COMMUNITY BANCORP /VT - Quarter Report: 2023 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, 2023

☐ 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 06, 2023, there were 5,493,658 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	32
Item 3	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4	Controls and Procedures	52

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	52
Item 1A	Risk Factors	52
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 6	Exhibits	53
	Signatures	54
	Exhibit Index	55

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	2023			2022
	(Unaudited)

Assets
Cash and due from banks	$	12,267,270		$	12,302,771
Federal funds sold and overnight deposits		5,265,072			58,837,557
Total cash and cash equivalents		17,532,342			71,140,328
Securities available-for-sale		181,928,461			192,918,109
Restricted equity securities, at cost		1,423,550			1,411,750
Loans held-for-sale		56,700			0
Loans		838,572,268			748,548,608
Allowance for credit losses		(9,487,973	)		(8,709,225	)
Deferred net loan costs		550,230			493,275
Net loans		829,634,525			740,332,658
Bank premises and equipment, net		12,597,756			13,042,468
Accrued interest receivable		3,830,129			3,214,332
Bank owned life insurance		5,212,622			5,153,387
Goodwill		11,574,269			11,574,269
Other assets		19,499,790			17,244,846
Total assets	$	1,083,290,144		$	1,056,032,147

Liabilities and Shareholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing	$	205,188,102		$	216,093,534
Interest-bearing transaction accounts		284,744,064			294,050,079
Money market funds		137,192,956			140,117,086
Savings		159,409,376			171,072,921
Time deposits, $250,000 and over		21,306,259			15,632,058
Other time deposits		93,364,162			86,006,601
Total deposits		901,204,919			922,972,279
Borrowed funds		49,150,000			1,300,000
Repurchase agreements		31,580,426			33,077,829
Junior subordinated debentures		12,887,000			12,887,000
Accrued interest and other liabilities		9,661,103			10,618,676
Total liabilities		1,004,483,448			980,855,784

Shareholders' Equity
Preferred stock, 1,000,000 shares authorized, 15 shares issued and outstanding
at 09/30/23 and 12/31/22 ($100,000 liquidation value, per share)		1,500,000			1,500,000
Common stock - $2.50 par value; 15,000,000 shares authorized, 5,700,828
shares issued at 09/30/23 and 5,647,710 shares issued at 12/31/22		14,252,070			14,119,275
Additional paid-in capital		37,242,239			36,383,235
Retained earnings		51,959,399			46,464,447
Accumulated other comprehensive loss		(23,524,235	)		(20,667,817	)
Less: treasury stock, at cost; 210,101 shares at 09/30/23 and 12/31/22		(2,622,777	)		(2,622,777	)
Total shareholders' equity		78,806,696			75,176,363
Total liabilities and shareholders' equity	$	1,083,290,144		$	1,056,032,147

Book value per common share outstanding	$	14.08		$	13.55

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	2023		2022
(Unaudited)

Interest income
Interest and fees on loans	$	10,919,330	$	8,182,209
Interest on taxable debt securities		941,956		799,856
Interest on tax-exempt debt securities		90,659		68,155
Dividends		39,904		23,029
Interest on federal funds sold and overnight deposits		94,515		358,907
Total interest income		12,086,364		9,432,156

Interest expense
Interest on deposits		2,501,243		837,983
Interest on borrowed funds		676,837		21,363
Interest on repurchase agreements		201,518		45,153
Interest on junior subordinated debentures		276,707		154,091
Total interest expense		3,656,305		1,058,590

Net interest income		8,430,059		8,373,566
Provision for credit losses		240,889		125,000
Net interest income after provision for credit losses		8,189,170		8,248,566

Non-interest income
Service fees		937,890		939,807
Income from sold loans		144,747		109,411
Other income from loans		310,645		301,710
Other income		318,309		180,675
Total non-interest income		1,711,591		1,531,603

Non-interest expense
Salaries and wages		2,164,760		1,984,000
Employee benefits		797,304		629,681
Occupancy expenses, net		662,277		677,805
Other expenses		2,190,203		2,049,423
Total non-interest expense		5,814,544		5,340,909

Income before income taxes		4,086,217		4,439,260
Income tax expense		723,708		828,754
Net income	$	3,362,509	$	3,610,506

Earnings per common share	$	0.61	$	0.66
Weighted average number of common shares
used in computing earnings per share		5,478,960		5,409,612
Dividends declared per common share	$	0.23	$	0.23

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	2023		2022
(Unaudited)

Interest income
Interest and fees on loans	$	30,310,324	$	23,300,119
Interest on taxable debt securities		2,815,397		2,192,540
Interest on tax-exempt debt securities		271,975		112,890
Dividends		104,556		56,121
Interest on federal funds sold and overnight deposits		568,803		609,532
Total interest income		34,071,055		26,271,202

Interest expense
Interest on deposits		6,570,373		1,975,401
Interest on borrowed funds		953,799		64,993
Interest on repurchase agreements		548,300		88,322
Interest on junior subordinated debentures		776,296		373,506
Total interest expense		8,848,768		2,502,222

Net interest income		25,222,287		23,768,980
Provision for credit losses		808,557		1,325,000
Net interest income after provision for credit losses		24,413,730		22,443,980

Non-interest income
Service fees		2,757,629		2,739,076
Income from sold loans		358,942		508,795
Other income from loans		1,081,093		895,884
Other income		1,111,136		708,574
Total non-interest income		5,308,800		4,852,329

Non-interest expense
Salaries and wages		6,718,280		6,058,000
Employee benefits		2,363,444		2,106,356
Occupancy expenses, net		2,133,492		2,104,346
Other expenses		6,342,955		5,960,259
Total non-interest expense		17,558,171		16,228,961

Income before income taxes		12,164,359		11,067,348
Income tax expense		2,266,751		2,030,148
Net income	$	9,897,608	$	9,037,200

Earnings per common share	$	1.80	$	1.67
Weighted average number of common shares
used in computing earnings per share		5,461,660		5,396,215
Dividends declared per common share	$	0.69	$	0.69

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 (Loss)
(Unaudited)	Three Months Ended September 30,
	2023			2022

Net income	$	3,362,509		$	3,610,506

Other comprehensive loss, net of tax:
Unrealized holding loss on securities AFS arising during the period		(5,155,445	)		(8,978,128	)
Tax effect		1,082,645			1,885,407
Other comprehensive loss, net of tax		(4,072,800	)		(7,092,721	)
Total comprehensive loss	$	(710,291	)	$	(3,482,215	)

	Nine Months Ended September 30,
	2023			2022

Net income	$	9,897,608		$	9,037,200

Other comprehensive loss, net of tax:
Unrealized holding loss on securities AFS arising during the period		(3,615,720	)		(27,078,956	)
Tax effect		759,302			5,686,580
Other comprehensive loss, net of tax		(2,856,418	)		(21,392,376	)
Total comprehensive income (loss)	$	7,041,190		$	(12,355,176	)

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, 2023
					Additional											Total
	Common		Preferred		paid-in		Retained						Treasury			shareholders'
	Stock		Stock		capital		earnings			AOCI*			stock			equity

January 1, 2023	$	14,119,275	$	1,500,000	$	36,383,235	$	46,464,447		$	(20,667,817	)	$	(2,622,777	)	$	75,176,363
Cumulative change in accounting principle (Note 2)								(549,113	)								(549,113	)
Balance at January 1, 2023 (as adjusted for change								45,915,334									74,627,250
in accounting principle)
Issuance of common stock		43,693				276,184											319,877
Cash dividends declared
Common stock								(1,250,794	)								(1,250,794	)
Preferred stock								(28,125	)								(28,125	)
Comprehensive income
Net income								3,338,761									3,338,761
Other comprehensive income											2,672,818						2,672,818
March 31, 2023	$	14,162,968	$	1,500,000	$	36,659,419	$	47,975,176		$	(17,994,999	)	$	(2,622,777	)	$	79,679,787

Issuance of common stock		45,720				336,527											382,247
Cash dividends declared
Common stock								(1,254,836	)								(1,254,836	)
Preferred stock								(30,000	)								(30,000	)
Comprehensive loss
Net income								3,196,340									3,196,340
Other comprehensive loss											(1,456,436	)					(1,456,436	)
June 30, 2023	$	14,208,688	$	1,500,000	$	36,995,946	$	49,886,680		$	(19,451,435	)	$	(2,622,777	)	$	80,517,102

Issuance of common stock		43,382				246,293											289,675
Cash dividends declared
Common stock								(1,258,852	)								(1,258,852	)
Preferred stock								(30,938	)								(30,938	)
Comprehensive loss
Net income								3,362,509									3,362,509
Other comprehensive loss											(4,072,800	)					(4,072,800	)
September 30, 2023	$	14,252,070	$	1,500,000	$	37,242,239	$	51,959,399		$	(23,524,235	)	$	(2,622,777	)	$	78,806,696

*Accumulated other comprehensive loss

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, 2022
					Additional											Total
	Common		Preferred		paid-in		Retained						Treasury			shareholders'
	Stock		Stock		capital		earnings			AOCI*			stock			equity

January 1, 2022	$	13,969,848	$	1,500,000	$	35,322,063	$	37,758,105		$	(1,166,971	)	$	(2,622,777	)	$	84,760,268

Issuance of common stock		35,597				237,086											272,683
Cash dividends declared
Common stock								(1,236,880	)								(1,236,880	)
Preferred stock								(12,188	)								(12,188	)
Comprehensive loss
Net income								2,405,542									2,405,542
Other comprehensive loss											(8,744,637	)					(8,744,637	)
March 31, 2022	$	14,005,445	$	1,500,000	$	35,559,149	$	38,914,579		$	(9,911,608	)	$	(2,622,777	)	$	77,444,788

Issuance of common stock		33,048				287,882											320,930
Cash dividends declared
Common stock								(1,240,049	)								(1,240,049	)
Preferred stock								(13,124	)								(13,124	)
Comprehensive loss
Net income								3,021,152									3,021,152
Other comprehensive loss											(5,555,018	)					(5,555,018	)
June 30, 2022	$	14,038,493	$	1,500,000	$	35,847,031	$	40,682,558		$	(15,466,626	)	$	(2,622,777	)	$	73,978,679

Issuance of common stock		33,780				270,581											304,361
Cash dividends declared
Common stock								(1,243,187	)								(1,243,187	)
Preferred stock								(17,813	)								(17,813	)
Comprehensive loss
Net income								3,610,506									3,610,506
Other comprehensive loss											(7,092,721	)					(7,092,721	)
September 30, 2022	$	14,072,273	$	1,500,000	$	36,117,612	$	43,032,064		$	(22,559,347	)	$	(2,622,777	)	$	69,539,825

*Accumulated other comprehensive loss

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,
	2023			2022

Cash Flows from Operating Activities:
Net income	$	9,897,608		$	9,037,200
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization, bank premises and equipment		809,560			853,685
Provision for credit losses		808,557			1,325,000
Deferred income tax		(269,192	)		(38,020	)
Gain on sale of loans		(114,912	)		(218,501	)
Loss on sale of bank premises and equipment		449			0
Income from CFS Partners		(705,342	)		(386,217	)
Amortization of bond premium, net		201,050			518,833
Proceeds from sales of loans held for sale		5,597,777			10,756,242
Originations of loans held for sale		(5,539,565	)		(10,328,741	)
(Decrease) increase in taxes payable		(271,441	)		251,872
Increase in interest receivable		(615,797	)		(309,185	)
Decrease in mortgage servicing rights		48,123			17,084
Decrease in right-of-use assets		150,971			149,011
Decrease in operating lease liabilities		(161,271	)		(153,871	)
Increase in other assets		(71,207	)		(209,618	)
Increase in cash surrender value of BOLI		(59,235	)		(60,433	)
Amortization of limited partnerships		201,384			201,537
Change in net deferred loan fees and costs		(56,955	)		(504,574	)
Increase (decrease) in interest payable		720,343			(25,558	)
Decrease in accrued expenses		(310,304	)		(4,198	)
Increase in other liabilities		369,059			12,439
Net cash provided by operating activities		10,629,660			10,883,987

Cash Flows from Investing Activities:
Investments - AFS
Maturities, calls, pay downs and sales		11,164,002			14,994,113
Purchases		(3,991,124	)		(47,476,763	)
Proceeds from redemption of restricted equity securities		3,516,500			43,500
Purchases of restricted equity securities		(3,528,300	)		0
Decrease in limited partnership contributions payable		(1,823,301	)		0
Investments in limited liability entities		(282,000	)		0
Increase in loans, net		(90,497,664	)		(34,956,148	)
Capital expenditures net of proceeds from sales of bank
premises and equipment		(516,267	)		(398,378	)
Recoveries of loans charged off		159,827			147,510
Net cash used in investing activities		(85,798,327	)		(67,646,166	)

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	2023			2022

Cash Flows from Financing Activities:
Net (decrease) increase in demand and interest-bearing transaction accounts		(20,211,447	)		5,391,362
Net (decrease) increase in money market and savings accounts		(14,587,675	)		19,373,851
Net increase (decrease) in time deposits		13,031,762			(1,124,017	)
Net decrease in repurchase agreements		(1,497,403	)		(354,951	)
Net increase in short-term borrowings		3,550,000			0
Proceeds from long-term borrowings		44,500,000			0
Repayments on long-term borrowings		(200,000	)		0
Decrease in finance lease obligations		(164,420	)		(159,333	)
Dividends paid on preferred stock		(89,063	)		(43,125	)
Dividends paid on common stock		(2,771,073	)		(2,778,271	)
Net cash provided by financing activities		21,560,681			20,305,516

Net decrease in cash and cash equivalents		(53,607,986	)		(36,456,663	)
Cash and cash equivalents:
Beginning		71,140,328			110,358,926
Ending	$	17,532,342		$	73,902,263

Supplemental Schedule of Cash Paid During the Period:
Interest	$	8,128,425		$	2,527,780

Income taxes, net of refunds	$	2,606,000		$	1,614,759

Supplemental Schedule of Noncash Investing and Financing Activities:
Change in unrealized loss on securities AFS	$	(3,615,720	)	$	(27,078,956	)

Common Shares Dividends Paid:
Dividends declared	$	3,764,480		$	3,720,116
Increase in dividends payable attributable to dividends declared		(1,608	)		(43,871	)
Dividends reinvested		(991,799	)		(897,974	)
Total dividends paid	$	2,771,073		$	2,778,271

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, 2022, contained in the Company's Annual Report on Form 10-K. Certain amounts in the 2022 consolidated financial statements were reclassified to conform to the current period presentation. The reclassification had no effect on net income or shareholders’ equity as previously reported. 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, 2023.

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 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 certain other smaller reporting company scaled disclosures where management deems it appropriate.

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	FDIC:	Federal Deposit Insurance Corporation
AFS:	Available-for-sale	FDICIA:	Federal Deposit Insurance Corporation
Agency MBS:	MBS issued by a US government agency		Improvement Act of 1991
	or GSE	FHLBB:	Federal Home Loan Bank of Boston
ACL:	Allowance for Credit Losses	FHLMC:	Federal Home Loan Mortgage Corporation
ALCO:	Asset Liability Committee	FOMC:	Federal Open Market Committee
ALL:	Allowance for Loan Losses	FRB:	Federal Reserve Board
AOCI:	Accumulated other comprehensive income	FRBB:	Federal Reserve Bank of Boston
ASC:	Accounting Standards Codification	GAAP:	Generally Accepted Accounting Principles
ASU:	Accounting Standards Update		in the United States
Bancorp:	Community Bancorp.	GSE:	Government sponsored enterprise
Bank:	Community National Bank	HTM:	Held-to-maturity
BHG:	Bankers Healthcare Group	ICS:	Insured Cash Sweeps of the IntraFi Network
BIC:	Borrower-in-Custody	IRS:	Internal Revenue Service
Board:	Board of Directors	JNE:	Jobs for New England
BOLI:	Bank owned life insurance	Jr:	Junior
bp or bps:	Basis point(s)	LIBOR	London Interbank Offered Rate
BTFP:	Bank Term Funding Program	MBS:	Mortgage-backed security
CDARS:	Certificate of Deposit Accounts Registry	MSRs:	Mortgage servicing rights
	Service of the IntraFi Network	NII:	Net interest income
CDs:	Certificates of deposit	OAS:	Other amortizing security
CDI:	Core deposit intangible	OBS:	Off-balance sheet
CECL:	Current Expected Credit Loss	OCI:	Other comprehensive income (loss)
CFSG:	Community Financial Services Group, LLC	OREO:	Other real estate owned
CFS Partners:	Community Financial Services Partners,	OTTI:	Other-than-temporary impairment
	LLC	PMI:	Private mortgage insurance
CMO:	Collateralized Mortgage Obligations	PPP:	Paycheck Protection Program
Company:	Community Bancorp. and Subsidiary	RD:	USDA Rural Development
CRE:	Commercial Real Estate	SBA:	U.S. Small Business Administration
DCF:	Discounted cash flow	SEC:	U.S. Securities and Exchange Commission
DDA or DDAs:	Demand Deposit Account(s)	SOFR:	Secured Overnight Financing Rate
DTC:	Depository Trust Company	TDR:	Troubled-debt restructuring
DRIP:	Dividend Reinvestment Plan	USDA:	U.S. Department of Agriculture
Exchange Act:	Securities Exchange Act of 1934	VA:	U.S. Veterans Administration
FASB:	Financial Accounting Standards Board

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Note 2. Recent Accounting Developments

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 provide 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. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extended the sunset date of December 31, 2022, to December 31, 2024. The guidance is effective for all entities as of March 12, 2020, through December 31, 2024. 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. That transition became effective for the Debentures as of the first London banking day after June 30, 2023 (see the Interest Rate Risk and Asset and Liability Management section of the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations following these Notes).

In March 2023, the FASB issued ASU No. 2023-02, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU No. 2014-01, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects, previously introduced the option to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met; however, this guidance limited the proportional amortization method to investments in low-income-housing tax credit (LIHTC) structures. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the income statement as a component of net income tax expense (benefit). Equity investments in other tax credit structures are typically accounted for using the equity method, which results in investment income, gains and losses, and tax credits being presented gross on the income statement in their respective line items. The amendments in this update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. The amendments in this update are effective for the Company for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. Early adoption is permitted in any interim period. If early adoption is elected, adoption must be as of the beginning of the fiscal year that includes the interim period of adoption. The amendments in this update must be applied on either a modified retrospective or a retrospective basis. The Company is analyzing the impact of early adoption of this ASU, and is currently evaluating the impact of this standard for its tax equity investments as well as the impact within the consolidated financial statements.

Accounting Standards Adopted in 2023

The Company adopted the following accounting standards effective January 1, 2023, and applied them to the Company’s interim unaudited consolidated financial statements beginning with the quarter ended March 31, 2023. Prior periods have not been restated as a result of adoption of these accounting standards.

ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under that guidance, which replaced the existing incurred loss model for recognizing credit losses, banks and other lending institutions are required to recognize the full amount of expected credit losses over the life of a loan. The 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 requires that credit losses on those securities be recorded through an allowance for credit losses rather than a write-down. Upon adoption of this ASU on January 1, 2023, the Company recorded a cumulative-effect adjustment of $549,113 as a reduction to retained earnings, with a corresponding adjustment of $243,376 increasing the ACL on loans, an adjustment of $451,704, increasing other liabilities for the ACL on off-balance sheet credit exposures, and an adjustment of $145,967 increasing deferred tax assets. There was no allowance recorded for credit losses on AFS debt securities resulting from adoption of this ASU.

ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The guidance amends Topic 326 (CECL) to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, under the CECL model creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to Topic 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance became effective for the Company beginning with the fiscal year 2023, including interim periods. Adoption of this ASU did not have a material impact on the consolidated financial statements.

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Note 3. 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,	2023		2022

Net income, as reported	$	3,362,509	$	3,610,506
Less: dividends to preferred shareholders		30,938		17,813
Net income available to common shareholders	$	3,331,571	$	3,592,693
Weighted average number of common shares
used in calculating earnings per share		5,478,960		5,409,612
Earnings per common share	$	0.61	$	0.66

Nine Months Ended September 30,	2023		2022

Net income, as reported	$	9,897,608	$	9,037,200
Less: dividends to preferred shareholders		89,063		43,125
Net income available to common shareholders	$	9,808,545	$	8,994,075
Weighted average number of common shares
used in calculating earnings per share		5,461,660		5,396,215
Earnings per common share	$	1.80	$	1.67

Note 4. 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, 2023
U.S. GSE debt securities	$	12,000,000	$	0	$	1,601,656	$	10,398,344
U.S. Government securities		41,247,775		0		2,705,620		38,542,155
Taxable Municipal securities		300,000		0		66,286		233,714
Tax-exempt Municipal securities		11,994,655		0		1,398,268		10,596,387
Agency MBS		130,156,068		0		23,333,064		106,823,004
ABS and OAS		2,533,447		0		234,381		2,299,066
CMO		11,740,029		0		374,375		11,365,654
Other investments		1,734,000		0		63,863		1,670,137
Total	$	211,705,974	$	0	$	29,777,513	$	181,928,461

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			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
December 31, 2022
U.S. GSE debt securities	$	12,000,000	$	0	$	1,624,709	$	10,375,291
U.S. Government securities		41,368,624		0		3,137,035		38,231,589
Taxable Municipal securities		300,000		0		65,142		234,858
Tax-exempt Municipal securities		12,042,410		40,513		759,356		11,323,567
Agency MBS		135,193,097		69,447		20,030,945		115,231,599
ABS and OAS		2,929,740		0		236,134		2,693,606
CMO		12,278,033		581		342,689		11,935,925
Other investments		2,968,000		0		76,326		2,891,674
Total	$	219,079,904	$	110,541	$	26,272,336	$	192,918,109

The Company had investments in Agency MBS exceeding 10% of shareholders’ equity with a book value of $130.2 million and $135.2 million, respectively, and a fair value of $106.8 million and $115.2 million, respectively, at September 30, 2023 and December 31, 2022.

Investment securities pledged as collateral for repurchase agreements consisted of certain U.S. GSE debt securities, Agency MBS, ABS and OAS, and CMO. These repurchase agreements mature daily. The aggregate amortized cost and fair value of these pledged investments as of the balance sheet dates were as follows:

	Amortized		Fair
	Cost		Value

September 30, 2023	$	53,615,357	$	45,066,265
December 31, 2022		55,899,113		46,789,284

Investment securities pledged as collateral for BTFP borrowings consisted of U.S. Government securities and U.S. GSE debt securities with an aggregate amortized cost of $49,934,319 and fair value of $42,323,851 at September 30, 2023. The Company began utilizing the BTFP during 2023 as a source of liquidity. For more information on these borrowings, see the Liquidity and Capital Resources section of the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations following these Notes.

There were no sales of debt securities during the first nine months of 2023 or 2022.

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

	Amortized		Fair
	Cost		Value
September 30, 2023
Due in one year or less	$	15,695,850	$	15,361,820
Due from one to five years		47,182,358		43,290,817
Due from five to ten years		4,509,457		4,030,167
Due after ten years		14,162,241		12,422,653
Agency MBS		130,156,068		106,823,004
Total	$	211,705,974	$	181,928,461

December 31, 2022
Due in one year or less	$	1,976,000	$	1,966,767
Due from one to five years		58,875,224		54,736,949
Due from five to ten years		8,631,626		7,591,761
Due after ten years		14,403,957		13,391,033
Agency MBS		135,193,097		115,231,599
Total	$	219,079,904	$	192,918,109

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

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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				Totals
	Fair		Unrealized		Fair		Unrealized		Number of		Fair		Unrealized
	Value		Loss		Value		Loss		Securities		Value		Loss
September 30, 2023
U.S. GSE debt securities	$	0	$	0	$	10,398,344	$	1,601,656		11	$	10,398,344	$	1,601,656
U.S. Government securities		0		0		38,542,155		2,705,620		54		38,542,155		2,705,620
Taxable Municipal securities		0		0		233,714		66,286		1		233,714		66,286
Tax-exempt Municipal securities		6,459,331		426,299		4,137,056		971,969		23		10,596,387		1,398,268
Agency MBS		7,854,937		203,432		98,968,067		23,129,632		123		106,823,004		23,333,064
ABS and OAS		0		0		2,299,066		234,381		4		2,299,066		234,381
CMO		3,891,798		28,927		7,473,856		345,448		10		11,365,654		374,375
Other investments		0		0		1,670,137		63,863		7		1,670,137		63,863
Total	$	18,206,066	$	658,658	$	163,722,395	$	29,118,855		233	$	181,928,461	$	29,777,513

	Less than 12 months				12 months or more				Totals
	Fair		Unrealized		Fair		Unrealized		Number of		Fair		Unrealized
	Value		Loss		Value		Loss		Securities		Value		Loss
December 31, 2022
U.S. GSE debt securities	$	2,723,388	$	276,611	$	7,651,903	$	1,348,098		11	$	10,375,291	$	1,624,709
U.S. Government securities		4,837,891		169,501		33,393,698		2,967,534		54		38,231,589		3,137,035
Taxable Municipal securities		0		0		234,858		65,142		1		234,858		65,142
Tax-exempt Municipal securities		8,608,507		522,128		592,388		237,228		19		9,200,895		759,356
Agency MBS		14,541,901		810,356		97,718,436		19,220,589		120		112,260,337		20,030,945
ABS and OAS		2,693,606		236,134		0		0		4		2,693,606		236,134
CMO		8,954,323		232,398		1,014,910		110,291		9		9,969,233		342,689
Other investments		2,451,892		20,108		439,782		56,218		12		2,891,674		76,326
Total	$	44,811,508	$	2,267,236	$	141,045,975	$	24,005,100		230	$	185,857,483	$	26,272,336

The Company adopted ASU No. 2016-13 effective January 1, 2023, which requires credit losses on debt securities AFS to be recorded in an allowance for credit losses and eliminates the concept of OTTI for debt securities AFS. Under the ASU, if the Company intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, then the credit loss is recorded through an allowance rather than as a write-down of the security. As of September 30, 2023, the Company did not have the intent to sell, nor was it more likely than not that we would be required to sell any of the debt securities AFS in an unrealized loss position prior to recovery and determined that no individual debt securities in an unrealized loss position represented credit losses that would require an allowance for credit losses. The Company concluded that the unrealized losses were primarily attributed to increases in market interest rates since these securities were purchased under other market conditions.

As of December 31, 2022, in management’s view the unrealized losses on securities AFS were due to market conditions rather than reduced estimated cash flows or deterioration in the creditworthiness of the issuer. At December 31, 2022, the Company did not intend to sell these securities, did not anticipate that these securities would be required to be sold before anticipated recovery, and expected full principal and interest to be collected. Therefore, under the accounting principles pertaining to OTTI analysis then in effect, the Company did not consider the declines in the fair value of these securities to be OTTI as of December 31, 2022.

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Note 5. Loans, Allowance for Credit Losses, Credit Quality and Off-Balance Sheet Credit Exposures

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

	September 30, 2023					December 31, 2022

Commercial & industrial	$	126,161,034		15.04	%	$	112,951,873		15.09	%
Purchased		5,977,866		0.71	%		7,530,458		1.00	%
Commercial real estate		407,039,093		48.54	%		356,892,986		47.68	%
Municipal		58,747,359		7.01	%		34,633,055		4.63	%
Residential real estate - 1st lien		206,098,103		24.58	%		198,743,375		26.55	%
Residential real estate - Jr lien		31,054,331		3.70	%		33,756,872		4.51	%
Consumer		3,494,482		0.42	%		4,039,989		0.54	%
Total loans		838,572,268		100.00	%		748,548,608		100.00	%

ACL		(9,487,973	)				(8,709,225	)
Deferred net loan costs		550,230					493,275
Net loans	$	829,634,525				$	740,332,658

Provision for Credit Losses

The provision for credit losses was made up of the following components for the periods indicated:

Three Months Ended September 30,	2023			2022

Provision for loan losses	$	264,009		$	125,000
Provision for credit losses on OBS credit exposure		(23,120	)		0
Provision for credit losses	$	240,889		$	125,000

Nine Months Ended September 30,	2023			2022

Provision for loan losses	$	849,549		$	1,325,000
Provision for credit losses on OBS credit exposure		(40,992	)		0
Provision for credit losses	$	808,557		$	1,325,000

The following tables present the activity in the ACL on loans for the three- and nine-month periods following adoption of ASU 2016-13 (CECL) on January 1, 2023 and select information on impairment evaluation by portfolio segment for those interim periods.

As of or for the three months ended September 30, 2023

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

ACL beginning balance	$	1,054,342	$	18,337		$	5,271,521	$	69,360	$	2,314,554	$	493,236		$	34,151		$	9,255,501
Charge-offs		0		0			0		0		0		0			(42,985	)		(42,985	)
Recoveries		1,585		0			0		0		0		1,237			8,626			11,448
Provision (credit)		9,401		(170	)		43,638		77,508		122,263		(17,723	)		29,092			264,009
ACL ending balance	$	1,065,328	$	18,167		$	5,315,159	$	146,868	$	2,436,817	$	476,750		$	28,884		$	9,487,973

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As of or for the nine months ended September 30, 2023

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

ACL beginning balance	$	1,116,322		$	53,090		$	5,061,813		$	62,339	$	2,001,836	$	241,950		$	69,686		$	102,189		$	8,709,225
Impact of adopting CECL		(164,115	)		(29,196	)		(22,467	)		24,243		273,167		297,746			(33,813	)		(102,189	)		243,376
Charge-offs		(361,578	)		0			0			0		0		0			(112,426	)		0			(474,004	)
Recoveries		3,935			0			22,058			0		72,588		28,015			33,231			0			159,827
Provision (credit)		470,764			(5,727	)		253,755			60,286		89,226		(90,961	)		72,206			0			849,549
ACL ending balance	$	1,065,328		$	18,167		$	5,315,159		$	146,868	$	2,436,817	$	476,750		$	28,884		$	0		$	9,487,973

	Commercial & Industrial		Purchased		Commercial Real Estate		Municipal		Residential Real Estate 1st Lien		Residential Real Estate Jr Lien		Consumer		Total
ACL evaluated for impairment
Individually	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Collectively		1,065,328		18,167		5,315,159		146,868		2,436,817		476,750		28,884		9,487,973
Total	$	1,065,328	$	18,167	$	5,315,159	$	146,868	$	2,436,817	$	476,750	$	28,884	$	9,487,973

Loans evaluated for impairment
Individually	$	3,619,626	$	0	$	2,897,499	$	0	$	614,502	$	66,962	$	0	$	7,198,589
Collectively		122,541,408		5,977,866		404,141,594		58,747,359		205,483,601		30,987,369		3,494,482		831,373,679
Total	$	126,161,034	$	5,977,866	$	407,039,093	$	58,747,359	$	206,098,103	$	31,054,331	$	3,494,482	$	838,572,268

The following tables present activity in the ALL and select loan information on impairment evaluation, by portfolio segment, under the incurred loss methodology, for the periods indicated:

As of or for the year ended December 31, 2022

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

ALL beginning balance	$	870,392		$	68,655		$	4,151,760		$	76,728		$	1,765,892	$	182,014	$	55,698		$	539,117		$	7,710,256
Charge-offs		(76,875	)		0			(667,474	)		0			0		0		(63,625	)		0			(807,974	)
Recoveries		14,112			0			667,474			0			111,763		5,089		30,505			0			828,943
Provision (credit)		308,693			(15,565	)		910,053			(14,389	)		124,181		54,847		47,108			(436,928	)		978,000
ALL ending balance	$	1,116,322		$	53,090		$	5,061,813		$	62,339		$	2,001,836	$	241,950	$	69,686		$	102,189		$	8,709,225

ALL evaluated for impairment
Individually	$	2,322		$	0		$	0		$	0		$	106,280	$	0	$	0		$	0		$	108,602
Collectively		1,114,000			53,090			5,061,813			62,339			1,895,556		241,950		69,686			102,189			8,600,623
Total	$	1,116,322		$	53,090		$	5,061,813		$	62,339		$	2,001,836	$	241,950	$	69,686		$	102,189		$	8,709,225

Loans evaluated for impairment
Individually	$	3,442,124		$	0		$	3,176,835		$	0		$	3,816,012	$	77,416	$	0					$	10,512,387
Collectively		109,509,749			7,530,458			353,716,151			34,633,055			194,927,363		33,679,456		4,039,989						738,036,221
Total	$	112,951,873		$	7,530,458		$	356,892,986		$	34,633,055		$	198,743,375	$	33,756,872	$	4,039,989					$	748,548,608

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As of or for the nine months ended September 30, 2022

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

ALL beginning balance	$	870,392		$	68,655		$	4,151,760		$	76,728		$	1,765,892		$	182,014		$	55,698		$	539,117		$	7,710,256
Charge-offs		(47,500	)		0			(667,474	)		0			0			0			(35,706	)		0			(750,680	)
Recoveries		12,862			0			0			0			111,163			3,728			19,757			0			147,510
Provision (credit)		255,773			(12,107	)		1,419,813			(4,432	)		(63,658	)		(2,998	)		13,171			(280,562	)		1,325,000
ALL ending balance	$	1,091,527		$	56,548		$	4,904,099		$	72,296		$	1,813,397		$	182,744		$	52,920		$	258,555		$	8,432,086

ALL evaluated for impairment
Individually	$	4,259		$	0		$	8,867		$	0		$	96,784		$	4		$	0		$	0		$	109,914
Collectively		1,087,268			56,548			4,895,232			72,296			1,716,613			182,740			52,920			258,555			8,322,172
Total	$	1,091,527		$	56,548		$	4,904,099		$	72,296		$	1,813,397		$	182,744		$	52,920		$	258,555		$	8,432,086

Loans evaluated for impairment
Individually	$	3,408,207		$	0		$	3,812,657		$	0		$	3,670,995		$	79,742		$	0					$	10,971,601
Collectively		117,815,855			8,078,281			320,514,503			40,164,698			188,895,584			33,693,729			4,059,750						713,222,400
Total	$	121,224,062		$	8,078,281		$	324,327,160		$	40,164,698		$	192,566,579		$	33,773,471		$	4,059,750					$	724,194,001

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

			90 Days		Total
September 30, 2023	30-89 Days		or More		Past Due		Current		Total Loans

Commercial & industrial	$	0	$	3,093,578	$	3,093,578	$	123,067,456	$	126,161,034
Purchased		0		0		0		5,977,866		5,977,866
Commercial real estate		585,102		1,092,154		1,677,256		405,361,837		407,039,093
Municipal		0		0		0		58,747,359		58,747,359
Residential real estate - 1st lien		303,985		787,911		1,091,896		205,006,207		206,098,103
Residential real estate - Jr lien		187,736		25,007		212,743		30,841,588		31,054,331
Consumer		24,779		0		24,779		3,469,703		3,494,482
Totals	$	1,101,602	$	4,998,650	$	6,100,252	$	832,472,016	$	838,572,268

			90 Days		Total
December 31, 2022	30-89 Days		or More		Past Due		Current		Total Loans

Commercial & industrial	$	2,377,668	$	879,802	$	3,257,470	$	109,694,403	$	112,951,873
Purchased		0		0		0		7,530,458		7,530,458
Commercial real estate		1,395,444		353,842		1,749,286		355,143,700		356,892,986
Municipal		0		0		0		34,633,055		34,633,055
Residential real estate - 1st lien		1,517,653		641,141		2,158,794		196,584,581		198,743,375
Residential real estate - Jr lien		321,579		25,007		346,586		33,410,286		33,756,872
Consumer		18,745		0		18,745		4,021,244		4,039,989
Totals	$	5,631,089	$	1,899,792	$	7,530,881	$	741,017,727	$	748,548,608

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

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The following tables present the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more and still accruing as of the dates presented. There were no nonaccrual loans with an ACL at September 30, 2023.

			90 Days or
	Total		More and
September 30, 2023	Nonaccrual		Accruing

Commercial & industrial	$	3,619,626	$	64,311
Commercial real estate		2,900,078		315,826
Residential real estate - 1st lien		574,302		619,469
Residential real estate - Jr lien		120,786		0
Totals	$	7,214,792	$	999,606

							90 Days or
	Nonaccrual		Nonaccrual		Total		More and
December 31, 2022	with an ALL		with No ALL		Nonaccrual		Accruing

Commercial & industrial	$	452,963	$	2,989,161	$	3,442,124	$	0
Commercial real estate		0		3,180,478		3,180,478		324,927
Residential real estate - 1st lien		278,026		858,304		1,136,330		248,157
Residential real estate - Jr lien		0		131,088		131,088		0
Totals	$	730,989	$	7,159,031	$	7,890,020	$	573,084

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

	Number of loans		Balance

September 30, 2023		1	$	33,825
December 31, 2022		1	$	19,746

Allowance for loan losses (prior to adoption of CECL)

Please refer to Note 4 to the audited consolidated financial statements contained in the Company’s 2022 Annual Report on Form 10-K for a description of the ALL, under previously applicable GAAP, prior to adoption of CECL.

Allowance for credit losses

Effective January 1, 2023, with the adoption of CECL, the Company established the ACL through a provision for credit losses charged to earnings. Credit 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. The 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.

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

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General component

The general component of the ACL is based on methodologies, inputs, and assumptions utilized to estimate lifetime credit losses when applied to the following loan segments: commercial and industrial, purchased loans, 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.

The Company utilizes a discounted cash flow (DCF) approach to calculate the expected loss for each portfolio segment. Within the DCF model, probability of default (PD) and loss given default (LGD) assumptions are applied to calculate the expected loss for each segment. PD is management’s estimate of the probability the asset will default within a given timeframe and LGD is management’s estimate of the percentage of assets not expected to be collected due to default. The Company's PD and LGD assumptions may be derived from internal historical default and loss experience or from external data where there are not statistically meaningful loss events for a loan segment, or it does not have default and loss data that covers a full economic cycle.

As of September 30, 2023, the primary macroeconomic drivers used within the DCF model included forecasts of civilian unemployment and changes in national gross domestic product (GDP). Management monitors and assesses its macroeconomic drivers at least annually (generally in the fourth quarter, or more frequently as circumstances warrant) to determine whether they continue to be the most predictive indicator of losses within the Company's loan portfolio, and these macroeconomic drivers may change from time to time.

To determine its reasonable and supportable forecast, management may leverage macroeconomic forecasts obtained from various reputable sources, which may include, but are not limited to, the FOMC forecast and other publicly available forecasts from well recognized, leading economists or firms. The Company's reasonable and supportable forecast period generally ranges from one to three years, depending on the facts and circumstances of the current state of the economy, portfolio segment, and management's judgment of what can be reasonably supported. The model reversion period generally ranges from one to six years, and it also depends on the current state of the economy and management's judgments of such. Management monitors and assesses the forecast and reversion period at least annually, or more frequently as circumstances warrant. The Company used a one-year forecast and reversion period to calculate the ACL on loans as of September 30, 2023.

When the DCF method is used to determine the ACL, management does not adjust the effective interest rate used to discount expected cash flows to incorporate expected prepayments.

Expected credit losses are estimated over the contractual term of the loans. For term loans, the contractual life is calculated based on the maturity date. For commercial revolving loans with no stated maturity date, the contractual life is calculated based on the internal review date. For all other revolving loans, the contractual life is based on either the estimated maturity date or a default date. The contractual term excludes expected extensions, renewals, and modifications.

In calculating the ACL on loans, the contractual life of a loan must be adjusted for prepayments in order to arrive at expected cash flows. The Company models term loans using an annualized prepayment. When the Company has a specific expectation of differing payment behavior for a given loan, the loan may be evaluated individually. For revolving loans that do not have a principal payment schedule, a curtailment rate is factored into the expected cash flow.

Management has elected to use loss rate methodologies appropriate for each loan segment. The DCF method was chosen for the commercial and industrial, CRE, residential real estate 1^st lien, residential real estate Jr Lien and consumer loans. The DCF model, being periodic in nature, allows for effective incorporation of a reasonable and supportable forecast in a directionally consistent and objective manner. For the purchased loans segment, a long-term average loss rate is calculated and applied on a quarterly basis for the remaining life of the pool. Due to the lack of any historical loss data, a manual entry methodology was chosen for the municipal loans given the immaterial nature of the pool when considering prior loss history as well as the inability to reasonably forecast a PD or LGD for the pool.

Qualitative factors are also applied to 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. During the third quarter of 2023, the qualitative factor for collateral in the CRE loan segment was adjusted to reflect the stable values of real estate in the commercial sector.

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:

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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 credit quality in this segment.

Purchased –Loans in this segment are loans purchased through a loan purchasing program with Bankers Healthcare Group (BHG). BHG originates commercial loans to medical professionals nationwide and sells them individually to a secondary market, primarily banks, through a bid process. The Bank has established conservative credit parameters and expects a low risk of default in this portfolio.

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 farmland 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. Qualitative factors are not utilized in the manual entry method for municipal loans.

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.

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

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are also not included in the collective evaluation. In general, loans individually evaluated for estimated credit losses include those (i) greater than $100,000 with a nonaccrual status or (ii) have other unique characteristics differing from the portfolio segment. Specific reserves are established when appropriate for such loans based on the present value of expected future cash flows of the loan. However, when management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

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The following table presents the amortized cost basis of collateral-dependent loans as of September 30, 2023, by collateral type:

	Business		Commercial		Residential
	Assets (1)		Real Estate		Real Estate

Commercial & industrial	$	1,548,677	$	0	$	0
Commercial real estate		0		776,329		0
Residential real estate - 1st lien		0		0		311,338
Totals	$	1,548,677	$	776,329	$	311,338

(1)	Including, but not limited to, inventory, equipment and accounts receivable, but excluding real estate.

Impaired loans, by portfolio segment, prior to adoption of ASU 2022-02 (Troubled Debt Restructurings and Vintage Disclosures), were as follows:

	As of December 31, 2022
			Unpaid
	Recorded		Principal		Related
	Investment (1)		Balance		Allowance

Related allowance recorded
Commercial & industrial	$	452,963	$	462,745	$	2,322
Residential real estate – 1st lien		1,041,730		1,073,350		106,280
Total with related allowance		1,494,693		1,536,095		108,602

No related allowance recorded
Commercial & industrial		2,989,161		3,078,769
Commercial real estate		3,176,962		3,671,196
Residential real estate - 1st lien		2,785,669		3,805,682
Residential real estate - Jr lien		77,419		126,250
Total with no related allowance		9,029,211		10,681,897

Total impaired loans	$	10,523,904	$	12,217,992	$	108,602

(1)	Recorded investment in impaired loans in the table above includes accrued interest receivable and deferred net loan costs of $11,517.

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	As of September 30, 2022
			Unpaid
	Recorded		Principal		Related
	Investment (1)		Balance		Allowance

Related allowance recorded
Commercial & industrial	$	954,098	$	965,266	$	4,259
Commercial real estate		249,709		252,806		8,867
Residential real estate - 1st lien		1,172,194		1,192,445		96,784
Residential real estate - Jr lien		2,532		2,529		4
Total with related allowance		2,378,533		2,413,046		109,914

No related allowance recorded
Commercial & industrial		2,454,109		2,525,175
Commercial real estate		3,563,089		4,751,499
Residential real estate - 1st lien		2,511,284		3,515,246
Residential real estate - Jr lien		77,213		124,795
Total with no related allowance		8,605,695		10,916,715

Total impaired loans	$	10,984,228	$	13,329,761	$	109,914

(1)	Recorded investment in impaired loans in the table above includes accrued interest receivable and deferred net loan costs of $12,627.

	As of September 30, 2022
	Three Months Ended				Nine Months Ended
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized

Related allowance recorded
Commercial & industrial	$	477,049	$	0	$	238,525	$	0
Commercial real estate		124,854		0		62,427		0
Residential real estate - 1st lien		1,031,145		31,349		969,497		58,306
Residential real estate - Jr lien		1,266		147		633		247
Total with related allowance		1,634,314		31,496		1,271,082		58,553

No related allowance recorded
Commercial & industrial		1,299,959		0		728,879		204
Commercial real estate		3,479,786		72,754		3,806,739		74,245
Residential real estate - 1st lien		2,686,280		27,154		2,814,818		119,663
Residential real estate - Jr lien		79,809		0		83,471		0
Total with no related allowance		7,545,834		99,908		7,433,907		194,112

Total impaired loans	$	9,180,148	$	131,404	$	8,704,989	$	252,665

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 ACL, 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 - Pass– 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, including purchased 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 – Special Mention - 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 – Substandard/Doubtful – 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 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 Chief Lending 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 and current period gross charge-offs, by loan segment and origination year were as follows:

As of or for the nine months ended,													Revolving		Revolving
September 30, 2023													Loans		Loans
	Term Loans Amortized Cost Basis by Origination Year												Amortized		Converted
(In thousands)	2023		2022		2021		2020		2019		Prior		Cost Basis		to Term		Total

Commercial & Industrial:
Pass	$	10,874	$	20,286	$	13,821	$	3,108	$	4,176	$	4,795	$	58,359	$	0	$	115,419
Special mention		0		0		777		0		13		2		4,631		0		5,423
Substandard/Doubtful		0		429		132		482		271		1,565		2,440		0		5,319
Total commercial	$	10,874	$	20,715	$	14,730	$	3,590	$	4,460	$	6,362	$	65,430	$	0	$	126,161

Current period gross charge-offs	$	0	$	150	$	0	$	0	$	0	$	212	$	0	$	0	$	362

Purchased:
Pass	$	337	$	97	$	1,641	$	1,521	$	2,382	$	0	$	0	$	0	$	5,978
Total purchased	$	337	$	97	$	1,641	$	1,521	$	2,382	$	0	$	0	$	0	$	5,978

Commercial real estate:
Pass	$	64,005	$	85,851	$	39,398	$	43,929	$	35,241	$	87,004	$	41,990	$	0	$	397,418
Special mention		0		377		1,485		0		0		1,258		0		0		3,120
Substandard/Doubtful		0		0		0		3,344		1,381		1,776		0		0		6,501
Total commercial real estate	$	64,005	$	86,228	$	40,883	$	47,273	$	36,622	$	90,038	$	41,990	$	0	$	407,039

Municipal:
Pass	$	32,286	$	838	$	3,327	$	5,042	$	631	$	10,707	$	5,916	$	0	$	58,747
Total municipal	$	32,286	$	838	$	3,327	$	5,042	$	631	$	10,707	$	5,916	$	0	$	58,747

Residential real estate - 1st lien:
Pass	$	22,995	$	39,726	$	41,687	$	33,854	$	10,516	$	52,682	$	1,956	$	0	$	203,416
Special mention		0		301		130		0		0		0		0		0		431
Substandard/Doubtful		0		0		0		1,842		40		369		0		0		2,251
Total residential real estate - 1st lien	$	22,995	$	40,027	$	41,817	$	35,696	$	10,556	$	53,051	$	1,956	$	0	$	206,098

Residential real estate - Jr lien:
Pass	$	1,424	$	1,967	$	355	$	609	$	645	$	1,121	$	23,142	$	1,710	$	30,973
Special mention		0		50		0		0		0		0		0		0		50
Substandard/Doubtful		0		0		0		0		0		31		0		0		31
Total residential real estate - Jr lien	$	1,424	$	2,017	$	355	$	609	$	645	$	1,152	$	23,142	$	1,710	$	31,054

Consumer
Pass	$	1,580	$	969	$	470	$	248	$	133	$	95	$	0	$	0	$	3,495
Total consumer	$	1,580	$	969	$	470	$	248	$	133	$	95	$	0	$	0	$	3,495

Current period gross charge-offs	$	31	$	27	$	0	$	0	$	1	$	53	$	0	$	0	$	112

Total Loans	$	133,501	$	150,891	$	103,223	$	93,979	$	55,429	$	161,405	$	138,434	$	1,710	$	838,572

Total current period gross charge-offs	$	31	$	177	$	0	$	0	$	1	$	265	$	0	$	0	$	474

As of or for the nine months ended, September 30, 2023, there were (i) no current period gross charge-offs within the Purchased, CRE, Municipal, Residential real estate 1st lien and Residential real estate Jr lien loan segments and (ii) no Special mention or Substandard/Doubtful loans within the Purchased, Municipal and Consumer loan segments.

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Before the adoption of ASC 326 (CECL), the risk ratings within the loan portfolio, by segment, as of December 31, 2022, were as follows:

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

Group A	$	104,697,047	$	7,530,458	$	347,732,935	$	34,633,055	$	195,269,893	$	33,538,767	$	4,039,989	$	727,442,144
Group B		6,296,411		0		2,754,649		0		0		0		0		9,051,060
Group C		1,958,415		0		6,405,402		0		3,473,482		218,105		0		12,055,404
Total	$	112,951,873	$	7,530,458	$	356,892,986	$	34,633,055	$	198,743,375	$	33,756,872	$	4,039,989	$	748,548,608

Modifications of Loans

A loan is considered modified 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 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 modified. 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 consideration payments expected to be received from third parties, including third-party guarantors, provided the third party has the ability to perform on the guarantee.

The Company’s modified loans are principally a result of extending loan repayment terms to relieve cash flow difficulties. The Company has only, on a limited basis, reduced accrued interest or reduced interest rates for borrowers below the current market rate for the borrower. The Company has not generally forgiven principal within the terms of original restructurings, nor converted variable rate terms to fixed rate terms. However, the Company evaluates each potential loan modification on its own merits and does not foreclose the granting of any particular type of concession. In connection with modifications, the Company takes into account applicable regulatory guidance, including a 2023 interagency Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts.

There were no loan modifications for the first nine months of 2023.

Prior to adoption of ASU 2022-02, new TDRs, by portfolio segment, during the periods presented below were as follows.

Year ended December 31, 2022

Pre-

Post-

Modification

Outstanding

Number of

Recorded

Contracts

Investment

Residential real estate – 1st lien

562,592

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Nine months ended September 30, 2022

Pre-

Post-

Modification

Outstanding

Number of

Recorded

Contracts

Investment

Residential real estate – 1st lien

292,592

There were no new TDRs for the three months ended September 30, 2022.

There were no TDRs for which there was a payment default during the twelve-month period ended December 31, 2022. The TDRs for which there was a payment default during the twelve-month period ended September 30, 2022 were as follows:

	Number of		Recorded
	Contracts		Investment

Commercial real estate		1	$	818,570

Prior to adoption of ASU 2022-02, TDRs were treated as other impaired loans and carried individual specific reserves with respect to the calculation of the ALL. These loans were categorized as non-performing, may have been past due, and were generally adversely risk rated. The TDRs that had defaulted under their restructured terms were generally in collection status and their ALL reserve was typically calculated using the fair value of collateral method.

Prior to adoption of ASU 2022-02, the specific allowances within the ALL related to TDRs as of December 31, 2022 totaled $106,280.

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 modified.

Off-Balance Sheet Credit Exposures

In the ordinary course of business, the Company enters into commitments to extend credit, including commercial letters of credit and standby letters of credit. Such financial instruments are recorded as loans when they are funded.

Allowance for Credit Losses on OBS Credit Exposures

Effective January 1, 2023, with the adoption of ASU No. 2016-13 (CECL), the Company estimates expected credit losses on OBS credit exposures over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on OBS credit exposures is adjusted through credit loss expense. To appropriately measure expected credit losses, management disaggregates the loan portfolio into similar risk characteristics, identical to those determined for the loan portfolio. An estimated funding rate is then applied to the qualifying unfunded loan commitments and letters of credit using the Company's own historical experience to estimate the expected funded amount for each loan segment as of the reporting date. Once the expected funded amount for each loan segment is determined, the loss rate, which is the calculated expected loan loss as a percent of the amortized cost basis for each loan segment, is applied to calculate the ACL on OBS credit exposures as of the reporting date. The ACL on OBS credit exposures is presented within accrued interest and other liabilities on the consolidated balance sheets.

Note 6. 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. Goodwill is not amortizable and is not deductible for tax purposes.

As of December 31, 2022, 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.

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Note 7. 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, net of any related credit allowance. 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, municipal securities and other asset-backed securities.

Individually analyzed loans:Individually analyzed 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 ACL. Accordingly, certain individually analyzed loans may be subject to measurement at fair value on a non-recurring basis. Management has estimated the fair value 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.

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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 of the periods presented for 2023 or 2022.

	September 30,		December 31,
Assets: (market approach)	2023		2022

Level 1
U.S. Government securities	$	38,542,155	$	38,231,589

Level 2
U.S. GSE debt securities	$	10,398,344	$	10,375,291
Taxable Municipal securities		233,714		234,858
Tax-exempt Municipal securities		10,596,387		11,323,567
Agency MBS		106,823,004		115,231,599
ABS and OAS		2,299,066		2,693,606
CMO		11,365,654		11,935,925
Other investments		1,670,137		2,891,674
Level 2 Total	$	143,386,306	$	154,686,520

Grand Total	$	181,928,461	$	192,918,109

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. Individually analyzed loans measured at fair value only include those loans with a partial write-down or with a related specific ACL and are presented net of the specific allowances as disclosed in Note 5. 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 of the periods presented for 2023 or 2022.

	September 30,		December 31,
Level 2	2023		2022
Assets: (market approach)
Individually analyzed loans, net of related allowance	$	679,802	$	94,458
Loans held-for-sale		56,700		0
MSRs (1)		814,470		862,593

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

FASB ASC Topic 825, “Financial Instruments”, requires disclosure 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.

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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, 2023			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	$	17,532	$	17,532	$	0	$	0	$	17,532
Debt securities AFS		181,928		38,542		143,386		0		181,928
Restricted equity securities		1,424		0		1,424		0		1,424
Loans and loans held-for-sale, net of ACL
Commercial & industrial		125,074		0		680		120,780		121,460
Purchased		5,960		0		0		5,537		5,537
Commercial real estate		401,695		0		0		376,490		376,490
Municipal		58,600		0		0		55,681		55,681
Residential real estate - 1st lien		204,319		0		0		184,617		184,617
Residential real estate - Jr lien		30,577		0		0		30,109		30,109
Consumer		3,466		0		0		3,473		3,473
MSRs (1)		814		0		1,286		0		1,286
Accrued interest receivable		3,830		0		3,830		0		3,830

Financial liabilities:
Deposits
Other deposits		900,956		0		897,998		0		897,998
Brokered deposits		249		0		227		0		227
Short-term borrowings		3,550		0		3,550		0		3,550
Long-term borrowings		45,600		0		45,223		0		45,223
Repurchase agreements		31,580		0		31,580		0		31,580
Operating lease obligations		497		0		497		0		497
Finance lease obligations		3,480		0		3,480		0		3,480
Subordinated debentures		12,887		0		12,694		0		12,694
Accrued interest payable		794		0		794		0		794

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

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December 31, 2022			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	$	71,140	$	71,140	$	0	$	0	$	71,140
Debt securities AFS		192,918		38,232		154,686		0		192,918
Restricted equity securities		1,412		0		1,412		0		1,412
Loans and loans held-for-sale, net of ACL
Commercial & industrial		111,792		0		0		109,534		109,534
Purchased		7,476		0		0		7,119		7,119
Commercial real estate		351,738		0		29		340,254		340,283
Municipal		34,566		0		0		34,558		34,558
Residential real estate - 1st lien		197,281		0		65		180,879		180,944
Residential real estate - Jr lien		33,510		0		0		33,218		33,218
Consumer		3,970		0		0		3,949		3,949
MSRs (1)		863		0		1,287		0		1,287
Accrued interest receivable		3,214		0		3,214		0		3,214

Financial liabilities:
Deposits
Other deposits		922,723		0		918,882		0		918,882
Brokered deposits		249		0		225		0		225
Long-term borrowings		1,300		0		1,025		0		1,025
Repurchase agreements		33,078		0		33,078		0		33,078
Operating lease obligations		658		0		658		0		658
Finance lease obligations		3,645		0		3,645		0		3,645
Subordinated debentures		12,887		0		12,740		0		12,740
Accrued interest payable		74		0		74		0		74

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

Note 8. 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, 2023			December 31, 2022

Balance at beginning of year	$	862,593		$	897,720
MSRs capitalized		55,666			120,629
MSRs amortized		(103,789	)		(155,756	)
Balance at end of period	$	814,470		$	862,593

Note 9. 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 10. 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 21, 2023, the Company’s Board declared a cash dividend of $0.23 per common share, payable November 1, 2023, to shareholders of record as of October 15, 2023. 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, 2023

The following discussion analyzes the consolidated financial condition of Community Bancorp. and its wholly-owned subsidiary, Community National Bank, as of September 30, 2023 and December 31, 2022, and its consolidated results of operations for the three- and nine-month interim periods and one year period presented. The Company is considered a “smaller reporting company” and a “non-accelerated filer” under the disclosure rules of the SEC. Accordingly, the Company has elected to provide its statements of income, comprehensive income, cash flows and changes in shareholders’ equity for a two-year, rather than a three-year, period and provide certain other smaller reporting company scaled disclosures where management deems it appropriate.

The following discussion should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in its 2022 Annual Report on Form 10-K filed with the SEC. Please refer to Note 1 in the accompanying consolidated financial statements for a listing of acronyms and defined terms used throughout the following discussion.

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the results of operations, financial condition and business of the Company and its subsidiary. Words used in the discussion below such as "believes," "expects," "anticipates," "intends," "estimates," “projects”, "plans," “assumes”, "predicts," “may”, “might”, “will”, “could”, “should” and similar expressions, indicate that management of the Company is making forward-looking statements.

Forward-looking statements are not guarantees of future performance. They necessarily involve risks, uncertainties and assumptions. Examples of forward looking statements included in this discussion include, but are not limited to, statements regarding the estimated contingent liability related to assumptions made within the asset/liability management process; management's expectations as to the future interest rate environment and the Company's related liquidity level; credit risk expectations relating to the Company's loan portfolio and off-balance sheet commitments; and management's general outlook for the future performance of the Company and the local or national economy. Although forward-looking statements are based on management's expectations and estimates as of the date they are made, many of the factors that could influence or determine actual results are unpredictable and not within the Company's control.

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

	·	interest rates change in such a way as to negatively affect loan demand, the local economy or the Company's net income, asset valuations or margins;
	·	general economic or business conditions, either nationally, regionally or locally, deteriorate, resulting in a decline in credit quality or a diminished demand for the Company's products and services;
	·	the impact of inflation and slowing economic growth on the Company’s customers and on its financial results and performance;
	·	the effect of United States monetary and fiscal policies, including deficit spending and the interest rate policies of the FRB and its regulation of the money supply;
	·	changes in applicable accounting policies, practices and standards;
	·	the geographic concentration of the Company’s loan portfolio and deposit base;
	·	reductions in deposit levels, which necessitate increased borrowings to fund loans and sale of investment securities;
	·	increases in the level of nonperforming assets and charge-offs;
	·	changes in federal or state tax laws or policy;
	·	changes in laws or government rules, including the rules of the federal Consumer Financial Protection Bureau, or the way in which courts or government agencies interpret or implement those laws or rules, increase our costs of doing business, causing us to limit or change our product offerings or pricing, or otherwise adversely affect the Company's business;
	·	regulatory responses to recent high profile bank failures increase our costs of operation, including through regulatory compliance changes and higher FDIC deposit insurance assessments to replenish the Bank Insurance Fund (BIF);

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	·	competitive pressures increase among financial service providers in the Company's northern New England market area or in the financial services industry generally, including competitive pressures from non-bank financial service providers, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems;
	·	cybersecurity risks could adversely affect the Company’s business, financial performance or reputation and could result in financial liability for losses incurred by customers or others due to data breaches or other compromise of the Company’s information security systems;
	·	higher-than-expected costs are incurred relating to information technology or difficulties arise in implementing technological enhancements;
	·	management’s risk management measures may not be completely effective;
	·	changes in consumer and business spending, borrowing and savings habits;
	·	operational and internal system failures due to changes in normal business practices, including remote working for Company staff;
	·	increased cybercrime and payment system risk due to increased usage by customers of online, mobile and other remote banking channels;
	·	the ongoing challenges to find qualified workers to maintain a stable workforce;
	·	losses due to the fraudulent or negligent conduct of third parties, including the Company’s service providers, customers and employees; and
	·	adverse changes in the credit rating of U.S. government debt.

Readers are cautioned not to place undue reliance on such statements as they speak only as of the date they are made. The Company does not undertake, and disclaims any obligation, to revise or update any forward-looking statements to reflect the occurrence or anticipated occurrence of events or circumstances after the date of this Report, except as required by applicable law. The Company claims the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995.

NON-GAAP FINANCIAL MEASURES

Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, three non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled Interest Income Versus Interest Expense (NII)) and core earnings (as defined and discussed in the Results of Operations section), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G.

Management believes that these non-GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.

OVERVIEW

The Company’s consolidated assets at September 30, 2023, were $1.08 billion compared to $1.06 billion at December 31, 2022, an increase of 2.6%. Significant changes in the asset base were due to an increase in loans of $90.0 million, or 12.0%, which was partially offset by a decrease of $53.6 million, or 75.4%, in cash and cash equivalents and a decrease of $11.0 million, or 5.7% in investment securities. This change in the asset base reflects the Company’s efforts to deploy cash into higher earning assets. The increase in the loan portfolio was primarily attributable to an increase of $13.2 million in commercial & industrial loans, $50.1 million in CRE loans, $24.1 million in municipal loans and $7.4 million in residential first lien loans, which was partially offset by a decrease of $2.7 million in residential junior lien loans and $1.6 million in purchased loans.

Total deposits at September 30, 2023, were $901.2 million compared to $923.0 million at December 31, 2022, a decrease of $21.8 million, or 2.4%. Year to date, demand and interest-bearing transaction accounts decreased in total by $20.2 million or 4.0%, followed by a decrease of $11.7 million, or 6.8%, in savings accounts and $2.9 million, or 2.1%, in money market funds. This was partially offset by an increase of $13.0 million, or 12.8%, in time deposits. The Company has been offering some competitive interest rates for retail time deposits, accounting for the increase in these funds. The decrease in deposit balances combined with the loan growth, has required the use of borrowed funds as a supplemental funding source.

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Total interest income increased $2.7 million, or 28.1%, for the third quarter of 2023, and $7.8 million, or 29.7%, for the first nine months of 2023, compared to the same periods in 2022. The growth of the loan portfolio, coupled with increases in the fed funds rate throughout 2022 and into 2023, helped to support the year over year increase in interest income.

Total interest expense increased $2.6 million, or 245.4% for the third quarter of 2023, and $6.3 million, or 253.6%, for the first nine months of 2023, compared to the same periods in 2022. The recent increases in the fed funds rate have increased borrowing costs and have put more pressure on competitive deposit pricing, resulting in an increase in the Company’s money market and time deposit rates. Please refer to the interest rate sensitivity discussion in the Interest Rate Risk and Asset and Liability Management section for more information on the impact that the actions of the FRB’s FOMC in regulating interest rates, and changes in the yield curve, could have on net interest income.

The provision for credit losses for the three and nine months ended September 30, 2023, was determined under ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, commonly referenced as the Current Expected Credit Losses, or CECL, which the Company adopted effective January 1, 2023.

The provision for credit losses for the third quarter of 2023 was $240,889 compared to $125,000 for the same quarter in 2022, an increase of $115,889, or 92.7%, and for the first nine months of 2023 was $808,557 compared to $1.3 million for the same period in 2022, a decrease of $516,443, or 39.0%. This decrease to the provision year over year was driven primarily by a write-down on a non-performing CRE loan totaling $667,474 during the first quarter of 2022, which necessitated a substantial provision for that quarter. Please refer to Note 5 of the unaudited consolidated financial statements as well as the ACL and provisions discussion in the Credit Risk section of this MD&A.

Consolidated net income for the third quarter of 2023 decreased $247,997 to $3.4 million compared to $3.6 million for the same quarter of 2022, while an increase of $860,408 is noted for the first nine months of 2023 to $9.9 million compared to $9.0 million in the same period of 2022. Year over year, a $7.8 million increase in interest income was partially offset by an increase of $6.3 million in interest expense and coupled with a decrease of $516,443 in the provision for credit losses between periods, resulted in an increase of $2.0 million in net interest income after provision for credit losses. These changes, along with other significant changes in non-interest income and non-interest expense are discussed in the appropriate sections of this MD&A.

Equity capital increased to $78.8 million, with a book value per share of $14.08 as of September 30, 2023, compared to $75.2 million and a book value per share of $13.55 as of December 31, 2022. Equity capital increased between periods despite a cumulative effect charge to retained earnings of $549,113 upon the transition to CECL effective on January 1, 2023. The increase in equity capital reflects year to date net income, but is partially offset by an increase in unrealized losses in the investment portfolio of $2.9 million, net of tax, reflected in the accumulated other comprehensive loss component of the shareholders’ equity portion of the balance sheet. This position is considered by management as temporary and, unlike the charge to retained earnings in connection with the transition to CECL, does not impact the Company’s regulatory capital ratios.

Heavy rainfall in the month of July caused extensive flooding across much of the state of Vermont leading to Governor Phil Scott declaring a state of emergency. While the impact was considerable, the impact to the Bank’s customers was manageable with many having flood insurance coverage and or qualifying for the various assistance programs offered at the state and federal level. The portion of the Company’s service area most impacted was central Vermont, including one of the Bank’s branches which sustained extensive flooding. The branch was immediately closed for restoration and repairs although night depository and ATM services were restored soon thereafter, and the drive up was reopened with limited hours on October 25, 2023. A full-service opening of the retail branch is anticipated by mid-November.

On September 21, 2023, the Company's Board of Directors declared a quarterly cash dividend of $0.23 per common share, payable on November 1, 2023, to shareholders of record on October 15, 2023.

As of September 30, 2023, all the Company’s capital ratios, and those of our subsidiary Bank, were in excess of applicable regulatory requirements. While we believe that we have sufficient capital to withstand an economic downturn from any headwinds related to inflation or recessionary periods, should one occur, our equity capital and regulatory capital ratios could be adversely impacted, including as a result of credit losses and other adverse impacts of deteriorating economic conditions, or government monetary policy.

CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared according to U.S. GAAP. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities in the consolidated financial statements and related notes. The SEC has defined a company’s critical accounting policies as those that are most important to the portrayal of the Company’s financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Because of the significance of these estimates and assumptions, there is a high likelihood that materially different amounts would be reported for the Company under different conditions or using different assumptions or estimates. Management evaluates on an ongoing basis its judgment as to which policies are considered to be critical and communicates all evaluations with the Company’s Audit Committee.

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The Company’s critical accounting policies govern:

·	the ACL;
·	OREO;
·	credit losses on debt securities;
·	valuation of residential MSRs; and
·	the carrying value of goodwill.

These policies are described in the Company’s 2022 Annual Report on Form 10-K in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” and in Note 1 (Significant Accounting Policies) to the audited consolidated financial statements. With the exception of the ACL policy, there were no material changes during the first nine months of 2023 in the Company’s critical accounting policies.

ACL -Management believes that the calculation of the ACL is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. In estimating the ACL, management has adopted a methodology consistent with ASU No. 2016-13 that requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses over the life of the loans at the measurement date. Further consideration is given to qualitative factors, including changes in current economic indicators and their probable impact on borrowers and collateral, trends in delinquent and non-performing loans, trends in criticized and classified assets, levels of exceptions, the impact of competition in the market, concentrations of credit risk in a variety of areas, including portfolio product mix, the level of loans to individual borrowers and their related interests, loans to industry segments and the geographic distribution of CRE loans. Management’s estimates used in calculating the ACL may increase or decrease based on changes in these factors, which in turn will affect the amount of the Company’s provision for credit losses charged against current period income. This evaluation is inherently subjective and actual results could differ significantly from these estimates under different assumptions, judgments or conditions. The Company estimates expected credit losses on OBS credit exposures over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on OBS credit exposures is adjusted through credit loss expense.

A modified version of these requirements applies to debt securities classified as available for sale, which eliminates OTTI impairment analysis and requires that if a decline in the fair value of debt securities AFS is deemed by management to be the result of credit losses rather than other factors, the credit losses on those securities is recorded through an allowance for credit losses rather than a write-down of the security. The Company’s securities portfolio is evaluated for impairment on a quarterly basis.

RESULTS OF OPERATIONS

The Company’s net income for the third quarter of 2023 was $3.4 million or $0.61 per common share, compared to $3.6 million or $0.66 per common share for the same quarter of 2022. Net income for the first nine months of 2023 was $9.9 million or $1.80 per common share, compared to $9.0 million or $1.67 per common share for the same period of 2022. Core earnings (NII) were $8.43 million for the third quarter of 2023 compared to $8.37 million for the same quarter of 2022, and $25.2 million for the first nine months of 2023 compared to $23.8 million for the same period in 2022. Interest and fees on loans, the major component of interest income, increased $2.7 million, or 33.5%, for the third quarter of 2023 compared to the same quarter of 2022, and $7.0 million, or 30.1%, for the first nine months of 2023 compared to the same period in 2022. Interest paid on deposits, which is the major component of total interest expense, increased $1.7 million, or 198.5%, for the third quarter of 2023 compared to the same quarter of 2022, and increased $4.6 million, or 232.6%, year over year, driven primarily by the increases in the fed funds rate during 2022 and into the first nine months of 2023. Market pressures on deposit rates along with an increased use of wholesale funding is driving up the cost of funds and compressing the net interest margin.

Return on average assets, which is net income divided by average total assets, measures how effectively a corporation uses its assets to produce earnings. Return on average equity, which is net income divided by average shareholders' equity, measures how effectively a corporation uses its equity capital to produce earnings.

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The following tables show these ratios annualized, as well as other equity ratios monitored by management, for the comparison periods presented.

Three Months Ended September 30,	2023			2022

Return on average assets		1.24	%		1.41	%
Return on average equity		16.48	%		19.06	%
Dividend payout ratio (1)		37.70	%		34.85	%
Average equity to average assets		7.55	%		7.38	%

Nine Months Ended September 30,	2023			2022

Return on average assets		1.27	%		1.19	%
Return on average equity		16.68	%		15.55	%
Dividend payout ratio (1)		38.33	%		41.32	%
Average equity to average assets		7.60	%		7.68	%

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

INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST INCOME)

The largest component of the Company’s operating income is NII, which is the difference between interest earned on loans and investments and the interest paid on deposits and other sources of funds (i.e., borrowings). The Company’s level of net interest income can fluctuate over time due to changes in the level and mix of earning assets and sources of funds (volume), and changes in the yield earned and costs of funds (rate). A portion of the Company’s income from loans to local municipalities is not subject to income taxes. Because the proportion of tax-exempt items in the Company's balance sheet varies from year-to-year, to improve comparability of information, the non-taxable income shown in the tables below has been converted to a tax equivalent basis. The Company’s corporate tax rate is 21%; therefore, to equalize tax-free and taxable income in the comparison, we divide the tax-free income by 79%, with the result that every tax-free dollar is equivalent to $1.27 in taxable income for the periods presented.

The Company’s tax-exempt interest income of $559,985 and $284,618 for the three months ended September 30, 2023 and 2022, respectively, and $1.2 million and $777,314 for the nine months ended September 30, 2023 and 2022, respectively, was derived from loans to local municipalities of $58.7 million and $40.2 million, and tax-exempt municipal investments of $10.6 million and $10.3 million at September 30, 2023 and 2022, respectively.

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

Three Months Ended September 30,	2023		2022

Net interest income as presented	$	8,430,059	$	8,373,566
Effect of tax-exempt income		148,857		75,658
Net interest income, tax equivalent	$	8,578,916	$	8,449,224

Nine Months Ended September 30,	2023		2022

Net interest income as presented	$	25,222,287	$	23,768,980
Effect of tax-exempt income		306,315		206,628
Net interest income, tax equivalent	$	25,528,602	$	23,975,608

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

	Three Months Ended September 30,
	2023							2022
					Average							Average
	Average		Income/		Yield/			Average		Income/		Yield/
	Balance		Expense		Rate			Balance		Expense		Rate
Average Assets
Loans, net (1)	$	813,431,805	$	11,044,088		5.39	%	$	709,936,691	$	8,239,751		4.60	%
Taxable investment securities		176,104,770		941,956		2.12	%		182,586,203		799,856		1.74	%
Tax-exempt investment securities		11,353,244		114,758		4.01	%		9,135,697		86,271		3.75	%
Sweep and interest-earning accounts		7,796,502		94,515		4.81	%		58,264,306		358,907		2.44	%
Other investments (2)		2,074,630		39,904		7.63	%		1,777,950		23,029		5.14	%
Total interest-earning assets	$	1,010,760,951	$	12,235,221		4.80	%	$	961,700,847	$	9,507,814		3.92	%
Cash and due from banks		10,653,464							11,034,240
Premises and equipment		12,655,076							13,217,724
BOLI		5,199,896							5,120,380
Goodwill		11,574,269							11,574,269
Other assets		21,142,242							15,500,345
Total assets	$	1,071,985,898						$	1,018,147,805

Average Liabilities and Shareholders' Equity
Interest-bearing transaction accounts	$	263,787,094	$	1,116,811		1.68	%	$	252,413,763	$	382,833		0.60	%
Money market funds		136,210,933		695,234		2.02	%		138,497,037		197,849		0.57	%
Savings deposits		164,695,504		34,076		0.08	%		181,818,265		27,930		0.06	%
Time deposits		109,526,390		655,122		2.37	%		105,915,323		229,371		0.86	%
Borrowed funds		51,964,152		656,726		5.01	%		1,301,120		8		0.00	%
Repurchase agreements		34,056,695		201,518		2.35	%		33,402,748		45,153		0.54	%
Finance lease obligations		3,499,404		20,111		2.30	%		3,716,571		21,355		2.30	%
Junior subordinated debentures		12,887,000		276,707		8.52	%		12,887,000		154,091		4.74	%
Total interest-bearing liabilities	$	776,627,172	$	3,656,305		1.87	%	$	729,951,827	$	1,058,590		0.58	%
Noninterest bearing deposits		207,879,544							208,681,213
Other liabilities		6,519,520							4,473,162
Total liabilities		991,026,236							943,106,202
Shareholders' equity		80,959,662							75,041,603
Total liabilities and shareholders' equity	$	1,071,985,898						$	1,018,147,805

Net interest income			$	8,578,916						$	8,449,224
Net interest spread (3)						2.93	%						3.34	%
Net interest margin (4)						3.37	%						3.49	%

(1)	Included in net loans are non-accrual loans with average balances of $7,344,200 and $7,337,588 for the three months ended September 30, 2023 and 2022, respectively. Loans are stated net of unearned discount and ACL, plus loans held-for-sale and include tax-exempt loans to local municipalities with average balances of $56,085,091 and $39,007,717 for the three months ended September 30, 2023 and 2022, respectively.

(2)	Included in other investments is the Company’s FHLBB Stock with average balances of $1,009,480 and $712,800 for the three months ended September 30, 2023 and 2022, respectively, with a dividend rate of approximately 8.04% and 3.72%, respectively, per quarter.

(3)	Net interest spread is the difference between the average yield on average interest-earning assets and the average rate paid on average interest-bearing liabilities.

(4)	Net interest margin is net interest income divided by average earning assets.

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	Nine Months Ended September 30,
	2023							2022
					Average							Average
	Average		Income/		Yield/			Average		Income/		Yield/
	Balance		Expense		Rate			Balance		Expense		Rate
Average Assets
Loans, net (1)	$	774,050,459	$	30,544,342		5.28	%	$	697,118,020	$	23,476,738		4.50	%
Taxable investment securities		178,750,212		2,815,397		2.11	%		183,417,294		2,192,540		1.60	%
Tax-exempt investment securities		11,456,678		344,272		4.02	%		5,628,689		142,899		3.39	%
Sweep and interest-earning accounts		16,880,174		568,803		4.51	%		68,303,360		609,532		1.19	%
Other investments (2)		1,912,446		104,556		7.31	%		1,778,428		56,121		4.22	%
Total interest-earning assets		983,049,969	$	34,377,370		4.68	%		956,245,791	$	26,477,830		3.70	%
Cash and due from banks		10,584,558							10,631,909
Premises and equipment		12,798,118							13,416,551
BOLI		5,180,070							5,100,385
Goodwill		11,574,269							11,574,269
Other assets		20,013,956							14,177,372
Total assets	$	1,043,200,940						$	1,011,146,277

Average Liabilities and Shareholders' Equity
Interest-bearing transaction accounts	$	271,528,726	$	3,254,644		1.60	%	$	256,909,959	$	754,189		0.39	%
Money market funds		130,690,426		1,699,425		1.74	%		132,391,636		446,751		0.45	%
Savings deposits		168,151,363		98,104		0.08	%		178,709,726		77,373		0.06	%
Time deposits		106,178,078		1,518,200		1.91	%		106,235,079		697,088		0.88	%
Borrowed funds		24,875,392		892,522		4.80	%		1,301,132		14		0.00	%
Repurchase agreements		35,611,331		548,300		2.06	%		30,752,887		88,322		0.38	%
Finance lease obligations		3,553,782		61,277		2.30	%		3,769,459		64,979		2.30	%
Junior subordinated debentures		12,887,000		776,296		8.05	%		12,887,000		373,506		3.88	%
Total interest-bearing liabilities		753,476,098	$	8,848,768		1.57	%		722,956,878	$	2,502,222		0.46	%
Noninterest bearing deposits		203,639,925							206,574,381
Other liabilities		6,766,501							3,920,106
Total liabilities		963,882,524							933,451,365
Shareholders' equity		79,318,416							77,694,912
Total liabilities and shareholders' equity	$	1,043,200,940						$	1,011,146,277

Net interest income			$	25,528,602						$	23,975,608
Net interest spread (3)						3.11	%						3.24	%
Net interest margin (4)						3.47	%						3.35	%

(1)	Included in net loans are non-accrual loans with average balances of $7,873,201 and $6,029,756 for the nine months ended September 30, 2023 and 2022, respectively. Loans are stated net of unearned discount and ACL, and include loans held-for-sale and tax-exempt loans to local municipalities with average balances of $42,203,207 and $45,161,639 for the nine months ended September 30, 2023 and 2022, respectively.

(2)	Included in other investments is the Company’s FHLBB Stock with average balances of $847,296 and $713,278, respectively, with a dividend rate of approximately 8.5% and 3.38%, respectively, for the nine months ended September 30, 2023 and 2022, respectively.

(3)	Net interest spread is the difference between the average yield on average interest-earning assets and the average rate paid on average interest-bearing liabilities.

(4)	Net interest margin is net interest income divided by average earning assets.

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The average volume of interest-earning assets for the three- and nine-month periods ended September 30, 2023, increased 5.1% and 2.8%, respectively, compared to the same periods last year, and the average yield on interest-earning assets increased 88 bps and 98 bps, respectively.

The average volume of loans increased over the three- and nine-month comparison periods of 2023 versus 2022 by 14.6% and 11.0%, respectively, and the average yield on loans increased 79 bps and 78 bps, respectively. Loans accounted for 80.5% and 78.7%, respectively, of the average interest-earning asset portfolio for the three- and nine- month periods ended September 30, 2023, compared to 73.8% and 72.9%, respectively, for the same periods last year. Interest earned on the loan portfolio as a percentage of total interest income was 90.3% and 88.9%, respectively, for the three- and nine-month periods in 2023 compared to 86.7% and 88.7%, respectively, for the same periods in 2022.

The average volume of the taxable investment portfolio (classified as AFS) decreased 3.6% and 2.5% during the three- and nine-month periods ended September 30, 2023, compared to the same periods last year, while the average yield increased 38 bps and 51 bps, respectively, between periods. There were no purchases of taxable AFS investment securities during the first nine months of 2023, accounting for the decrease year over year.

The average volume of the tax-exempt investment portfolio (classified as AFS) for the three- and nine-month periods ended September 30, 2023, increased $2.2 million and $5.8 million, respectively, and the tax equivalent yield increased 26 bps and 63 bps, respectively. The Company purchased several bonds during 2023, accounting for the increase in this portfolio.

The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing account at the FRBB, decreased 86.6% for the three-months ended September 30, 2023, compared to the same period in 2022, and 75.3% for the nine-months ended September 30, 2023, compared to the same period in 2022. The decrease in average volume year over year is attributable to the funding of loan growth, and to a decrease in customer deposit accounts. The average yield on these funds increased 237 bps and 332 bps for the three- and nine-month periods ended September 30, 2023, versus the same periods in 2022, directly related to the increases in the fed funds rate throughout 2022 and into 2023.

The average volume of interest-bearing liabilities for the three- and nine-month periods ended September 30, 2023 increased 6.5% and 4.2%, respectively, compared to the same periods in 2022, and the average rate paid on interest-bearing liabilities increased 129 bps and 111 bps, respectively.

The average volume of interest-bearing transaction accounts increased 4.5% and 5.7%, respectively for the three- and nine-month periods ended September 30, 2023, compared to the same periods of 2022, reflecting deposit growth year over year. The average rate paid on these accounts increased 108 bps and 121 bps, respectively, between comparison periods. Interest paid on these funds accounted for 30.5% and 36.8% of total interest expense for the three- and nine-month periods of 2023, respectively.

The average volume of money market accounts decreased 1.7% and 1.3%, respectively, for the three- and nine-month periods ended September 30, 2023, compared to the same periods of 2022, while the average rate paid on these deposits increased 145 bps and 129 bps, respectively.

The average volume of savings accounts decreased 9.4% and 5.9%, respectively, for the three- and nine-month periods ended September 30, 2023, compared to the same periods in 2022, while the average rate paid on these accounts increased two bps in both comparison periods.

The average volume of time deposits increased 3.4% and decreased 0.1%, respectively, for the three- and nine-month periods ended September 30, 2023, compared to the same periods in 2022, and the average rate paid increased 151 bps and 103 bps, respectively.

As a result of the decrease in deposits, the Company has had to rely on borrowed funds to fund loan growth during the first nine months of 2023, particularly during the second and third quarters of 2023, accounting for the increase of $50.7 million for the three months ended September 30, 2023, and $23.6 million for the nine months ended September 30, 2023, compared to the respective periods in 2022. The average rate paid on borrowed funds increased by 501 bps and 480 bps for the three- and nine-month periods ended September 30, 2023, respectively.

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The average volume of repurchase agreements increased 2.0% and 15.8%, respectively, for the three- and nine-month periods ended September 30, 2023, compared to the same periods in 2022 and the average rate paid increased 181 bps and 168 bps, respectively, between comparison periods.

In summary, between the three- and nine-month periods ended September 30, 2023 and 2022, the average yield on interest-earning assets increased 88 bps and 98 bps, respectively, and the average rate paid on interest-bearing liabilities increased 129 and 111 bps, respectively. Net interest spread decreased 41 bps and 13 bps, respectively, for the three- and nine-month period ended September 30, 2023, versus the same periods in 2022. Net interest margins decreased 12 bps for the three-month comparison period while increasing 12 bps for the nine-month comparison period of 2023 versus 2022.

The following table summarizes the variances in interest income and interest expense on a fully tax-equivalent basis for the interim periods presented for 2023 and 2022 resulting from volume changes in daily average assets and daily average liabilities and fluctuations in average rates earned and paid.

	Three Months Ended September 30,									Nine Months Ended September 30,
	Variance			Variance						Variance		Variance
	Due to			Due to			Total			Due to		Due to			Total
	Rate (1)			Volume (1)			Variance			Rate (1)		Volume (1)			Variance

Average Interest-Earning Assets

Loans, net	$	1,604,361		$	1,199,976		$	2,804,337		$	4,478,248	$	2,589,356		$	7,067,604
Taxable investment securities		176,734			(34,634	)		142,100			696,511		(73,654	)		622,857
Tax-exempt investment securities		7,527			20,960			28,487			53,602		147,771			201,373
Sweep and interest-earning accounts		347,471			(611,863	)		(264,392	)		1,693,895		(1,734,624	)		(40,729	)
Other investments		13,031			3,844			16,875			44,205		4,230			48,435
Total	$	2,149,124		$	578,283		$	2,727,407		$	6,966,461	$	933,079		$	7,899,540

Average Interest-Bearing Liabilities

Interest-bearing transaction accounts	$	716,778		$	17,200		$	733,978		$	2,457,812	$	42,643		$	2,500,455
Money market funds		509,025			(11,640	)		497,385			1,274,814		(22,140	)		1,252,674
Savings deposits		9,599			(3,453	)		6,146			27,049		(6,318	)		20,731
Time deposits		417,923			7,828			425,751			821,925		(814	)		821,111
Borrowed funds		656,718			0			656,718			892,509		0			892,509
Repurchase agreements		155,475			890			156,365			446,169		13,809			459,978
Finance lease obligations		15			(1,259	)		(1,244	)		8		(3,710	)		(3,702	)
Junior subordinated debentures		122,616			0			122,616			402,790		0			402,790
Total	$	2,588,149		$	9,566		$	2,597,715		$	6,323,076	$	23,470		$	6,346,546

Changes in net interest income	$	(439,025	)	$	568,717		$	129,692		$	643,385	$	909,609		$	1,552,994

(1)	Items which have shown a year-to-year increase in volume have variances allocated as follows:
	Variance due to rate = Change in rate x new volume
	Variance due to volume = Change in volume x old rate
	Items which have shown a year-to-year decrease in volume have variances allocated as follows:
	Variance due to rate = Change in rate x old volume
	Variances due to volume = Change in volume x new rate

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NON-INTEREST INCOME AND NON-INTEREST EXPENSE

Non-interest Income

The components of non-interest income for the periods presented were as follows:

	Three Months Ended										Nine Months Ended
	September 30,				Change						September 30,				Change
	2023		2022		Income			Percent			2023		2022		Income			Percent

Service fees	$	937,890	$	939,807	$	(1,917	)		-0.20	%	$	2,757,629	$	2,739,076	$	18,553			0.68	%
Income from sold loans		144,747		109,411		35,336			32.30	%		358,942		508,795		(149,853	)		-29.45	%
Other income from loans		310,645		301,710		8,935			2.96	%		1,081,093		895,884		185,209			20.67	%
Other income
Income from CFS Partners		150,140		87,386		62,754			71.81	%		705,343		386,217		319,126			82.63	%
Exchange income		29,500		5,000		24,500			490.00	%		63,500		19,950		43,550			218.30	%
VISA card commission		73,176		23,576		49,600			210.38	%		140,841		70,728		70,113			99.13	%
Other miscellaneous income		65,493		64,713		780			1.21	%		201,452		231,679		(30,227	)		-13.05	%
Total non-interest income	$	1,711,591	$	1,531,603	$	179,988			11.75	%	$	5,308,800	$	4,852,329	$	456,471			9.41	%

Total non-interest income increased $179,988, or 11.8%, for the three months ended September 30, 2023, and $456,471, or 9.4% for the nine months ended September 30, 2023, compared to the same periods in 2022, with significant changes noted in the following:

	·	The volume of loans sold into the secondary market increased during the third quarter of 2023, but not enough to make up for the lower volume during the first two quarters of 2023, thereby accounting for the increase in the three- month comparison periods and the decrease year over year in income from sold loans.

	·	Although the volume was lower in the third quarter of 2023, an increase in year to date CRE loan volume in 2023 resulted in a significant increase in documentation fees collected at origination as well as commercial rate lock fees collected, accounting for the increase in other income from loansfor both comparison periods of 2023 versus 2022.

	·	Income from CFS Partners increased between periods due in part to a rebound of market prices during the latter part of the first quarter of 2023 and an increase in managed accounts. CFS Partners has a small portion of its equity capital invested in the stock market, and as a result is sensitive to general stock market conditions.

	·	The Company has seen an increase in volume of Canadian funds purchased accounting for the increase in exchange income.

	·	The increase in VISA card commission is attributable to additional income from a renegotiated contract in June of 2023, including a renewal incentive payment as well as an increase in the monthly commission beginning in July 2023.

	·	Included in other miscellaneous income for 2022 is a one-time credit totaling $23,400 associated with a renegotiated contract with the Company’s check printing vendor, accounting for the decrease year over year.

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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
	2023		2022			Expense			Percent			2023		2022		Expense		Percent

Salaries and wages	$	2,164,760	$	1,984,000		$	180,760			9.11	%	$	6,718,280	$	6,058,000	$	660,280		10.90	%
Employee benefits		797,304		629,681			167,623			26.62	%		2,363,444		2,106,356		257,088		12.21	%
Occupancy expenses, net		662,277		677,805			(15,528	)		-2.29	%		2,133,492		2,104,346		29,146		1.39	%
Other expenses
Outsourcing expense		157,191		137,929			19,262			13.97	%		434,541		402,891		31,650		7.86	%
Service contracts - administrative		159,437		142,081			17,356			12.22	%		467,926		428,254		39,672		9.26	%
Telephone expense		38,493		33,039			5,454			16.51	%		110,674		101,388		9,286		9.16	%
Travel, entertainment and meals expense		27,363		26,794			569			2.12	%		97,532		70,744		26,788		37.87	%
Audit fees		137,232		122,034			15,198			12.45	%		382,841		337,790		45,051		13.34	%
FDIC insurance		104,000		90,637			13,363			14.74	%		360,343		277,047		83,296		30.07	%
Collection & non-accruing loan expense		25,500		(14,000	)		39,500			-282.14	%		61,500		33,000		28,500		86.36	%
Other miscellaneous expenses		1,540,987		1,510,909			30,078			1.99	%		4,427,598		4,309,145		118,453		2.75	%
Total non-interest expense	$	5,814,544	$	5,340,909		$	473,635			8.87	%	$	17,558,171	$	16,228,961	$	1,329,210		8.19	%

Total non-interest expense increased $473,635, or 8.9% for the three months ended September 30, 2023, and $1,329,210, or 8.2%, for the nine months ended September 30, 2023, compared to the same periods in 2022, with significant changes noted in the following:

	·	In addition to normal salary increases, the increase in salaries and wages year over year is attributable to new hires in the area of commercial lending and operations during the last quarter of 2022. Also contributing to the increase was a one-time salary adjustment in November of 2022 of $2,000 to all employees below vice president status that impacted the year over year comparison by $57,500.

	·	The increase in employee benefits is attributable to an increase in health insurance claims year over year under the Company’s self-insured health insurance plan.

	·	The increase in outsourcing expense is attributable to normal increases in costs associated with these arrangements.

	·	The increase in service contracts - administrative is due to a combination of an increase in transaction-based pricing for certain contracts and contractual inflationary adjustment factors that are higher than historical increase adjustments.

	·	The increase in telephone expense is attributable to a new phone system with advanced technology.

	·	The increase in travel, entertainment and meals expenses is attributable to an increase in travel expenses as more seminars and training sessions return to in-person attendance.

	·	The increase in audit fees reflects increased audit services due to additional audit requirements required by FDICIA due to the Company surpassing $1.0 billion asset size.

	·	The Company increased the 2023 monthly accrual for FDIC insurance in anticipation of an increase in the assessment multiplier, as announced by the FDIC in late 2022.

	·	Collection & non-accruing loan expenses were lower year over year due to a decrease in expenses associated with properties in the Company’s non-accruing loan portfolio.

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APPLICABLE INCOME TAXES

The provision for income taxes decreased $105,046, or 12.7% for the third quarter of 2023 compared to the same quarter of 2022, as a result of the decrease in income before income taxes. An increase of $236,603, or 11.7%, is noted for the first nine months of 2023 compared to the same period in 2022, which is consistent with the increase in income before income taxes. Tax credits related to limited partnership investments amounted to $80,529 and $99,958, respectively, for the third quarter of 2023 compared to the same quarter of 2022, and $241,587 and $292,437 for the first nine months of 2023 and 2022.

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $67,128 and $67,353, respectively, for the third quarter of 2023 compared to the same quarter of 2022, and $201,384 and $201,537 for the first nine months of 2023 and 2022, respectively. These investments provide tax benefits, including tax credits, and are designed to provide a targeted effective annual yield between 7% and 10%.

CHANGES IN FINANCIAL CONDITION

The following table reflects the composition of the Company's major categories of assets and liabilities as a percentage of total assets or liabilities and shareholders’ equity, as of the balance sheet dates:

	September 30, 2023				December 31, 2022
Assets
Loans	$	838,572,268	77.41	%	$	748,548,608	70.88	%
AFS securities		181,928,461	16.79	%		192,918,109	18.27	%

Liabilities
Demand deposits		205,188,102	18.94	%		216,093,534	20.46	%
Interest-bearing transaction accounts		284,744,064	26.29	%		294,050,079	27.84	%
Money market funds		137,192,956	12.66	%		140,117,086	13.27	%
Savings deposits		159,409,376	14.72	%		171,072,921	16.20	%
Time deposits		114,670,421	10.59	%		101,638,659	9.62	%
Overnight borrowings		3,550,000	0.33	%		0	0.00	%
Long-term advances		45,600,000	4.21	%		1,300,000	0.12	%

The following table reflects the changes in the composition of the Company's major categories of assets and liabilities between the balance sheet dates, as disclosed in the table above:

	Volume Change			Percentage
Assets
Loans	$	90,023,660			12.03	%
AFS securities		(10,989,648	)		-5.70	%

Liabilities
Demand deposits		(10,905,432	)		-5.05	%
Interest-bearing transaction accounts		(9,306,015	)		-3.16	%
Money market funds		(2,924,130	)		-2.09	%
Savings deposits		(11,663,545	)		-6.82	%
Time deposits		13,031,762			12.82	%
Overnight borrowings		3,550,000			100.00	%
Long-term advances		44,300,000			3407.69	%

The increase in the loan portfolio during the first nine months of 2023 was attributable to increases of $50.1 million in CRE loans, $13.2 million in commercial & industrial, $24.1 million in municipal loans and $7.4 million in residential 1^st lien loans, which was partially offset by decreases of $1.6 million in purchased loans, and $2.7 million in residential junior lien loans. The Company has experienced strong loan activity among its commercial customers, but only minimal consumer loan activity.

The decrease in the securities AFS portfolio during the first nine months of 2023 is attributable to purchases of $4.0 million, which was offset by maturities amounting to $1.2 million and principal payments on various securities totaling $9.9 million and an increase of $3.6 million in unrealized losses arising during the first nine months of 2023, which is reflected in OCI. In management’s view, the size of the securities AFS portfolio is appropriate and proportional to the overall asset base, as this portfolio serves an important role in the Company’s liquidity position.

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The decrease in the demand deposit accounts reflected a $9.3 million, or 5.7%, decrease in business DDAs and a $1.6 million, or 3.1%, decrease in retail DDAs. The decrease in interest-bearing transaction accounts consisted of a decrease of $5.9 million, or 4.86%, in consumer interest-bearing transaction accounts, a decrease of $6.4 million, or 16.0%, in municipal deposit accounts and a decrease of $5.4 million, or 6.3% in ICS deposit accounts. These decreases were partially offset by a combined increase of $8.4 million, or 18.9%, in health savings accounts and the deposit account of the Company’s trust and asset management affiliate, CFSG. The decrease in money market funds was driven by decreases of $12.3 million, or 41.8%, in ICS accounts, $6.4 million, or 6.3%, in retail money market funds, which was partially offset by an increase of $3.0 million, or 33.6%, in municipal deposits. The increase in time deposits is attributable to customer response to periodic certificate of deposit specials that have been offered. As a result of the year to date decrease in aggregate deposits, the Company had to rely on borrowed funds, including long-term advances, as a supplemental funding source, accounting for the significant increase in these funds.

UNINSURED DEPOSITS

The estimated balances of uninsured time deposits at September 30, 2023 were made up of time CDs of $18,313,231 and retirement accounts of $2,993,028. Increments of maturity of these time deposits are summarized as follows:

3 months or less	$	2,162,576
Over 3 through 6 months		6,390,509
Over 6 through 12 months		9,014,818
Over 12 months		3,738,356
Total	$	21,306,259

Estimated deposits in excess of the FDIC insurance level amounted to $319,620,273 at September 30, 2023 and $331,530,619 at December 31, 2022.

Interest Rate Risk and Asset and Liability Management - Management actively monitors and manages the Company’s interest rate risk exposure and attempts to structure the balance sheet to maximize net interest income while controlling its exposure to interest rate risk. The Company's ALCO is made up of the Executive Officers and certain Vice Presidents of the Bank representing major business lines. The ALCO formulates strategies to manage interest rate risk by evaluating the impact on earnings and capital of such factors as current interest rate forecasts and economic indicators, potential changes in such forecasts and indicators, liquidity and various business strategies. The ALCO meets at least quarterly to review financial statements, liquidity levels, yields and spreads to better understand, measure, monitor and control the Company’s interest rate risk. In the ALCO process, the committee members apply policy limits set forth in the Asset Liability, Liquidity and Investment policies approved and periodically reviewed by the Company’s Board of Directors. The ALCO's methods for evaluating interest rate risk include an analysis of the effects of interest rate changes on net interest income and an analysis of the Company's interest rate sensitivity "gap", which provides a static analysis of the maturity and repricing characteristics of the entire balance sheet. The ALCO Policy also includes a contingency funding plan to help management prepare for unforeseen liquidity restrictions, including hypothetical severe liquidity crises.

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change, thereby impacting NII, the primary component of the Company’s earnings. Fluctuations in interest rates can also have an impact on liquidity. The ALCO uses an outside consultant to perform rate shock simulations to the Company's net interest income, as well as a variety of other analyses. It is ALCO’s function to provide the assumptions used in the modeling process. Assumptions used in prior period simulation models are regularly tested by comparing projected NII with actual NII. The ALCO utilizes the results of the simulation model to quantify the estimated exposure of NII and liquidity to sustained interest rate changes. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on the Company’s balance sheet. The model also simulates the balance sheet’s sensitivity to a prolonged flat rate environment. All rate scenarios are simulated assuming a parallel shift of the yield curve; however further simulations are performed utilizing non-parallel changes in the yield curve. The results of this sensitivity analysis are compared to the ALCO policy limits which specify a maximum tolerance level for NII exposure over a 1-year horizon, assuming no balance sheet growth, given a 200 bp shift upward and a 100 bp shift downward in interest rates.

Under the Company’s interest rate sensitivity modeling, with the continued asset sensitive balance sheet, in a rising rate environment NII initially trends upward as the short-term asset base (cash and adjustable-rate loans) quickly cycle upward while the retail funding base (deposits) lags the market. If rates paid on deposits must be increased more and/or more quickly than projected due to competitive pressures, the expected benefit to rising rates would be reduced. In a falling rate environment, NII is expected to trend slightly downward compared with the current rate environment scenario for the first year of the simulation as asset yield erosion is not fully offset by decreasing funding costs. Thereafter, net interest income is projected to experience sustained downward pressure as funding costs reach their assumed floors and asset yields continue to reprice into the lower rate environment. The current rising rate environment has had a positive impact on the Company’s NII, however market expectations for higher deposit rates and increased borrowing costs are applying increasing pressure to the spread between interest income and interest expense.

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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, 2023:

Rate Change	Percent Change in NII

Down 100 bps	0.5%
Up 200 bps	-3.1%

The estimated amounts shown in the table above are within the ALCO Policy limits. However, those amounts do not represent a forecast and should not be relied upon as indicative of future results. The ALCO model also provides alternate scenarios including a sustained flat, or inverted yield curve. While assumptions used in the ALCO process, including the interest rate simulation analyses, are developed based upon current economic and local market conditions, and expected future conditions, the Company cannot provide any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change. As the market rates continue to increase, the impact of a falling rate environment is more pronounced, and the possibility more plausible than during the last several years of near zero short-term rates.

As of September 30, 2023, the Company had outstanding $12,887,000 in principal amount of Junior Subordinated Debentures due December 15, 2037, which previously bore a quarterly floating rate of interest equal to the 3-month London Interbank Offered Rate (LIBOR), plus 2.85%. As previously announced, 3-month LIBOR for U.S. dollar denominated deposits was phased out as of June 30, 2023. In accordance with the federal Adjustable Interest Rate (LIBOR) Act enacted in March 2022 (the “LIBOR Act”), the interest rate provisions under the Company’s debenture documents were replaced as a matter of law, as of the first London banking day after June 30, 2023 (the “LIBOR Replacement Date”) with a benchmark interest rate identified in regulations promulgated by the FRB. As required under the LIBOR Act, the Federal Reserve-identified benchmark rates specified in the final regulations for various tenors of LIBOR are based on the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York and each includes an appropriate “tenor spread adjustment” to reflect historical spreads between LIBOR and SOFR. In accordance with the LIBOR Act and its implementing regulations, as of the LIBOR Replacement Date, the Company’s Junior Subordinated Debentures bear interest at a quarterly floating rate equal to 3-month CME SOFR, as adjusted by a spread adjustment factor of 0.26161, plus 2.85%.

Aside from the Debentures, the Company does not have any other exposures to the phase out of LIBOR. The Company has not generally utilized LIBOR as an interest rate benchmark for its variable rate commercial, residential or other loans and has not utilized derivatives or other financial instruments tied to LIBOR for hedging or investment purposes. Accordingly, the Company’s exposure to the phase out of LIBOR is limited to the effect on the interest rate paid on its Debentures.

Credit Risk - As a financial institution, one of the primary risks the Company manages is credit risk, the risk of loss stemming from borrowers’ failure to repay loans or inability to meet other contractual obligations. The Company’s Board of Directors prescribes policies for managing credit risk, including Loan, Appraisal and Environmental policies. These policies are supplemented by comprehensive underwriting standards and procedures. The Company maintains a Credit Administration department whose function includes credit analysis and monitoring of and reporting on the status of the loan portfolio, including delinquent and non-performing loan trends. The Company also monitors concentration of credit risk in a variety of areas, including portfolio mix, the level of loans to individual borrowers and their related interests, loans to industry segments, and the geographic distribution of commercial real estate loans. Loans are reviewed periodically by an independent loan review firm to help ensure accuracy of the Company's internal risk ratings and compliance with various internal policies, procedures and regulatory guidance.

Residential mortgage loans represented 28.3% of the Company’s loan balances at September 30, 2023, compared to 31.1% at December 31, 2022. The Company maintains a residential mortgage loan portfolio of traditional mortgage products and does not offer higher risk loan products, such as option adjustable-rate mortgage products, high loan-to-value products, interest only mortgages, subprime loans and products with deeply discounted teaser rates. Residential mortgages with loan-to-value ratios exceeding 80% are generally covered by PMI. A 90% loan-to-value residential mortgage product without PMI is only available to borrowers with excellent credit and low debt-to-income ratios and has not been widely originated. As of September 30, 2023, junior lien home equity products made up 13.1% of the residential mortgage portfolio with maximum loan-to-value ratios (including prior liens) of 80%. The Company also originates some home equity loans greater than 80% under an insured loan program with stringent underwriting criteria.

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Consistent with the strategic focus on commercial lending, the commercial & industrial and CRE loan portfolios have seen solid growth over recent years. Commercial & industrial, purchased, CRE and municipal loans collectively comprised 71.3% of the Company’s loan portfolio at September 30, 2023, compared to 68.4% at December 31, 2022. The largest components of the CRE portfolio were $115.0 million in owner-occupied CRE and $161.8 million in non-owner occupied CRE at September 30, 2023.

Risk in the Company’s commercial & industrial and CRE loan portfolios is mitigated in part by government guarantees issued by federal agencies such as the SBA and RD. At September 30, 2023, the Company had $25.1 million in guaranteed loans with guaranteed balances of $16.8 million, compared to $27.0 million in guaranteed loans with guaranteed balances of $18.3 million at December 31, 2022. PPP loans with outstanding balances of $95,529 at September 30, 2023, and $199,664 at December 31, 2022, are included in these totals, all of which carry a 100% guarantee through the SBA, subject to borrower eligibility requirements.

The Company works actively with customers early in the delinquency process to help them to avoid default and foreclosure. Commercial & industrial and CRE loans are generally placed on non-accrual status when there is deterioration in the financial position of the borrower, payment in full of principal and interest is not expected, and/or principal or interest has been in default for 90 days or more. However, such a loan need not be placed on non-accrual status if it is both well secured and in the process of collection. Residential mortgages and home equity loans are considered for non-accrual status at 90 days past due and are evaluated on a case-by-case basis. The Company obtains current property appraisals or market value analyses and considers the cost of carrying and selling collateral in order to assess the level of specific allocations required. Consumer loans are generally not placed in non-accrual but are charged off by the time they reach 120 days past due. When a loan is placed in non-accrual status, the Company reverses the accrued interest against current period income and discontinues the accrual of interest until the borrower clearly demonstrates the ability and intention to resume normal payments, typically demonstrated by regular timely payments for a period of not less than six months. Interest payments received on non-accrual or impaired loans are generally applied as a reduction of the loan book balance.

Provision for Credit Losses

The provision for credit losses was made up of the following components for the periods indicated:

	Three Months Ended
	September 30,					Change
	2023			2022		$			%
Provision for credit losses on loans	$	264,009		$	125,000	$	139,009			111.21	%
Provision for credit losses on OBS credit exposure		(23,120	)		0		(23,120	)		100.00	%
Provision for credit losses	$	240,889		$	125,000	$	115,889			92.71	%

	Nine Months Ended
	September 30,					Change
	2023			2022		$			%
Provision for credit losses on loans	$	849,549		$	1,325,000	($475,451)				-35.88	%
Provision for credit losses on OBS credit exposure		(40,992	)		0		(40,992	)		100.00	%
Provision for credit losses	$	808,557		$	1,325,000	($516,443)				-38.98	%

The increase in the provision for credit losses for the three months ended September 30, 2023, was due to a reduction of the provision in the third quarter of 2022, which was the result of an increase in recoveries during that quarter, as well as loan growth that exceeded budget in 2023. The decrease of $516,443 year over year was driven in part by a write-down totaling $667,474, on a single non-performing loan, in March of 2022.

ACL and provisions – As stated in Note 2 of the accompanying notes to the Company’s unaudited interim consolidated financial statements, effective January 1, 2023, the Company was required to recognize credit losses under the guidance of ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, rather than under the incurred loss model. The new guidance, which is referred to as the current expected credit loss, or CECL model, requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses over the life of the loans. The adjustment from the adoption of CECL amounted to $549,113, net of tax and was recorded as an adjustment to retained earnings, which affects calculation of regulatory capital ratios. Changes in forecasts used in the CECL model could produce different results, quarter to quarter.

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

The Company maintains an ACL at a level that management believes is appropriate to absorb losses inherent in the loan portfolio as of the measurement date (See Note 5 of the accompanying unaudited interim consolidated financial statements). Although the Company, in establishing the ACL, considers the inherent losses in individual loans and pools of loans, the ACL is a general reserve available to absorb all credit losses in the loan portfolio. No part of the ACL is segregated to absorb losses from any loan or segment of loans.

When establishing the ACL each quarter, the Company applies a combination of significant key assumptions and methodologies, as discussed in the ACL section under Critical Accounting Policies in this MD&A and presented in Note 5 of the accompanying unaudited interim consolidated financial statements.

The following table summarizes the Company’s credit risk ratios for the balance sheet dates presented:

	September 30,			December 31,
	2023			2022

ACL to total loans outstanding		1.13	%		1.16	%
ACL	$	9,487,973		$	8,709,225
Loans outstanding	$	838,572,268		$	748,548,608

Non-accruing loans to loans outstanding		0.86	%		1.05	%
Non-accruing loans	$	7,214,792		$	7,890,020
Loans outstanding	$	838,572,268		$	748,548,608

ACL to non-accruing loans		131.51	%		110.38	%
ACL	$	9,487,973		$	8,709,225
Non-accruing loans	$	7,214,792		$	7,890,020

The third quarter ACL analysis indicates that the reserve balance of $9.5 million at September 30, 2023, is sufficient to cover expected credit losses that are probable and estimable as of the measurement date. Included in the ACL calculation for September 30, 2023, is a decrease to the qualitative factor adjustment for collateral within the CRE pool of loans. Management feels that the economic forecasts adequately quantify the risk in this area. Management believes the reserve balance continues to be directionally consistent with the overall risk profile of the Company’s loan portfolio and credit risk appetite. While the ACL is described as consisting of separate allocated portions, the entire ACL is available to support loan losses, regardless of category. The adequacy of the ACL is presented to the full Board for approval quarterly.

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

For the Nine Months Ended September 30,	2023			2022

Commercial & industrial		-0.29	%		-0.03	%
Net charge-offs during the period	$	(357,643	)	$	(34,638	)
Average amount outstanding	$	121,805,882		$	115,489,717

Purchased		0.00	%		0.00	%
Net charge-offs during the period	$	0		$	0
Average amount outstanding	$	6,503,285		$	8,782,234

Commercial real estate		0.01	%		-0.21	%
Net recoveries (charge-offs) during the period	$	22,058		$	(667,474	)
Average amount outstanding	$	376,591,108		$	313,919,164

Municipal		0.00	%		0.00	%
Net charge-offs during the period	$	0		$	0
Average amount outstanding	$	42,203,207		$	45,161,639

Residential real estate - 1st lien		0.04	%		0.06	%
Net recoveries during the period	$	72,588		$	111,163
Average amount outstanding	$	199,778,580		$	184,548,015

Residential real estate - Jr lien		0.09	%		0.01	%
Net recoveries during the period	$	28,015		$	3,728
Average amount outstanding	$	32,110,911		$	33,260,177

Consumer		-2.16	%		-0.45	%
Net charge-offs during the period	$	(79,195	)	$	(15,949	)
Average amount outstanding	$	3,674,543		$	3,513,004

Total loans		-0.04	%		-0.09	%
Net charge-offs during the period	$	(314,177	)	$	(603,170	)
Average amount outstanding	$	782,667,516		$	704,673,950

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

COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET ARRANGEMENTS

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and risk-sharing commitments on certain sold loans. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. During the first nine months of 2023, the Company did not engage in any activity that created any additional types of off-balance sheet risk.

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With the adoption of ASU 2016-13 (CECL), the Company is required to establish an allowance for expected credit losses on OBS credit exposures. Expected credit losses are estimated by management over the contractual period during which the Company is exposed to credit risk under a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over the estimated lives of such commitments. Upon adoption of ASU 2016-13, the Company recorded an adjustment to retained earnings of $451,704 to reflect an allowance for credit losses for unfunded commitments. The allowance for credit losses for OBS credit exposures is presented in the "Accrued interest and other liabilities" line of the consolidated balance sheets. There was a decrease of $40,992 to the allowance for credit losses for OBS credit exposures during the nine months ended September 30, 2023.

LIQUIDITY AND CAPITAL RESOURCES

Managing liquidity risk is essential to maintaining both depositor confidence and stability in earnings. Liquidity management refers to the ability of the Company to adequately cover fluctuations in assets and liabilities. Meeting loan demand (assets) and covering the withdrawal of deposit funds (liabilities) are two key components of the liquidity management process. The Company’s principal sources of funds are deposits, amortization and prepayment of loans and securities, maturities of investment securities, sales of loans available-for-sale, and earnings and funds provided from operations. These sources are supplemented by short-term and long-term borrowings as needed. Maintaining a relatively stable funding base, which is achieved by diversifying funding sources, competitively pricing deposit products, and extending the contractual maturity of liabilities, reduces the Company’s exposure to rollover risk on deposits and limits reliance on volatile short-term borrowed funds. Short-term funding needs arise from declines in deposits or other funding sources and from funding requirements for loan commitments. The Company’s strategy is to fund assets to the maximum extent possible with core deposits that provide a sizable source of relatively stable and lower-cost funds.

The Company recognizes that, at times, when loan demand exceeds deposit growth or the Company has other liquidity demands, it may be desirable to utilize alternative sources of deposit funding to augment retail deposits and borrowings. One-way deposits acquired through the CDARS program provide an alternative funding source when needed. At September 30, 2023, and December 31, 2022, the Company had no one-way CDARS outstanding. In addition, two-way (reciprocal) CDARS deposits, as well as reciprocal ICS money market and demand deposits, enhance the Company’s ability to retain larger deposit balances by allowing the Company to provide FDIC deposit insurance to its customers in excess of account coverage limits through the exchange of deposits with other participating FDIC-insured financial institutions. At September 30, 2023 and December 31, 2022, the Company reported $2.4 million and $2.8 million, respectively, in reciprocal CDARS deposits. The balance in ICS reciprocal money market deposits was $17.1 million at September 30, 2023, compared to $29.5 million at December 31, 2022, and the balance in ICS reciprocal demand deposits as of those dates was $79.9 million and $85.3 million, respectively.

On September 30, 2023 and December 31, 2022, borrowing capacity of $107.9 million and $112.3 million, respectively, was available through the FHLBB, secured by the Company's qualifying loan portfolio (generally, residential mortgage and commercial loans), reduced by outstanding advances and by collateral pledges securing FHLBB letters of credit collateralizing public unit deposits of $23.1 million and $52.4 million, respectively.

The following table reflects the Company’s outstanding advances with FHLBB as of the dates indicated:

	September 30,		December 31,
	2023		2022
FHLBB Advances (1)
FHLBB term advance, 0.00%, due September 22, 2023	$	0	$	200,000
FHLBB term advance, 0.00%, due November 12, 2025		300,000		300,000
FHLBB term advance, 0.00%, due November 13, 2028		800,000		800,000
Total FRBB Advances		1,100,000		1,300,000

Overnight borrowings at 5.57%		3,550,000		0
	$	4,650,000	$	1,300,000

(1)

Under the JNE program, the FHLBB provides a subsidy, funded by the FHLBB’s earnings, to write down interest rates to zero percent on advances that finance qualifying loans to small businesses. JNE advances must support small business in New England that create and/or retain jobs, or otherwise contribute to overall economic development activities.

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The Company also has an unsecured Federal Funds credit line with the FHLBB with an available balance of $500,000 with no outstanding advances during either of the respective comparison periods. Interest is chargeable at a rate determined daily, approximately 25 bps higher than the rate paid on federal funds sold.

The Company has a BIC arrangement with the FRBB secured by eligible commercial & industrial loans, CRE loans and home equity loans, resulting in an available credit line of $59.9 million and $56.1 million, respectively, at September 30, 2023 and December 31, 2022. Credit advances under this FRBB lending program are overnight advances with interest chargeable at the primary credit rate (generally referred to as the discount rate), currently 500 bps. The Company had no outstanding advances through this facility at September 30, 2023 or December 31, 2022.

As of September 30, 2023, the Company had additional potential borrowing capacity, subject to pledging of required collateral consisting of eligible U.S. Agency and U.S. Government Securities, under the FRB’s BTFP which was established in March 2023 to provide banks with an additional source of liquidity.

The Company’s advances under the BTFP were as follows:

	September 30,
	2023
FRBB Advances
FRB BTFP term advance, 4.92%, due April 26, 2024	$	10,000,000
FRB BTFP term advance, 4.71%, due May 13, 2024		10,000,000
FRB BTFP term advance, 4.91%, due May 17, 2024		6,500,000
FRB BTFP term advance, 5.45%, due August 05, 2024		18,000.000
Total BTFP Advances	$	44,500,000

As of September 30, 2023, the Company had an unsecured line of credit with one correspondent bank of $12.5 million, compared to unsecured lines of credit with two correspondent banks with aggregate available borrowing capacity totaling $20.5 million as of December 31, 2022. The Company had no outstanding advances against these credit lines as of the balance sheet dates presented.

Management believes that the combination of high levels of potentially liquid assets, unencumbered securities, cash flows from operations, and additional borrowing capacity are sufficient to meet the Company’s liquidity and capital needs.

The following table illustrates the changes in shareholders' equity from December 31, 2022 to September 30, 2023:

Balance at December 31, 2022 (book value $13.55 per common share)	$	75,176,363
Cumulative change in accounting principle (Note 2)		(549,113	)
Net income		9,897,608
Issuance of common stock through the DRIP		991,799
Dividends declared on common stock		(3,764,480	)
Dividends declared on preferred stock		(89,063	)
Change in AOCI on AFS securities, net of tax		(2,856,418	)
Balance at September 30, 2023 (book value $14.08 per common share)	$	78,806,696

The primary objective of the Company’s capital planning process is to balance appropriately the retention of capital to support operations and future growth, with the goal of providing shareholders with an attractive return on their investment. To that end, management monitors capital retention and dividend policies on an ongoing basis.

As described in more detail in Note 22 to the audited consolidated financial statements contained in the Company’s 2022 Annual Report on Form 10-K and under the caption “LIQUIDITY AND CAPITAL RESOURCES” in the MD&A section of that report, the Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies pursuant to which they must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

As of September 30, 2023, the Bank was considered well capitalized under the standard regulatory capital framework for Prompt Corrective Action and the Company exceeded currently applicable consolidated regulatory guidelines for capital adequacy. While we believe that the Company has sufficient capital to withstand an extended economic downturn, our regulatory capital ratios could be adversely impacted by future credit losses and other operational impacts of deteriorating economic conditions and inflation.

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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. The calculations as of September 30, 2023 reflect adoption of ASU 2016-13 (CECL), including the beginning period cumulative effect adjustment of $549,113, which reduced retained earnings.

											Minimum					Minimum
						Minimum					For Capital					To Be Well
						For Capital					Adequacy Purposes					Capitalized Under
						Adequacy					with Conservation					Prompt Corrective
	Actual					Purposes					Buffer (1)					Action Provisions (2)
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
September 30, 2023
Common equity tier 1 capital
(to risk-weighted assets)
Company	$	89,257		11.65	%	$	34,467		4.50	%	$	53,615		7.00	%		N/A		N/A
Bank	$	102,537		13.40	%	$	34,438		4.50	%	$	53,571		7.00	%	$	49,744		6.50	%
Tier 1 capital (to risk-weighted assets)
Company	$	103,644		13.53	%	$	45,956		6.00	%	$	65,104		8.50	%		N/A		N/A
Bank	$	102,537		13.40	%	$	45,918		6.00	%	$	65,050		8.50	%	$	61,224		8.00	%
Total capital (to risk-weighted assets)
Company	$	113,223		14.78	%	$	61,274		8.00	%	$	80,422		10.50	%		N/A		N/A
Bank	$	112,108		14.65	%	$	61,224		8.00	%	$	80,356		10.50	%	$	76,529		10.00	%
Tier 1 capital (to average assets)
Company	$	103,644		9.59	%	$	43,236		4.00	%		N/A		N/A			N/A		N/A
Bank	$	102,537		9.49	%	$	43,214		4.00	%		N/A		N/A		$	54,017		5.00	%

December 31, 2022:
Common equity tier 1 capital
(to risk-weighted assets)
Company	$	82,770		11.74	%	$	31,731		4.50	%	$	49,359		7.00	%		N/A		N/A
Bank	$	96,112		13.64	%	$	31,703		4.50	%	$	49,315		7.00	%	$	45,793		6.50	%
Tier 1 capital (to risk-weighted assets)
Company	$	97,157		13.78	%	$	42,308		6.00	%	$	59,936		8.50	%		N/A		N/A
Bank	$	96,112		13.64	%	$	42,270		6.00	%	$	59,883		8.50	%	$	56,361		8.00	%
Total capital (to risk-weighted assets)
Company	$	105,971		15.03	%	$	56,410		8.00	%	$	74,038		10.50	%		N/A		N/A
Bank	$	104,918		14.89	%	$	56,361		8.00	%	$	73,973		10.50	%	$	70,451		10.00	%
Tier 1 capital (to average assets)
Company	$	97,157		9.24	%	$	42,047		4.00	%		N/A		N/A			N/A		N/A
Bank	$	96,112		9.15	%	$	42,025		4.00	%		N/A		N/A		$	52,531		5.00	%

(1)	Conservation Buffer is calculated based on risk-weighted assets and does not apply to calculations of average assets.

(2)	Applicable to banks, but not bank holding companies.

The Company's ability to pay dividends to its shareholders is largely dependent on the Bank's ability to pay dividends to the Company. In general, a national bank may not pay dividends that exceed net income for the current and preceding two years. Regardless of statutory restrictions, as a matter of regulatory policy, banks and bank holding companies should pay dividends only out of current earnings and only if, after paying such dividends, they remain adequately capitalized.

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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, 2023, 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 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, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

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, 2022 represent the most significant risks to the Company's future results of operations and financial condition as of the date of this quarterly report.

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

There were no purchases of the Company’s common stock during the three months ended September 30, 2023, by the Company or by any affiliated purchaser (as defined in SEC Rule 10b-18). During the same reporting period, the Company did not have any publicly announced repurchase plans or programs.

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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 nine-months ended September 30, 2023 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, 2023 and 2022, (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 13, 2023		/s/Kathryn M. Austin
		Kathryn M. Austin, President
		& Chief Executive Officer
		(Principal Executive Officer)

DATED: November 13, 2023		/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, 2023

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 nine-months ended September 30, 2023 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, 2023 and 2022, (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.