COMMUNITY BANCORP /VT - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to __________

Commission File Number 000-16435

COMMUNITY BANCORP /VT

(Exact name of Registrant as Specified in its Charter)

Vermont		03-0284070
(State of Incorporation)		(IRS Employer Identification Number)

4811 US Route 5, Derby, Vermont		05829
(Address of Principal Executive Offices)		(zip code)

Registrant’s Telephone Number: (802) 334-7915

Securities registered pursuant to Section 12(b) of the Act: NONE

Title of Each Class	Trading Symbol(s)	Name of each exchange on which registered
	(Not Applicable)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file for such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ NO ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

At November 8, 2021, there were 5,363,403 shares outstanding of the Corporation’s common stock.

FORM 10-Q

Index
		Page
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4	Controls and Procedures	53

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	54
Item 1A	Risk Factors	54
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 6	Exhibits	55
	Signatures	56
	Exhibit Index	57

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements (Unaudited)

The following are the unaudited consolidated financial statements for the Company.

Community Bancorp. and Subsidiary	September 30,			December 31,
Consolidated Balance Sheets	2021			2020
	(Unaudited)

Assets
Cash and due from banks	$	32,717,906		$	10,850,787
Federal funds sold and overnight deposits		97,034,130			104,199,133
Total cash and cash equivalents		129,752,036			115,049,920
Securities available-for-sale		110,676,139			60,705,178
Restricted equity securities, at cost		1,447,150			1,446,550
Loans held-for-sale		50,000			130,400
Loans		692,638,375			709,355,330
Allowance for loan losses		(7,819,307	)		(7,208,485	)
Deferred net loan fees		(1,149,278	)		(1,195,741	)
Net loans		683,669,790			700,951,104
Bank premises and equipment, net		13,992,622			10,209,869
Accrued interest receivable		2,730,415			2,987,977
Bank owned life insurance		5,052,197			4,988,236
Goodwill		11,574,269			11,574,269
Other Assets		9,639,649			10,189,781
Total assets	$	968,584,267		$	918,233,284

Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Demand, non-interest bearing	$	201,415,866		$	185,954,976
Interest-bearing transaction accounts		237,282,454			228,712,371
Money market funds		124,792,185			115,546,064
Savings		168,966,595			138,745,468
Time deposits, $250,000 and over		16,511,010			16,488,963
Other time deposits		91,126,650			96,842,998
Total deposits		840,094,760			782,290,840
Borrowed funds		2,300,000			2,800,000
Repurchase agreements		22,352,213			38,727,312
Junior subordinated debentures		12,887,000			12,887,000
Accrued interest and other liabilities		7,735,592			4,239,419
Total liabilities		885,369,565			840,944,571

Shareholders’ Equity
Preferred stock, 1,000,000shares authorized, 15 shares issued and outstanding
at 09/30/21 and 12/31/20 ($100,000 liquidation value, per share)		1,500,000			1,500,000
Common stock - $2.50 par value; 15,000,000 shares authorized, 5,575,074
shares issued at 09/30/21 and 5,527,380 shares issued at 12/31/20		13,937,685			13,818,450
Additional paid-in capital		35,098,086			34,309,646
Retained earnings		35,583,213			29,368,046
Accumulated other comprehensive (loss) income		(281,505	)		915,348
Less: treasury stock, at cost; 210,101 shares at 09/30/21 and 12/31/20		(2,622,777	)		(2,622,777	)
Total shareholders’ equity		83,214,702			77,288,713
Total liabilities and shareholders’ equity	$	968,584,267		$	918,233,284

Book value per common share outstanding	$	15.23		$	14.25

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Community Bancorp. and Subsidiary	Three Months Ended September 30,
Consolidated Statements of Income	2021		2020
(Unaudited)

Interest income
Interest and fees on loans	$	8,778,173	$	7,742,914
Interest on taxable debt securities		325,002		249,341
Dividends		14,666		17,715
Interest on federal funds sold and overnight deposits		92,923		76,896
Total interest income		9,210,764		8,086,866

Interest expense
Interest on deposits		594,327		877,466
Interest on borrowed funds		19,721		1,806
Interest on repurchase agreements		16,871		67,327
Interest on junior subordinated debentures		97,776		104,181
Total interest expense		728,695		1,050,780

Net interest income		8,482,069		7,036,086
Provision for loan losses		89,167		362,499
Net interest income after provision for loan losses		8,392,902		6,673,587

Non-interest income
Service fees		882,688		794,381
Income from sold loans		242,560		601,825
Other income from loans		223,388		281,959
Other income		351,950		263,130
Total non-interest income		1,700,586		1,941,295

Non-interest expense
Salaries and wages		2,002,999		1,958,754
Employee benefits		811,817		791,172
Occupancy expenses, net		743,219		601,093
Other expenses		1,973,822		1,753,698
Total non-interest expense		5,531,857		5,104,717

Income before income taxes		4,561,632		3,510,165
Income tax expense		862,429		629,722
Net income	$	3,699,202	$	2,880,443

Earnings per common share	$	0.69	$	0.54
Weighted average number of common shares used in computing earnings per share		5,354,187		5,285,771
Dividends declared per common share	$	0.22	$	0.19

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Community Bancorp. and Subsidiary	Nine Months Ended September 30,
Consolidated Statements of Income	2021		2020
(Unaudited)

Interest income
Interest and fees on loans	$	24,919,892	$	22,951,272
Interest on taxable debt securities		883,846		787,275
Dividends		40,265		63,540
Interest on federal funds sold and overnight deposits		260,811		248,373
Total interest income		26,104,814		24,050,460

Interest expense
Interest on deposits		1,930,664		3,154,211
Interest on borrowed funds		49,111		18,335
Interest on repurchase agreements		72,822		185,868
Interest on junior subordinated debentures		296,486		375,669
Total interest expense		2,349,083		3,734,083

Net interest income		23,755,731		20,316,377
Provision for loan losses		624,165		1,046,501
Net interest income after provision for loan losses		23,131,566		19,269,876

Non-interest income
Service fees		2,527,943		2,322,112
Income from sold loans		704,627		1,138,579
Other income from loans		653,377		803,555
Net realized gain on sale of securities AFS		0		39,086
Other income		1,155,405		753,772
Total non-interest income		5,041,352		5,057,104

Non-interest expense
Salaries and wages		5,923,001		5,773,491
Employee benefits		2,467,237		2,324,055
Occupancy expenses, net		2,140,141		1,921,597
Other expenses		5,635,925		5,166,247
Total non-interest expense		16,166,304		15,185,390

Income before income taxes		12,006,614		9,141,590
Income tax expense		2,235,305		1,557,598
Net income	$	9,771,309	$	7,583,992

Earnings per common share	$	1.82	$	1.43
Weighted average number of common shares used in computing earnings per share		5,338,481		5,264,802
Dividends declared per common share	$	0.66	$	0.57

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Community Bancorp. and Subsidiary
Consolidated Statements of Comprehensive Income
(Unaudited)	Three Months Ended September 30,
	2021			2020

Net income	$	3,699,202		$	2,880,443

Other comprehensive loss, net of tax:
Unrealized holding loss on securities AFS arising during the period		(475,176	)		(49,737	)
Tax effect		99,786			10,444
Other comprehensive loss, net of tax		(375,390	)		(39,293	)
Total comprehensive income	$	3,323,812		$	2,841,150

	Nine Months Ended September 30,
	2021			2020

Net income	$	9,771,309		$	7,583,992

Other comprehensive (loss) income, net of tax:
Unrealized holding (loss) gain on securities AFS arising during the period		(1,515,004	)		939,486
Reclassification adjustment for gain realized in income		0			(39,086	)
Unrealized (loss) gain during the period		(1,515,004	)		900,400
Tax effect		318,151			(189,085	)
Other comprehensive (loss) income, net of tax		(1,196,853	)		711,315
Total comprehensive income	$	8,574,456		$	8,295,307

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Community Bancorp. and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

	Nine Months Ended September 30, 2021
					Additional											Total
	Common		Preferred		paid-in		Retained							Treasury		shareholders’
	Stock		Stock		capital		earnings			AOCI*				stock		equity

January 1, 2021	$	13,818,450	$	1,500,000	$	34,309,646	$	29,368,046		$	915,348		$	(2,622,777	)	$	77,288,713

Issuance of common stock		42,523				222,256											264,779
Cash dividends declared
Common stock								(1,169,555	)								(1,169,555	)
Preferred stock								(12,188	)								(12,188	)
Comprehensive income
Net income								3,025,701									3,025,701
Other comprehensive loss											(1,311,905	)					(1,311,905	)
March 31, 2021	$	13,860,973	$	1,500,000	$	34,531,902	$	31,212,004		$	(396,557	)	$	(2,622,777	)	$	78,085,545

Issuance of common stock		38,695				251,441											290,136
Cash dividends declared
Common stock								(1,173,253	)								(1,173,253	)
Preferred stock								(12,187	)								(12,187	)
Comprehensive income
Net income								3,046,406									3,046,406
Other comprehensive income											490,442						490,442
June 30, 2021	$	13,899,668	$	1,500,000	$	34,783,343	$	33,072,970		$	93,885		$	(2,622,777	)	$	80,727,089

Issuance of common stock		38,017				314,743											352,760
Cash dividends declared
Common stock								(1,176,771	)								(1,176,771	)
Preferred stock								(12,188	)								(12,188	)
Comprehensive income
Net income								3,699,202									3,699,202
Other comprehensive loss											(375,390	)					(375,390	)
September 30, 2021	$	13,937,685	$	1,500,000	$	35,098,086	$	35,583,213		$	(281,505	)	$	(2,622,777	)	$	83,214,702

*Accumulated other comprehensive (loss) income

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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	Nine Months Ended September 30, 2020
					Additional										Total
	Common		Preferred		paid-in		Retained							Treasury	shareholders’
	Stock		Stock		capital		earnings			AOCI*				stock	equity

January 1, 2020	$	13,624,643	$	1,500,000	$	33,464,381	$	22,667,949		$	260,483		$	(2,622,777)	$	68,894,679

Issuance of common stock		40,465				213,812										254,277
Cash dividends declared
Common stock								(995,536	)							(995,536	)
Preferred stock								(17,813	)							(17,813	)
Comprehensive income
Net income								1,861,239								1,861,239
Other comprehensive income											586,646					586,646
March 31, 2020	$	13,665,108	$	1,500,000	$	33,678,193	$	23,515,839		$	847,129		$	(2,622,777)	$	70,583,492

Issuance of common stock		47,752				214,135										261,887
Cash dividends declared
Common stock								(998,899	)							(998,899	)
Preferred stock								(12,187	)							(12,187	)
Comprehensive income
Net income								2,842,311								2,842,311
Other comprehensive income											163,962					163,962
June 30, 2020	$	13,712,860	$	1,500,000	$	33,892,328	$	25,347,064		$	1,011,091		$	(2,622,777)	$	72,840,566

Issuance of common stock		62,920				200,826										263,746
Cash dividends declared
Common stock								(1,002,969	)							(1,002,969	)
Preferred stock								(12,188	)							(12,188	)
Comprehensive income
Net income								2,880,443								2,880,443
Other comprehensive loss											(39,293	)				(39,293	)
September 30, 2020	$	13,775,780	$	1,500,000	$	34,093,154	$	27,212,350		$	971,798		$	(2,622,777)	$	74,930,305

*Accumulated other comprehensive income

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Community Bancorp. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)	Nine Months Ended September 30,
	2021			2020

Cash Flows from Operating Activities:
Net income	$	9,771,309		$	7,583,992
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, bank premises and equipment		815,454			677,086
Provision for loan losses		624,165			1,046,501
Deferred income tax		(75,779	)		(128,103	)
Net realized gain on sale of securities AFS		0			(39,086	)
Gain on sale of loans		(404,428	)		(766,440	)
Gain on sale of bank premises and equipment		(7,559	)		0
Gain on sale of OREO		0			(55,602	)
Capital loss on leases		63,125			0
Income from CFS Partners		(834,781	)		(462,964	)
Amortization of bond premium, net		355,461			55,568
Proceeds from sales of loans held for sale		6,487,773			31,538,375
Originations of loans held for sale		(6,002,945	)		(32,015,674	)
Decrease in taxes payable		(376,202	)		(145,105	)
Decrease (increase) in interest receivable		257,562			(873,638	)
Decrease (increase) in mortgage servicing rights		23,797			(31,463	)
Decrease in right-of-use assets		147,125			182,475
Decrease in operating lease liabilities		(147,616	)		(180,657	)
Increase in other assets		(141,037	)		(54,430	)
Increase in cash surrender value of BOLI		(63,961	)		(62,508	)
Amortization of limited partnerships		272,286			252,513
Change in net deferred loan fees and costs		(46,463	)		2,615,453
Decrease in interest payable		(29,252	)		(34,364	)
Decrease in accrued expenses		(126,996	)		(53,918	)
Decrease in other liabilities		(40,317	)		(103,646	)
Net cash provided by operating activities		10,520,722			8,944,365

Cash Flows from Investing Activities:
Investments - AFS
Maturities, calls, pay downs and sales		14,130,683			14,407,740
Purchases		(65,972,109	)		(12,745,042	)
Proceeds from redemption of restricted equity securities		0			522,400
Purchases of restricted equity securities		(600	)		(503,400	)
Decrease in limited partnership contributions payable		(150,000	)		(288,000	)
Proceeds of distribution from CFS Partners		2,000,000			0
Decrease (increase) in loans, net		16,630,097			(131,508,927	)
Capital expenditures net of proceeds from sales of bank
premises and equipment		(782,522	)		(240,919	)
Proceeds from sales of OREO		0			1,022,340
Recoveries of loans charged off		73,515			65,208
Net cash used in investing activities		(34,070,936	)		(129,268,600	)

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	2021			2020

Cash Flows from Financing Activities:
Net increase in demand and interest-bearing transaction accounts		24,030,973			91,052,024
Net increase in money market and savings accounts		39,467,248			37,393,558
Net decrease in time deposits		(5,694,301	)		(447,896	)
Net decrease in repurchase agreements		(16,375,099	)		(2,592,200	)
Proceeds from long-term borrowings		0			150,000
Repayments on long-term borrowings		(500,000	)		0
Decrease in finance lease obligations		(144,774	)		(45,814	)
Dividends paid on preferred stock		(36,563	)		(42,188	)
Dividends paid on common stock		(2,495,153	)		(2,204,435	)
Net cash provided by financing activities		38,252,331			123,263,049

Net increase in cash and cash equivalents		14,702,116			2,938,814
Cash and cash equivalents:
Beginning		115,049,920			48,562,212
Ending	$	129,752,036		$	51,501,026

Supplemental Schedule of Cash Paid During the Period:
Interest	$	2,378,335		$	3,768,447

Income taxes, net of refunds	$	2,415,000		$	1,578,293

Supplemental Schedule of Noncash Investing and Financing Activities:
Change in unrealized (loss) gain on securities AFS	($1,515,004)			$	900,400

Additions to finance lease obligations	$	3,955,252		$	0

Common Shares Dividends Paid:
Dividends declared	$	3,519,579		$	2,997,403
Increase in dividends payable attributable to dividends declared		(116,751	)		(13,058	)
Dividends reinvested		(907,675	)		(779,910	)
Total dividends paid	$	2,495,153		$	2,204,435

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Notes to Consolidated Financial Statements

Note 1. Basis of Presentation and Consolidation and Certain Definitions

Basis of Presentation and Consolidation. The interim consolidated financial statements of Community Bancorp. and Subsidiary are unaudited. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments necessary for the fair presentation of the consolidated financial condition and results of operations of the Company and its subsidiary, Community National Bank (the Bank), contained herein have been made. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2020 contained in the Company’s Annual Report on Form 10-K. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for any other interim period or the full annual period ending December 31, 2021.

There were reclassifications to the consolidated financial statements for the periods presented.

The Company is considered a “smaller reporting company” under the disclosure rules of the SEC, as amended in 2018. Accordingly, the Company has elected to provide its audited consolidated statements of income, comprehensive income, cash flows and changes in shareholders’ equity for a two year, rather than a three year, period, and provides smaller reporting company scaled disclosures where management deems it appropriate.

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In addition to the definitions provided elsewhere in this quarterly report, the definitions, acronyms and abbreviations identified below are used throughout this report, including in Part I. “Financial Information” and Part II. “Other Information”, and are intended to aid the reader and provide a reference page when reviewing this report.

ABS:	Asset backed security	FASB:	Financial Accounting Standards Board
ACBB:	Atlantic Community Bankers Bank	FDIC:	Federal Deposit Insurance Corporation
AFS:	Available-for-sale	FHLBB:	Federal Home Loan Bank of Boston
Agency MBS:	MBS issued by a US government agency	FHLMC:	Federal Home Loan Mortgage Corporation
	or GSE	FOMC:	Federal Open Market Committee
ALCO:	Asset Liability Committee	FRB:	Federal Reserve Board
ALL:	Allowance for loan losses	FRBB:	Federal Reserve Bank of Boston
AOCI:	Accumulated other comprehensive income	GAAP:	Generally Accepted Accounting Principles
ASC:	Accounting Standards Codification		in the United States
ASU:	Accounting Standards Update	GSE:	Government sponsored enterprise
ATS:	Automatic transfer service	HTM:	Held-to-maturity
Bancorp:	Community Bancorp.	ICS:	Insured Cash Sweeps of the Promontory
Bank:	Community National Bank		Interfinancial Network
BHG	Bankers Healthcare Group	IRS:	Internal Revenue Service
BIC:	Borrower-in-Custody	JNE:	Jobs for New England
Board:	Board of Directors	Jr:	Junior
BOLI:	Bank owned life insurance	MBS:	Mortgage-backed security
bp or bps:	Basis point(s)	MPF:	Mortgage Partnership Finance
BSA	Bank Secrecy Act	MSRs:	Mortgage servicing rights
CARES ACT:	Coronavirus Aid Relief and Economic	NII:	Net interest income
	Security Act	OAS:	Other amortizing security
CBLR:	Community Bank Leverage Ratio	OCI:	Other comprehensive income (loss)
CDARS:	Certificate of Deposit Accounts Registry	OREO:	Other real estate owned
	Service of the Promontory Interfinancial	OTTI:	Other-than-temporary impairment
	Network	PMI:	Private mortgage insurance
CDs:	Certificates of deposit	PPP:	Paycheck Protection Program
CDI:	Core deposit intangible	PPPLF:	PPP Liquidity Facility of the FRBB
CECL:	Current Expected Credit Loss	RD:	USDA Rural Development
CFSG:	Community Financial Services Group, LLC	SBA:	U.S. Small Business Administration
CFS Partners:	Community Financial Services Partners,	SEC:	U.S. Securities and Exchange Commission
	LLC	SERP:	Supplemental Employee Retirement Plan
CMO	Collateralize Mortgage Obligation	TDR:	Troubled-debt restructuring
Company:	Community Bancorp. and Subsidiary	USDA:	U.S. Department of Agriculture
COVID-19:	Coronavirus Disease 2019	VA:	U.S. Veterans Administration
CRE:	Commercial Real Estate	2017 Tax Act:	Tax Cut and Jobs Act of 2017
DDA or DDAs:	Demand Deposit Account(s)	2018	Economic Growth, Regulatory Relief and
DTC:	Depository Trust Company	Regulatory	Consumer Protection Act of 2018
DRIP:	Dividend Reinvestment Plan	Relief Act:
Exchange Act:	Securities Exchange Act of 1934

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Note 2. Risks and Uncertainties

The COVID-19 pandemic has adversely affected, and may continue to adversely affect, economic activity globally, nationally and locally. Government actions taken to help mitigate the spread of COVID-19 and its economic effects included restrictions on travel, quarantines in certain areas, forced closures for certain types of public places and businesses, extensions of unemployment benefits and direct stimulus payments to individuals. Although most COVID-19 related restrictions on businesses have been lifted, the effects of the pandemic and the measures taken in response to it are expected to continue to impact financial markets, consumer confidence, unemployment rates and the economy, including the local economy in the Company’s Vermont and New Hampshire markets, in ways that cannot be predicted. Moreover, the emergence of new strains of the COVID-19 virus could result in additional responsive government measures and economic disruption.

In addition, due to the COVID-19 pandemic, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00 percent on March 3, 2020 for the first time. On March 3, 2020, the FOMC reduced the targeted federal funds interest rate range by 50 bps to a range of 1.00% to 1.25%. This range was further reduced to a range of 0 percent to 0.25% on March 16, 2020. On April 29, 2020, the FOMC indicated that the federal funds target rate range will remain unchanged until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. Since that time, the FOMC has repeatedly reiterated that position, most recently in November, 2021.

The duration of these reductions in interest rates and other lingering after-effects of the COVID-19 pandemic could adversely affect the Company’s business, financial condition and results of operations in future periods. It is reasonably possible that estimates made in the Company’s consolidated financial statements could be materially and adversely impacted as a result of the effects of the pandemic, including potential credit losses on loan receivables.

Note 3. Recent Accounting Developments

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under the new guidance, which will replace the existing incurred loss model for recognizing credit losses, banks and other lending institutions will be required to recognize the full amount of expected credit losses over the life of a loan. 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. A modified version of these requirements also applies to debt securities classified as available for sale, which will require that credit losses on those securities be recorded through an allowance for credit losses rather than a write-down. The ASU may have a material impact on the Company’s consolidated financial statements upon adoption as it will require a change in the Company’s methodology for calculating its ALL and allowance on unused commitments. The Company will transition from an incurred loss model to an expected loss model, which may result in an increase in the ALL upon adoption and may negatively impact the Company’s and the Bank’s regulatory capital ratios. The Company has formed a committee to assess the implications of this new pronouncement and transitioned to a software solution for preparing the ALL calculation and related reports that management believes provides the Company with stronger data integrity, ease and efficiency in ALL preparation. The new software solution also provides numerous training opportunities for the appropriate personnel within the Company. The Company has gathered and is continuing to analyze the historical data to serve as a basis for estimating the ALL under CECL and continues to evaluate the anticipated impact of the adoption of the ASU on its consolidated financial statements. As initially proposed, the ASU was to be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018, including interim periods within such years. However, on October 16, 2019, the FASB approved an extended effective date for compliance with the ASU by smaller reporting companies, which are now required to comply with the ASU for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company qualifies for this extension and does not intend to early adopt the ASU at this time. Management will continue to evaluate the Company’s CECL compliance and implementation timetable in light of the extension.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and has issued subsequent amendments thereto, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is assessing ASU No. 2020-04 and its impact on the transition away from LIBOR for its Junior Subordinated Debentures due December 15, 2037, the Company’s only financial instruments that utilize LIBOR as a reference rate.

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In March and April, 2020, federal banking regulators issued interagency guidance on accounting for loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term (that is, six months or less) modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant, provided that the loan is less than 30 days past due at the time a modification program is implemented. The banking agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs under ASC No. 310-40, Receivables - Troubled Debt Restructurings by Creditors. Additionally, a provision of the CARES Act enacted in March 2020 provides that COVID-19 related loan modifications (including modifications that are not short-term) made to a loan between March 1, 2020 and the earlier of December 31, 2020 or the sixtieth day after the end of the COVID-19 emergency declared by the President will not require the loan to be treated as a TDR under GAAP, so long as the modified loan was not past due as of December 31, 2019. On December 27, 2020, the Consolidated Appropriations Act 2021 (CAA) extended the date for COVID-19 related loan modifications from December 31, 2020 to January 1, 2022.

Note 4. Earnings per Common Share

Earnings per common share amounts are computed based on the weighted average number of shares of common stock issued during the period (retroactively adjusted for stock splits and stock dividends, if any), including Dividend Reinvestment Plan shares issuable upon reinvestment of dividends declared, and reduced for shares held in treasury.

The following tables illustrate the calculation of earnings per common share for the periods presented, as adjusted for the cash dividends declared on the preferred stock:

Three Months Ended September 30,	2021		2020

Net income, as reported	$	3,699,202	$	2,880,443
Less: dividends to preferred shareholders		12,188		12,188
Net income available to common shareholders	$	3,687,015	$	2,868,255
Weighted average number of common shares
used in calculating earnings per share		5,354,187		5,285,771
Earnings per common share	$	0.69	$	0.54

Nine Months Ended September 30,	2021		2020

Net income, as reported	$	9,771,309	$	7,583,992
Less: dividends to preferred shareholders		36,563		42,188
Net income available to common shareholders	$	9,734,746	$	7,541,804
Weighted average number of common shares
used in calculating earnings per share		5,338,481		5,264,802
Earnings per common share	$	1.82	$	1.43

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Note 5. Investment Securities

Debt securities AFS as of the balance sheet dates consisted of the following:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

September 30, 2021
U.S. GSE debt securities	$	10,003,253	$	69,462	$	105,637	$	9,967,078
U.S. Government securities		10,128,255		6,498		33,931		10,100,822
Agency MBS		80,876,989		261,920		821,647		80,317,262
ABS and OAS		2,131,767		90,684		0		2,222,451
CMO		958,211		0		18,570		939,641
Other investments		6,934,000		195,068		183		7,128,885
Total	$	111,032,475	$	623,632	$	979,968	$	110,676,139

December 31, 2020
U.S. GSE debt securities	$	8,007,142	$	165,934	$	3,245	$	8,169,831
Agency MBS		40,861,370		547,930		30,951		41,378,349
ABS and OAS		2,508,997		160,999		0		2,669,996
Other investments		8,169,000		318,002		0		8,487,002
Total	$	59,546,509	$	1,192,865	$	34,196	$	60,705,178

Investments pledged as collateral for repurchase agreements consisted of U.S. GSE debt securities, Agency MBS, ABS and OAS, and CMO. These repurchase agreements mature daily. These pledged investments as of the balance sheet dates were as follows:

	Amortized		Fair
	Cost		Value

September 30, 2021	$	66,394,672	$	66,017,746
December 31, 2020		59,546,509		60,705,178

Proceeds from sales of debt securities were $884,137 for the first nine months of 2020, with gains of $39,086. There were no sales for the first nine months of 2021.

The scheduled maturities of debt securities as of the balance sheet dates were as follows:

	Amortized		Fair
	Cost		Value
September 30, 2021
Due in one year or less	$	3,470,000	$	3,519,638
Due from one to five years		11,990,364		12,117,682
Due from five to ten years		13,692,473		13,701,738
Due after ten years		1,002,649		1,019,819
Agency MBS		80,876,989		80,317,262
Total	$	111,032,475	$	110,676,139

December 31, 2020
Due in one year or less	$	2,227,000	$	2,247,603
Due from one to five years		5,942,000		6,239,399
Due from five to ten years		9,511,476		9,801,921
Due after ten years		1,004,663		1,037,906
Agency MBS		40,861,370		41,378,349
Total	$	59,546,509	$	60,705,178

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Agency MBS are not due at a single maturity date and have not been allocated to maturity groupings for purposes of the maturity table.

Debt securities with unrealized losses as of the balance sheet dates are presented in the table below.

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Number of		Fair		Unrealized
	Value		Loss		Value		Loss		Securities		Value		Loss
September 30, 2021
U.S. GSE debt securities	$	5,894,967	$	105,637	$	0	$	0		6	$	5,894,967	$	105,637
U.S. Government securities		6,565,249		33,931		0		0		13		6,565,249		33,931
Agency MBS		64,902,217		817,068		252,509		4,579		50		65,154,726		821,647
CMO		939,641		18,570		0		0		2		939,641		18,570
Other investments		247,816		183		0		0		1		247,816		183
Total	$	78,549,890	$	975,389	$	252,509	$	4,579		72	$	78,802,399	$	979,968

December 31, 2020
U.S. GSE debt securities	$	1,999,234	$	3,245	$	0	$	0		2	$	1,999,234	$	3,245
Agency MBS		2,076,167		19,845		520,546		11,106		6		2,596,713		30,951
Total	$	4,075,401	$	23,090	$	520,546	$	11,106		8	$	4,595,947	$	34,196

The unrealized losses for all periods presented were principally attributable to changes in prevailing interest rates for similar types of securities and not deterioration in the creditworthiness of the issuer.

Management evaluates its debt securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions, or adverse developments relating to the issuer, warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than the carrying value, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies or other adverse developments in the status of the securities have occurred, and the results of reviews of the issuer’s financial condition. As of September 30, 2021 and December 31, 2020, there were no declines in the fair value of any of the securities reflected in the table above that were deemed by management to be OTTI.

Note 6. Loans, Allowance for Loan Losses and Credit Quality

The composition of net loans as of the balance sheet dates was as follows:

	September 30,			December 31,
	2021			2020

Commercial & industrial	$	139,061,736		$	161,067,501
Commercial real estate		285,912,606			280,544,550
Municipal		53,774,882			54,807,367
Residential real estate - 1st lien		174,895,121			170,507,263
Residential real estate - Jr lien		34,917,009			38,147,659
Consumer		4,077,021			4,280,990
Total loans		692,638,375			709,355,330

ALL		(7,819,307	)		(7,208,485	)
Deferred net loan fees		(1,149,278	)		(1,195,741	)
Net loans	$	683,669,790		$	700,951,104

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The following is an age analysis of past due loans (including non-accrual) as of the balance sheet dates, by portfolio segment:

September 30, 2021	30-89 Days		90 Days or More		Total Past Due		Current		Total Loans		Non-Accrual Loans		90 Days or More and Accruing

Commercial & industrial	$	2,286,922	$	0	$	2,286,922	$	136,774,814	$	139,061,736	$	148,674	$	0
Commercial real estate		776,299		233,042		1,009,341		284,903,265		285,912,606		3,671,880		0
Municipal		0		0		0		53,774,882		53,774,882		0		0
Residential real estate
- 1st lien		805,094		1,251,352		2,056,446		172,838,675		174,895,121		1,183,306		657,604
- Jr lien		158,845		78,311		237,156		34,679,853		34,917,009		178,845		78,311
Consumer		15,177		0		15,177		4,061,844		4,077,021		0		0
Totals	$	4,042,337	$	1,562,705	$	5,605,042	$	687,033,333	$	692,638,375	$	5,182,705	$	735,915

December 31, 2020	30-89 Days		90 Days or More		Total Past Due		Current		Total Loans		Non-Accrual Loans		90 Days or More and Accruing

Commercial & industrial	$	119,413	$	0	$	119,413	$	160,948,088	$	161,067,501	$	434,196	$	0
Commercial real estate		127,343		567,957		695,300		279,849,250		280,544,550		1,875,942		0
Municipal		0		0		0		54,807,367		54,807,367		0		0
Residential real estate
- 1st lien		1,872,439		828,344		2,700,783		167,806,480		170,507,263		2,173,315		390,288
- Jr lien		18,322		180,711		199,033		37,948,626		38,147,659		191,311		98,889
Consumer		14,388		0		14,388		4,266,602		4,280,990		0		0
Totals	$	2,151,905	$	1,577,012	$	3,728,917	$	705,626,413	$	709,355,330	$	4,674,764	$	489,177

For all loan segments, loans over 30 days past due are considered delinquent.

As of the balance sheet dates presented, loans in process of foreclosure consisted of the following residential mortgage loans:

	Number of loans		Balance

September 30, 2021		5	$	192,940
December 31, 2020		6		312,807

A Vermont state-imposed moratorium on residential foreclosure proceedings adopted in April 2020 in response to the COVID-19 pandemic, ended on July 15, 2021.

Allowance for loan losses

The ALL is established through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes that future payments of a loan balance are unlikely. Subsequent recoveries, if any, are credited to the allowance.

Unsecured loans are charged off when they become uncollectible and no later than 120 days past due. Unsecured loans to customers who subsequently file bankruptcy are charged off within 30 days of receipt of the notification of filing or by the end of the month in which the loans become 120 days past due, whichever occurs first. For secured loans, both residential and commercial, the potential loss on impaired loans is carried as a loan loss reserve specific allocation; the loss portion is charged off when collection of the full loan appears unlikely. The unsecured portion of a real estate loan is that portion of the loan exceeding the “fair value” of the collateral less the estimated cost to sell. Value of the collateral is determined in accordance with the Company’s appraisal policy. The unsecured portion of an impaired real estate secured loan is charged off by the end of the month in which the loan becomes 180 days past due.

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As described below, the allowance consists of general, specific and unallocated components. However, the entire allowance is available to absorb losses in the loan portfolio, regardless of specific, general and unallocated components considered in determining the amount of the allowance.

General component

The general component of the ALL is based on historical loss experience and various qualitative factors and is stratified by the following loan segments: commercial and industrial, CRE, municipal, residential real estate 1st lien, residential real estate Jr lien and consumer loans. The Company does not disaggregate its portfolio segments further into classes.

Loss ratios are calculated by loan segment using appropriate look back periods. Management uses an average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment in the current economic climate. During periods of economic stability, a relatively longer period (e.g., five years) may be appropriate. During periods of significant expansion or contraction, the Company may appropriately shorten the historical time period. Due primarily to the effects of COVID-19, during 2020 the Company shortened its look back period to one year, which remained in effect as of September 30, 2021.

Qualitative factors include the levels of and trends in delinquencies and non-performing loans, levels of and trends in loan risk groups, trends in volumes and terms of loans, effects of any changes in loan related policies, experience, ability and the depth of management, documentation and credit data exception levels, national and local economic trends, external factors such as competition and regulation and lastly, concentrations of credit risk in a variety of areas, including portfolio product mix, the level of loans to individual borrowers and their related interests, loans to industry segments, and the geographic distribution of CRE loans. This evaluation is inherently subjective as it requires estimates that are susceptible to revision as more information becomes available.

The qualitative factors are determined based on the various risk characteristics of each loan segment. The Company has policies, procedures and internal controls that management believes are commensurate with the risk profile of each of these segments. Major risk characteristics relevant to each portfolio segment are as follows:

Commercial & Industrial - Loans in this segment include commercial and industrial loans and to a lesser extent loans to finance agricultural production. Commercial loans are made to businesses and are generally secured by assets of the business, including trade assets and equipment. While not the primary collateral, in many cases these loans may also be secured by the real estate of the business. Repayment is expected from the cash flows of the business. A weakened economy, soft consumer spending, unfavorable foreign trade conditions and the rising cost of labor or raw materials are examples of issues that can impact the credit quality in this segment.

Commercial Real Estate - Loans in this segment are principally made to businesses and are generally secured by either owner-occupied, or non-owner occupied CRE. A relatively small portion of this segment includes farm loans secured by farm land and buildings. As with commercial and industrial loans, repayment of owner-occupied CRE loans is expected from the cash flows of the business and the segment would be impacted by the same risk factors as commercial and industrial loans. The non-owner occupied CRE portion includes both residential and commercial construction loans, vacant land and real estate development loans, multi-family dwelling loans and commercial rental property loans. Repayment of construction loans is expected from permanent financing takeout; the Company generally requires a commitment or eligibility for the take-out financing prior to construction loan origination. Real estate development loans are generally repaid from the sale of the subject real property as the project progresses. Construction and development lending entail additional risks, including the project exceeding budget, not being constructed according to plans, not receiving permits, or the pre-leasing or occupancy rate not meeting expectations. Repayment of multi-family loans and commercial rental property loans is expected from the cash flow generated by rental payments received from the individuals or businesses occupying the real estate. CRE loans are impacted by factors such as competitive market forces, vacancy rates, cap rates, net operating incomes, lease renewals and overall economic demand. In addition, loans in the recreational and tourism sector can be affected by weather conditions, such as unseasonably low winter snowfalls. CRE lending also carries a higher degree of environmental risk than other real estate lending.

Municipal - Loans in this segment are made to local municipalities, attributable to municipal financing transactions and backed by the full faith and credit of town governments or dedicated governmental revenue sources, with no historical losses recognized by the Company.

Residential Real Estate - 1^st Lien - Loans in this segment are collateralized by first mortgages on 1 - 4 family owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.

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Residential Real Estate - Jr Lien - Loans in this segment are collateralized by junior lien mortgages on 1 - 4 family residential real estate and repayment is primarily dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.

Consumer - Loans in this segment are made to individuals for consumer and household purposes. This segment includes both loans secured by automobiles and other consumer goods, as well as loans that are unsecured. This segment also includes overdrafts, which are extensions of credit made to both individuals and businesses to cover temporary shortages in their deposit accounts and are generally unsecured. The Company maintains policies restricting the size and term of these extensions of credit. The overall health of the economy, including unemployment rates, has an impact on the credit quality of this segment.

Specific component

The specific component of the ALL relates to loans that are impaired. Impaired loans are loans to a borrower that in the aggregate are greater than $100,000 and that are in non-accrual status or are TDRs regardless of amount. A specific allowance is established for an impaired loan when its estimated fair value or net present value of future cash flows is less than the carrying value of the loan. For all loan segments, except consumer loans, a loan is considered impaired when, based on current information and events, in management’s estimation it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant or temporary payment delays and payment shortfalls generally are not classified as impaired. Management evaluates the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and frequency of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis, by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Impaired loans also include troubled loans that are restructured. A TDR occurs when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that would otherwise not be granted. TDRs may include the transfer of assets to the Company in partial satisfaction of a troubled loan, a modification of a loan’s terms, or a combination of the two. As described above in Note 3, under March 2020 guidance from the federal banking agencies and concurrence by the FASB, certain short-term loan accommodations made in good faith for borrowers experiencing financial difficulties due to the COVID-19 health emergency will not be considered TDRs.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment evaluation, unless such loans are subject to a restructuring agreement.

Unallocated component

An unallocated component of the ALL is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component reflects management’s estimate of the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

The tables below summarize changes in the ALL and select loan information, by portfolio segment, for the periods indicated.

As of or for the three months ended September 30, 2021

	Commercial & Industrial		Commercial Real Estate			Municipal		Residential Real Estate 1st Lien			Residential Real Estate Jr Lien			Consumer			Unallocated		Total

ALL beginning balance	$	899,163	$	3,932,846		$	57,292	$	1,655,042		$	201,269		$	61,224		$	912,420	$	7,719,256
Charge-offs		0		0			0		0			0			(30,638	)		0		(30,638	)
Recoveries		0		20,162			0		2,275			8,641			10,444			0		41,522
Provision (credit)		3,201		(56,471	)		28,748		(10,532	)		(20,684	)		37,843			107,062		89,167
ALL ending balance	$	902,364	$	3,896,537		$	86,040	$	1,646,785		$	189,226		$	78,873		$	1,019,482	$	7,819,307

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As of or for the nine months ended September 30, 2021

	Commercial & Industrial			Commercial Real Estate		Municipal		Residential Real Estate 1st Lien			Residential Real Estate Jr Lien			Consumer			Unallocated		Total

ALL beginning balance	$	842,547		$	3,854,153	$	82,211	$	1,735,304		$	234,896		$	60,461		$	398,913	$	7,208,485
Charge-offs		(18,847	)		0		0		0			0			(68,011	)		0		(86,858	)
Recoveries		4,761			27,160		0		4,602			9,601			27,391			0		73,515
Provision (credit)		73,903			15,224		3,829		(93,121	)		(55,271	)		59,032			620,569		624,165
ALL ending balance	$	902,364		$	3,896,537	$	86,040	$	1,646,785		$	189,226		$	78,873		$	1,019,482	$	7,819,307

ALL evaluated for impairment
Individually	$	0		$	0	$	0	$	88,874		$	159		$	0		$	0	$	89,033
Collectively		902,364			3,896,537		86,040		1,557,911			189,067			78,873			1,019,482		7,730,274
Total	$	902,364		$	3,896,537	$	86,040	$	1,646,785		$	189,226		$	78,873		$	1,019,482	$	7,819,307

Loans evaluated for impairment
Individually	$	140,098		$	3,711,049	$	0	$	3,853,902		$	134,383		$	0				$	7,839,432
Collectively		138,921,638			282,201,557		53,774,882		171,041,219			34,782,626			4,077,021					684,798,943
Total	$	139,061,736		$	285,912,606	$	53,774,882	$	174,895,121		$	34,917,009		$	4,077,021				$	692,638,375

As of or for the year ended December 31, 2020

	Commercial & Industrial			Commercial Real Estate			Municipal		Residential Real Estate 1st Lien			Residential Real Estate Jr Lien			Consumer			Unallocated		Total

ALL beginning balance	$	836,766		$	3,181,646		$	0	$	1,388,564		$	289,684		$	51,793		$	178,038	$	5,926,491
Charge-offs		(39,148	)		(34,200	)		0		(203,623	)		(28,673	)		(74,327	)		0		(379,971	)
Recoveries		1,087			20,000			0		12,856			5,809			33,213			0		72,965
Provision (credit)		43,842			686,707			82,211		537,507			(31,924	)		49,782			220,875		1,589,000
ALL ending balance	$	842,547		$	3,854,153		$	82,211	$	1,735,304		$	234,896		$	60,461		$	398,913	$	7,208,485

ALL evaluated for impairment
Individually	$	0		$	0		$	0	$	108,474		$	307		$	0		$	0	$	108,781
Collectively		842,547			3,854,153			82,211		1,626,830			234,589			60,461			398,913		7,099,704
Total	$	842,547		$	3,854,153		$	82,211	$	1,735,304		$	234,896		$	60,461		$	398,913	$	7,208,485

Loans evaluated for impairment
Individually	$	414,266		$	1,943,723		$	0	$	4,657,050		$	135,053		$	0				$	7,150,092
Collectively		160,653,235			278,600,827			54,807,367		165,850,213			38,012,606			4,280,990					702,205,238
Total	$	161,067,501		$	280,544,550		$	54,807,367	$	170,507,263		$	38,147,659		$	4,280,990				$	709,355,330

As of or for the three months ended September 30, 2020

	Commercial & Industrial			Commercial Real Estate			Municipal		Residential Real Estate 1st Lien			Residential Real Estate Jr Lien		Consumer			Unallocated			Total

ALL beginning balance	$	886,546		$	3,406,502		$	0	$	1,511,897		$	319,749	$	48,653		$	342,337		$	6,515,684
Charge-offs		(34,565	)		(2,200	)		0		(56,500	)		0		(7,560	)		0			(100,825	)
Recoveries		0			0			0		4,742			533		5,475			0			10,750
Provision (credit)		90,770			222,268			41,866		36,383			6,434		8,709			(43,931	)		362,499
ALL ending balance	$	942,751		$	3,626,570		$	41,866	$	1,496,522		$	326,716	$	55,277		$	298,406		$	6,788,108

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As of or for the nine months ended September 30, 2020

	Commercial & Industrial			Commercial Real Estate			Municipal		Residential Real Estate 1st Lien			Residential Real Estate Jr Lien			Consumer			Unallocated		Total

ALL beginning balance	$	836,766		$	3,181,646		$	0	$	1,388,564		$	289,684		$	51,793		$	178,038	$	5,926,491
Charge-offs		(34,565	)		(2,200	)		0		(134,196	)		(28,673	)		(50,458	)		0		(250,092	)
Recoveries		1,087			20,000			0		10,552			5,280			28,289			0		65,208
Provision (credit)		139,463			427,124			41,866		231,602			60,425			25,653			120,368		1,046,501
ALL ending balance	$	942,751		$	3,626,570		$	41,866	$	1,496,522		$	326,716		$	55,277		$	298,406	$	6,788,108

Impaired loans, by portfolio segment, were as follows:

	As of September 30, 2021
	Recorded Investment(1)		Unpaid Principal Balance		Related Allowance		Average Recorded Investment(1)(2)		Average Recorded Investment(1)(3)		Interest Income Recognized(3)

Related allowance recorded
Residential real estate
1st lien	$	793,401	$	804,655	$	88,874	$	785,752	$	897,008	$	48,200
Jr lien		3,836		3,833		159		4,008		4,315		332
Total with related allowance		797,237		808,488		89,033		789,760		901,323		48,532

No related allowance recorded
Commercial & industrial		140,098		161,331				261,153		339,386		204
Commercial real estate		3,711,470		4,210,006				2,795,979		2,295,473		78,462
Residential real estate
1st lien		3,094,255		3,991,516				3,253,698		3,402,302		155,005
Jr lien		130,551		176,460				133,148		133,861		0
Total with no related allowance		7,076,374		8,539,313				6,443,978		6,171,022		233,671

Total impaired loans	$	7,873,611	$	9,347,801	$	89,033	$	7,233,738	$	7,072,345	$	282,203

(1)	Recorded investment in impaired loans as of September 30, 2021 includes accrued interest receivable and deferred net loan costs of $34,179.
(2)	For the three months ended September 30, 2021.
(3)	For the nine months ended September 30, 2021.

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	As of December 31, 2020
	Recorded Investment(1)		Unpaid Principal Balance		Related Allowance		Average Recorded Investment(1)(2)		Interest Income Recognized(2)

Related allowance recorded
Residential real estate
1st lien	$	900,581	$	950,063	$	108,474	$	889,262	$	72,713
Jr lien		4,777		4,775		307		5,416		541
Total with related allowance		905,358		954,838		108,781		894,678		73,254

No related allowance recorded
Commercial & industrial		414,266		471,405				397,136		6,396
Commercial real estate		1,944,013		2,394,284				1,746,430		14,139
Residential real estate
1st lien		3,788,965		4,607,848				3,878,829		230,838
Jr lien		130,279		169,720				163,750		4,524
Total with no related allowance		6,277,523		7,643,257				6,186,145		255,897

Total impaired loans	$	7,182,881	$	8,598,095	$	108,781	$	7,080,823	$	329,151

(1)	Recorded investment in impaired loans as of December 31, 2020 includes accrued interest receivable and deferred net loan costs of $32,789.
(2)	For the year ended December 31, 2020.

	As of September 30, 2020
	Recorded Investment(1)		Unpaid Principal Balance		Related Allowance		Average Recorded Investment(1)(2)		Average Recorded Investment(1)(3)		Interest Income Recognized(3)

Related allowance recorded
Residential real estate
1st lien	$	1,166,549	$	1,207,778	$	111,435	$	1,015,521	$	969,485	$	81,313
Jr lien		5,083		5,079		361		5,249		5,576		415
Total with related allowance		1,171,632		1,212,857		111,796		1,020,770		975,061		81,728

No related allowance recorded
Commercial & industrial		374,558		410,356				379,147		392,854		4,077
Commercial real estate		1,823,015		2,213,788				1,718,560		1,697,035		10,989
Residential real estate
1st lien		3,592,591		4,378,079				3,911,876		3,818,241		148,099
Jr lien		142,829		180,016				114,830		172,117		0
Total with no related allowance		5,932,993		7,182,239				6,124,413		6,080,247		163,165

Total impaired loans	$	7,104,625	$	8,395,096	$	111,796	$	7,145,183	$	7,055,308	$	244,893

(1)	Recorded investment in impaired loans as of September 30, 2020 includes accrued interest receivable and deferred net loan costs of $34,909.
(2)	For the three months ended September 30, 2020.
(3)	For the nine months ended September 30, 2020.

For all loan segments, the accrual of interest is discontinued when a loan is specifically determined to be impaired or when the loan is delinquent 90 days and management believes, after considering collection efforts and other factors, that the borrower’s financial condition is such that collection of interest is considered by management to be doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is generally not recognized on specific impaired loans unless the likelihood of further loss is considered by management to be remote. Interest payments received on impaired loans are generally applied as a reduction of the loan principal balance. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and a satisfactory payment performance of six or more months has occurred.

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Credit Quality Grouping

In developing the ALL, management uses credit quality groupings to help evaluate trends in credit quality. The Company groups credit risk into Groups A, B and C. The manner the Company utilizes to assign risk grouping is driven by loan purpose. Commercial purpose loans are individually risk graded while the retail portion of the portfolio is generally grouped by delinquency pool.

Group A loans - Acceptable Risk - are loans that are expected to perform as agreed under their respective terms. Such loans carry a normal level of risk that does not require management attention beyond that warranted by the loan or loan relationship characteristics, such as loan size or relationship size. Group A loans include commercial purpose loans that are individually risk rated and retail loans that are rated by pool. Group A retail loans include performing consumer and residential real estate loans. Residential real estate loans are loans to individuals secured by 1-4 family homes, including first mortgages, home equity and home improvement loans. Loan balances fully secured by deposit accounts or that are fully guaranteed by the federal government are considered acceptable risk.

Group B loans - Management Involved - are loans that require greater attention than the acceptable risk loans in Group A. Characteristics of such loans may include, but are not limited to, borrowers that are experiencing negative operating trends such as reduced sales or margins, borrowers that have exposure to adverse market conditions such as increased competition or regulatory burden, or borrowers that have had unexpected or adverse changes in management. These loans have a greater likelihood of migrating to an unacceptable risk level if these characteristics are left unchecked. Group B is limited to commercial purpose loans that are individually risk rated.

Group C loans - Unacceptable Risk - are loans that have distinct shortcomings that require a greater degree of management attention. Examples of these shortcomings include a borrower’s inadequate capacity to service debt, poor operating performance, or insolvency. These loans are more likely to result in repayment through collateral liquidation. Group C loans range from those that are likely to sustain some loss if the shortcomings are not corrected, to those for which loss is imminent and non-accrual treatment is warranted. Group C loans include individually rated commercial purpose loans and retail loans adversely rated in accordance with the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification Policy. Group C retail loans include 1-4 family residential real estate loans and home equity loans past due 90 days or more with loan-to-value ratios greater than 60%, home equity loans 90 days or more past due where the Bank does not hold first mortgage, irrespective of loan-to-value, loans in bankruptcy where repayment is likely but not yet established, and lastly consumer loans that are 90 days or more past due.

Commercial purpose loan ratings are assigned by the commercial account officer; for larger and more complex commercial loans, the credit rating is a collaborative assignment by the lender and the credit analyst. The credit risk rating is based on the borrower’s expected performance, i.e., the likelihood that the borrower will be able to service its obligations in accordance with the loan terms. Credit risk ratings are meant to measure risk versus simply record history. Assessment of expected future payment performance requires consideration of numerous factors. While past performance is part of the overall evaluation, expected performance is based on an analysis of the borrower’s financial strength, and historical and projected factors such as size and financing alternatives, capacity and cash flow, balance sheet and income statement trends, the quality and timeliness of financial reporting, and the quality of the borrower’s management. Other factors influencing the credit risk rating to a lesser degree include collateral coverage and control, guarantor strength and commitment, documentation, structure and covenants and industry conditions. There are uncertainties inherent in this process.

Credit risk ratings are dynamic and require updating whenever relevant information is received. Risk ratings are assessed on an ongoing basis and at various points, including at delinquency or at the time of other adverse events. For larger, more complex or adversely rated loans, risk ratings are also assessed at the time of annual or periodic review. Lenders are required to make immediate disclosure to the Senior Credit Officer of any known increase in loan risk, even if considered temporary in nature.

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The risk ratings within the loan portfolio, by segment, as of the balance sheet dates were as follows:

As of September 30, 2021

							Residential		Residential
	Commercial		Commercial				Real Estate		Real Estate
	& Industrial		Real Estate		Municipal		1st Lien		Jr Lien		Consumer		Total

Group A	$	135,579,309	$	270,522,821	$	53,774,882	$	172,862,774	$	34,652,449	$	4,077,021	$	671,469,256
Group B		707,522		8,337,352		0		0		0		0		9,044,874
Group C		2,774,905		7,052,433		0		2,032,347		264,560		0		12,124,245
Total	$	139,061,736	$	285,912,606	$	53,774,882	$	174,895,121	$	34,917,009	$	4,077,021	$	692,638,375

As of December 31, 2020

							Residential		Residential
	Commercial		Commercial				Real Estate		Real Estate
	& Industrial		Real Estate		Municipal		1st Lien		Jr Lien		Consumer		Total

Group A	$	156,748,590	$	261,932,833	$	54,807,367	$	167,478,918	$	37,850,056	$	4,280,990	$	683,098,754
Group B		998,641		12,784,078		0		0		0		0		13,782,719
Group C		3,320,270		5,827,639		0		3,028,345		297,603		0		12,473,857
Total	$	161,067,501	$	280,544,550	$	54,807,367	$	170,507,263	$	38,147,659	$	4,280,990	$	709,355,330

Modifications of Loans and TDRs

A loan is classified as a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider.

The Company is deemed to have granted such a concession if it has modified a troubled loan in any of the following ways:

	·	Reduced accrued interest;
	·	Reduced the original contractual interest rate to a rate that is below the current market rate for the borrower;
	·	Converted a variable-rate loan to a fixed-rate loan;
	·	Extended the term of the loan beyond an insignificant delay;
	·	Deferred or forgiven principal in an amount greater than three months of payments;
	·	Performed a refinancing and deferred or forgiven principal on the original loan;
	·	Capitalized protective advance to pay delinquent real estate taxes; or
	·	Capitalized delinquent accrued interest.

An insignificant delay or insignificant shortfall in the amount of payments typically would not require the loan to be accounted for as a TDR. However, pursuant to regulatory guidance, any payment delay longer than three months is generally not considered insignificant. Management’s assessment of whether a concession has been granted also takes into account payments expected to be received from third parties, including third-party guarantors, provided that the third party has the ability to perform on the guarantee.

The Company’s TDRs are principally a result of extending loan repayment terms to relieve cash flow difficulties. The Company has only, on a limited basis, reduced interest rates for borrowers below the current market rate for the borrower. The Company has not forgiven principal or reduced accrued interest within the terms of original restructurings, nor has it converted variable rate terms to fixed rate terms. However, the Company evaluates each TDR situation on its own merits and does not foreclose the granting of any particular type of concession.

The Company has adopted the TDR guidance issued by the federal banking agencies in March and April 2020 regarding the treatment of certain short-term loan modifications relating to the COVID-19 pandemic (See Note 3). Under this guidance, qualifying concessions and modifications are not considered TDRs. As of September 30, 2021, the Company had granted short term loan concessions and/or modifications within the terms of this guidance to 593 borrowers, with respect to loans having an aggregate principal balance of $109.5 million as of September 30, 2021. These loans may bear a higher risk of default in future periods.

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New TDRs, by portfolio segment, during the periods presented were as follows:

	Three months ended September 30, 2021					Nine months ended September 30, 2021
		Pre-		Post-				Pre-		Post-
		Modification		Modification				Modification		Modification
	Number	Outstanding		Outstanding		Number		Outstanding		Outstanding
	of	Recorded		Recorded		of		Recorded		Recorded
	Contracts	Investment		Investment		Contracts		Investment		Investment

Commercial & industrial	0	$	0	$	0		1	$	41,751	$	41,751
Commercial real estate	1		2,250,000		2,250,000		1		2,250,000		2,250,000
	1	$	2,250,000	$	2,250,000		2	$	2,291,751	$	2,291,751

	Year ended December 31, 2020
		Pre-		Post-
		Modification		Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Contracts	Investment		Investment

Residential real estate - 1st lien	6	$	591,826	$	687,751

Three months ended September 30, 2020

Nine months ended September 30, 2020

Pre-

Post-

Pre-

Post-

Modification

Number

Outstanding

Number

Outstanding

Recorded

Contracts

Investment

Contracts

Investment

Residential real estate

- 1st lien

54,318

57,053

591,826

687,751

The TDRs for which there was a payment default during the twelve month periods presented below were as follows:

For the twelve months ended September 30, 2021

	Number of	Recorded
	Contracts	Investment

Commercial & industrial	1	$	38,751

For the twelve months ended December 31, 2020

	Number of	Recorded
	Contracts	Investment

Residential real estate - 1st lien	1	$	165,168

For the twelve months ended September 30, 2020

	Number of	Recorded
	Contracts	Investment

Commercial & industrial	3	$	25,720
Residential real estate - 1st lien	3		408,505
Residential real estate - Jr lien	1		50,095
	7	$	484,320

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TDRs are treated as other impaired loans and carry individual specific reserves with respect to the calculation of the ALL. These loans are categorized as non-performing, may be past due, and are generally adversely risk rated. The TDRs that have defaulted under their restructured terms are generally in collection status and their reserve is typically calculated using the fair value of collateral method.

The specific allowances within the ALL related to TDRs as of the balance sheet dates are presented in the table below.

	September 30,		December 31,
	2021		2020

Specific Allocation	$	89,033	$	108,781

As of the balance sheet dates, the Company evaluates whether it is contractually committed to lend additional funds to debtors with impaired, non-accrual or modified loans. The Company is contractually committed to lend on one SBA guaranteed line of credit to a borrower whose lending relationship was previously restructured.

Note 7. Goodwill and Other Intangible Assets

As a result of a merger with LyndonBank on December 31, 2007, the Company recorded goodwill amounting to $11,574,269. The goodwill is not amortizable and is not deductible for tax purposes.

As of December 31, 2020, the most recent evaluation, management concluded that no impairment existed. Management evaluates its goodwill intangible for impairment at least annually, or more frequently as circumstances warrant, including, as applicable, circumstances arising out of the COVID-19 pandemic, including the disruptions to the economy and increased volatility in the financial markets and related impacts on the Company’s business.

Note 8. Fair Value

Certain assets and liabilities are recorded at fair value to provide additional insight into the Company’s quality of earnings and comprehensive income. The fair values of some of these assets and liabilities are measured on a recurring basis while others are measured on a non-recurring basis, with the determination based upon applicable existing accounting pronouncements. For example, securities available-for-sale are recorded at fair value on a recurring basis. Other assets, such as MSRs, loans held-for-sale, impaired loans, and OREO are recorded at fair value on a non-recurring basis using the lower of cost or market methodology to determine impairment of individual assets. The Company groups assets and liabilities which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with Level 1 considered highest and Level 3 considered lowest). A brief description of each level follows.

Level 1	Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasury and other U.S. Government debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2	Observable inputs other than Level 1 prices such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes MSRs, collateral-dependent impaired loans and OREO.

Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The following methods and assumptions were used by the Company in estimating its fair value measurements:

Debt Securities AFS: Fair value measurement is based upon quoted prices for similar assets, if available. If quoted prices are not available, fair values are measured using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curves, prepayment speeds and default rates. Level 1 securities would include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 securities include federal agency securities.

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Impaired loans: Impaired loans are reported based on one of three measures: the present value of expected future cash flows discounted at the loan’s effective interest rate; the loan’s observable market price; or the fair value of the collateral if the loan is collateral dependent. If the fair value is less than an impaired loan’s recorded investment, an impairment loss is recognized as part of the ALL. Accordingly, certain impaired loans may be subject to measurement at fair value on a non-recurring basis. Management has estimated the fair values of collateral-dependent loans using Level 2 inputs, such as the fair value of collateral based on independent third-party appraisals.

Loans held-for-sale: The fair value of loans held-for-sale is based upon an actual purchase and sale agreement between the Company and an independent market participant. The sale is executed within a reasonable period following quarter end at the stated fair value.

MSRs: MSRs represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method and compared to fair value for impairment. In evaluating the carrying values of MSRs, the Company obtains third party valuations based on loan level data including note rate, and the type and term of the underlying loans. The Company classifies MSRs as non-recurring Level 2.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis and reflected in the consolidated balance sheets at the dates presented, segregated by fair value hierarchy, are summarized below. There were no Level 3 assets or liabilities measured on a recurring basis as of the balance sheet dates presented, nor were there any transfers of assets between Levels during either 2021 or 2020.

	September 30,		December 31,
Assets: (market approach)	2021		2020

Level 1
U.S. Government securities	$	10,100,822	$	0

Level 2
U.S. GSE debt securities	$	9,967,078	$	8,169,831
Agency MBS		80,317,262		41,378,349
ABS and OAS		2,222,451		2,669,996
CMO		939,641		0
Other investments		7,128,885		8,487,002
Total	$	100,575,317	$	60,705,178

	$	110,676,139	$	60,705,178

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

The following table includes assets measured at fair value on a non-recurring basis that have had a fair value adjustment since their initial recognition. Impaired loans measured at fair value only include impaired loans with a partial write-down or with a related specific ALL and are presented net of the specific allowances as disclosed in Note 6. Assets measured at fair value on a non-recurring basis and reflected in the consolidated balance sheets at the dates presented, segregated by fair value hierarchy level, are summarized below. There were no Level 1 or Level 3 assets or liabilities measured on a non-recurring basis as of the balance sheet dates presented, nor were there any transfers of assets between levels during either 2021 or 2020.

	September 30,		December 31,
Level 2	2021		2020
Assets: (market approach)
Impaired loans, net of related allowance	$	150,873	$	323,645
Loans held-for-sale		50,000		130,400
MSRs (1)		898,349		922,146

(1) Represents MSRs at lower of cost or fair value.

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FASB ASC Topic 825, “Financial Instruments”, requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, if the fair values can be reasonably determined. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques using observable inputs when available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The estimated fair values of commitments to extend credit and letters of credit were immaterial as of the dates presented in the tables below. The estimated fair values of the Company’s financial instruments as of the balance sheet dates were as follows:

September 30, 2021			Fair		Fair		Fair		Fair
	Carrying		Value		Value		Value		Value
	Amount		Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)
Financial assets:
Cash and cash equivalents	$	129,752	$	129,752	$	0	$	0	$	129,752
Debt securities AFS		110,676		10,101		100,575		0		110,676
Restricted equity securities		1,447		0		1,447		0		1,447
Loans and loans held-for-sale, net of ALL
Commercial & industrial		136,380		0		0		138,509		138,509
Commercial real estate		281,551		0		42		282,928		282,970
Municipal		53,610		0		0		55,437		55,437
Residential real estate - 1st lien		173,511		0		109		174,521		174,630
Residential real estate - Jr lien		34,676		0		0		34,573		34,573
Consumer		3,992		0		0		4,031		4,031
MSRs (1)		898		0		927		0		927
Accrued interest receivable		2,730		0		2,730		0		2,730

Financial liabilities:
Deposits
Other deposits		839,646		0		840,638		0		840,638
Brokered deposits		449		0		450		0		450
Long-term borrowings		2,300		0		2,191		0		2,191
Repurchase agreements		22,352		0		22,352		0		22,352
Operating lease obligations		913		0		913		0		913
Finance lease obligations		3,912		0		3,912		0		3,912
Subordinated debentures		12,887		0		12,876		0		12,876
Accrued interest payable		57		0		57		0		57

(1) Reported fair value represents all MSRs for loans serviced by the Company, regardless of carrying amount.

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December 31, 2020			Fair		Fair		Fair		Fair
	Carrying		Value		Value		Value		Value
	Amount		Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)
Financial assets:
Cash and cash equivalents	$	115,050	$	115,050	$	0	$	0	$	115,050
Debt securities AFS		60,705		0		60,705		0		60,705
Restricted equity securities		1,447		0		1,447		0		1,447
Loans and loans held-for-sale, net of ALL
Commercial & industrial		158,601		0		0		160,371		160,371
Commercial real estate		276,476		0		208		279,281		279,489
Municipal		54,694		0		0		55,601		55,601
Residential real estate - 1st lien		169,201		0		116		170,385		170,501
Residential real estate - Jr lien		37,892		0		0		37,991		37,991
Consumer		4,218		0		0		4,238		4,238
MSRs (1)		922		0		922		0		922
Accrued interest receivable		2,988		0		2,988		0		2,988

Financial liabilities:
Deposits
Other deposits		778,085		0		779,824		0		779,824
Brokered deposits		4,206		0		4,208		0		4,208
Long-term borrowings		2,800		0		2,724		0		2,724
Repurchase agreements		38,727		0		38,727		0		38,727
Operating lease obligations		1,060		0		1,060		0		1,060
Finance lease obligations		38		0		38		0		38
Subordinated debentures		12,887		0		12,876		0		12,876
Accrued interest payable		86		0		86		0		86

(1) Reported fair value represents all MSRs for loans serviced by the Company, regardless of carrying amount.

Note 9. Loan Servicing

The following table shows the changes in the carrying amount of the MSRs, included in other assets in the consolidated balance sheets, for the periods indicated:

	Nine Months Ended			Year Ended
	September 30, 2021			December 31, 2020

Balance at beginning of year	$	922,146		$	939,577
MSRs capitalized		97,083			292,654
MSRs amortized		(174,530	)		(256,435	)
Change in valuation allowance		53,650			(53,650	)
Balance at end of period	$	898,349		$	922,146

Note 10. Legal Proceedings

In the normal course of business, the Company is involved in litigation that is considered incidental to its business. Management does not expect that any such litigation will be material to the Company’s consolidated financial condition or results of operations.

Note 11. Subsequent Events

The Company has evaluated events and transactions through the date that the financial statements were issued for potential recognition or disclosure in these financial statements, as required by GAAP. On September 23, 2021, the Company’s Board declared a cash dividend of $0.22 per common share, payable November 1, 2021 to shareholders of record as of October 15, 2021. This dividend has been recorded in the Company’s consolidated financial statements as of the declaration date, including shares issuable under the DRIP.

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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, 2021

The following discussion analyzes the consolidated financial condition of Community Bancorp. and its wholly-owned subsidiary, Community National Bank, as of September 30, 2021 and December 31, 2020, and its consolidated results of operations for the three- and nine-month interim periods presented. The Company is considered a “smaller reporting company” under the disclosure rules of the SEC. Accordingly, the Company has elected to provide its audited statements of income, comprehensive income, cash flows and changes in shareholders’ equity for a two year, rather than a three year, period and intends to provide smaller reporting company scaled disclosures where management deems it appropriate. Additionally, beginning with the 2020 Annual Report on Form 10-K, the Company is considered a non-accelerated filer under the amended disclosure rules of the SEC.

The following discussion should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in its 2020 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.

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 continued effects of the COVID-19 pandemic on our business, financial condition, results of operations and prospects; the estimated contingent liability related to assumptions made within the asset/liability management process; management’s expectations as to the future interest rate environment and the Company’s related liquidity level; credit risk expectations relating to the Company’s loan portfolio and its participation in the FHLBB MPF program; and management’s general outlook for the future performance of the Company or the local or national economy. Although forward-looking statements are based on management’s expectations and estimates as of the date they are made, many of the factors that could influence or determine actual results are unpredictable and not within the Company’s control.

Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities:

	·	general economic or business conditions, either nationally, regionally or locally, deteriorate, resulting in a decline in credit quality or a diminished demand for the Company’s products and services;
	·	competitive pressures increase among financial service providers in the Company’s northern New England market area or in the financial services industry generally, including competitive pressures from non-bank financial service providers, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems;
	·	interest rates change in such a way as to negatively affect the Company’s net income, asset valuations or margins;
	·	changes in laws or government rules, including the rules of the federal Consumer Financial Protection Bureau, or the way in which courts or government agencies interpret or implement those laws or rules, increase our costs of doing business, causing us to limit or change our product offerings or pricing, or otherwise adversely affect the Company’s business;
	·	changes in federal or state tax laws or policy;
	·	changes in the level of nonperforming assets and charge-offs;
	·	changes in applicable accounting policies, practices and standards, including, without limitation, implementation of pending changes to the measurement of credit losses in financial statements under US GAAP pursuant to the CECL model;
	·	changes in consumer and business spending, borrowing and savings habits;
	·	reductions in deposit levels, which necessitate increased borrowings to fund loans and investments;
	·	the geographic concentration of the Company’s loan portfolio and deposit base;
	·	losses due to the fraudulent or negligent conduct of third parties, including the Company’s service providers, customers and employees;

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	·	cybersecurity risks could adversely affect the Company’s business, financial performance or reputation and could result in financial liability for losses incurred by customers or others due to data breaches or other compromise of the Company’s information security systems;
	·	higher-than-expected costs are incurred relating to information technology or difficulties arise in implementing technological enhancements;
	·	management’s risk management measures may not be completely effective;
	·	changes in the United States monetary and fiscal policies, including the interest rate policies of the FRB and its regulation of the money supply;
	·	adverse changes in the credit rating of U.S. government debt;
	·	the planned phase out of three month LIBOR by June 30, 2023, which could adversely affect the Company’s interest costs in future periods on its $12,887,000 in principal amount of Junior Subordinated Debentures due December 12, 2037, which currently bear interest at a variable rate, adjusted quarterly, equal to 3-month LIBOR, plus 2.85%;
	·	the effect of COVID-19 and emerging variants of the virus on our Company, the communities where we have branches and loan production offices, the State of Vermont and the national and global economies and overall stability of the financial markets;
	·	government and regulatory responses to the COVID-19 pandemic and emerging threats from variants of the virus;
	·	operational and internal system failures due to changes in normal business practices, including remote working for Company staff;
	·	increased cybercrime and payment system risk due to increase usage by customers of online and other remote banking channels;
	·	rising unemployment rates in our markets due to the COVID-19 related business shutdowns, delays and setbacks in scheduled re-openings and other economic disruptions, which reduce our borrowers’ ability to repay their loans and reduce customer demand for our products and services; and
	·	the short-term and long-term effects of government interventions in the U.S. economy and financial system in response to the COVID-19 pandemic and emerging variants of the virus, including the effects of recent legislative, tax, accounting and regulatory actions and reforms, such as passage of the CARES Act, the actions of the Federal Reserve affecting monetary policy, and the temporary moratorium on foreclosures imposed by the State of Vermont in response to the COVID-19 emergency.

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, 2021 were $968,584,267 compared to $918,233,284 at December 31, 2020, an increase of 5.5%. Changes in the asset base included an increase of $49,970,961, or 82.3%, in securities AFS, and an increase in cash and cash equivalents of $14,702,116, or 12.8%, which was partially offset by a decrease in net loans of $17,281,314, or 2.5%. The growth in the securities AFS portfolio was due to purchases totaling $66.0 million during the first nine months of 2021. The decrease in loans was primarily attributable to forgiveness payments in the PPP portfolio, which had an aggregate principal balance of $35.7 million as of September 30, 2021, compared to $64.4 million at December 31, 2020. Net of the decrease in PPP loans, loans increased by $12MM, or 1.9% year to date. More discussion on the activity of this portfolio can be found in the Credit Risk section.

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Total deposits on September 30, 2021 were $840,094,760 compared to $782,290,840 on December 31, 2020, an increase of $57.8 million, or 7.4%, reflecting the combined effect of increases in core deposits (demand deposit accounts, non-interest bearing) of $15.5 million, or 8.30%, an increase in interest-bearing transaction accounts of $8.6 million, or 3.8%, an increase in money market funds totaling $9.2 million, or 8.0%, and an increase in savings accounts of $30.2 million, or 21.8%. These increases were partially offset by a decrease of $5.7 million, or 5.0%, in time deposits. The increase in core deposits was driven in part by PPP loan funds that were deposited in business checking accounts as well as increases in customer checking accounts likely from stimulus payments, unemployment benefits and deferral or forbearance agreements on residential mortgage and student loans.

Consolidated net income during the third quarter of 2021 increased $818,760, or 28.4%, and year to date consolidated net income increased $2.2 million, or 28.8%, from $7.6 million for the first nine months of 2020 to $9.8 million for the same period in 2021. PPP loan processing fees from the SBA and a significant decrease in interest expense were the main drivers in the increase in net income for the three- and nine-month comparison periods. Please refer to the Non-interest Income and Non-interest Expense sections for more information on these and other changes for the three- and nine-month periods ended September 30, 2021.

Total interest income increased $1.1 million, or 13.9%, for the third quarter of 2021, compared to the same quarter in 2020, and increased $2.1 million, or 8.5%, year to date through September 30, 2021, compared to the same period in 2020. The increase in interest earned on the investment portfolio was due to an increase in volume, and the recognition of PPP loan processing fees from the SBA of $1.6 million for the third quarter and $3.7 million for the first nine months of 2021 contributed to the increase in both periods. Those processing fees represented 95.5% and 94.3%, respectively, of the total of fees on loans of $1.7 million for the third quarter of 2021, and $3.9 million for the nine months ended September 30, 2021, compared to 86.3% and 84.8%, respectively, of total fees on loans of $525,601 and $1.2 million, for the same periods in 2020. The opportunity for an increase in interest income from the loan growth was curbed by the mandated 1% interest rate on SBA PPP loans.

Despite a 14.2% increase in total interest-bearing deposits year over year, a decrease in total interest expense of $322,086, or 30.7%, is noted for the third quarter of 2021 compared to 2020, and a decrease of $1.4 million, or 37.1%, is noted for the first nine months of 2021, compared to the same period in 2020. The 150 basis point decrease in short-term rates initiated by the FRB in March 2020 in response to the COVID-19 pandemic and sustained since then has resulted in a decrease in most components of interest expense, as rates paid on deposit accounts were reduced to reflect the changes in market rates. Please refer to the interest rate sensitivity discussion in the Interest Rate Risk and Asset and Liability Management section for more information on the impact that FRB action and changes in the yield curve could have on net interest income.

The provision for loan losses for the third quarter of 2021 was $89,167 compared to $362,499 for the same quarter of 2020, and $624,165 for the first nine months of 2021, compared to just over $1.0 million for the same period in 2020, resulting in decreases of 75.4% and 40.4%, respectively, between periods. These decreases to the provision in both periods were primarily due to a negligible level of charge off activity, a decline in historical loss rates and a decrease in the amount of the loan portfolio during the first nine months of 2021, compared to higher than anticipated loan charge off activity as well as loan growth during the same period last year. Additionally, most of the loan growth during the first nine months of 2021 was attributable to PPP loans, which bear a 100% SBA guarantee, subject to borrower eligibility requirements. Please refer to the ALL and provisions discussion in the Credit Risk section for more information on these decreases.

Equity capital grew to $83.2 million, with a book value per share of $15.23 as of September 30, 2021, compared to equity capital of $77.3 million and a book value of $14.25 as of December 31, 2020. On September 23, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.22 per common share, payable on November 1, 2021 to shareholders of record on October 15, 2021.

As of September 30, 2021, all of the Company’s capital ratios, and those of our subsidiary Bank, were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an economic downturn from a resurgence of COVID-19, should one occur, our equity capital and regulatory capital ratios could be adversely impacted by credit losses and other adverse economic and operational impacts of the pandemic.

CRITICAL ACCOUNTING POLICIES

The Company’s significant accounting policies are fundamental to understanding the Company’s results of operations and financial condition because they require management to use estimates and assumptions that may affect the value of the Company’s assets or liabilities and financial results, sometimes in material respects. These policies are considered by management to be critical because they require subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies, and others deemed less critical, are described in the Company’s Accounting Policy, which is updated yearly for review and approval by the Company’s Audit Committee, and then presented to the Company’s Board for final review and approval.

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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 2020 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 2021 in the Company’s critical accounting policies.

RESULTS OF OPERATIONS

Net income for the third quarter of 2021 was $3,699,202 or $0.69 per common share, compared to $2,880,443 or $0.54 per common share for the same quarter of 2020. Net income for the first nine months of 2021 was $9,771,309 or $1.82 per common share, compared to $7,583,992 or $1.43 per common share for the same period in 2020. Core earnings (NII) for the third quarter of 2021 was $8.5 million compared to $7.0 million for the same quarter in 2020 and $23.8 million for the first nine months of 2021, compared to $20.3 million for the same period in 2020. As noted and discussed in the Overview, interest income during the third quarter and year to date period was supported by fees generated from administering PPP loans. These fees have offset a decrease in interest income due to the repricing of loans, new loans (other than PPP loans) booked at lower market rates and PPP loans booked at a mandated 1% annual interest rate. Despite the increase in deposits between periods, interest paid on deposits, which is the major component of total interest expense, decreased $283,139, or 32.3% for the third quarter of 2021 compared to the same quarter of 2020, and $1.2 million, or 38.8%, for the first nine months of 2021 compared to the same period last year, as rates paid on deposits continue to adjust downward, reflecting the decreases in short-term rates initiated by the FRB beginning in March 2020 in response to the pandemic.

Non-interest income for the third quarter of 2021 was $1.7 million compared to $1.9 million for the same quarter of 2020, and non-interest income for the first nine months of 2021 was $5.0 million compared to $5.1 million for the first nine months of 2020. Proceeds from sales of sold loans decreased from $31.5 million for the first nine months of 2020 to $6.5 million for the same period in 2021. This resulted in decreases in gain on sale from these proceeds totaling $359,265, or 59.7% for the third quarter of 2021 compared to the same quarter of 2020, and $433,952, or 38.1% for the first nine months of 2021 compared to the same period in 2020. Non-interest expense for the third quarter of 2021 was $5.5 million compared to $5.1 million for the same quarter of 2020, and non-interest expense for the first nine months of 2021 was $16.2 million compared to $15.2 million for the same period of 2020.

The following tables summarize certain balance sheet data and the earnings performance of the Company as of the balance sheet dates and for the nine month comparison periods.

	September 30,		December 31,
	2021		2020
Balance Sheet Data
Net loans	$	683,669,790	$	700,951,104
Total assets		968,584,267		918,233,284
Total deposits		840,094,760		782,290,840
Borrowed funds		2,300,000		2,800,000
Junior subordinated debentures		12,887,000		12,887,000
Total liabilities		885,369,565		840,944,571
Total shareholders’ equity		83,214,702		77,288,713

Book value per common share outstanding	$	15.23	$	14.25

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	Nine Months Ended September 30,
	2021		2020
Operating Data
Total interest income	$	26,104,814	$	24,050,460
Total interest expense		2,349,083		3,734,083
Net interest income		23,755,731		20,316,377

Provision for loan losses		624,165		1,046,501
Net interest income after provision for loan losses		23,131,566		19,269,876

Non-interest income		5,041,352		5,057,104
Non-interest expense		16,166,304		15,185,390
Income before income taxes		12,006,614		9,141,590
Applicable income tax expense(1)		2,235,305		1,557,598

Net Income	$	9,771,309	$	7,583,992

Per Common Share Data
Earnings per common share (2)	$	1.82	$	1.43
Dividends declared per common share	$	0.66	$	0.57
Weighted average number of common shares outstanding		5,338,481		5,264,802
Number of common shares outstanding, period end		5,364,973		5,300,211

(1)	Applicable income tax expense assumes a 21% tax rate for both periods.
(2)	Computed based on the weighted average number of common shares outstanding during the periods presented.

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, for the comparison periods presented.

	Three Months Ended September 30,
	2021			2020
Return on average assets		1.54	%		1.36	%
Return on average equity		17.87	%		15.54	%
Dividend payout ratio (1)		31.88	%		35.19	%
Average equity to average assets		8.64	%		8.76	%

	Nine Months Ended September 30,
	2021			2020
Return on average assets		1.40	%		1.27	%
Return on average equity		16.39	%		14.16	%
Dividend payout ratio (1)		36.26	%		39.86	%
Average equity to average assets		8.52	%		8.98	%

(1) Dividends declared per common share divided by earnings per common share.

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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 $246,627 and $319,697 for the three months ended September 30, 2021 and 2020, respectively, and $759,855 and $1.1 million for the nine months ended September 31, 2021 and 2020, respectively, was derived from loans to local municipalities of $53.8 million and $52.3 million at September 30, 2021 and 2020, respectively.

The following tables show the reconciliation between reported NII and tax equivalent NII for the comparison periods presented.

	Three Months Ended September 30,
	2021		2020

Net interest income as presented	$	8,482,070	$	7,036,086
Effect of tax-exempt income		65,559		84,982
Net interest income, tax equivalent	$	8,547,629	$	7,121,068

	Nine Months Ended September 30,
	2021		2020

Net interest income as presented	$	23,755,731	$	20,316,377
Effect of tax-exempt income		201,987		295,535
Net interest income, tax equivalent	$	23,957,718	$	20,611,912

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As a result of the adverse economic impacts and uncertainties from the COVID-19 pandemic, and from the FRB’s responsive monetary policies resulting in a prolonged low interest rate environment, the Company’s NII is likely to be adversely affected in future periods, although the duration and extent of such impacts cannot be predicted at this time.

The following tables present average interest-earning assets and 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 rate/yield for the comparison periods presented.

	Three Months Ended September 30,
	2021							2020
					Average							Average
	Average		Income/		Rate/			Average		Income/		Rate/
	Balance		Expense		Yield			Balance		Expense		Yield
Interest-Earning Assets
Loans (1)	$	705,990,188	$	8,843,732		4.97	%	$	735,066,284	$	7,827,896		4.24	%
Taxable investment securities		91,309,182		325,002		1.41	%		43,672,567		249,341		2.27	%
Sweep and interest-earning accounts		80,330,844		92,923		0.46	%		20,438,654		76,896		1.50	%
Other investments (2)		1,834,150		14,666		3.17	%		1,799,850		17,715		3.92	%
Total	$	879,464,364	$	9,276,323		4.18	%	$	800,977,355	$	8,171,848		4.06	%

Interest-Bearing Liabilities
Interest-bearing transaction accounts	$	222,858,078	$	126,042		0.22	%	$	187,233,075	$	198,932		0.42	%
Money market accounts		126,691,975		148,962		0.47	%		106,073,212		215,488		0.81	%
Savings deposits		162,353,105		51,909		0.13	%		130,272,439		39,142		0.12	%
Time deposits		107,239,980		267,414		0.99	%		113,353,872		423,904		1.49	%
Borrowed funds		2,301,326		12		0.00	%		3,663,261		598		0.06	%
Repurchase agreements		23,644,148		16,871		0.28	%		30,519,702		67,327		0.88	%
Finance lease obligations		2,385,977		19,709		3.30	%		59,386		1,208		8.14	%
Junior subordinated debentures		12,887,000		97,776		3.01	%		12,887,000		104,181		3.22	%
Total	$	660,361,589	$	728,695		0.44	%	$	584,061,947	$	1,050,780		0.72	%

Net interest income			$	8,547,628						$	7,121,068
Net interest spread (3)						3.74	%						3.34	%
Net interest margin (4)						3.86	%						3.54	%

	(1)	Included in gross loans are non-accrual loans with average balances of $5,274,531 and $4,677,752 for the three months ended September 30, 2021 and 2020, respectively. Loans are stated before deduction of unearned discount and ALL, less loans held-for-sale and include tax-exempt loans to local municipalities with average balances of $52,546,634 and $56,337,312 for the three months ended September 30, 2021 and 2020, respectively.

	(2)	Included in other investments is the Company’s FHLBB Stock with average balances of $769,000 and $734,700 for the three months ended September 30, 2021 and 2020, respectively, with a dividend rate of approximately 1.52% and 4.12%, 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,
	2021							2020
					Average							Average
	Average		Income/		Rate/			Average		Income/		Rate/
	Balance		Expense		Yield			Balance		Expense		Yield
Interest-Earning Assets
Loans (1)	$	718,366,424	$	25,121,879		4.68	%	$	685,896,774	$	23,246,807		4.53	%
Taxable investment securities		86,274,774		883,846		1.37	%		43,424,844		787,275		2.42	%
Sweep and interest-earning accounts		74,020,149		260,811		0.47	%		19,402,112		248,373		1.71	%
Other investments (2)		1,833,884		40,265		2.94	%		1,847,509		63,540		4.59	%
Total	$	880,495,231	$	26,306,801		3.99	%	$	750,571,239	$	24,345,995		4.33	%

Interest-Bearing Liabilities
Interest-bearing transaction accounts	$	228,892,277	$	408,410		0.24	%	$	183,023,743	$	832,020		0.61	%
Money market accounts		123,955,268		477,355		0.51	%		103,218,864		873,627		1.13	%
Savings deposits		144,060,590		121,748		0.11	%		119,367,893		120,681		0.14	%
Time deposits		109,049,139		923,151		1.13	%		111,607,801		1,327,883		1.59	%
Borrowed funds		2,376,974		36		0.00	%		5,645,077		13,853		0.33	%
Repurchase agreements		29,997,106		72,822		0.32	%		28,582,148		185,868		0.87	%
Finance lease obligations		2,156,173		49,075		3.03	%		74,656		4,482		8.00	%
Junior subordinated debentures		12,887,000		296,486		3.08	%		12,887,000		375,669		3.89	%
Total	$	653,374,527	$	2,349,083		0.48	%	$	564,407,182	$	3,734,083		0.88	%

Net interest income			$	23,957,718						$	20,611,912
Net interest spread (3)						3.51	%						3.45	%
Net interest margin (4)						3.64	%						3.67	%

	(1)	Included in gross loans are non-accrual loans with average balances of $4,388,561 and $4,706,338 for the nine months ended September 30, 2021 and 2020, respectively. Loans are stated before deduction of unearned discount and ALL, less loans held-for-sale and include tax-exempt loans to local municipalities with average balances of $52,105,647 and $58,086,317 for the nine months ended September 30, 2021 and 2020, respectively.

	(2)	Included in other investments is the Company’s FHLBB Stock with average balances of $768,734 and $782,359, respectively, with a dividend rate of approximately 1.52% and 4.37%, respectively, for the nine months ended September 30, 2021 and 2020, 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.

The average volume of interest-earning assets for the three- and nine-month periods ended September 30, 2021 increased 9.8% and 17.3%, respectively, compared to the same periods last year, while the average yield on interest-earning assets increased 12 bps and decreased 34 bps, respectively. The increase in average yield in the three-month comparison periods is primarily due to activity within the PPP loan portfolio. When these loans are paid off, as part of the SBA forgiveness program, the remainder of the deferred loan fee associated with each loan is taken into income. These fees for the third quarter of 2021 amounted to $1.6 million, compared to $453,505 for the third quarter of 2020. The decrease in the average yield in all other categories reflects the persistent low federal funds rate.

The average volume of loans decreased 4.0% over the three-month comparison periods of 2021 versus 2020 and increased 4.7% over the nine-month comparison periods of 2021 versus 2020, while the average yield on loans increased 73 bps and 15 bps, respectively. Loans accounted for 80.3% and 81.6%, respectively, of the average interest-earning asset portfolio for the three- and nine- month periods ended September 30, 2021 down from 91.8% and 91.4%, respectively, for the same periods last year. This percentage decline occurred despite the increase in the average volume of the loan portfolio and reflects the overall growth in the balance sheet, including in the significant increase in average volume of the taxable investment portfolio as a percentage of total assets between periods, as described below. Interest earned on the loan portfolio as a percentage of total interest income was 95.3% and 95.5%, respectively for the three- and nine-month periods in 2021 compared to 95.8% and 95.5%, respectively for the same periods in 2020.

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The average volume of the taxable investment portfolio (classified as AFS) increased 109.1% and 98.7% during the three- and nine-month periods ended September 30, 2021, compared to the same periods last year, while the average yield decreased 86 bps and 105 bps, respectively, between periods. The increase in volume for both periods reflects the excess liquidity resulting from the PPP loan program and other government mitigation measures adopted in response to the pandemic.

The average volume of sweep and interest-earning accounts, which consists primarily of interest-bearing accounts at the FRBB and two correspondent banks, increased $59.9 million, or 293.0% during the three-month period ended September 30, 2021, compared to the same period last year, and $54.6 million, or 281.5%, for the nine-month period ended September 30, 2021, while the average yield on these funds decreased 104 bps and 124 bps, respectively. This increase in cash volume is attributable to significant increases in core deposits which were driven in part by PPP loan funds that were deposited in business checking accounts as well as increases in customer checking accounts likely from stimulus payments, unemployment benefits and deferral or forbearance agreements on residential mortgage and student loans.

The average volume of interest-bearing liabilities for the three- and nine month periods ended September 30, 2021 increased 13.5% and 15.8%, respectively, compared to the same periods last year, while the average rate paid on interest-bearing liabilities decreased 28 bps and 40 bps, respectively, reflecting the decrease in the federal funds rate beginning in March 2020. Customer deposits of PPP loan proceeds and stimulus payments were contributing factors to the increase in average volume.

The average volume of interest-bearing transaction accounts increased 19.0% and 25.1%, respectively, during the three- and nine-month periods ended September 30, 2021 compared to the same periods last year, while the average rate paid on these accounts decreased 20 bps and 37 bps, respectively. Contributing factors to the increase in average volume were increases of $8.0 million, or 19.7%, and $9.8 million, or 23.6%, respectively, in the average volume of ICS DDAs, and $21.9 million or 24.0%, and $25.1 million, or 31.1%, respectively, in the average volume of other interest-bearing DDAs. Interest-bearing transaction accounts comprised 33.8% and 35.0%, respectively, of the average interest-bearing liabilities for the three- and nine-month periods ended September 30, 2021 compared to 32.1% and 32.4%, respectively, for the same periods last year.

The average volume of money market accounts increased 19.4% and 20.1%, respectively, during the three- and nine-month periods ended September 30, 2021 compared to the same periods in 2020, while the average rate paid decreased 34 bps and 62 bps, respectively.

The average volume of savings accounts increased 24.6% and 20.7%, respectively, for the three- and nine-month periods ended September 30, 2021 versus the same periods in 2020, while the average rate paid increased one bps and decreased three bps, respectively. Savings accounts comprised 24.6% and 22.1% respectively, of the average interest-bearing liabilities for the three- and nine-month periods ended September 30, 2021 compared to 22.3% and 21.2%, respectively, for the same periods last year.

The average volume of time deposits decreased 5.4% and 2.3%, respectively, during the three- and nine-month periods ended September 30, 2021, compared to the same periods last year, and the average rate paid on these accounts decreased 50 bps and 46 bps, respectively, between periods. The decrease in the average volume of time deposits between periods reflects the maturity of brokered deposits throughout the first three months of 2021 that had not been replaced as of September 30, 2021. Time deposits represented 16.2% and 16.7%, respectively, of average interest-bearing liabilities for the three- and nine-month periods ended September 30, 2021, compared to 19.4% and 19.8%, respectively, for the same periods last year. Interest paid on time deposits represented 36.7% and 39.3%, respectively, of total interest expense for the three- and nine-month period in 2021, compared to 40.3% and 35.6%, respectively, for the same periods in 2020. The average volume of retail time deposits decreased 1.1% for the three-month period from $103.0 million at September 30, 2020 to $101.9 million at September 30, 2021, and increased 0.9% for the nine-month period from $101.9 million at September 30, 2020 to $102.8 million at September 30, 2021. The average volume of wholesale time deposits decreased 48.7% from an average volume of $10.3 million to $5.3 million for the three-month periods ended September 30, 2021 and 2020, respectively, and 35.3% for the nine-month periods from an average volume of $9.7 million at September 30, 2020 to $6.3 million at September 30, 2021. Refer to the “Liquidity and Capital Resources” section for more discussion on these changes.

The average volume of borrowed funds decreased $1.4 million and $3.3 million, respectively, between the three- and nine-month comparison periods of 2021 and 2020, and the average rate paid on these borrowings decreased 6 bps and 33 bps, respectively, between periods. The average balances are reflective of the influx of cash throughout 2020 and into 2021 resulting from PPP lending activity, COVID stimulus payments and other government mitigation measures. The balance of borrowed funds at September 30, 2021 consists of only JNE funds at zero percent interest.

The average volume of repurchase agreements decreased 22.5% for the three-month comparison periods and increased 5.0%, for the nine-month comparison periods of 2021 versus 2020, while the average rate paid decreased 60 bps and 55 bps, respectively.

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In summary, between the three- and nine month periods ended September 30, 2021 and 2020, the average yield on interest-earning assets increased 12 bps and decreased 34 bps, respectively, and the average rate paid on interest-bearing liabilities decreased 28 bps and 40 bps, respectively. Net interest spread increased 40 bps for the third quarter of 2021 versus 2020, and net interest margin increased 32 bps for the same comparison periods. Net interest spread increased six bps for the nine-month period of 2021 versus 2020, and net interest margin decreased three bps for the same comparison periods.

While the Company’s net interest margin and net interest spread for the three month period ended September 30, 2021 increased compared to the same period last year, the prevailing low rate environment has continued to place pressure on both the net interest margin and spread and may continue to adversely affect them in future periods, although the extent and duration of such impacts cannot be predicted at this time.

The following table summarizes the variances in interest income and interest expense on a fully tax-equivalent basis for the interim periods presented for 2021 and 2020 resulting from volume changes in average assets and average liabilities and fluctuations in average rates earned and paid.

	Three Months Ended September 30,									Nine Months Ended September 30,
	Variance Due to Rate (1)			Variance Due to Volume (1)			Total Variance			Variance Due to Rate (1)			Variance Due to Volume (1)			Total Variance
Average Interest-Earning Assets
Loans	$	1,380,076		$	(364,240	)	$	1,015,836		$	773,925		$	1,101,147		$	1,875,072
Taxable investment securities		(196,154	)		271,815			75,661			(679,739	)		776,310			96,571
Sweep and interest-earning accounts		(209,796	)		225,823			16,027			(686,762	)		699,200			12,438
Other investments		(3,387	)		338			(3,049	)		(22,975	)		(300	)		(23,275	)
Total	$	970,739		$	133,736		$	1,104,475		$	(615,551	)	$	2,576,357		$	1,960,806

Average Interest-Bearing Liabilities
Interest-bearing transaction accounts	$	(110,501	)	$	37,611		$	(72,890	)	$	(633,076	)	$	209,466		$	(423,610	)
Money market accounts		(108,507	)		41,981			(66,526	)		(571,693	)		175,421			(396,272	)
Savings deposits		3,090			9,677			12,767			(24,813	)		25,880			1,067
Time deposits		(141,234	)		(15,256	)		(156,490	)		(383,107	)		(21,625	)		(404,732	)
Borrowed funds		(586	)		0			(586	)		(13,817	)		0			(13,817	)
Repurchase agreements		(45,604	)		(4,852	)		(50,456	)		(122,262	)		9,216			(113,046	)
Finance lease obligations		(29,104	)		47,605			18,501			(80,071	)		124,664			44,593
Junior subordinated debentures		(6,406	)		0			(6,406	)		(79,183	)		0			(79,183	)
Total	$	(438,852	)	$	116,766		$	(322,086	)	$	(1,908,022	)	$	523,022		$	(1,385,000	)

Changes in net interest income	$	1,409,591		$	16,970		$	1,426,561		$	1,292,471		$	2,053,335		$	3,345,806

(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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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
	2021		2020		Income			Percent			2021		2020		Income			Percent

Service fees	$	882,688	$	794,381	$	88,307			11.12	%	$	2,527,943	$	2,322,112	$	205,831			8.86	%
Income from sold loans		242,560		601,825		(359,265	)		-59.70	%		704,627		1,138,579		(433,952	)		-38.11	%
Other income from loans		223,388		281,959		(58,571	)		-20.77	%		653,377		803,555		(150,178	)		-18.69	%
Net realized gain on sale of securities AFS		0		0		0			0.00	%		0		39,086		(39,086	)		-100.00	%
Other income
Income from CFS Partners		240,723		151,796		88,927			58.58	%		834,781		462,963		371,818			80.31	%
Exchange income		4,000		13,500		(9,500	)		-70.37	%		36,100		13,500		22,600			167.41	%
VISA card commission		25,404		18,662		6,742			36.13	%		76,212		55,986		20,226			36.13	%
Other miscellaneous income		81,823		79,172		2,651			3.35	%		208,312		221,323		(13,011	)		-5.88	%
Total non-interest income	$	1,700,586	$	1,941,295	$	(240,709)			-12.40	%	$	5,041,352	$	5,057,104	$	(15,752)			-0.31	%

Total non-interest income decreased $240,709, or 12.4%, for the third quarter of 2021 and $15,752, or 0.3% for the first nine months of 2021 compared to the same periods in 2020, with significant changes noted in the following:

	·	The increase in service fees during both comparison periods is mostly due to an increase in VISA check interchange income of $52,860, or 15.2% for the third quarter of 2021 compared to the same quarter of 2020, and $201,362, or 20.8%, year over year.

	·	The decrease in income from sold loans is due to a lower volume of loans sold into the secondary market during the first nine months of 2021 versus 2020. The decrease is partly due to lower volume of applications for residential mortgages and the strategic decision to hold some 15 and 30 year mortgages in portfolio.

	·	A decrease in CRE and residential mortgage loan volume resulted in decreases in documentation fees collected at origination, accounting for the decrease in other income from loans in both comparison periods.

	·	There were no sales from the Company’s securities AFS portfolio during the first nine months of 2021, resulting in no net realized gains on sale of securities AFS during 2021 compared to a gain of $39,086 for the same period in 2020.

	·	Income from CFS Partners increased significantly between periods due in part to the impact of more favorable stock market valuations on the fee income of its trust and asset management subsidiary earlier in the year, as well as an increase in managed assets. Also, CFS Partners has a small portion of its equity capital invested in the stock market. It was necessary to mark-to-market the portfolio to reflect the stock market decline during the first quarter of 2020 at the outset of the COVID-19 pandemic, resulting in a $106,000 mark down.

	·	The shutdown of the US/Canadian border to all non-essential travel created less demand for an exchange of Canadian currency in the first half of 2020, accounting for the lack of exchange income. Although the border has re-opened to commerce related travel, subject to certain restrictions, the exchange of Canadian currency has not yet returned to normal levels.

	·	The increase in VISA card commission is attributable to an increase in transaction volume in the VISA card program.

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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
	2021		2020			Expense			Percent			2021			2020			Expense			Percent

Salaries and wages	$	2,002,999	$	1,958,754		$	44,245			2.26	%	$	5,923,001		$	5,773,491		$	149,510			2.59	%
Employee benefits		811,817		791,172			20,645			2.61	%		2,467,237			2,324,055			143,182			6.16	%
Occupancy expenses, net		743,219		601,093			142,126			23.64	%		2,140,141			1,921,597			218,544			11.37	%
Other expenses
Directors Fees		128,604		111,989			16,615			14.84	%		386,312			296,789			89,523			30.16	%
Investor relations and shareholder services		37,851		33,216			4,635			13.95	%		103,300			55,013			48,287			87.77	%
Outsourcing expense		135,876		120,337			15,539			12.91	%		387,776			355,699			32,077			9.02	%
Telephone expense		34,798		22,857			11,941			52.24	%		100,727			154,322			(53,595	)		-34.73	%
Audit fees		105,200		109,506			(4,306	)		-3.93	%		294,614			306,667			(12,053	)		-3.93	%
Consultant services		78,789		57,552			21,237			36.90	%		222,097			171,892			50,205			29.21	%
FDIC insurance		111,087		94,409			16,678			17.67	%		272,652			214,541			58,111			27.09	%
Collection & non-accruing loan expense		19,069		18,342			727			3.96	%		42,269			55,990			(13,721	)		-24.51	%
Expense on OREO		0		(38,610	)		38,610			-100.00	%		(1,683	)		(37,382	)		35,699			-95.50	%
ATM fees		143,993		128,306			15,687			12.23	%		414,288			361,806			52,482			14.51	%
State deposit tax		225,912		180,820			45,092			24.94	%		651,173			512,957			138,216			26.94	%
Other miscellaneous expenses		952,643		914,974			37,669			4.12	%		2,762,400			2,717,953			44,447			1.64	%
Total non-interest expense	$	5,531,857	$	5,104,717		$	427,140			8.37	%	$	16,166,304		$	15,185,390		$	980,914			6.46	%

Total non-interest expense increased $427,140, or 8.4% for the third quarter of 2021 and $980,914, or 6.5%, for the first nine months of 2021 compared to the same periods in 2020, with significant changes noted in the following:

	·	The increase in employee benefits in both periods was attributable to the increased cost of health insurance premiums.

	·	The increase in occupancy expense is primarily attributable to an increase in capital lease expense, which includes a write down of $63,125 at maturity of a capital lease during the third quarter of 2021.

	·	The increase in Directors fees is attributable to a change to the Director’s fee schedule as well as an additional Director for 2021 whose compensations totaled $9,624 for the third quarter of 2021 and $28,872 for the first nine months of 2021.

	·	The increase in Investor relations and shareholder services is due to a combination of engaging a new investor relations firm during the second half of 2020, a new service contract with the vendor that processes the Company’s SEC filings and the timing of the Company’s Annual Shareholder Meeting which was held in October, 2020 versus May, 2021.

	·	A moderate increase is noted in outsourcing expense due to a combination of annual increases in contract pricing and an increase in transactions.

	·	Telephone expense increased in the third quarter of 2021, but decreased for the first nine months of 2021 as a result of a renegotiated contract with the Company’s main connectivity vendor that was effective mid-year 2020.

	·	The increase in consultant services year over year is attributable in part to recruitment of a senior management position.

	·	FDIC insurance increased due primarily to an increase in assets as well as an increase in the assessment multiplier year over year.

	·	Collection & non-accruing loan expense are lower in all periods compared to historical activity, due primarily to the impact of a legislative moratorium on eviction and foreclosure actions during the COVID-19 emergency combined with borrowers seeking assistance through the Vermont COVID Emergency Mortgage Assistance Program funded through the CARES Act in order to bring their mortgages up to date and avoid foreclosure.

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	·	ATM fees increased due to the ongoing cost to support the upgraded and enhanced technology being utilized for deposit automation. The use of deposit automation replaces a manual process for BSA required monitoring of cash deposits as well as providing fraud detection measures at ATMs.

	·	State deposit tax increased year over year due primarily to a significant increase in deposits.

	·	The increase in other miscellaneous expense in both periods is attributable to fraudulent checks totaling $66,004 that were charged off during the third quarter of 2021.

APPLICABLE INCOME TAXES

The provision for income taxes increased in both comparison periods, with an increase of $232,707, or 37.0% for the third quarter of 2021, and $677,707, or 43.5%, for the first nine months of 2021 compared to the respective periods in 2020. These increases are proportional to the increases in income before income taxes totaling $1.1 million for the third quarter of 2021 versus 2020, and $2.9 million for the first nine months of 2021 versus 2020. Tax credits related to limited partnership investments amounted to $117,015 and $108,492, respectively, for the third quarters of 2021 and 2020, and $351,045 and $325,476, respectively, for the first nine months of 2021 and 2020.

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $90,762 and $84,171, respectively, for the third quarters of 2021 and 2020, and $272,286 and $252,513, respectively, for the first nine months of 2021 and 2020. 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, 2021				December 31, 2020
Assets
Loans	$	692,638,375	71.51	%	$	709,355,330	77.25	%
AFS securities		110,676,139	11.43	%		60,705,178	6.61	%

Liabilities
Demand deposits		201,415,866	20.79	%		185,954,976	20.25	%
Interest-bearing transaction accounts		237,282,454	24.50	%		228,712,371	24.91	%
Money market accounts		124,792,185	12.88	%		115,546,064	12.58	%
Savings deposits		168,966,595	17.44	%		138,745,468	15.11	%
Time deposits		107,637,660	11.11	%		113,331,961	12.34	%
Long-term advances		2,300,000	0.24	%		2,800,000	0.30	%

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	$	(16,716,955)			-2.36	%
AFS securities		49,970,961			82.32	%

Liabilities
Demand deposits		15,460,890			8.31	%
Interest-bearing transaction accounts		8,570,083			3.75	%
Money market accounts		9,246,121			8.00	%
Savings deposits		30,221,127			21.78	%
Time deposits		(5,694,301	)		-5.02	%
Long-term advances		(500,000	)		-17.86	%

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The decrease in the loan portfolio during the first nine months of 2021 was attributable to the paydowns or payoffs of certain PPP loans through the SBA’s forgiveness program totaling $125.3 million, which was offset in part by originations of new PPP loans and an increase in CRE loans. The Company booked a total of $58.6 million of PPP loans during the first six months of 2021. This program ended during the second quarter of 2021, so this portfolio will continue to decrease throughout the remainder of 2021.

The increase in the securities AFS portfolio is attributable to the purchase of $66.0 million in securities AFS during the first nine months of 2021, consisting of $10.1 million in US Treasuries, $4.0 million in US Government Bonds, $50.4 million in MBS, $1.0 million in CMOs, and $0.5 million in Investment CDs. These purchases were reduced in part by maturities and calls exercised amounting to $3.7 million, as well as principal payments on MBS totaling $10.4 million, accounting for the year to date increase in the AFS portfolio noted in the tables above. 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.

Most of the fluctuation in demand deposits is due to a year to date increase in business checking accounts of $14.9 million, or 10.7%, which the Company believes is a result of the distribution of funds generated through the PPP loans. The increase in interest-bearing transaction accounts reflects an increase of $17.2 million, or 17.2%, in consumer interest-bearing transaction accounts, offset by a decrease of $3.7 million, or 11.2% in the deposit account of the Company’s affiliate, CFSG, as well as a decrease of $3.3 million, or 6.2% in ICS deposit accounts, and $1.8 million, or 4.3%, in municipal deposit accounts. The increase of $20.8 million, or 26.9%, in consumer and business money market accounts year to date was offset, in part by decreases in ICS money market accounts of $7.9 million, or 34.0% and non-arbitrage borrowing accounts of $3.6 million, or 23.9%. The increase in savings deposits of $30.2 million, or 21.8%, 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. During the third quarter of 2021, the Company chose to reclassify its ATS deposits from interest-bearing transactions accounts into savings deposits, resulting in a change between deposit categories of approximately $18.5 million at September 30, 2021 and approximately $14.2 million at December 31, 2020. All appropriate sections of this quarterly report have been adjusted, including the Consolidated Balance Sheet found in the accompanying unaudited interim consolidated financial statements. The decrease in time deposits was split between a decrease in wholesale time deposits of $4.0 million, or 43.9%, and a decrease in retail time deposits of $1.7 million, or 1.6%. The decrease in long-term advances was due to maturities in the JNE advances. See “Liquidity and Capital Resources” section for additional information on these advances.

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 bps shift upward and a 100 bps 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, interest income is expected to trend upward as the short-term asset base (cash and adjustable rate loans) quickly cycle upward. However, as rates continue to rise, the cost of wholesale funds increases and pressure to increase rates paid on the retail funding base likewise increases, putting pressure on NII and reducing the benefit to rising rates. 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 slope of the yield curve will be very important to the Company’s margins going forward.

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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, 2021:

Rate Change	Percent Change in NII

Down 100 bps		-0.9	%
Up 200 bps		4.3	%

The amounts shown in the table above are well within the ALCO Policy limits. However, those amounts do not represent a forecast and should not be relied upon as indicative of future results. While assumptions used in the ALCO process, including the interest rate simulation analyses, are developed based upon current economic and local market conditions, and expected future conditions, the Company cannot provide any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change, or the measures that the FRB may take in managing monetary policy in response to external events such as the COVID-19 pandemic or emerging threats from variants of the virus.

As of September 30, 2021, the Company had outstanding $12,887,000 in principal amount of Junior Subordinated Debentures due December 15, 2037, which bear a quarterly floating rate of interest equal to the 3-month London Interbank Offered Rate (LIBOR), plus 2.85%. During 2017, the Financial Conduct Authority (FCA) in the United Kingdom that administers LIBOR announced that LIBOR reference rates will be phased out, beginning at the end of 2021. On March 5, 2021, the FCA announced firm target dates for the phase out of various LIBOR settings, including a phase out date of June 30, 2023 for 3-month LIBOR for U.S. dollar deposits. Under the terms of the Company’s Indenture, if 3-month LIBOR is not available, the Debenture Trustee may obtain substitute quotations from four leading banks in the London interbank market for their offered rate to prime banks in the London market for U.S. dollar deposits having a three month maturity; if at least two such quotations are provided, the quarterly rate on the Debentures will be the arithmetic mean of such quotations. If fewer than two such quotations are received, the Trustee will request substitute quotations from four major New York City banks for their offered rate to leading European banks for loans in U.S. dollars; if at least two such quotations are provided, the quarterly rate on the Debentures will be the arithmetic mean of such quotations. The Debenture Trustee has not yet informed the Company as to how it intends to proceed. Aside from the Debentures, the Company does not have any other exposures to the phase out of LIBOR. The Company has not generally utilized LIBOR as an interest rate benchmark for its variable rate commercial, residential or other loans and does not utilize derivatives or other financial instruments tied to LIBOR for hedging or investment purposes. Accordingly, management expects that the Company’s exposure to the phase out of LIBOR will be limited to the effect on the interest rate paid on its Debentures, but cannot predict the magnitude of the impact on the Company’s interest expense at this time.

Credit Risk - As a financial institution, one of the primary risks the Company manages is credit risk, the risk of loss stemming from borrowers’ failure to repay loans or inability to meet other contractual obligations. The Company’s Board of Directors prescribes policies for managing credit risk, including Loan, Appraisal and Environmental policies. These policies are supplemented by comprehensive underwriting standards and procedures. The Company maintains a Credit Administration department whose function includes credit analysis and monitoring of and reporting on the status of the loan portfolio, including delinquent and non-performing loan trends. The Company also monitors concentration of credit risk in a variety of areas, including portfolio mix, the level of loans to individual borrowers and their related 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 30.3% of the Company’s loan balances as of September 30, 2021, a level that has historically been on a gradual annual decline in recent years, consistent with the Company’s strategic shift to commercial lending. The Company maintains a residential mortgage loan portfolio of traditional mortgage products and does not engage in higher risk loans such as option adjustable rate mortgage products, high loan-to-value products, interest only mortgages, subprime loans and products with deeply discounted teaser rates. Residential mortgages with loan-to-values exceeding 80% are generally covered by PMI. A 90% loan-to-value residential mortgage product without PMI is only available to borrowers with excellent credit and low debt-to-income ratios and has not been widely originated. Junior lien home equity products make up 17.6% 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 and CRE loans together comprised 69.1% of the Company’s loan portfolio at September 30, 2021, compared to 70.0% at December 31, 2020. Those percentages included the Company’s portfolio of PPP loans which was $35.7 million at September 30, 2021, compared to $64.4 million at December 31, 2020.

As of September 30, 2021, the Company had originated 1,843 PPP loans totaling $163.6 million, and expects to earn approximately $7.0 million in loan fees over the life of the related loans, of which $5.8 million had been recognized. These loans are eligible to be forgiven to the extent that the funds are used for payroll costs and other permissible expenses. Borrowers can apply for forgiveness after a specified covered period. PPP loan forgiveness applications are processed by the lender, with forgiveness requests for loans in excess of $2.0 million reviewed by the SBA. Neither the government nor lenders are permitted to charge the borrowers any fees on PPP loans. These loans carry a fixed rate of 1.00% and are 100% guaranteed by the SBA, subject to borrower eligibility requirements. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. As of September 30, 2021, the Company had reviewed and submitted 1,438 PPP loans with total balances of $125.6 million to the SBA for forgiveness consideration, with 33 loans with total balances of $1.5 million pending forgiveness. One loan in the amount of $965 thousand was delinquent as of September 30, 2021. A claim was processed with the SBA and full payment was received on October 5, 2021.

Growth in the CRE portfolio in recent years has enhanced the geographic diversification of the loan portfolio as it has been driven by new loan volume outside the Company’s primary market area, principally in Chittenden County and in northern Windsor County around the White River Junction, Vermont 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 through a loan production office in Lebanon, New Hampshire by a commercial lender from the St. Johnsbury office with previous lending experience serving the greater White River Junction-Lebanon area. Larger transactions continue to be centrally underwritten and monitored through the Company’s commercial credit department. The types of transactions driving the growth in the CRE portfolio 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 $285.9 million CRE portfolio at September 30, 2021 were approximately $101.0 million in owner-occupied CRE and $100.7 million in non-owner occupied CRE.

The following table reflects the composition of the Company’s loan portfolio, by portfolio segment, as a percentage of total loans as of the dates indicated:

	September 30, 2021					December 31, 2020

Commercial & industrial	$	139,061,736		20.08	%	$	161,067,501		22.70	%
Commercial real estate		285,912,606		41.28	%		280,544,550		39.55	%
Municipal		53,774,882		7.76	%		54,807,367		7.73	%
Residential real estate - 1st lien		174,895,121		25.25	%		170,507,263		24.04	%
Residential real estate - Jr lien		34,917,009		5.04	%		38,147,659		5.38	%
Consumer		4,077,021		0.59	%		4,280,990		0.60	%
Total loans		692,638,375		100.00	%		709,355,330		100.00	%

ALL		(7,819,307	)				(7,208,485	)
Deferred net loan fees		(1,149,278	)				(1,195,741	)
Net loans	$	683,669,790				$	700,951,104

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, 2021, the Company had $64.7 million in guaranteed loans with guaranteed balances of $57.2 million, compared to $93.4 million in guaranteed loans with guaranteed balances of $86.1 million at December 31, 2020. PPP loans are included in these totals, all of which carry a 100% guarantee through the SBA, subject to borrower eligibility requirements.

At September 30, 2021, loan balances in the retail, restaurant and bars, hotels and lodging, and breweries totaled $30.4 million, $6.0 million, $28.3 million, and $16.4 million, respectively. Breweries have weathered well, but the other three segments of the economy have been particularly impacted by the COVID-19 business shutdowns and re-opening restrictions. While the Company has performed additional stress testing and oversight of these loan portfolios, the credit quality may deteriorate in future periods should COVID-19 business restrictions persist or be reimposed in response to the emergence of variants of the virus.

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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 non-performing assets increased $754,679 or 14.6%, during the first nine months of 2021. An increase in residential mortgage loan delinquencies in the 90 days or more past due, together with a substantial increase in CRE non-accrual loans was partially offset by decreases in the commercial & industrial and residential mortgage loan portfolios within the non-accrual loan portfolio. There were no claims receivable on related government guaranteed loans at September 30, 2021 compared to claims of $1,939 at December 31, 2020. Non-performing loans as of September 30, 2021 carried RD and SBA guarantees totaling $274,162, compared to $316,752 at December 31, 2020.

The following table reflects the composition of the Company’s non-performing assets, by portfolio segment, as a percentage of total non-performing assets as of the dates indicated:

	September 30, 2021				December 31, 2020
Loans past due 90 days or more
and still accruing (1)
Residential real estate - 1st lien	$	657,604	11.11	%	$	390,288	7.56	%
Residential real estate - Jr lien		78,311	1.32	%		98,889	1.91	%
Total		735,915	12.43	%		489,177	9.47	%

Non-accrual loans (1)
Commercial & industrial		148,674	2.51	%		434,196	8.41	%
Commercial real estate		3,671,880	62.04	%		1,875,942	36.33	%
Residential real estate - 1st lien		1,183,306	20.00	%		2,173,315	42.09	%
Residential real estate - Jr lien		178,845	3.02	%		191,311	3.70	%
Total		5,182,705	87.56	%		4,674,764	90.53	%

Total Non-Performing Assets	$	5,918,620	100.00	%	$	5,163,941	100.00	%

(1)

No commercial and industrial loans, CRE loans, municipal loans or consumer loans were past due 90 days or more and accruing, and no municipal loans or consumer loans were in non-accrual status as of the consolidated balance sheet dates presented. In accordance with Company policy, delinquent consumer loans are charged off at 120 days past due. There were no OREO properties as of the balance sheet dates presented.

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.

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The non-performing assets in the table above include the following TDRs that were past due 90 days or more or in non-accrual status as of the dates presented:

	September 30, 2021				December 31, 2020
	Number of		Principal		Number of		Principal
	Loans		Balance		Loans		Balance

Commercial & industrial		6	$	77,615		6	$	270,695
Commercial real estate		4		2,746,371		4		711,816
Residential real estate - 1st lien		14		1,198,882		18		1,892,695
Residential real estate - Jr lien		1		43,540		1		48,456
Total		25	$	4,066,408		29	$	2,923,663

The remaining TDRs were performing in accordance with their modified terms as of the dates presented and consisted of the following:

	September 30, 2021				December 31, 2020
	Number of		Principal		Number of		Principal
	Loans		Balance		Loans		Balance

Commercial real estate		2	$	44,913		2	$	74,757
Residential real estate - 1st lien		29		2,329,663		31		2,417,563
Residential real estate - Jr lien		1		3,833		1		4,775
Total		32	$	2,378,409		34	$	2,497,095

During 2020 and the first nine months of 2021, the Company navigated through the new challenges presented by the COVID-19 pandemic, including the granting of loan payment deferrals to customers impacted by the pandemic. As of September 30, 2021, 593 business and retail customer portfolio loans, with unpaid principal balances of $109.5 million, were granted loan payment deferrals to provide temporary debt relief to those customers impacted by the COVID-19 pandemic. Of these total loan payment deferrals, only 6 loans totaling $3.4 million are still in deferral as of September 30, 2021. These short term concessions were made in accordance with guidance from the federal banking regulators, confirmed by them with the FASB, and are therefore not considered to be impaired under GAAP (see Note 6 to the accompanying unaudited interim consolidated financial statements for additional information).

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 6 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 loan segments, including residential first and junior lien mortgages, CRE, commercial & industrial, and consumer loan portfolios, other than the municipal loans as there has never been a loss recorded in that loan segment. 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 6 to the accompanying unaudited interim consolidated financial statements for information on the recorded investment in impaired loans and their related allocations.

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The following table summarizes the Company’s loan loss experience for the periods presented:

As of or for the Nine Months Ended September 30,	2021			2020

Loans outstanding, end of period	$	692,638,375		$	738,247,772
Average loans outstanding during period	$	718,366,424		$	685,896,774
Non-accruing loans, end of period	$	5,182,705		$	4,808,846
Non-accruing loans, net of government guarantees	$	4,918,919		$	4,484,089

ALL, beginning of period	$	7,208,485		$	5,926,491
Loans charged off:
Commercial & industrial		(18,847	)		(34,565	)
Commercial real estate		0			(2,200	)
Residential real estate - 1st lien		0			(134,196	)
Residential real estate - Jr lien		0			(28,673	)
Consumer		(68,011	)		(50,458	)
Total loans charged off		(86,858	)		(250,092	)
Recoveries:
Commercial & industrial		4,761			1,087
Commercial real estate		27,160			20,000
Residential real estate - 1st lien		4,602			10,552
Residential real estate - Jr lien		9,601			5,280
Consumer		27,391			28,289
Total recoveries		73,515			65,208
Net loans charged off		(13,343	)		(184,884	)
Provision charged to income		624,165			1,046,501
ALL, end of period	$	7,819,307		$	6,788,108

Net charge offs to average loans outstanding		0.002	%		0.027	%
Provision charged to income as a percent of average loans		0.087	%		0.153	%
ALL to average loans outstanding		1.088	%		0.990	%
ALL to non-accruing loans		150.873	%		141.159	%
ALL to non-accruing loans net of government guarantees		158.964	%		151.382	%

The ALL increased $1.0 million, or 15.2%, as of September 30, 2021 compared to September 30, 2020, while the provision for loan losses decreased $422,336, or 40.4%, for the nine months ended September 30, 2021, compared to the same period last year. The decrease in the provision between periods reflects the growth during the first nine months of 2020 in the loan portfolio and higher than anticipated charge off activity, compared to a decrease of $17.3 million in the loan portfolio and negligible charge off activity during the first nine months of 2021. Increases in the provision in future periods may be necessary if economic conditions and credit quality continue to deteriorate due to the continuing impacts of the COVID-19 pandemic.

The Company has an experienced collections department that continues to work actively with borrowers to resolve problem loans and manage the OREO portfolio, and management continues to monitor the loan portfolio closely.

Based on the nine month ALL analysis, in management’s view the reserve balance of $7.8 million at September 30, 2021 is appropriate to cover losses that are probable and estimable as of the measurement date, with an unallocated reserve of $1.0 million compared to $398,913 at December 31, 2020. The reserve balance and unallocated amount continue to be directionally consistent with the overall risk profile of the Company’s loan portfolio and credit risk appetite. The portion of the ALL termed “unallocated” is established to absorb inherent credit losses that exist as of the measurement date although not specifically identified through management’s process for estimating credit losses. While the ALL is described as consisting of separate allocated portions, the entire ALL is available to support loan losses, regardless of category. Unallocated reserves are considered by management to be appropriate in light of the uncertainties as to the full impact to borrowers due to COVID-19, the Company’s continued growth strategy and shift in the portfolio from residential loans to commercial and industrial and CRE loans and the risk associated with the relatively new, unseasoned loans in those portfolios. The adequacy of the ALL is reviewed quarterly by the risk management committee of the Board and then presented to the full Board for approval.

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In addition to credit risk in the Company’s loan portfolio and liquidity risk in its loan and deposit-taking operations, the Company’s business activities also generate market risk. Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Declining capital markets can result in fair value adjustments necessary to record decreases in the value of the investment portfolio for other-than-temporary-impairment. The Company does not have any market risk sensitive instruments acquired for trading purposes. The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. During recessionary periods, a declining housing market can result in an increase in loan loss reserves or ultimately an increase in foreclosures. Interest rate risk is directly related to the different maturities and repricing characteristics of interest-bearing assets and liabilities, as well as to loan prepayment risks, early withdrawal of time deposits, and the fact that the speed and magnitude of responses to interest rate changes vary by product. As discussed above under “Interest Rate Risk and Asset and Liability Management”, the Company actively monitors and manages its interest rate risk through the ALCO process. However, sudden and dramatic changes in prevailing interest rates, such as those adopted by the FRB in response to the COVID-19 pandemic, create challenges for the Company’s interest rate risk management, as does the current prolonged low interest rate environment.

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 2021, 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 low-cost funds.

The Company recognizes that, at times, when loan demand exceeds deposit growth or the Company has other liquidity demands, it may be desirable to utilize alternative sources of deposit funding to augment retail deposits and borrowings. One-way deposits acquired through the CDARS program provide an alternative funding source when needed. At September 30, 2021 and December 31, 2020, the Company had no one-way CDARS outstanding. In addition, two-way (that is, reciprocal) CDARS deposits, as well as reciprocal ICS money market and demand deposits, allow the Company to provide FDIC deposit insurance to its customers in excess of account coverage limits by exchanging deposits with other participating FDIC-insured financial institutions. At September 30, 2021 and December 31, 2020, the Company reported $4.6 million and $4.9 million, respectively, in reciprocal CDARS deposits. The balance in ICS reciprocal money market deposits was $15.2 million at September 30, 2021, compared to $23.1 million at December 31, 2020, and the balance in ICS reciprocal demand deposits as of those dates was $49.8 million and $53.1 million, respectively.

During July, 2020, the Company issued $5.0 million of DTC Brokered CDs in three blocks of $1.3 million, $2.3 million, and $1.4 million with maturities in October, 2020, January, 2021 and April, 2021, respectively. The block that matured in October, 2020 was not replaced, leaving a total outstanding at December 31, 2020 of $3.7 million. The blocks that matured in January and April of 2021 were also not replaced, leaving no DTC Brokered CDs outstanding at September 30, 2021. 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 2020 and the first nine months of 2021 has reduced the Company’s need for supplementary funding sources in the near term.

At September 30, 2021 and December 31, 2020, borrowing capacity of $96.6 million and $93.1 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.

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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 $51.7 million and $50.4 million, respectively, at September 30, 2021 and December 31, 2020. 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 25 bps. The Company had no outstanding advances through this facility at September 30, 2021 or December 31, 2020.

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,
	2021		2020
Long-Term Advances(1)
FHLBB term advance, 0.00%, due January 07, 2021	$	0	$	150,000
FHLBB term advance, 0.00%, due February 26, 2021		0		350,000
FHLBB term advance, 0.00%, due November 22, 2021		1,000,000		1,000,000
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
	$	2,300,000	$	2,800,000

(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 three correspondent banks with aggregate available borrowing capacity totaling $25.5 million as of the balance sheet dates presented in this quarterly report. The Company had no outstanding advance against these credit lines as of the balance sheet dates presented.

Securities sold under agreements to repurchase provide another funding source for the Company. At September 30, 2021 and December 31, 2020, the Company had outstanding repurchase agreement balances of $22.4 million and $38.7 million, respectively. These repurchase agreements mature and are repriced daily.

The following table illustrates the changes in shareholders’ equity from December 31, 2020 to September 30, 2021:

Balance at December 31, 2020 (book value $14.25 per common share)	$	77,288,713
Net income		9,771,309
Issuance of common stock through the DRIP		907,675
Dividends declared on common stock		(3,519,579	)
Dividends declared on preferred stock		(36,563	)
Change in AOCI on AFS securities, net of tax		(1,196,853	)
Balance at September 30, 2021 (book value $15.23 per common share)	$	83,214,702

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 2020 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.

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Under the 2018 Regulatory Relief Act, these capital requirements have been simplified for qualifying community banks and bank holding companies. In September 2019, the OCC and the other federal bank regulators approved a final joint rule that permits a qualifying community banking organization to opt in to a simplified regulatory capital framework. A qualifying institution that elects to utilize the simplified framework must maintain a Tier 1 leverage ratio, or CBLR in excess of 9%, and will thereby be deemed to have satisfied the generally applicable risk-based and other leverage capital requirements and (if applicable) the FDIC’s prompt corrective action framework. In order to utilize the CBLR framework, in addition to maintaining a CBLR of over 9%, a community banking organization must have less than $10 billion in total consolidated assets and must meet certain other criteria such as limitations on the amount of off-balance sheet exposures and on trading assets and liabilities. The CBLR is calculated by dividing tangible equity capital by average total consolidated assets. The final rule became effective on January 1, 2020 for capital calculations as of March 31, 2020 and thereafter.

Pursuant to the CARES Act, the federal banking agencies adopted an interim rule temporarily lowering the CBLR benchmark to, in excess of 8%, rather than 9%, with a phased increase of the CBLR back to the 9% level by the end of 2021. The Company and Bank continued to qualify to utilize the CBLR framework as of September 30, 2021, but have not elected to do so.

Beginning in 2016, an additional capital conservation buffer was added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer was fully phased-in on January 1, 2019 at 2.5% of risk-weighted assets. A banking organization with a conservation buffer of less than 2.5% is subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The Company and the Bank were fully compliant as of the periods presented in the table below.

As of September 30, 2021, the Bank was considered well capitalized under the regulatory capital framework for Prompt Corrective Action and the Company exceeded currently applicable consolidated regulatory guidelines for capital adequacy. While we believe that the Company has sufficient capital to withstand an extended economic downturn in the wake of the COVID-19 pandemic, our regulatory capital ratios could be adversely impacted by future credit losses and other operational impacts related to COVID-19 or emerging variants of the virus.

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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, 2021
Common equity tier 1 capital
(to risk-weighted assets)
Company	$	84,745		14.62	%	$	26,087		4.50	%	$	40,579		7.00	%		N/A		N/A
Bank	$	83,916		14.49	%	$	26,063		4.50	%	$	40,542		7.00	%	$	37,646		6.50	%
Tier 1 capital (to risk-weighted assets)
Company	$	84,745		14.62	%	$	34,782		6.00	%	$	49,275		8.50	%		N/A		N/A
Bank	$	83,916		14.49	%	$	34,751		6.00	%	$	49,230		8.50	%	$	46,334		8.00	%
Total capital (to risk-weighted assets)
Company	$	91,999		15.87	%	$	46,376		8.00	%	$	60,869		10.50	%		N/A		N/A
Bank	$	91,164		15.74	%	$	46,334		8.00	%	$	60,814		10.50	%	$	57,918		10.00	%
Tier 1 capital (to average assets)
Company	$	84,745		9.02	%	$	37,575		4.00	%		N/A		N/A			N/A		N/A
Bank	$	83,916		8.94	%	$	37,555		4.00	%		N/A		N/A		$	46,944		5.00	%

December 31, 2020:
Common equity tier 1 capital
(to risk-weighted assets)
Company	$	77,594		14.15	%	$	24,680		4.50	%	$	38,391		7.00	%		N/A		N/A
Bank	$	77,017		14.06	%	$	24,654		4.50	%	$	38,351		7.00	%	$	35,611		6.50	%
Tier 1 capital (to risk-weighted assets)
Company	$	77,594		14.15	%	$	32,907		6.00	%	$	46,618		8.50	%		N/A		N/A
Bank	$	77,017		14.06	%	$	32,872		6.00	%	$	46,569		8.50	%	$	43,829		8.00	%
Total capital (to risk-weighted assets)
Company	$	84,455		15.40	%	$	43,876		8.00	%	$	57,587		10.50	%		N/A		N/A
Bank	$	83,871		15.31	%	$	43,829		8.00	%	$	57,526		10.50	%	$	54,787		10.00	%
Tier 1 capital (to average assets)
Company	$	77,594		8.80	%	$	35,273		4.00	%		N/A		N/A			N/A		N/A
Bank	$	77,017		8.74	%	$	35,252		4.00	%		N/A		N/A		$	44,065		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.

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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.

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act). As of September 30, 2021, an evaluation was performed under the supervision and with the participation of management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, management concluded that its disclosure controls and procedures as of September 30, 2021 were effective in ensuring that material information required to be disclosed in the reports it files with the Commission under the Exchange Act was recorded, processed, summarized, and reported on a timely basis.

For this purpose, the term “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

In the normal course of business, the Company is involved in litigation that is considered incidental to their business. Management does not expect that any such litigation will be material to the Company’s consolidated financial condition or results of operations.

ITEM 1A. Risk Factors

In management’s view, the Risk Factors identified in our Annual Report on Form 10-K for the year ended December 31, 2020, represent the most significant risks to the Company’s future results of operations and financial condition as of September 30, 2021.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information as to the purchases of the Company’s common stock during the three months ended September 30, 2021, by the Company or by any affiliated purchaser (as defined in SEC Rule 10b-18). During the monthly periods presented, the Company did not have any publicly announced repurchase plans or programs.

	Total Number		Average
	of Shares		Price Paid
For the period:	Purchased(1)		Per Share

July 1 - July 31		1,550	$	19.28
August 1 - August 31		0		0.00
September 1 - September 30		0		0.00
Total		1,550	$	19.28

(1)

All 1,550 shares were purchased for the account of participants invested in the Company Stock Fund under the Company’s Retirement Savings Plan by or on behalf of the Plan Trustee, the Human Resources Committee of the Bank. Such share purchases were facilitated through CFSG, which provides certain investment advisory services to the Plan. Both the Plan Trustee and CFSG may be considered affiliates of the Company under Rule 10b-18.

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ITEM 6. Exhibits

The following exhibits are filed with, or incorporated by reference in, this report:

Exhibit 31.1 -	Certification from the Chief Executive Officer (Principal Executive Officer) of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 -	Certification from the Treasurer (Principal Financial Officer) of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 -	Certification from the Chief Executive Officer (Principal Executive Officer) of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*
Exhibit 32.2 -	Certification from the Treasurer (Principal Financial Officer) of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*

Exhibit 101-	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three-month and nine-month interim periods ended September 30, 2021 and 2020, (iii) the unaudited consolidated statements of comprehensive income, (iv) the unaudited consolidated statements of cash flows and (v) related notes.
Exhibit 104 -	Cover page Interactive Data File (formatted in iXBRL and contained in Exhibit 101)

*This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act.

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SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	COMMUNITY BANCORP.

DATED: November 15, 2021	/s/Kathryn M. Austin
	Kathryn M. Austin, President
	& Chief Executive Officer
	(Principal Executive Officer)

DATED: November 15, 2021	/s/Louise M. Bonvechio
	Louise M. Bonvechio, Corporate
	Secretary & Treasurer
	(Principal Financial Officer)

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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2021

COMMUNITY BANCORP.

EXHIBITS

EXHIBIT INDEX

Exhibit 31.1 -	Certification from the Chief Executive Officer (Principal Executive Officer) of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 -	Certification from the Treasurer (Principal Financial Officer) of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 -	Certification from the Chief Executive Officer (Principal Executive Officer) of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*

Exhibit 32.2 -	Certification from the Treasurer (Principal Financial Officer) of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*

Exhibit 101 -	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three- and nine-month interim periods ended September 30, 2021 and 2020, (iii) the unaudited consolidated statements of comprehensive income, (iv) the unaudited consolidated statements of cash flows and (v) related notes.
Exhibit 104 -	Cover page Interactive Data File (formatted in iXBRL and contained in Exhibit 101)

* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act.