, respectively, for the third quarter of 2023 compared to the same quarter of 2022, and $201,384 and $201,537 for the first nine months of 2023 and 2022, respectively. 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 of the balance sheet dates:
 
 September 30, 2023 
 
 December 31, 2022 
 
 Assets 
 
 Loans
 
 $ 838,572,268 
 
 77.41 % 
 $ 748,548,608 
 
 70.88 % 
 AFS securities
 
 181,928,461 
 
 16.79 % 
 
 192,918,109 
 
 18.27 % 
 
 Liabilities 
 
 Demand deposits
 
 205,188,102 
 
 18.94 % 
 
 216,093,534 
 
 20.46 % 
 Interest-bearing transaction accounts
 
 284,744,064 
 
 26.29 % 
 
 294,050,079 
 
 27.84 % 
 Money market funds
 
 137,192,956 
 
 12.66 % 
 
 140,117,086 
 
 13.27 % 
 Savings deposits
 
 159,409,376 
 
 14.72 % 
 
 171,072,921 
 
 16.20 % 
 Time deposits
 
 114,670,421 
 
 10.59 % 
 
 101,638,659 
 
 9.62 % 
 Overnight borrowings
 
 3,550,000 
 
 0.33 % 
 
 0 
 
 0.00 % 
 Long-term advances
 
 45,600,000 
 
 4.21 % 
 
 1,300,000 
 
 0.12 % 
 
 The following table reflects the changes in the composition of the Company's major categories of assets and liabilities between the balance sheet dates, as disclosed in the table above:
 
 Volume Change 
 
 Percentage 
 
 Assets 
 
 Loans
 
 $ 90,023,660 
 
 12.03 % 
 AFS securities
 
 (10,989,648 ) 
 
 -5.70 % 
 
 Liabilities 
 
 Demand deposits
 
 (10,905,432 ) 
 
 -5.05 % 
 Interest-bearing transaction accounts
 
 (9,306,015 ) 
 
 -3.16 % 
 Money market funds
 
 (2,924,130 ) 
 
 -2.09 % 
 Savings deposits
 
 (11,663,545 ) 
 
 -6.82 % 
 Time deposits
 
 13,031,762 
 
 12.82 % 
 Overnight borrowings
 
 3,550,000 
 
 100.00 % 
 Long-term advances
 
 44,300,000 
 
 3407.69 % 
 
 The increase in the loan portfolio during the first nine months of 2023 was attributable to increases of $50.1 million in CRE loans, $13.2 million in commercial & industrial, $24.1 million in municipal loans and $7.4 million in residential 1 st lien loans, which was partially offset by decreases of $1.6 million in purchased loans, and $2.7 million in residential junior lien loans. The Company has experienced strong loan activity among its commercial customers, but only minimal consumer loan activity.
 
 The decrease in the securities AFS portfolio during the first nine months of 2023 is attributable to purchases of $4.0 million, which was offset by maturities amounting to $1.2 million and principal payments on various securities totaling $9.9 million and an increase of $3.6 million in unrealized losses arising during the first nine months of 2023, 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.
 
 43 
 
 Table of Contents 
 
 The decrease in the demand deposit accounts reflected a $9.3 million, or 5.7%, decrease in business DDAs and a $1.6 million, or 3.1%, decrease in retail DDAs. The decrease in interest-bearing transaction accounts consisted of a decrease of $5.9 million, or 4.86%, in consumer interest-bearing transaction accounts, a decrease of $6.4 million, or 16.0%, in municipal deposit accounts and a decrease of $5.4 million, or 6.3% in ICS deposit accounts. These decreases were partially offset by a combined increase of $8.4 million, or 18.9%, in health savings accounts and the deposit account of the Company’s trust and asset management affiliate, CFSG. The decrease in money market funds was driven by decreases of $12.3 million, or 41.8%, in ICS accounts, $6.4 million, or 6.3%, in retail money market funds, which was partially offset by an increase of $3.0 million, or 33.6%, in municipal deposits. The increase in time deposits is attributable to customer response to periodic certificate of deposit specials that have been offered. As a result of the year to date decrease in aggregate deposits, the Company had to rely on borrowed funds, including long-term advances, as a supplemental funding source, accounting for the significant increase in these funds.
 
 UNINSURED DEPOSITS 
 
 The estimated balances of uninsured time deposits at September 30, 2023 were made up of time CDs of $18,313,231 and retirement accounts of $2,993,028. Increments of maturity of these time deposits are summarized as follows:
 
 3 months or less
 
 $ 2,162,576 
 
 Over 3 through 6 months
 
 6,390,509 
 
 Over 6 through 12 months
 
 9,014,818 
 
 Over 12 months
 
 3,738,356 
 
 Total
 
 $ 21,306,259 
 
 Estimated deposits in excess of the FDIC insurance level amounted to $319,620,273 at September 30, 2023 and $331,530,619 at December 31, 2022.
 
 Interest Rate Risk and Asset and Liability Management - Management actively monitors and manages the Company’s interest rate risk exposure and attempts to structure the balance sheet to maximize net interest income while controlling its exposure to interest rate risk. The Company's ALCO is made up of the Executive Officers and certain Vice Presidents of the Bank representing major business lines. The ALCO formulates strategies to manage interest rate risk by evaluating the impact on earnings and capital of such factors as current interest rate forecasts and economic indicators, potential changes in such forecasts and indicators, liquidity and various business strategies. The ALCO meets at least quarterly to review financial statements, liquidity levels, yields and spreads to better understand, measure, monitor and control the Company’s interest rate risk. In the ALCO process, the committee members apply policy limits set forth in the Asset Liability, Liquidity and Investment policies approved and periodically reviewed by the Company’s Board of Directors. The ALCO's methods for evaluating interest rate risk include an analysis of the effects of interest rate changes on net interest income and an analysis of the Company's interest rate sensitivity "gap", which provides a static analysis of the maturity and repricing characteristics of the entire balance sheet. The ALCO Policy also includes a contingency funding plan to help management prepare for unforeseen liquidity restrictions, including hypothetical severe liquidity crises.
 
 Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change, thereby impacting NII, the primary component of the Company’s earnings. Fluctuations in interest rates can also have an impact on liquidity. The ALCO uses an outside consultant to perform rate shock simulations to the Company's net interest income, as well as a variety of other analyses. It is ALCO’s function to provide the assumptions used in the modeling process. Assumptions used in prior period simulation models are regularly tested by comparing projected NII with actual NII. The ALCO utilizes the results of the simulation model to quantify the estimated exposure of NII and liquidity to sustained interest rate changes. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on the Company’s balance sheet. The model also simulates the balance sheet’s sensitivity to a prolonged flat rate environment. All rate scenarios are simulated assuming a parallel shift of the yield curve; however further simulations are performed utilizing non-parallel changes in the yield curve. 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 initially trends upward as the short-term asset base (cash and adjustable-rate loans) quickly cycle upward while the retail funding base (deposits) lags the market. If rates paid on deposits must be increased more and/or more quickly than projected due to competitive pressures, the expected benefit 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. The current rising rate environment has had a positive impact on the Company’s NII, however market expectations for higher deposit rates and increased borrowing costs are applying increasing pressure to the spread between interest income and interest expense.
 
 44 
 
 Table of Contents 
 
 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, 2023:
 
 Rate Change 
 Percent Change in NII 
 
 Down 100 bps
 0.5%
 
 Up 200 bps
 -3.1%
 
 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.
 
 As of September 30, 2023, the Company had outstanding $12,887,000 in principal amount of Junior Subordinated Debentures due December 15, 2037, which previously bore a quarterly floating rate of interest equal to the 3-month London Interbank Offered Rate (LIBOR), plus 2.85%. As previously announced, 3-month LIBOR for U.S. dollar denominated deposits was phased out as of June 30, 2023. In accordance with the federal Adjustable Interest Rate (LIBOR) Act enacted in March 2022 (the “LIBOR Act”), the interest rate provisions under the Company’s debenture documents were replaced as a matter of law, as of the first London banking day after June 30, 2023 (the “LIBOR Replacement Date”) with a benchmark interest rate identified in regulations promulgated by the FRB. As required under the LIBOR Act, the Federal Reserve-identified benchmark rates specified in the final regulations for various tenors of LIBOR are based on the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York and each includes an appropriate “tenor spread adjustment” to reflect historical spreads between LIBOR and SOFR. In accordance with the LIBOR Act and its implementing regulations, as of the LIBOR Replacement Date, the Company’s Junior Subordinated Debentures bear interest at a quarterly floating rate equal to 3-month CME SOFR, as adjusted by a spread adjustment factor of 0.26161, plus 2.85%.
 
 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 has not utilized derivatives or other financial instruments tied to LIBOR for hedging or investment purposes. Accordingly, the Company’s exposure to the phase out of LIBOR is limited to the effect on the interest rate paid on its Debentures.
 
 Credit Risk - As a financial institution, one of the primary risks the Company manages is credit risk, the risk of loss stemming from borrowers’ failure to repay loans or inability to meet other contractual obligations. The Company’s Board of Directors prescribes policies for managing credit risk, including Loan, Appraisal and Environmental policies. These policies are supplemented by comprehensive underwriting standards and procedures. The Company maintains a Credit Administration department whose function includes credit analysis and monitoring of and reporting on the status of the loan portfolio, including delinquent and non-performing loan trends. The Company also monitors concentration of credit risk in a variety of areas, including portfolio mix, the level of loans to individual borrowers and their related interests, loans to industry segments, and the geographic distribution of commercial real estate loans. Loans are reviewed periodically by an independent loan review firm to help ensure accuracy of the Company's internal risk ratings and compliance with various internal policies, procedures and regulatory guidance.
 
 Residential mortgage loans represented 28.3% of the Company’s loan balances at September 30, 2023, compared to 31.1% at December 31, 2022. The Company maintains a residential mortgage loan portfolio of traditional mortgage products and does not offer higher risk loan products, such as option adjustable-rate mortgage products, high loan-to-value products, interest only mortgages, subprime loans and products with deeply discounted teaser rates. Residential mortgages with loan-to-value ratios exceeding 80% are generally covered by PMI. A 90% loan-to-value residential mortgage product without PMI is only available to borrowers with excellent credit and low debt-to-income ratios and has not been widely originated. As of September 30, 2023, junior lien home equity products made up 13.1% 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.
 
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 Consistent with the strategic focus on commercial lending, the commercial & industrial and CRE loan portfolios have seen solid growth over recent years. Commercial & industrial, purchased, CRE and municipal loans collectively comprised 71.3% of the Company’s loan portfolio at September 30, 2023, compared to 68.4% at December 31, 2022. The largest components of the CRE portfolio were $115.0 million in owner-occupied CRE and $161.8 million in non-owner occupied CRE at September 30, 2023.
 
 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, 2023, the Company had $25.1 million in guaranteed loans with guaranteed balances of $16.8 million, compared to $27.0 million in guaranteed loans with guaranteed balances of $18.3 million at December 31, 2022. PPP loans with outstanding balances of $95,529 at September 30, 2023, and $199,664 at December 31, 2022, are included in these totals, all of which carry a 100% guarantee through the SBA, subject to borrower eligibility requirements.
 
 The Company works actively with customers early in the delinquency process to help them to avoid default and foreclosure. Commercial & industrial and CRE loans are generally placed on non-accrual status when there is deterioration in the financial position of the borrower, payment in full of principal and interest is not expected, and/or principal or interest has been in default for 90 days or more. However, such a loan need not be placed on non-accrual status if it is both well secured and in the process of collection. Residential mortgages and home equity loans are considered for non-accrual status at 90 days past due and are evaluated on a case-by-case basis. The Company obtains current property appraisals or market value analyses and considers the cost of carrying and selling collateral in order to assess the level of specific allocations required. Consumer loans are generally not placed in non-accrual but are charged off by the time they reach 120 days past due. When a loan is placed in non-accrual status, the Company reverses the accrued interest against current period income and discontinues the accrual of interest until the borrower clearly demonstrates the ability and intention to resume normal payments, typically demonstrated by regular timely payments for a period of not less than six months. Interest payments received on non-accrual or impaired loans are generally applied as a reduction of the loan book balance.
 
 Provision for Credit Losses 
 
 The provision for credit losses was made up of the following components for the periods indicated:
 
 Three Months Ended
 
 September 30,
 
 Change
 
 2023
 
 2022
 
 $
 
 % 
 
 Provision for credit losses on loans
 
 $ 264,009 
 
 $ 125,000 
 
 $ 139,009 
 
 111.21 % 
 Provision for credit losses on OBS credit exposure
 
 (23,120 ) 
 
 0 
 
 (23,120 ) 
 
 100.00 % 
 Provision for credit losses
 
 $ 240,889 
 
 $ 125,000 
 
 $ 115,889 
 
 92.71 % 
 
 Nine Months Ended
 
 September 30,
 
 Change
 
 2023
 
 2022
 
 $
 
 % 
 
 Provision for credit losses on loans
 
 $ 849,549 
 
 $ 1,325,000 
 
 ($475,451)
 
 -35.88 % 
 Provision for credit losses on OBS credit exposure
 
 (40,992 ) 
 
 0 
 
 (40,992 ) 
 
 100.00 % 
 Provision for credit losses
 
 $ 808,557 
 
 $ 1,325,000 
 
 ($516,443)
 
 -38.98 % 
 
 The increase in the provision for credit losses for the three months ended September 30, 2023, was due to a reduction of the provision in the third quarter of 2022, which was the result of an increase in recoveries during that quarter, as well as loan growth that exceeded budget in 2023. The decrease of $516,443 year over year was driven in part by a write-down totaling $667,474, on a single non-performing loan, in March of 2022.
 
 ACL and provisions – As stated in Note 2 of the accompanying notes to the Company’s unaudited interim consolidated financial statements, effective January 1, 2023, the Company was required to recognize credit losses under the guidance of ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, rather than under the incurred loss model. The 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. The adjustment from the adoption of CECL amounted to $549,113, net of tax and was recorded as an adjustment to retained earnings, which affects calculation of regulatory capital ratios. Changes in forecasts used in the CECL model could produce different results, quarter to quarter.
 
 46 
 
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 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 5 of the accompanying unaudited interim 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 all credit losses in the loan portfolio. No part of the ACL is segregated to absorb losses from any loan or segment of loans.
 
 When establishing the ACL each quarter, the Company applies a combination of significant key assumptions and methodologies, as discussed in the ACL section under Critical Accounting Policies in this MD&A and presented in Note 5 of the accompanying unaudited interim consolidated financial statements.
 
 The following table summarizes the Company’s credit risk ratios for the balance sheet dates presented:
 
 September 30, 
 
 December 31, 
 
 2023 
 
 2022 
 
 ACL to total loans outstanding
 
 1.13 % 
 
 1.16 % 
 ACL
 
 $ 9,487,973 
 
 $ 8,709,225 
 
 Loans outstanding
 
 $ 838,572,268 
 
 $ 748,548,608 
 
 Non-accruing loans to loans outstanding
 
 0.86 % 
 
 1.05 % 
 Non-accruing loans
 
 $ 7,214,792 
 
 $ 7,890,020 
 
 Loans outstanding
 
 $ 838,572,268 
 
 $ 748,548,608 
 
 ACL to non-accruing loans
 
 131.51 % 
 
 110.38 % 
 ACL
 
 $ 9,487,973 
 
 $ 8,709,225 
 
 Non-accruing loans
 
 $ 7,214,792 
 
 $ 7,890,020 
 
 The third quarter ACL analysis indicates that the reserve balance of $9.5 million at September 30, 2023, is sufficient to cover expected credit losses that are probable and estimable as of the measurement date. Included in the ACL calculation for September 30, 2023, is a decrease to the qualitative factor adjustment for collateral within the CRE pool of loans. Management feels that the economic forecasts adequately quantify the risk in this area. 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. While the ACL is described as consisting of separate allocated portions, the entire ACL is available to support loan losses, regardless of category. The adequacy of the ACL is presented to the full Board for approval quarterly.
 
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 Net charge-offs during the periods presented to average loans outstanding were as follows:
 
 For the Nine Months Ended September 30, 
 
 2023 
 
 2022 
 
 Commercial & industrial
 
 -0.29 % 
 
 -0.03 % 
 Net charge-offs during the period
 
 $
 (357,643 ) 
 $
 (34,638 ) 
 Average amount outstanding
 
 $ 121,805,882 
 
 $ 115,489,717 
 
 Purchased
 
 0.00 % 
 
 0.00 % 
 Net charge-offs during the period
 
 $ 0 
 
 $ 0 
 
 Average amount outstanding
 
 $ 6,503,285 
 
 $ 8,782,234 
 
 Commercial real estate
 
 0.01 % 
 
 -0.21 % 
 Net recoveries (charge-offs) during the period
 
 $ 22,058 
 
 $
 (667,474 ) 
 Average amount outstanding
 
 $ 376,591,108 
 
 $ 313,919,164 
 
 Municipal
 
 0.00 % 
 
 0.00 % 
 Net charge-offs during the period
 
 $ 0 
 
 $ 0 
 
 Average amount outstanding
 
 $ 42,203,207 
 
 $ 45,161,639 
 
 Residential real estate - 1st lien
 
 0.04 % 
 
 0.06 % 
 Net recoveries during the period
 
 $ 72,588 
 
 $ 111,163 
 
 Average amount outstanding
 
 $ 199,778,580 
 
 $ 184,548,015 
 
 Residential real estate - Jr lien
 
 0.09 % 
 
 0.01 % 
 Net recoveries during the period
 
 $ 28,015 
 
 $ 3,728 
 
 Average amount outstanding
 
 $ 32,110,911 
 
 $ 33,260,177 
 
 Consumer
 
 -2.16 % 
 
 -0.45 % 
 Net charge-offs during the period
 
 $ (79,195 ) 
 $ (15,949 ) 
 Average amount outstanding
 
 $ 3,674,543 
 
 $ 3,513,004 
 
 Total loans
 
 -0.04 % 
 
 -0.09 % 
 Net charge-offs during the period
 
 $ (314,177 ) 
 $ (603,170 ) 
 Average amount outstanding
 
 $ 782,667,516 
 
 $ 704,673,950 
 
 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.
 
 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 2023, the Company did not engage in any activity that created any additional types of off-balance sheet risk.
 
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 With the adoption of ASU 2016-13 (CECL), the Company is required to establish an allowance for expected credit losses on OBS credit exposures. Expected credit losses are estimated by management over the contractual period during which the Company is exposed to credit risk under a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over the estimated lives of such commitments. Upon adoption of ASU 2016-13, the Company recorded an adjustment to retained earnings of $451,704 to reflect an allowance for credit losses for unfunded commitments. The allowance for credit losses for OBS credit exposures is presented in the "Accrued interest and other liabilities" line of the consolidated balance sheets. There was a decrease of $40,992 to the allowance for credit losses for OBS credit exposures during the nine months ended September 30, 2023.
 
 LIQUIDITY AND CAPITAL RESOURCES 
 
 Managing liquidity risk is essential to maintaining both depositor confidence and stability in earnings. Liquidity management refers to the ability of the Company to adequately cover fluctuations in assets and liabilities. Meeting loan demand (assets) and covering the withdrawal of deposit funds (liabilities) are two key components of the liquidity management process. The Company’s principal sources of funds are deposits, amortization and prepayment of loans and securities, maturities of investment securities, sales of loans available-for-sale, and earnings and funds provided from operations. These sources are supplemented by short-term and long-term borrowings as needed. Maintaining a relatively stable funding base, which is achieved by diversifying funding sources, competitively pricing deposit products, and extending the contractual maturity of liabilities, reduces the Company’s exposure to rollover risk on deposits and limits reliance on volatile short-term borrowed funds. Short-term funding needs arise from declines in deposits or other funding sources and from funding requirements for loan commitments. The Company’s strategy is to fund assets to the maximum extent possible with core deposits that provide a sizable source of relatively stable and lower-cost funds.
 
 The Company recognizes that, at times, when loan demand exceeds deposit growth or the Company has other liquidity demands, 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, 2023, and December 31, 2022, 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, 2023 and December 31, 2022, the Company reported $2.4 million and $2.8 million, respectively, in reciprocal CDARS deposits. The balance in ICS reciprocal money market deposits was $17.1 million at September 30, 2023, compared to $29.5 million at December 31, 2022, and the balance in ICS reciprocal demand deposits as of those dates was $79.9 million and $85.3 million, respectively.
 
 On September 30, 2023 and December 31, 2022, borrowing capacity of $107.9 million and $112.3 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 of $23.1 million and $52.4 million, respectively.
 
 The following table reflects the Company’s outstanding advances with FHLBB as of the dates indicated:
 
 September 30, 
 
 December 31, 
 
 2023 
 
 2022 
 
 FHLBB Advances (1) 
 
 FHLBB term advance, 0.00%, due September 22, 2023
 
 $ 0 
 
 $ 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 
 
 Total FRBB Advances
 
 1,100,000 
 
 1,300,000 
 
 Overnight borrowings at 5.57%
 
 3,550,000 
 
 0 
 
 $ 4,650,000 
 
 $ 1,300,000 
 
 (1)
 Under the JNE program, the FHLBB provides a subsidy, funded by the FHLBB’s earnings, to write down interest rates to zero percent on advances that finance qualifying loans to small businesses. JNE advances must support small business in New England that create and/or retain jobs, or otherwise contribute to overall economic development activities.
 
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 The Company also has an unsecured Federal Funds credit line with the FHLBB with an available balance of $500,000 with no outstanding advances during either of the respective comparison periods. Interest is chargeable at a rate determined daily, approximately 25 bps higher than the rate paid on federal funds sold.
 
 The Company has a BIC arrangement with the FRBB secured by eligible commercial & industrial loans, CRE loans and home equity loans, resulting in an available credit line of $59.9 million and $56.1 million, respectively, at September 30, 2023 and December 31, 2022. Credit advances under this FRBB lending program are overnight advances with interest chargeable at the primary credit rate (generally referred to as the discount rate), currently 500 bps. The Company had no outstanding advances through this facility at September 30, 2023 or December 31, 2022.
 
 As of September 30, 2023, the Company had additional potential borrowing capacity, subject to pledging of required collateral consisting of eligible U.S. Agency and U.S. Government Securities, under the FRB’s BTFP which was established in March 2023 to provide banks with an additional source of liquidity.
 
 The Company’s advances under the BTFP were as follows:
 
 September 30, 
 
 2023 
 
 FRBB Advances 
 
 FRB BTFP term advance, 4.92%, due April 26, 2024
 
 $ 10,000,000 
 
 FRB BTFP term advance, 4.71%, due May 13, 2024
 
 10,000,000 
 
 FRB BTFP term advance, 4.91%, due May 17, 2024
 
 6,500,000 
 
 FRB BTFP term advance, 5.45%, due August 05, 2024
 
 18,000.000 
 
 Total BTFP Advances
 
 $ 44,500,000 
 
 As of September 30, 2023, the Company had an unsecured line of credit with one correspondent bank of $12.5 million, compared to unsecured lines of credit with two correspondent banks with aggregate available borrowing capacity totaling $20.5 million as of December 31, 2022. The Company had no outstanding advances against these credit lines as of the balance sheet dates presented.
 
 Management believes that the combination of high levels of potentially liquid assets, unencumbered securities, cash flows from operations, and additional borrowing capacity are sufficient to meet the Company’s liquidity and capital needs.
 
 The following table illustrates the changes in shareholders' equity from December 31, 2022 to September 30, 2023:
 
 Balance at December 31, 2022 (book value $13.55 per common share)
 
 $ 75,176,363 
 
 Cumulative change in accounting principle (Note 2)
 
 (549,113 ) 
 Net income
 
 9,897,608 
 
 Issuance of common stock through the DRIP
 
 991,799 
 
 Dividends declared on common stock
 
 (3,764,480 ) 
 Dividends declared on preferred stock
 
 (89,063 ) 
 Change in AOCI on AFS securities, net of tax
 
 (2,856,418 ) 
 Balance at September 30, 2023 (book value $14.08 per common share)
 
 $ 78,806,696 
 
 The primary objective of the Company’s capital planning process is to balance appropriately the retention of capital to support operations and future growth, with the goal of providing shareholders with an attractive return on their investment. To that end, management monitors capital retention and dividend policies on an ongoing basis.
 
 As described in more detail in Note 22 to the audited consolidated financial statements contained in the Company’s 2022 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, 2023, 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.
 
 50 
 
 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. The calculations as of September 30, 2023 reflect adoption of ASU 2016-13 (CECL), including the beginning period cumulative effect adjustment of $549,113, which reduced retained earnings.
 
 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, 2023 
 
 Common equity tier 1 capital 
 
 (to risk-weighted assets)
 
 Company
 
 $ 89,257 
 
 11.65 % 
 $ 34,467 
 
 4.50 % 
 $ 53,615 
 
 7.00 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 102,537 
 
 13.40 % 
 $ 34,438 
 
 4.50 % 
 $ 53,571 
 
 7.00 % 
 $ 49,744 
 
 6.50 % 
 Tier 1 capital (to risk-weighted assets)
 
 Company
 
 $ 103,644 
 
 13.53 % 
 $ 45,956 
 
 6.00 % 
 $ 65,104 
 
 8.50 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 102,537 
 
 13.40 % 
 $ 45,918 
 
 6.00 % 
 $ 65,050 
 
 8.50 % 
 $ 61,224 
 
 8.00 % 
 Total capital (to risk-weighted assets)
 
 Company
 
 $ 113,223 
 
 14.78 % 
 $ 61,274 
 
 8.00 % 
 $ 80,422 
 
 10.50 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 112,108 
 
 14.65 % 
 $ 61,224 
 
 8.00 % 
 $ 80,356 
 
 10.50 % 
 $ 76,529 
 
 10.00 % 
 Tier 1 capital (to average assets)
 
 Company
 
 $ 103,644 
 
 9.59 % 
 $ 43,236 
 
 4.00 % 
 
 N/A 
 
 N/A 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 102,537 
 
 9.49 % 
 $ 43,214 
 
 4.00 % 
 
 N/A 
 
 N/A 
 
 $ 54,017 
 
 5.00 % 
 
 December 31, 2022: 
 
 Common equity tier 1 capital
 
 (to risk-weighted assets)
 
 Company
 
 $ 82,770 
 
 11.74 % 
 $ 31,731 
 
 4.50 % 
 $ 49,359 
 
 7.00 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 96,112 
 
 13.64 % 
 $ 31,703 
 
 4.50 % 
 $ 49,315 
 
 7.00 % 
 $ 45,793 
 
 6.50 % 
 Tier 1 capital (to risk-weighted assets)
 
 Company
 
 $ 97,157 
 
 13.78 % 
 $ 42,308 
 
 6.00 % 
 $ 59,936 
 
 8.50 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 96,112 
 
 13.64 % 
 $ 42,270 
 
 6.00 % 
 $ 59,883 
 
 8.50 % 
 $ 56,361 
 
 8.00 % 
 Total capital (to risk-weighted assets)
 
 Company
 
 $ 105,971 
 
 15.03 % 
 $ 56,410 
 
 8.00 % 
 $ 74,038 
 
 10.50 % 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 104,918 
 
 14.89 % 
 $ 56,361 
 
 8.00 % 
 $ 73,973 
 
 10.50 % 
 $ 70,451 
 
 10.00 % 
 Tier 1 capital (to average assets)
 
 Company
 
 $ 97,157 
 
 9.24 % 
 $ 42,047 
 
 4.00 % 
 
 N/A 
 
 N/A 
 
 N/A 
 
 N/A 
 
 Bank
 
 $ 96,112 
 
 9.15 % 
 $ 42,025 
 
 4.00 % 
 
 N/A 
 
 N/A 
 
 $ 52,531 
 
 5.00 % 
 
 (1)
 Conservation Buffer is calculated based on risk-weighted assets and does not apply to calculations of average assets.
 
 (2)
 Applicable to banks, but not bank holding companies.
 
 The Company's ability to pay dividends to its shareholders is largely dependent on the Bank's ability to pay dividends to the Company. In general, a national bank may not pay dividends that exceed net income for the current and preceding two years. Regardless of statutory restrictions, as a matter of regulatory policy, banks and bank holding companies should pay dividends only out of current earnings and only if, after paying such dividends, they remain adequately capitalized.
 
 51 
 
 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
