UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, ~~2017~~2019

[ ] 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.

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

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 ( X ) No ( )

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ( X ) NO ( )

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

Large accelerated filer ( )	Accelerated filer ( X )
Non-accelerated filer ( ) ~~(Do not check if a smaller reporting company)~~	Smaller reporting company ( X )
	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. ( )

~~Table of Content~~

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ( ) NO(X)

At November ~~02, 2017,~~4, 2019, there were ~~5,099,479~~5,223,408 shares outstanding of the Corporation's common stock.

F~~ORM~~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	31
Item 3	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4	Controls and Procedures	53

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	53
Item 1A	Risk Factors	53
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 6	Exhibits	54
	Signatures	55
	Exhibit Index	56

~~Table of Content~~

PART I. FINANCIAL INFORMATION

P~~ART I. FINANCIAL INFORMATION~~

~~ITEM~~ITEM 1. Financial Statements (Unaudited)

The following are the unaudited consolidated financial statements for ~~Community Bancorp. and Subsidiary, "the Company".~~the Company.

Community Bancorp. and Subsidiary

September 30,

December 31,

September 30,

Consolidated Balance Sheets

2017

2016

2016

(Unaudited)

(Unaudited)

Assets

  Cash and due from banks
$13,655,114
$10,943,344
$11,705,902
  Federal funds sold and overnight deposits
  16,064,422
  18,670,942
  673,911
     Total cash and cash equivalents
  29,719,536
  29,614,286
  12,379,813
  Securities held-to-maturity (HTM) (fair value $54,571,000 at



  09/30/17, $51,035,000 at 12/31/16 and $57,592,000 at 09/30/16)
  53,882,287
  49,886,631
  56,837,100
  Securities available-for-sale (AFS)
  36,719,673
  33,715,051
  29,412,216
  Restricted equity securities, at cost
  1,700,050
  2,755,850
  1,855,850
  Loans held-for-sale
  687,100
  0
  708,975
  Loans
  506,048,119
  487,249,226
  470,186,895
    Allowance for loan losses (ALL)
  (5,436,313)
  (5,278,445)
  (5,179,965)
    Deferred net loan costs
  318,452
  310,130
  312,565
        Net loans
  500,930,258
  482,280,911
  465,319,495
  Bank premises and equipment, net
  10,542,790
  10,830,556
  10,833,164
  Accrued interest receivable
  1,893,478
  1,818,510
  1,649,964
  Bank owned life insurance (BOLI)
  4,697,837
  4,625,406
  4,599,301
  Core deposit intangible
  68,166
  272,691
  340,861
  Goodwill
  11,574,269
  11,574,269
  11,574,269
  Other real estate owned (OREO)
  324,235
  394,000
  409,000
  Other assets
  8,799,392
  9,885,504
  9,870,422
        Total assets
$661,539,071
$637,653,665
$605,790,430
Liabilities and Shareholders' Equity



Liabilities



  Deposits:



    Demand, non-interest bearing
$115,930,899
$104,472,268
$101,259,470
    Interest-bearing transaction accounts
  127,426,517
  118,053,360
  119,981,648
    Money market funds
  85,947,545
  79,042,619
  76,976,376
    Savings
  99,439,616
  86,776,856
  91,274,380
    Time deposits, $250,000 and over
  18,097,628
  19,274,880
  10,848,979
    Other time deposits
  109,910,115
  97,115,049
  103,466,053
        Total deposits
  556,752,320
  504,735,032
  503,806,906
  Borrowed funds
  3,550,000
  31,550,000
  5,795,000
  Repurchase agreements
  27,458,927
  30,423,195
  25,834,249
  Capital lease obligations
  409,147
  483,161
  493,810
  Junior subordinated debentures
  12,887,000
  12,887,000
  12,887,000
  Accrued interest and other liabilities
  3,260,937
  3,123,760
  3,129,831
        Total liabilities
  604,318,331
  583,202,148
  551,946,796
Shareholders' Equity



  Preferred stock, 1,000,000 shares authorized, 25 shares issued



    and outstanding ($100,000 liquidation value)
  2,500,000
  2,500,000
  2,500,000
  Common stock - $2.50 par value; 15,000,000 shares authorized,



   5,310,776 shares issued at 09/30/17, 5,269,053 shares issued



    at 12/31/16 and 5,253,090 shares issued at 09/30/16
  13,276,940
  13,172,633
  13,132,725
  Additional paid-in capital
  31,434,250
  30,825,658
  30,639,268
  Retained earnings
  12,711,488
  10,666,782
  9,991,842
  Accumulated other comprehensive (loss) income
  (79,161)
  (90,779)
  202,576
  Less: treasury stock, at cost; 210,101 shares at 09/30/17,



  12/31/16, and 09/30/16
  (2,622,777)
  (2,622,777)
  (2,622,777)
        Total shareholders' equity
  57,220,740
  54,451,517
  53,843,634
        Total liabilities and shareholders' equity
$661,539,071
$637,653,665
$605,790,430




Book value per common share outstanding
$10.73
$10.27
$10.18

~~The accompanying notes are an integral part of these consolidated financial statements~~

~~Table of Content~~

Community Bancorp. and Subsidiary

Three Months Ended September 30,

Consolidated Statements of Income

2017

2016

(Unaudited)

Interest income

   Interest and fees on loans
$6,244,899
$5,732,855
   Interest on debt securities


     Taxable
  171,880
  128,767
     Tax-exempt
  332,102
  339,999
   Dividends
  41,320
  49,429
   Interest on federal funds sold and overnight deposits
  29,964
  3,048
        Total interest income
  6,820,165
  6,254,098



Interest expense


   Interest on deposits
  628,534
  504,170
   Interest on borrowed funds
  12,213
  53,404
   Interest on repurchase agreements
  20,564
  18,820
   Interest on junior subordinated debentures
  134,881
  115,349
        Total interest expense
  796,192
  691,743



     Net interest income
  6,023,973
  5,562,355
Provision for loan losses
  150,000
  150,000
     Net interest income after provision for loan losses
  5,873,973
  5,412,355



Non-interest income


   Service fees
  773,419
  719,341
   Income from sold loans
  185,844
  230,623
   Other income from loans
  222,026
  209,882
   Net realized gain on sale of securities available-for-sale
  1,246
  0
   Other income
  266,712
  323,674
        Total non-interest income
  1,449,247
  1,483,520



Non-interest expense


   Salaries and wages
  1,653,751
  1,725,000
   Employee benefits
  682,944
  679,762
   Occupancy expenses, net
  614,817
  605,378
   Other expenses
  1,890,604
  1,780,363
        Total non-interest expense
  4,842,116
  4,790,503



    Income before income taxes
  2,481,104
  2,105,372
Income tax expense
  688,155
  589,472
        Net income
$1,792,949
$1,515,900



Earnings per common share
$0.35
$0.30
Weighted average number of common shares


  used in computing earnings per share
  5,091,283
  5,032,156
Dividends declared per common share
$0.17
$0.16

Community Bancorp. and Subsidiary	September 30,	December 31,
Consolidated Balance Sheets	2019	2018
	(Unaudited)
Assets
Cash and due from banks	$17,073,112	$14,906,529
Federal funds sold and overnight deposits	29,525,448	53,028,286
Total cash and cash equivalents	46,598,560	67,934,815
Securities available-for-sale	42,579,295	39,366,831
Restricted equity securities, at cost	1,379,850	1,749,450
Loans held-for-sale	1,322,338	0
Loans	604,107,288	578,450,517
Allowance for loan losses	(5,883,642)	(5,602,541)
Deferred net loan costs	360,390	363,614
Net loans	598,584,036	573,211,590
Bank premises and equipment, net	10,928,528	9,713,455
Accrued interest receivable	2,161,899	2,300,841
Bank owned life insurance	4,880,813	4,814,099
Goodwill	11,574,269	11,574,269
Other real estate owned	73,448	201,386
Other assets	9,148,905	9,480,762
Total assets	$729,231,941	$720,347,498

Liabilities and Shareholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing	$128,574,014	$122,430,805
Interest-bearing transaction accounts	167,089,977	177,815,417
Money market funds	96,309,501	85,261,685
Savings	98,240,128	93,129,875
Time deposits, $250,000 and over	13,929,934	14,395,291
Other time deposits	102,243,694	115,783,492
Total deposits	606,387,248	608,816,565
Borrowed funds	1,550,000	1,550,000
Repurchase agreements	35,769,931	30,521,565
Junior subordinated debentures	12,887,000	12,887,000
Accrued interest and other liabilities	5,316,474	3,968,657
Total liabilities	661,910,653	657,743,787

Shareholders' Equity
Preferred stock, 1,000,000 shares authorized, 15 and 20 shares issued and
outstanding in 2019 and 2018, respectively
($100,000 liquidation value)	1,500,000	2,000,000
Common stock - $2.50 par value; 15,000,000 shares authorized, 5,432,809
shares issued at 09/30/19 and 5,382,103 shares issued at 12/31/18	13,582,023	13,455,258
Additional paid-in capital	33,239,064	32,536,532
Retained earnings	21,307,847	17,882,282
Accumulated other comprehensive income (loss)	315,131	(647,584)
Less: treasury stock, at cost; 210,101 shares at 09/30/19 and 12/31/18	(2,622,777)	(2,622,777)
Total shareholders' equity	67,321,288	62,603,711
Total liabilities and shareholders' equity	$729,231,941	$720,347,498

Book value per common share outstanding	$12.60	$11.72

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

~~Table of Content~~

Community Bancorp. and Subsidiary	Nine Months Ended September 30,		Three Months Ended September 30,
Consolidated Statements of Income	2017	2016	2019	2018
(Unaudited)

Interest income
Interest and fees on loans	$17,737,531	$16,582,276	$7,452,084	$7,166,414
Interest on debt securities
Taxable	488,250	384,413
Tax-exempt	992,831	942,246
Interest on taxable debt securities			302,063	228,497
Dividends	117,979	108,141	24,301	36,587
Interest on federal funds sold and overnight deposits	84,802	18,654	128,006	85,524
Total interest income	19,421,393	18,035,730	7,906,454	7,517,022

Interest expense
Interest on deposits	1,734,432	1,529,465	1,256,864	920,361
Interest on borrowed funds	92,492	106,807	6,304	65,074
Interest on repurchase agreements	64,326	56,125	74,510	60,049
Interest on junior subordinated debentures	388,855	339,603	171,355	174,661
Total interest expense	2,280,105	2,032,000	1,509,033	1,220,145

Net interest income	17,141,288	16,003,730	6,397,421	6,296,877
Provision for loan losses	450,000	400,000	412,499	210,000
Net interest income after provision for loan losses	16,691,288	15,603,730	5,984,922	6,086,877

Non-interest income
Service fees	2,293,773	1,992,560	867,688	820,956
Income from sold loans	560,210	683,114	203,175	212,105
Other income from loans	616,931	616,473	235,883	232,485
Net realized gain on sale of securities available-for-sale	4,647	0
Net realized gain (loss) on sale of securities AFS			331	(9,741)
Other income	725,635	747,923	290,255	286,988
Total non-interest income	4,201,196	4,040,070	1,597,332	1,542,793

Non-interest expense
Salaries and wages	5,068,626	5,175,000	1,817,931	1,730,386
Employee benefits	2,016,923	2,049,926	785,187	695,735
Occupancy expenses, net	1,963,543	1,857,482	606,629	629,389
Other expenses	5,416,710	5,065,565	1,653,969	1,818,822
Total non-interest expense	14,465,802	14,147,973	4,863,716	4,874,332

Income before income taxes	6,426,682	5,495,827	2,718,538	2,755,338
Income tax expense	1,720,003	1,515,234	456,595	485,606
Net income	$4,706,679	$3,980,593	$2,261,943	$2,269,732

Earnings per common share	$0.91	$0.78	$0.43	$0.44
Weighted average number of common shares
used in computing earnings per share	5,077,473	5,016,191	5,212,162	5,146,817
Dividends declared per common share	$0.51	$0.48	$0.19

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

~~Table of Content~~

Community Bancorp. and Subsidiary

Consolidated Statements of Comprehensive Income

(Unaudited)

Three Months Ended September 30,

2017

2016

Net income
$1,792,949
$1,515,900



Other comprehensive income, net of tax:


  Unrealized holding loss on available-for-sale securities


    arising during the period
  (55,963)
  (46,840)
  Reclassification adjustment for gain realized in income
  (1,246)
  0
     Unrealized loss during the period
  (57,209)
  (46,840)
Tax effect
  19,451
  15,926
  Other comprehensive loss, net of tax
  (37,758)
  (30,914)
          Total comprehensive income
$1,755,191
$1,484,986

Nine Months Ended September 30,

2017

2016

Net income
$4,706,679
$3,980,593



Other comprehensive income, net of tax:


  Unrealized holding gain on available-for-sale securities


    arising during the period
  22,250
  375,713
  Reclassification adjustment for gain realized in income
  (4,647)
  0
     Unrealized gain during the period
  17,603
  375,713
Tax effect
  (5,985)
  (127,742)
  Other comprehensive income, net of tax
  11,618
  247,971
          Total comprehensive income
$4,718,297
$4,228,564

Community Bancorp. and Subsidiary	Nine Months Ended September 30,
Consolidated Statements of Income	2019	2018
(Unaudited)

Interest income
Interest and fees on loans	$22,491,903	$20,317,095
Interest on taxable debt securities	820,197	652,398
Dividends	77,048	96,135
Interest on federal funds sold and overnight deposits	478,097	257,091
Total interest income	23,867,245	21,322,719

Interest expense
Interest on deposits	3,820,084	2,326,812
Interest on borrowed funds	21,310	90,199
Interest on repurchase agreements	220,411	128,896
Interest on junior subordinated debentures	532,722	481,486
Total interest expense	4,594,527	3,027,393

Net interest income	19,272,718	18,295,326
Provision for loan losses	766,668	570,000
Net interest income after provision for loan losses	18,506,050	17,725,326

Non-interest income
Service fees	2,478,711	2,401,769
Income from sold loans	434,951	586,434
Other income from loans	598,136	643,107
Net realized gain (loss) on sale of securities AFS	331	(19,977)
Other income	838,041	1,017,292
Total non-interest income	4,350,170	4,628,625

Non-interest expense
Salaries and wages	5,453,791	5,260,388
Employee benefits	2,367,866	2,092,039
Occupancy expenses, net	1,939,742	1,961,859
Other expenses	5,337,301	5,395,138
Total non-interest expense	15,098,700	14,709,424

Income before income taxes	7,757,520	7,644,527
Income tax expense	1,304,374	1,389,598
Net income	$6,453,146	$6,254,929

Earnings per common share	$1.23	$1.20
Weighted average number of common shares
used in computing earnings per share	5,196,630	5,131,654
Dividends declared per common share	$0.57	$0.55

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

~~Table of Content~~

Community Bancorp. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended September 30,

2017

2016

Cash Flows from Operating Activities:

  Net income
$4,706,679
$3,980,593
  Adjustments to reconcile net income to net cash provided by


   operating activities:


    Depreciation and amortization, bank premises and equipment
  772,344
  779,240
    Provision for loan losses
  450,000
  400,000
    Deferred income tax
  8,937
  (132,862)
    Gain on sale of securities available-for-sale
  (4,647)
  0
    Gain on sale of loans
  (250,826)
  (351,824)
    Loss on sale of bank premises and equipment
  1,580
  0
    (Gain) loss on sale of OREO
  (143)
  4,965
    Income from Trust LLC
  (314,572)
  (326,675)
    Amortization of bond premium, net
  86,467
  90,099
    Write down of OREO
  0
  26,000
    Proceeds from sales of loans held for sale
  11,163,180
  18,648,432
    Originations of loans held for sale
  (11,599,454)
  (17,806,183)
    Increase in taxes payable
  298,146
  358,630
    Increase in interest receivable
  (74,968)
  (16,751)
    Decrease in mortgage servicing rights
  97,661
  77,768
    Decrease (increase) in other assets
  1,013,781
  (17,149)
    Increase in cash surrender value of BOLI
  (72,431)
  (78,815)
    Amortization of core deposit intangible
  204,525
  204,525
    Amortization of limited partnerships
  462,924
  439,470
    (Increase) decrease in unamortized loan costs
  (8,322)
  3,926
    Increase (decrease) in interest payable
  36,179
  (8,421)
    Increase in accrued expenses
  457,667
  93,410
    (Decrease) increase in other liabilities
  (860,426)
  17,835
       Net cash provided by operating activities
  6,574,281
  6,386,213



Cash Flows from Investing Activities:


  Investments - held-to-maturity


    Maturities and pay downs
  30,488,706
  28,312,853
    Purchases
  (34,484,362)
  (41,795,534)
  Investments - available-for-sale


    Maturities, calls, pay downs and sales
  9,737,133
  4,550,645
    Purchases
  (12,805,972)
  (7,206,847)
  Proceeds from redemption of restricted equity securities
  1,055,800
  1,866,400
  Purchases of restricted equity securities
  0
  (1,280,600)
  Increase (decrease) in limited partnership contributions payable
  459,250
  (687,500)
  Investments in limited partnerships
  (486,750)
  0
  Increase in loans, net
  (19,492,075)
  (12,747,728)
  Capital expenditures for bank premises and equipment
  (486,158)
  (152,199)
  Proceeds from sales of OREO
  399,123
  217,143
  Recoveries of loans charged off
  71,835
  53,242
       Net cash used in investing activities
  (25,543,470)
  (28,870,125)

Community Bancorp. and Subsidiary
Consolidated Statements of Comprehensive Income
(Unaudited)	Three Months Ended September 30,
	2019	2018

Net income	$2,261,943	$2,269,732

Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities AFS arising during the period	199,767	(175,306)
Reclassification adjustment for (gain) loss realized in income	(331)	9,741
Unrealized gain (loss) during the period	199,436	(165,565)
Tax effect	(41,881)	34,768
Other comprehensive income (loss), net of tax	157,555	(130,797)
Total comprehensive income	$2,419,498	$2,138,935

~~Table of Content~~

	Nine Months Ended September 30,
	2019	2018

Net income	$6,453,146	$6,254,929

Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities AFS arising during the period	1,218,958	(879,673)
Reclassification adjustment for (gain) loss realized in income	(331)	19,977
Unrealized gain (loss) during the period	1,218,627	(859,696)
Tax effect	(255,912)	180,537
Other comprehensive income (loss), net of tax	962,715	(679,159)
Total comprehensive income	$7,415,861	$5,575,770

2017

2016

Cash Flows from Financing Activities:

  Net increase (decrease) in demand and interest-bearing transaction accounts
  20,831,788
  (3,019,738)
  Net increase in money market and savings accounts
  19,567,686
  4,588,578
  Net increase in time deposits
  11,617,814
  6,752,504
  Net (decrease) increase in repurchase agreements
  (2,964,268)
  3,761,011
  Net decrease in short-term borrowings
  (30,000,000)
  (4,755,000)
  Proceeds from long-term borrowings
  2,000,000
  550,000
  Decrease in capital lease obligations
  (74,014)
  (64,555)
  Dividends paid on preferred stock
  (75,000)
  (65,625)
  Dividends paid on common stock
  (1,829,567)
  (1,735,340)
       Net cash provided by financing activities
  19,074,439
  6,011,835



       Net increase (decrease) in cash and cash equivalents
  105,250
  (16,472,077)
  Cash and cash equivalents:


          Beginning
  29,614,286
  28,851,890
          Ending
$29,719,536
$12,379,813



Supplemental Schedule of Cash Paid During the Period:


  Interest
$2,243,926
$2,040,421



  Income taxes, net of refunds
$950,000
$850,000



Supplemental Schedule of Noncash Investing and Financing Activities:


  Change in unrealized gain on securities available-for-sale
$17,603
$375,713



  Loans transferred to OREO
$329,215
$395,108



Common Shares Dividends Paid:


  Dividends declared
$2,586,973
$2,405,222
  (Increase) decrease in dividends payable attributable to dividends declared
  (44,507)
  1,380
  Dividends reinvested
  (712,899)
  (671,262)

$1,829,567
$1,735,340

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

~~Table of Content~~

Community Bancorp. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
	Nine Months Ended September 30, 2019
			Additional				Total
	Common	Preferred	paid-in	Retained		Treasury	shareholders'
	Stock	Stock	capital	earnings	AOCI*	stock	equity

January 1, 2019	$13,455,258	$2,000,000	$32,536,532	$17,882,282	$(647,584)	$(2,622,777)	$62,603,711

Issuance of common stock	49,415		263,611				313,026
Cash dividends declared
Common stock				(983,122)			(983,122)
Preferred stock				(27,500)			(27,500)
Redemption of preferred stock		(500,000)					(500,000)
Comprehensive income
Net income				1,771,905			1,771,905
Other comprehensive income					451,690		451,690

March 31, 2019	$13,504,673	$1,500,000	$32,800,143	$18,643,565	$(195,894)	$(2,622,777)	$63,629,710

Issuance of common stock	41,825		234,664				276,489
Cash dividends declared
Common stock				(986,368)			(986,368)
Preferred stock				(20,625)			(20,625)
Comprehensive income
Net income				2,419,298			2,419,298
Other comprehensive income					353,470		353,470

June 30, 2019	$13,546,498	$1,500,000	$33,034,807	$20,055,870	$157,576	$(2,622,777)	$65,671,974

Issuance of common stock	35,525		204,257				239,782
Cash dividends declared
Common stock				(989,341)			(989,341)
Preferred stock				(20,625)			(20,625)
Comprehensive income
Net income				2,261,943			2,261,943
Other comprehensive income					157,555		157,555

September 30, 2019	$13,582,023	$1,500,000	$33,239,064	$21,307,847	$315,131	$(2,622,777)	$67,321,288

*Accumulated other comprehensive (loss) income

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

Community Bancorp. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
	Nine Months Ended September 30, 2018
			Additional				Total
	Common	Preferred	paid-in	Retained		Treasury	shareholders'
	Stock	Stock	capital	earnings	AOCI*	stock	equity

January 1, 2018	$13,305,800	$2,500,000	$31,639,189	$13,387,739	$(274,097)	$(2,622,777)	$57,935,854

Issuance of common stock	33,345		207,208				240,553
Cash dividends declared
Common stock				(869,128)			(869,128)
Preferred stock				(28,125)			(28,125)
Redemption of preferred stock		(500,000)					(500,000)
Comprehensive income
Net income				1,982,543			1,982,543
Other comprehensive loss					(452,876)		(452,876)

March 31, 2018	$13,339,145	$2,000,000	$31,846,397	$14,473,029	$(726,973)	$(2,622,777)	$58,308,821

Issuance of common stock	36,183		202,203				238,386
Cash dividends declared
Common stock				(973,992)			(973,992)
Preferred stock				(23,750)			(23,750)
Comprehensive income
Net income				2,002,654			2,002,654
Other comprehensive loss					(95,486)		(95,486)

June 30, 2018	$13,375,328	$2,000,000	$32,048,600	$15,477,941	$(822,459)	$(2,622,777)	$59,456,633

Issuance of common stock	43,070		255,213				298,283
Cash dividends declared
Common stock				(976,936)			(976,936)
Preferred stock				(25,000)			(25,000)
Comprehensive income
Net income				2,269,732			2,269,732
Other comprehensive loss					(130,797)		(130,797)

September 30, 2018	$13,418,398	$2,000,000	$32,303,813	$16,745,737	$(953,256)	$(2,622,777)	$60,891,915

*Accumulated other comprehensive loss

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

Community Bancorp. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)	Nine Months Ended September 30,
	2019	2018

Cash Flows from Operating Activities:
Net income	$6,453,146	$6,254,929
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization, bank premises and equipment	689,813	736,352
Provision for loan losses	766,668	570,000
Deferred income tax provision (credit)	56,925	(70,716)
Net realized (gain) loss on sale of securities AFS	(331)	19,977
Gain on sale of loans	(158,201)	(265,035)
Gain on sale of bank premises and equipment	0	(260,013)
Loss on sale of OREO	817	2,397
Income from CFS Partners	(482,185)	(429,786)
Amortization of bond premium, net	81,354	98,245
Write down of OREO	95,008	0
Proceeds from sales of loans held for sale	6,169,639	8,702,602
Originations of loans held for sale	(7,333,776)	(7,860,877)
(Decrease) increase in taxes payable	(96,632)	292,201
Decrease (increase) in interest receivable	138,942	(164,070)
Decrease in mortgage servicing rights	83,833	62,413
Decrease in right-of-use assets	176,361	0
Decrease in operating lease liabilities	(169,761)	0
Decrease (increase) in other assets	279,923	(775,983)
Increase in cash surrender value of BOLI	(66,714)	(68,811)
Amortization of limited partnerships	234,081	283,113
Decrease (increase) in unamortized loan costs	3,224	(34,897)
Increase in interest payable	33,148	44,079
Increase in accrued expenses	158,337	103,133
Decrease in other liabilities	(89,035)	(35,961)
Net cash provided by operating activities	7,024,584	7,203,292

Cash Flows from Investing Activities:
Investments - AFS
Maturities, calls, pay downs and sales	12,124,796	6,896,563
Purchases	(14,199,656)	(8,351,213)
Proceeds from redemption of restricted equity securities	493,600	1,147,500
Purchases of restricted equity securities	(124,000)	(1,188,500)
Decrease in limited partnership contributions payable	0	(486,250)
Increase in loans, net	(26,271,976)	(30,346,971)
Capital expenditures net of proceeds from sales of bank
premises and equipment	(590,468)	168,098
Proceeds from sales of OREO	105,561	333,503
Recoveries of loans charged off	56,190	114,960
Net cash used in investing activities	(28,405,953)	(31,712,310)

	2019	2018

Cash Flows from Financing Activities:
Net (decrease) increase in demand and interest-bearing transaction accounts	(4,582,231)	12,361,306
Net increase (decrease) in money market and savings accounts	16,158,069	(7,982,921)
Net (decrease) increase in time deposits	(14,005,155)	20,471,357
Net increase in repurchase agreements	5,248,366	2,030,982
Repayments on long-term borrowings	0	(2,000,000)
Decrease in finance lease obligations	(92,614)	(85,416)
Redemption of preferred stock	(500,000)	(500,000)
Dividends paid on preferred stock	(68,750)	(76,875)
Dividends paid on common stock	(2,112,571)	(1,965,241)
Net cash provided by financing activities	45,114	22,253,192

Net decrease in cash and cash equivalents	(21,336,255)	(2,255,826)
Cash and cash equivalents:
Beginning	67,934,815	42,653,501
Ending	$46,598,560	$40,397,675

Supplemental Schedule of Cash Paid During the Period:
Interest	$4,561,379	$2,983,314

Income taxes, net of refunds	$1,110,000	$885,000

Supplemental Schedule of Noncash Investing and Financing Activities:
Change in unrealized gain (loss) on securities AFS	$1,218,627	$(859,696)

Loans transferred to OREO	$73,448	$249,900

Common Shares Dividends Paid:
Dividends declared	$2,958,831	$2,820,056
Increase in dividends payable attributable to dividends declared	(16,963)	(77,593)
Dividends reinvested	(829,297)	(777,222)
	$2,112,571	$1,965,241

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

Notes to Consolidated Financial Statements

Note 1. 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, ~~2016~~2018 contained in the Company's Annual Report on Form 10-K. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full annual period ending December 31, ~~2017,~~2019, or for any other interim period.

Certain amounts in the ~~2016 unaudited~~2018 consolidated ~~income~~financial statements have been reclassified to conform to the ~~2017~~2019 presentation. Reclassifications had no effect on prior period net income or shareholders’ equity.

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

Note 2. Recent Accounting Developments

~~In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-01,~~ ~~Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities~~. This guidance changes how entities account for equity investments that do not result in consolidation and are not accounted for under the equity method of accounting. This guidance also changes certain disclosure requirements and other aspects of current accounting principles generally accepted in the United States of America (US GAAP). Public businesses must use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of the ASU on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In July 2018, the FASB amended the updated guidance and provided an additional transition method for adoption of the guidance. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. ~~Early application of~~The ASU became effective for the ~~amendments in the ASU is permitted for all entities.~~Company on January 1, 2019. The ~~Company is currently evaluating the~~ impact of adopting this ASU was not material to the ~~adoption of the ASU on its~~Company’s consolidated financial statements.

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

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU was issued to reduce the cost and complexity of the goodwill impairment test. To simplify the subsequent measurement of goodwill, step two of the goodwill impairment test was eliminated. Instead, a ~~Company~~company will recognize an impairment of goodwill should the carrying value of a reporting unit exceed its fair value (i.e., step one). ~~The~~As initially proposed, the ASU was to be effective for the Company on January 1, 2020, however similar to ASU No. 2016-13, the effective date for this ASU was also extended and will be effective for the Company on January 1, ~~2020~~2023. The Company has evaluated the impact of this ASU and ~~will be applied prospectively.~~plans to early adopt as permitted, with no material impact on its consolidated financial statements.

~~Table of Content~~

The Company has goodwill from its acquisition of LyndonBank in 2007 and performs an impairment test annually or more frequently if circumstances warrant (see Note 6).

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The standard is effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The ASU will become effective for the Company on January 1, 2020. The Company is ~~currently~~ evaluating the impact of ~~the~~ adoption of ~~the~~this ASU on its consolidated financial statements, but does not anticipate any material impact at this time.

~~The FASB issued ASU No. 2014-09,Revenue from Contracts with Customers~~, in 2014 to replace the current plethora of industry-specific rules with a broad, principles-based framework for recognizing and measuring revenue. Due to the complexity of the new pronouncement and the anticipated effort required by entities in many industries to implement ASU No. 2014-09, FASB delayed the effective date. ASU 2014-09 is effective for the Company for annual periods beginning after December 15, 2017.

FASB formed a Transition Resource Group to assist it in identifying implementation issues that may require further clarification or amendment to ASU No. 2014-09. As a result of that group’s deliberations, FASB has issued several amendments, which will be effective concurrently with ASU No. 2014-09, including ASU No. 2016-08,~~Principal versus Agent Considerations~~, which clarifies whether an entity should record the gross amount of revenue or only its ultimate share when a third party is also involved in providing goods or services to a customer. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other US GAAP, the Company does not expect the new guidance to have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company is currently performing an overall assessment of revenue streams and reviewing contracts potentially affected by the ASU including deposit related fees, interchange fees, and merchant income, to determine the potential impact the new guidance is expected to have on its consolidated financial statements. In addition, the Company continues to follow certain implementation issues relevant to the banking industry which are still pending resolution.

~~In August 2017, the FASB issued ASU 2017-12,~~ ~~Derivatives and Hedging~~ (Topic 815). The amendments in this ASU improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, this ASU makes certain targeted improvements to simplify the application of the hedge accounting guidance in current US GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted in any interim period after issuance of the ASU. The Company does not currently engage in hedging transactions; therefore, the ASU does not have an impact on the Company’s current consolidated financial statements.

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,
	2017	2016
Three Months Ended September 30,			2019	2018

Net income, as reported	$1,792,949	$1,515,900	$2,261,943	$2,269,732
Less: dividends to preferred shareholders	26,562	21,875	20,625	25,000
Net income available to common shareholders	$1,766,387	$1,494,025	$2,241,318	$2,244,732
Weighted average number of common shares
used in calculating earnings per share	5,091,283	5,032,156	5,212,162	5,146,817
Earnings per common share	$0.35	$0.30	$0.43	$0.44

	Nine Months Ended September 30,
	2017	2016
Nine Months Ended September 30,			2019	2018

Net income, as reported	$4,706,679	$3,980,593	$6,453,146	$6,254,929
Less: dividends to preferred shareholders	75,000	65,625	68,750	76,875
Net income available to common shareholders	$4,631,679	$3,914,968	$6,384,396	$6,178,054
Weighted average number of common shares
used in calculating earnings per share	5,077,473	5,016,191	5,196,630	5,131,654
Earnings per common share	$0.91	$0.78	$1.23	$1.20

~~Table of Content~~

Note 4. Investment Securities

~~Securities~~Change in Accounting Principle

Prior to 2019, the entire balance of the Company’s HTM investment portfolio consisted of Municipal notes. Effective January 1, 2019, and in accordance with ASC 250 (Accounting Changes and Error Corrections), the Company chose to reclassify these debt instruments from the investment portfolio into the loan portfolio. This change represents a voluntary reclassification of municipal debt instruments from classification as investment securities under ASC 320 (Investments – Debt and Equity Securities) to classification as loans under ASC 310 (Receivables). All periods presented have been restated to conform to this change. Accordingly, for all periods presented below, the Company’s investment portfolio consists entirely of AFS investments and ~~HTM~~municipal debt obligations are reported as a component of the Company’s loan portfolio (See Note 5). The reclassification of the municipal debt instruments in this portfolio did not have a material impact on the Company’s consolidated financial statements or results of operations.

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

		Gross				Gross
	Amortized	Unrealized		Fair	Amortized	Unrealized		Fair
Securities AFS	Cost	Gains	Losses	Value

September 30, 2017
U.S. Government sponsored enterprise (GSE) debt securities	$15,316,323	$9,140	$68,619	$15,256,844
Agency mortgage-backed securities (Agency MBS)	16,568,291	29,716	89,963	16,508,044
Other investments	4,955,000	11,831	12,046	4,954,785
	$36,839,614	$50,687	$170,628	$36,719,673	Cost	Gains	Losses	Value

December 31, 2016
September 30, 2019
U.S. GSE debt securities	$17,365,805	$24,854	$73,331	$17,317,328	$16,715,156	$103,252	$10,433	$16,807,975
Agency MBS	13,265,790	3,896	115,458	13,154,228	15,003,111	89,940	54,556	15,038,495
ABS and OAS					1,797,128	88,221	0	1,885,349
Other investments	3,221,000	24,947	2,452	3,243,495	8,665,000	182,623	147	8,847,476
Total					$42,180,395	$464,036	$65,136	$42,579,295
	$33,852,595	$53,697	$191,241	$33,715,051

September 30, 2016
December 31, 2018
U.S. GSE debt securities	$13,751,867	$96,874	$5,247	$13,843,494	$14,010,100	$394	$259,391	$13,751,103
Agency MBS	12,380,416	164,771	18,571	12,526,616	16,020,892	2,701	449,068	15,574,525
ABS and OAS					1,988,565	3,806	6,242	1,986,129
Other investments	2,973,000	69,106	0	3,042,106	8,167,000	8,472	120,398	8,055,074
	$29,105,283	$330,751	$23,818	$29,412,216
Total					$40,186,557	$15,373	$835,099	$39,366,831

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Securities HTM

Cost

Gains

Losses

Value*

September 30, 2017

States and political subdivisions
$53,882,287
$688,713
$0
$54,571,000





December 31, 2016




States and political subdivisions
$49,886,631
$1,148,369
$0
$51,035,000





September 30, 2016




States and political subdivisions
$56,837,100
$754,900
$0
$57,592,000

*Method used to determine fair value of HTM securities rounds values to nearest thousand.

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

Amortized

Fair

Cost

Value

September 30, 2017
$36,839,614
$36,719,673
December 31, 2016
  33,604,595
  33,469,254
September 30, 2016
  29,105,283
  29,412,216

	Amortized	Fair
	Cost	Value

September 30, 2019	$42,180,395	$42,579,295
December 31, 2018	40,186,557	39,366,831

~~Table of Content~~

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

	Amortized	Fair	Amortized	Fair
	Cost	Value	Cost	Value
September 30, 2017
September 30, 2019
Due in one year or less	$2,250,000	$2,245,258	$1,521,908	$1,522,901
Due from one to five years	13,029,323	13,009,642	12,633,885	12,807,696
Due from five to ten years	4,992,000	4,956,729	12,041,660	12,217,358
Due after ten years			979,831	992,845
Agency MBS	16,568,291	16,508,044	15,003,111	15,038,495
Total			$42,180,395	$42,579,295
	$36,839,614	$36,719,673

December 31, 2016
Due in one year or less	$2,006,027	$2,010,287
December 31, 2018
Due from one to five years	17,335,778	17,329,503	$12,714,642	$12,519,008
Due from five to ten years	1,245,000	1,221,033	11,451,023	11,273,298
Agency MBS	13,265,790	13,154,228	16,020,892	15,574,525
	$33,852,595	$33,715,051

September 30, 2016
Due in one year or less	$1,000,000	$1,001,865
Due from one to five years	14,479,867	14,630,210
Due from five to ten years	1,245,000	1,253,525
Agency MBS	12,380,416	12,526,616
	$29,105,283	$29,412,216
Total			$40,186,557	$39,366,831

~~Because the actual maturities of~~ Agency MBS ~~usually differ from their contractual maturities due to the right of borrowers to prepay the underlying mortgage loans, usually without penalty, those securities~~ are not ~~presented in~~due at a single maturity date and have not been allocated to maturity groupings for purposes of the ~~table by contractual~~ maturity ~~date.~~table.

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

Amortized

Fair

Cost

Value*

September 30, 2017

Due in one year or less
$28,773,116
$28,773,000
Due from one to five years
  4,866,604
  5,039,000
Due from five to ten years
  3,990,576
  4,163,000
Due after ten years
  16,251,991
  16,596,000

$53,882,287
$54,571,000



December 31, 2016


Due in one year or less
$25,368,725
$25,369,000
Due from one to five years
  4,030,900
  4,318,000
Due from five to ten years
  4,013,242
  4,300,000
Due after ten years
  16,473,764
  17,048,000

$49,886,631
$51,035,000



September 30, 2016


Due in one year or less
$35,141,204
$35,141,000
Due from one to five years
  4,029,095
  4,218,000
Due from five to ten years
  3,430,921
  3,620,000
Due after ten years
  14,235,880
  14,613,000

$56,837,100
$57,592,000

*Method used to determine fair value of HTM securities rounds values to nearest thousand.

~~Table of Content~~

~~There were no debt securities HTM in an unrealized loss position as of the balance sheet dates.~~ Debt securities ~~AFS~~ with unrealized losses as of the balance sheet dates are presented in the table below.

	Less than 12 months		12 months or more		Total			Less than 12 months		12 months or more		Total
	Fair	Unrealized	Fair	Unrealized	Number of	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized	Number of	Fair	Unrealized
	Value	Loss	Value	Loss	Securities	Value	Loss	Value	Loss	Value	Loss	Securities	Value	Loss
September 30, 2017
September 30, 2019
U.S. GSE debt securities	$9,702,979	$41,405	$1,972,786	$27,214	10	$11,675,765	$68,619	$1,999,231	$769	$1,990,336	$9,664	2	$3,989,567	$10,433
Agency MBS	11,618,020	86,230	209,545	3,733	15	11,827,565	89,963	1,845,095	3,306	5,662,969	51,250	18	7,508,064	54,556
Other investments	1,969,953	12,046	0		8	1,969,953	12,046	0		247,853	147	3	247,853	147
Total								$3,844,326	$4,075	$7,901,158	$61,061	23	$11,745,484	$65,136
	$23,290,952	$139,681	$2,182,331	$30,947	33	$25,473,283	$170,628

December 31, 2016
December 31, 2018
U.S. GSE debt securities	$5,176,669	$73,331	$0		4	$5,176,669	$73,331	$1,465,947	$6,752	$11,284,761	$252,639	11	$12,750,708	$259,391
Agency MBS	10,704,717	115,458	0		15	10,704,717	115,458	2,317,838	22,029	12,223,386	427,039	24	14,541,224	449,068
ABS and OAS								976,226	6,242	0		1	976,226	6,242
Other investments	493,548	2,452	0		2	493,548	2,452	1,956,914	20,086	4,113,688	100,312	25	6,070,602	120,398
	$16,374,934	$191,241	$0		21	$16,374,934	$191,241

September 30, 2016
U.S. GSE debt securities	$1,994,753	$5,247	$0		1	$1,994,753	$5,247
Agency MBS	2,054,035	18,571	0		4	2,054,035	18,571
	$4,048,788	$23,818	$0		5	$4,048,788	$23,818
Total								$6,716,925	$55,109	$27,621,835	$779,990	61	$34,338,760	$835,099

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

Management evaluates its investment securities for ~~other-than-temporary impairment~~OTTI at least on a quarterly basis, and more frequently when economic or market conditions, or adverse developments relating to the issuer, warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than the carrying value, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies or other adverse developments in the status of the securities have occurred, and the results of reviews of the issuer's financial condition. As of September 30, ~~2017,~~2019 and December 31, 2018, there were no declines in the fair value of any of the securities reflected in the table above that were deemed by management to be ~~other than temporary.~~OTTI.

Note 5. Loans, Allowance for Loan Losses and Credit Quality

Change in Accounting Principle

As disclosed in Note 4 (Investment Securities), effective January 1, 2019 and in accordance with ASC 250 (Accounting Changes and Error Corrections), the Company chose to reclassify its municipal debt instruments from the investment portfolio into the loan portfolio. This change represents a voluntary reclassification of municipal debt instruments by management from classification as investment securities under ASC 320 (Investments – Debt and Equity Securities) to classification as loans under ASC 310 (Receivables). As stated in Note 4, the reclassification of this portfolio did not have a material impact on the Company’s consolidated financial statements or results of operations.

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

	September 30,	December 31,	September 30,	September 30,	December 31,
	2017	2016		2019	2018

Commercial & industrial	$77,604,260	$68,730,573	$69,791,331	$92,644,869	$80,766,693
Commercial real estate	210,983,668	201,728,280	190,246,590	249,599,721	235,318,148
Municipal (1)				51,935,005	47,067,023
Residential real estate - 1st lien	167,185,874	166,691,962	161,277,406	161,056,228	165,665,175
Residential real estate - Junior (Jr) lien	43,962,578	42,927,335	41,739,827
Residential real estate - Jr lien				44,161,727	44,544,987
Consumer	6,311,739	7,171,076	7,131,741	4,709,738	5,088,491
Gross Loans	506,048,119	487,249,226	470,186,895
Total loans				604,107,288	578,450,517
Deduct (add):
Allowance for loan losses	5,436,313	5,278,445	5,179,965
ALL				5,883,642	5,602,541
Deferred net loan costs	(318,452)	(310,130)	(312,565)	(360,390)	(363,614)
Net Loans	$500,930,258	$482,280,911	$465,319,495
Net loans				$598,584,036	$573,211,590

(1)

~~Table~~Prior to 2019, all loans in this category were reported as HTM securities as a component of ~~Content~~

Investment Securities (see Note 4). All periods presented have been restated to conform to the reclassification.

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

							90 Days or							90 Days or
		90 Days	Total			Non-Accrual	More and		90 Days	Total			Non-Accrual	More and
September 30, 2017	30-89 Days	or More	Past Due	Current	Total Loans	Loans	Accruing
September 30, 2019								30-89 Days	or More	Past Due	Current	Total Loans	Loans	Accruing

Commercial & industrial	$76,185	$0	$76,185	$77,528,075	$77,604,260	$48,385	$0	$174,959	$162,330	$337,289	$92,307,580	$92,644,869	$570,171	$0
Commercial real estate	1,186,687	228,621	1,415,308	209,568,360	210,983,668	714,720	15,011	536,098	261,321	797,419	248,802,302	249,599,721	1,746,986	0
Municipal								0			51,935,005		0
Residential real estate
- 1st lien	1,366,466	1,823,490	3,189,956	163,995,918	167,185,874	1,511,891	725,581	1,896,729	2,166,286	4,063,015	156,993,213	161,056,228	2,754,912	969,072
- Jr lien	454,613	261,256	715,869	43,246,709	43,962,578	450,192	64,292	475,345	294,600	769,945	43,391,782	44,161,727	266,815	181,477
Consumer	53,597	2,777	56,374	6,255,365	6,311,739	0	2,777	24,426	0	24,426	4,685,312	4,709,738	0
	$3,137,548	$2,316,144	$5,453,692	$500,594,427	$506,048,119	$2,725,188	$807,661
Totals								$3,107,557	$2,884,537	$5,992,094	$598,115,194	$604,107,288	$5,338,884	$1,150,549

90 Days or

90 Days

Total

Non-Accrual

More and

December 31, 2016

30-89 Days

or More

Past Due

Current

Total Loans

Loans

Accruing

Commercial & industrial
$328,684
$26,042
$354,726
$68,375,847
$68,730,573
$143,128
$26,042
Commercial real estate
  824,836
  222,738
  1,047,574
  200,680,706
  201,728,280
  765,584
  0
Residential real estate







- 1st lien
  4,881,496
  1,723,688
  6,605,184
  160,086,778
  166,691,962
  1,227,220
  1,068,083
- Jr lien
  984,849
  116,849
  1,101,698
  41,825,637
  42,927,335
  338,602
  27,905
Consumer
  53,972
  2,176
  56,148
  7,114,928
  7,171,076
  0
  2,176

$7,073,837
$2,091,493
$9,165,330
$478,083,896
$487,249,226
$2,474,534
$1,124,206

							90 Days or							90 Days or
		90 Days	Total			Non-Accrual	More and		90 Days	Total			Non-Accrual	More and
September 30, 2016	30-89 Days	or More	Past Due	Current	Total Loans	Loans	Accruing
December 31, 2018								30-89 Days	or More	Past Due	Current	Total Loans	Loans	Accruing

Commercial & industrial	$236,510	$116,720	$353,230	$69,438,101	$69,791,331	$205,358	$116,720	$217,385	$0	$217,385	$80,549,308	$80,766,693	$84,814	$0
Commercial real estate	655,874	249,749	905,623	189,340,967	190,246,590	759,332	227,302	1,509,839	190,789	1,700,628	233,617,520	235,318,148	1,742,993	0
Municipal								0			47,067,023		0
Residential real estate
- 1st lien	1,837,612	1,005,342	2,842,954	158,434,452	161,277,406	1,289,968	744,379	4,108,319	1,371,061	5,479,380	160,185,795	165,665,175	2,026,939	622,486
- Jr lien	203,174	91,420	294,594	41,445,233	41,739,827	343,766	91,420	484,855	353,914	838,769	43,706,218	44,544,987	408,540	104,959
Consumer	66,776	0	66,776	7,064,965	7,131,741	0		43,277	1,661	44,938	5,043,553	5,088,491	0	1,661
	$2,999,946	$1,463,231	$4,463,177	$465,723,718	$470,186,895	$2,598,424	$1,179,821
Total								$6,363,675	$1,917,425	$8,281,100	$570,169,417	$578,450,517	$4,263,286	$729,106

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

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

Number of loans

Balance

September 30, 2017
  7
$443,099
December 31, 2016
  8
  322,663
September 30, 2016
  6
  250,413

	Number of loans	Balance

September 30, 2019	13	$864,019
December 31, 2018	12	961,709

Allowance for loan losses

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

~~Table of Content~~

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

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

General component

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

Loss ratios are calculated by loan segment for one year, two year, three year, four year and five year look back periods. Management uses an average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment in the current economic climate. During periods of economic stability, a relatively longer period (e.g., five years) may be appropriate. During periods of significant expansion or contraction, the Company may appropriately shorten the historical time period. The Company is currently using an extended look back period of five years.

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

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

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

Commercial Real Estate – Loans in this segment are principally made to businesses and are generally secured by either owner-occupied, or non-owner occupied ~~commercial real estate.~~CRE. A relatively small portion of this segment includes farm loans secured by farm land and buildings. As with commercial and industrial loans, repayment of owner-occupied ~~commercial real estate~~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 ~~commercial real estate~~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. ~~Commercial 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. ~~Commercial real estate~~CRE lending also carries a higher degree of environmental risk than other real estate lending.

~~Table~~Municipal – Loans in this segment are made to local municipalities, attributable to municipal financing transactions and backed by the full faith and credit of ~~Content~~

town governments or dedicated governmental revenue sources, with no historical losses recognized by the Company.

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

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

Specific component

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

Impaired loans also include troubled loans that are restructured. A TDR occurs when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that would otherwise not be granted. TDRs may include the transfer of assets to the Company in partial satisfaction of a troubled loan, a modification of a loan’s terms, or a combination of the two.

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

Unallocated component

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

~~ALL methodology changes implemented as of June 30, 2017~~

During the second quarter of 2017, the Company transitioned to a software solution for preparing the ALL calculation and related reports, replacing previously used Excel spreadsheets. The software solution provides the Company with stronger data integrity, ease and efficiency in ALL preparation, and helps ready the Company for the future transition to the CECL model. During the implementation and testing of the software, several changes to the underlying ALL methodology were made. Those changes included (i) removing the government guaranteed balances from the calculation of the ALL for both the pooled loans and impaired loans, (ii) treating all TDRs as impaired regardless of size, and (iii) using a fixed look back period for historical losses based on loss history and economic conditions rather than applying the highest look back period of the last 5 years. The Company has a solid history of collection of government guarantees; removal of the guaranteed portion of the loan balance from the ALL calculation for government guaranteed loans reduces the amount of reserves that would otherwise be required against those loans. Management expects the change to the historical loss methodology will eliminate sharp increases or decreases in loss ratios resulting from isolated losses rolling into or out of the look back period and is more reflective of the Company’s loss history during periods of economic stability. Although the inclusion of all TDRs in the impaired calculation now requires the individual analysis of a significantly larger number of loans than was the case under the previous ALL methodology, the ability to individually analyze a greater number of loans is facilitated by the new software. Compared to the prior ALL methodology, the net impact of the foregoing methodology changes reduced required reserves by approximately $247,000 for the quarter ended June 30, 2017, the quarter during which the changes were first implemented.

~~Table of Content~~

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

As of or for the three months ended September 30, ~~2017~~2019

			Residential								Residential
	Commercial		Real Estate					Commercial			Real Estate
	& Industrial	Real Estate	1st Lien	Jr Lien	Consumer	Unallocated	Total	& Industrial	Real Estate	Municipal	1st Lien	Jr Lien	Consumer	Unallocated	Total
Allowance for loan losses
Beginning balance	$695,663	$2,530,215	$1,363,324	$374,364	$51,295	$359,517	$5,374,378

ALL beginning balance								$715,132	$3,094,781	$0	$1,427,357	$287,984	$53,410	$145,089	$5,723,753
Charge-offs	0		(84,098)	0	(35,825)	0	(119,923)	(6,795)	(101,476)	0	(147,724)	0	(11,338)	0	(267,333)
Recoveries	19,151	0	4,621	60	8,026	0	31,858	1,690	0		1,059	485	11,489	0	14,723
Provision (credit)	(41,481)	113,047	136,764	11,115	28,115	(97,560)	150,000	133,632	272,858	0	130,189	(3,402)	(454)	(120,324)	412,499
Ending balance	$673,333	$2,643,262	$1,420,611	$385,539	$51,611	$261,957	$5,436,313
ALL ending balance								$843,659	$3,266,163	$0	$1,410,881	$285,067	$53,107	$24,765	$5,883,642

As of or for the nine months ended September 30, ~~2017~~2019

			Residential								Residential
	Commercial		Real Estate					Commercial			Real Estate
	& Industrial	Real Estate	1st Lien	Jr Lien	Consumer	Unallocated	Total	& Industrial	Real Estate	Municipal	1st Lien	Jr Lien	Consumer	Unallocated	Total
Allowance for loan losses
Beginning balance	$726,848	$2,496,085	$1,369,757	$371,176	$83,973	$230,606	$5,278,445

ALL beginning balance								$697,469	$3,019,868	$0	$1,421,494	$273,445	$56,787	$133,478	$5,602,541
Charge-offs	0	(160,207)	(88,833)	(15,311)	(99,617)	0	(363,968)	(10,368)	(116,186)	0	(242,244)	(102,000)	(70,959)	0	(541,757)
Recoveries	23,469	231	14,838	180	33,118	0	71,836	10,768	0		11,131	1,486	32,805	0	56,190
Provision (credit)	(76,984)	307,153	124,849	29,494	34,137	31,351	450,000	145,790	362,481	0	220,500	112,136	34,474	(108,713)	766,668
Ending balance	$673,333	$2,643,262	$1,420,611	$385,539	$51,611	$261,957	$5,436,313
ALL ending balance								$843,659	$3,266,163	$0	$1,410,881	$285,067	$53,107	$24,765	$5,883,642

Allowance for loan losses
Evaluated for impairment
ALL evaluated for impairment
Individually	$0	$65,150	$153,570	$119,224	$0		$337,944	$95,945	$0		$107,526	$1,709	$0		$205,180
Collectively	673,333	2,578,112	1,267,041	266,315	51,611	261,957	5,098,369	747,714	3,266,163	0	1,303,355	283,358	53,107	24,765	5,678,462
	$673,333	$2,643,262	$1,420,611	$385,539	$51,611	$261,957	$5,436,313
Total								$843,659	$3,266,163	$0	$1,410,881	$285,067	$53,107	$24,765	$5,883,642

Loans evaluated for impairment
Individually	$48,385	$1,936,399	$3,760,913	$379,777	$0		$6,125,474	$570,172	$1,849,290	$0	$5,129,666	$180,516	$0		$7,729,644
Collectively	77,555,875	209,047,269	163,424,961	43,582,801	6,311,739		499,922,645	92,074,697	247,750,431	51,935,005	155,926,562	43,981,211	4,709,738		596,377,644
	$77,604,260	$210,983,668	$167,185,874	$43,962,578	$6,311,739		$506,048,119
Total								$92,644,869	$249,599,721	$51,935,005	$161,056,228	$44,161,727	$4,709,738		$604,107,288

~~Table of Content~~

As of or for the year ended December 31, ~~2016~~2018

			Residential								Residential
	Commercial		Real Estate					Commercial			Real Estate
	& Industrial	Real Estate	1st Lien	Jr Lien	Consumer	Unallocated	Total	& Industrial	Real Estate	Municipal	1st Lien	Jr Lien	Consumer	Unallocated	Total
Allowance for loan losses
Beginning balance	$712,902	$2,152,678	$1,368,028	$422,822	$75,689	$279,759	$5,011,878

ALL beginning balance								$675,687	$2,674,029	$0	$1,460,547	$316,982	$43,303	$267,551	$5,438,099
Charge-offs	(49,009)	0	(244,149)	0	(15,404)	0	(308,562)	(152,860)	(124,645)	0	(251,654)	(69,173)	(143,688)	0	(742,020)
Recoveries	36,032	0	23,712	240	15,145	0	75,129	60,192	0		26,832	1,420	38,018	0	126,462
Provision (credit)	26,923	343,407	222,166	(51,886)	8,543	(49,153)	500,000	114,450	470,484	0	185,769	24,216	119,154	(134,073)	780,000
Ending balance	$726,848	$2,496,085	$1,369,757	$371,176	$83,973	$230,606	$5,278,445
ALL ending balance								$697,469	$3,019,868	$0	$1,421,494	$273,445	$56,787	$133,478	$5,602,541

Allowance for loan losses
Evaluated for impairment
ALL evaluated for impairment
Individually	$0	$86,400	$6,200	$114,800	$0		$207,400	$0			$112,969	$1,757	$0		$114,726
Collectively	726,848	2,409,685	1,363,557	256,376	83,973	230,606	5,071,045	697,469	3,019,868	0	1,308,525	271,688	56,787	133,478	5,487,815
	$726,848	$2,496,085	$1,369,757	$371,176	$83,973	$230,606	$5,278,445
Total								$697,469	$3,019,868	$0	$1,421,494	$273,445	$56,787	$133,478	$5,602,541

Loans evaluated for impairment
Individually	$48,385	$687,495	$946,809	$224,053	$0		$1,906,742	$60,846	$1,746,894	$0	$4,392,060	$319,321	$0		$6,519,121
Collectively	68,682,188	201,040,785	165,745,153	42,703,282	7,171,076		485,342,484	80,705,847	233,571,254	47,067,023	161,273,115	44,225,666	5,088,491		571,931,396
	$68,730,573	$201,728,280	$166,691,962	$42,927,335	$7,171,076		$487,249,226
Total								$80,766,693	$235,318,148	$47,067,023	$165,665,175	$44,544,987	$5,088,491		$578,450,517

As of or for the three months ended September 30, ~~2016~~2018

			Residential							Residential
	Commercial		Real Estate					Commercial		Real Estate
	& Industrial	Real Estate	1st Lien	Jr Lien	Consumer	Unallocated	Total	& Industrial	Real Estate	1st Lien	Jr Lien	Consumer	Unallocated	Total
Allowance for loan losses
Beginning balance	$825,242	$2,316,966	$1,294,272	$414,082	$80,560	$146,298	$5,077,420

ALL beginning balance								$785,089	$2,708,239	$1,398,041	$287,602	$51,635	$182,417	$5,413,023
Charge-offs	(1,358)	0	(42,000)	0	(14,438)	0	(57,796)	0		(591)	(12,174)	(37,327)	0	(50,092)
Recoveries	2,174	0	3,974	60	4,133	0	10,341	34,818	0	17,353	260	15,865	0	68,296
Provision (credit)	(54,384)	34,435	82,396	(32,861)	(11,915)	132,329	150,000	(34,687)	102,491	(18,277)	78,108	21,590	60,775	210,000
Ending balance	$771,674	$2,351,401	$1,338,642	$381,281	$58,340	$278,627	$5,179,965
ALL ending balance								$785,220	$2,810,730	$1,396,526	$353,796	$51,763	$243,192	$5,641,227

As of or for the nine months ended September 30, ~~2016~~2018

Residential

Residential

Commercial

Commercial

Real Estate

Real Estate

& Industrial

Real Estate

1st Lien

Jr Lien

Consumer

Unallocated

Total

Allowance for loan losses

Beginning balance
$712,902
$2,152,678
$1,368,028
$422,822
$75,689
$279,759
$5,011,878
  Charge-offs
  (12,194)
  0
  (234,549)
  0
  (38,412)
  0
  (285,155)
  Recoveries
  22,650
  0
  9,660
  180
  20,752
  0
  53,242
  Provision (credit)
  48,316
  198,723
  195,503
  (41,721)
  311
  (1,132)
  400,000
Ending balance
$771,674
$2,351,401
$1,338,642
$381,281
$58,340
$278,627
$5,179,965








Allowance for loan losses







Evaluated for impairment







  Individually
$0
$92,900
$19,000
$115,600
$0
$0
$227,500
  Collectively
  771,674
  2,258,501
  1,319,642
  265,681
  58,340
  278,627
  4,952,465

$771,674
$2,351,401
$1,338,642
$381,281
$58,340
$278,627
$5,179,965








Loans evaluated for impairment







  Individually
$188,528
$703,852
$1,064,752
$226,590
$0

$2,183,722
  Collectively
  69,602,803
  189,542,738
  160,212,654
  41,513,237
  7,131,741

  468,003,173

$69,791,331
$190,246,590
$161,277,406
$41,739,827
$7,131,741

$470,186,895

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

ALL beginning balance	$675,687	$2,674,029	$1,460,547	$316,982	$43,303	$267,551	$5,438,099
Charge-offs	(131,273)	(124,645)	(79,025)	(36,174)	(110,715)	0	(481,832)
Recoveries	54,858	0	26,511	935	32,656	0	114,960
Provision (credit)	185,948	261,346	(11,507)	72,053	86,519	(24,359)	570,000
ALL ending balance	$785,220	$2,810,730	$1,396,526	$353,796	$51,763	$243,192	$5,641,227

~~Table of Content~~

Impaired loans, by portfolio segment, were as follows:

	As of September 30, 2017						As of September 30, 2019
		Unpaid		Average		Interest		Unpaid		Average		Interest
	Recorded	Principal	Related	Recorded		Income	Recorded	Principal	Related	Recorded		Income
	Investment	Balance	Allowance	Investment (1)	Investment (2)	Recognized (2)	Investment	Balance	Allowance	Investment (1)	Investment (2)	Recognized(2)

Related allowance recorded
Commercial & industrial							$162,330		$95,945	$81,165	$40,583	$0
Commercial real estate	$204,645	$225,681	$65,150	$207,572	$212,451	$0	0				122,150	0
Residential real estate
- 1st lien	1,071,713	1,108,286	153,570	1,055,232	608,943	20,535	1,114,686	1,135,476	107,526	1,089,372	1,008,088	70,281
- Jr lien	224,957	293,638	119,224	254,291	238,679	305	7,346	109,333	1,709	7,010	7,056	495
	1,501,315	1,627,605	337,944	1,517,095	1,060,073	20,840
Total with related allowance							1,284,362	1,407,139	205,180	1,177,547	1,177,877	70,776

No related allowance recorded
Commercial & industrial	48,385	62,498		91,882	70,133	0	407,841	426,051		507,336	278,776	4,077
Commercial real estate	1,735,982	2,305,028		1,749,498	1,105,573	50,123	1,849,859	2,273,987		1,951,505	1,841,103	13,223
Residential real estate
- 1st lien	2,705,775	3,006,813		2,630,926	1,587,592	87,720	4,035,429	4,808,932		4,108,857	3,819,787	164,274
- Jr lien	154,839	154,918		145,830	107,120	0	173,184	222,339		183,283	243,679	0
Total with no related allowance							6,466,313	7,731,309		6,750,981	6,183,345	181,574
	4,644,981	5,529,257		4,618,136	2,870,418	137,843

	$6,146,296	$7,156,862	$337,944	$6,135,231	$3,930,491	$158,683
Total impaired loans							$7,750,675	$9,138,448	$205,180	$7,928,528	$7,361,222	$252,350

(1) For the three months ended September 30, ~~2017~~2019

(2) For the nine months ended September 30, ~~2017~~2019

In the table above, recorded investment ofin impaired loans as of September 30, ~~2017~~2019 includes accrued interest receivable and deferred net loan costs of ~~$20,822.~~$21,031.

	As of December 31, 2016			2016	As of December 31, 2018
		Unpaid		Average		Unpaid		Average	Interest
	Recorded	Principal	Related	Recorded	Recorded	Principal	Related	Recorded	Income
	Investment	Balance	Allowance	Investment	Investment	Balance	Allowance	Investment (1)	Recognized (1)

Related allowance recorded
Commercial real estate	$220,257	$232,073	$86,400	$89,664	$0			$57,658	$0
Residential real estate - 1st lien	271,962	275,118	6,200	350,709
Residential real estate - Jr lien	224,053	284,342	114,800	241,965
	716,272	791,533	207,400	682,338
Residential real estate
- 1st lien					942,365	963,367	112,969	836,326	45,139
- Jr lien					7,271	7,248	1,757	77,555	351
Total with related allowance					949,636	970,615	114,726	971,539	45,490

No related allowance recorded
Commercial & industrial	48,385	62,498		183,925	60,846	80,894		120,924	0
Commercial real estate	467,238	521,991		1,059,542	1,748,323	1,975,831		1,663,794	13,131
Residential real estate - 1st lien	674,847	893,741		877,237
Residential real estate - Jr lien	0			15,888
Residential real estate
- 1st lien					3,465,117	4,082,637		3,497,772	94,313
- Jr lien					312,072	351,139		235,970	0
Total with no related allowance					5,586,358	6,490,501		5,518,460	107,444
	1,190,470	1,478,230		2,136,592

	$1,906,742	$2,269,763	$207,400	$2,818,930
Total impaired loans					$6,535,994	$7,461,116	$114,726	$6,489,999	$152,934

~~Table of Content~~

(1) For the year ended December 31, 2018

As of September 30, 2016

Unpaid

Average

Average

Recorded

Principal

Related

Recorded

Recorded

Investment

Balance

Allowance

Investment(1)

Investment(2)

Related allowance recorded

   Commercial real estate
$228,062
$235,152
$92,900
$0
$45,612
   Residential real estate





    - 1st lien
  436,191
  579,182
  19,000
  435,802
  296,316
    - Jr lien
  226,590
  284,314
  115,600
  262,589
  197,154

  890,843
  1,098,648
  227,500
  698,391
  539,082






No related allowance recorded





   Commercial & industrial
  188,528
  262,297

  198,137
  174,248
   Commercial real estate
  475,790
  523,245

  901,468
  966,095
   Residential real estate





    - 1st lien
  628,561
  729,602

  918,378
  742,267
    - Jr lien
  0
  0

  39,721
  15,888

  1,292,879
  1,515,144

  2,057,704
  1,898,498







$2,183,722
$2,613,792
$227,500
$2,756,095
$2,437,580
In the table above, recorded investment in impaired loans as of December 31, 2018 includes accrued interest receivable and deferred net loan costs of $16,873.

	As of September 30, 2018
		Unpaid		Average	Average	Interest
	Recorded	Principal	Related	Recorded	Recorded	Income
	Investment	Balance	Allowance	Investment (1)	Investment (2)	Recognized(2)

Related allowance recorded
Commercial real estate	$0	$0	$0	$0	$72,073	$0
Residential real estate
- 1st lien	857,688	900,987	141,863	823,580	809,816	46,721
- Jr lien	217,869	220,712	82,236	112,833	95,126	571
Total with related allowance	1,075,557	1,121,699	224,099	936,413	977,015	47,292

No related allowance recorded
Commercial & industrial	62,879	82,267		129,979	135,944	0
Commercial real estate	1,879,357	2,082,229		1,972,312	1,642,662	56,857
Residential real estate
- 1st lien	3,671,955	4,225,575		3,607,829	3,505,936	180,255
- Jr lien	151,731	152,678		224,653	216,944	0
Total with no related allowance	5,765,922	6,542,749		5,934,773	5,501,486	237,112

Total impaired loans	$6,841,479	$7,664,448	$224,099	$6,871,186	$6,478,501	$284,404

(1) For the three months ended September 30, ~~2016~~2018

(2) For the ~~nine~~six months ended September 30, ~~2016~~2018

~~Interest income recognized on~~In the table above, recorded investment in impaired loans ~~was immaterial for the December 31, 2016 and~~as of September 30, ~~2016 periods presented.~~2018 includes accrued interest receivable and deferred net loan costs of $20,375.

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 future payments are considered by management to be reasonably assured.

Credit Quality Grouping

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

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

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

~~Table of Content~~

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

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

Credit risk ratings are dynamic and require updating whenever relevant information is received. ~~The~~Risk ratings are assessed on an ongoing basis and at various points, including at delinquency or at the time of other adverse events. For larger, more complex or adversely rated loans, risk ratings ~~of larger or more complex loans, and Group B and C rated loans,~~ are also assessed at the time of ~~their respective~~ annual ~~reviews, during quarterly updates, in action plans~~ or ~~at any other time that relevant information warrants update.~~periodic review. Lenders are required to make immediate disclosure to the Chief Credit Officer of any known increase in loan risk, even if considered temporary in nature.

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

As of September 30, ~~2017~~2019

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

Group A	$74,066,398	$201,257,154	$164,684,918	$43,235,529	$6,308,962	$489,552,961	$90,358,067	$238,563,693	$51,935,005	$156,675,620	$43,564,376	$4,709,738	$585,806,499
Group B	277,046	877,021	0	154,942	0	1,309,009	176,070	2,737,733	0				2,913,803
Group C	3,260,816	8,849,493	2,500,956	572,107	2,777	15,186,149	2,110,732	8,298,295	0	4,380,608	597,351	0	15,386,986
	$77,604,260	$210,983,668	$167,185,874	$43,962,578	$6,311,739	$506,048,119
Total							$92,644,869	$249,599,721	$51,935,005	$161,056,228	$44,161,727	$4,709,738	$604,107,288

As of December 31, ~~2016~~2018

Residential

Residential

Commercial

Commercial

Real Estate

Real Estate

& Industrial

Real Estate

1st Lien

Jr Lien

Consumer

Total

Group A
$67,297,983
$191,755,393
$164,708,778
$42,289,062
$7,168,901
$473,220,117
Group B
  512,329
  2,971,364
  0
  169,054
  0
  3,652,747
Group C
  920,261
  7,001,523
  1,983,184
  469,219
  2,175
  10,376,362

$68,730,573
$201,728,280
$166,691,962
$42,927,335
$7,171,076
$487,249,226

~~Table of Content~~

~~As of September 30, 2016~~

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

Group A	$67,062,235	$179,855,087	$158,989,152	$41,124,097	$7,131,741	$454,162,312	$78,585,348	$226,785,919	$47,067,023	$161,293,233	$43,817,872	$5,086,830	$562,636,225
Group B	1,551,890	3,270,984	451,736	146,896	0	5,421,506	90,763	246,357	0	224,992	0		562,112
Group C	1,177,206	7,120,519	1,836,518	468,834	0	10,603,077	2,090,582	8,285,872	0	4,146,950	727,115	1,661	15,252,180
	$69,791,331	$190,246,590	$161,277,406	$41,739,827	$7,131,741	$470,186,895
Total							$80,766,693	$235,318,148	$47,067,023	$165,665,175	$44,544,987	$5,088,491	$578,450,517

Modifications of Loans and TDRs

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

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

●

Reduced accrued interest;

●

Reduced the original contractual interest rate to a rate that is below the current market rate for the borrower;

●

Converted a variable-rate loan to a fixed-rate loan;

●

Extended the term of the loan beyond an insignificant delay;

●

Deferred or forgiven principal in an amount greater than three months of payments; or

●

Performed a refinancing and deferred or forgiven principal on the original loan.

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

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

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

Three months ended September 30, 2017

Nine months ended September 30, 2017

Three months ended September 30, 2019

Nine months ended September 30, 2019

Pre-

Post-

Pre-

Post-

Pre-

Post-

Pre-

Post-

Modification

Outstanding

Number of

Recorded

Number of

Recorded

Number of

Recorded

Number of

Recorded

Contracts

Investment

Contracts

Investment

Contracts

Investment

Contracts

Investment

Commercial & industrial

$288,912

$338,129

Commercial real estate

19,265

21,628

Residential real estate

- 1st lien

$80,323

$87,844

$122,180

$145,262

20,984

31,598

530,330

569,800

Total

$309,896

$320,510

$887,724

$929,557

~~Table of Content~~

Year ended December 31, 2016

Pre-

Post-

Modification

Modification

Outstanding

Outstanding

Number of

Recorded

Recorded

Contracts

Investment

Investment

Residential real estate

- 1st lien
  8
$572,418
$598,030
- Jr lien
  2
  62,819
  64,977

  10
$635,237
$663,007

	Year ended December 31, 2018
		Pre-	Post-
		Modification	Modification
		Outstanding	Outstanding
	Number of	Recorded	Recorded
	Contracts	Investment	Investment

Commercial real estate	1	$406,920	$406,920
Residential real estate – 1st lien	10	1,031,330	1,142,089
Total	11	$1,438,250	$1,549,009

Three months ended September 30, 2016

Nine months ended September 30, 2016

Pre-

Post-

Pre-

Post-

Modification

Modification

Modification

Modification

Outstanding

Outstanding

Outstanding

Outstanding

Number of

Recorded

Recorded

Number of

Recorded

Recorded

Contracts

Investment

Investment

Contracts

Investment

Investment

Residential real estate

- 1st lien
  3
$177,182
$185,107
  8
$572,418
$598,030
- Jr lien
  0
  0
  0
  2
  62,819
  64,977

  3
$177,182
$185,107
  10
$635,237
$663,007

	Three months ended September 30, 2018			Nine months ended September 30, 2018
		Pre-	Post-		Pre-	Post-
		Modification	Modification		Modification	Modification
		Outstanding	Outstanding		Outstanding	Outstanding
	Number of	Recorded	Recorded	Number of	Recorded	Recorded
	Contracts	Investment	Investment	Contracts	Investment	Investment

Residential real estate
- 1st lien	1	$49,108	$50,814	8	$947,671	$1,054,280

The ~~TDR’s~~TDRs for which there was a payment default during the twelve month periods presented were as follows:

Twelve months ended September 30, 2017

Number of

Recorded

Contracts

Investment

Residential real estate – 1st lien
1
$87,844
For the twelve months ended September 30, 2019

	Number of	Recorded
	Contracts	Investment

Commercial real estate	1	$376,864

Twelve months ended December 31, 2016

Number of

Recorded

Contracts

Investment

Residential real estate - 1st lien
  2
$93,230
Residential real estate - Jr lien
  1
  54,557

  3
$147,787
For the twelve months ended December 31, 2018

	Number of	Recorded
	Contracts	Investment

Commercial real estate	1	$400,646
Residential real estate - 1st lien	3	518,212
Total	4	$918,858

Twelve months ended September 30, 2016

Number of

Recorded

Contracts

Investment

Commercial
  1
$71,808
Commercial real estate
  1
  228,063
Residential real estate - 1st lien
  2
  94,004
Residential real estate - Jr lien
  1
  54,557

  5
$448,432

For the twelve months ended September 30, 2018	Number of	Recorded
	Contracts	Investment

Residential real estate – 1st lien	3	$479,652

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

~~Table of Content~~

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

September 30,

December 31,

September 30,

2017

2016

2016

Specific Allocation(1)
$216,939
$92,600
$98,600

~~(1) The increase in specific allocations at September 30, 2017 is principally related to the change in methodology during the second quarter of 2017 that recognized all TDR’s as impaired.~~

	September 30,	December 31,
	2019	2018

Specific Allocation (TDRs)	$108,246	$114,726

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 ~~Small Business Administration (SBA)~~SBA guaranteed line of credit to a borrower whose lending relationship was previously restructured.

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. The goodwill is not amortizable and is not deductible for tax purposes.

The Company also initially recorded $4,161,000 of acquired identified intangible assets in the LyndonBank merger, representing the core deposit intangible which is subject to amortization as a non-interest expense over a ten year period. The accumulated amortization expense was $4,092,834 and $3,820,139 as of September 30, 2017 and 2016, respectively.

Amortization expense for the core deposit intangible for the first nine months of 2017 and 2016 was $204,525. The future amortization expense related to the remaining core deposit intangible is $68,166 and will be fully expensed in 2017.

Management evaluates goodwill for impairment ~~annually and the core deposit intangible for impairment if conditions warrant.~~annually. As of ~~the date of~~December 31, 2018, the most recent evaluation, ~~(December 31, 2016),~~ management concluded that no impairment ~~existed in either category.~~existed.

Note 7. Leases

The Company adopted ASU No. 2016-02 (Leases) on January 1, 2019 with no required adjustment to prior periods presented or cumulative-effect adjustment to retained earnings. The Company has operating and finance leases for some of its bank premises, with remaining lease terms of one year to seven years. Some of the operating leases have options to renew, which are reflected in the seven years. The Company’s operating lease right-of-use assets and finance lease assets are included in “Bank premises and equipment, net” in the consolidated balance sheet and operating lease liabilities and finance lease liabilities are included in other liabilities in the consolidated balance sheet.

The components of lease expense for the periods presented were as follows:

Three Months Ended September 30,	2019	2018

Operating lease cost	$64,869	$56,785

Finance lease cost:
Amortization of right-of-use assets	$17,667	$17,667
Interest on lease liabilities	3,868	6,315
Variable rent expense	8,485	8,485
Total finance lease cost	$30,020	$32,467

Nine Months Ended September 30,	2019	2018

Operating lease cost	$190,607	$169,931

Finance lease cost:
Amortization of right-of-use assets	$53,000	$53,000
Interest on lease liabilities	13,482	20,679
Variable rent expense	25,455	25,455
Total finance lease cost	$91,937	$99,134

Supplemental cash flow information related to right-of-use assets and for lease obligations recorded upon adoption of ASU No. 2016-02 (Note 2) was as follows:

Nine Months Ended September 30,	2019

Operating Leases	$1,455,829

Supplemental balance sheet information related to leases was as follows:

	September 30,	December 31,
	2019	2018
Operating Leases
Operating lease right-of-use assets	$1,314,418	$0

Operating lease liabilities	$1,321,018	$0

Finance Leases
Property, at cost	$991,014	$991,014
Accumulated depreciation	(830,335)	(777,335)
Property, net	$160,679	$213,679

Finance lease liabilities	$174,133	$266,747

	September 30,	December 31,
	2019	2018
Weighted Average Remaining Lease Term
Operating Leases	4.7 Years	6.0 Years
Finance Leases	1.3 Years	2.0 Years

Weighted Average Discount Rate
Operating Leases	1.28%	N/A
Finance Leases	7.89%	7.86%

Maturities of lease liabilities as of September 30, 2019 were as follows:

Operating Leases

2019	$62,672
2020	257,039
2021	210,350
2022	207,380
2023	210,232
Subsequent to 2023	435,872
Total	$1,383,545

Finance Leases

2019	$35,365
2020	110,460
2021	39,117
Total minimum lease payments	184,942
Less amount representing interest	(10,809)
Present value of net minimum lease payments	$174,133

A reconciliation of the undiscounted cash flows in the maturity analysis above and the lease liability recognized in the consolidated balance sheet as of September 30, 2019, is shown below:

	Operating Leases	Finance Leases

Undiscounted cash flows	$1,383,545	$184,942
Discount effect of cash flows	(62,527)	(10,809)
Lease liabilities	$1,321,018	$174,133

Note 8. Fair Value

Certain assets and liabilities are recorded at fair value to provide additional insight into the Company’s quality of ~~earnings.~~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, 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, 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.

~~Table of Content~~

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

~~Cash and cash equivalents:~~ ~~The carrying amounts reported in the balance sheet for cash and cash equivalents approximate their fair values. As such, the Company classifies these financial instruments as Level 1.~~

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

~~Restricted equity securities:~~Impaired loans: Restricted equity securities are comprised of Federal Reserve Bank of Boston (FRBB) stock and Federal Home Loan Bank of Boston (FHLBB) stock. These securities are carried at cost, which is believed to approximate fair value, based on the redemption provisions of the FRBB and the FHLBB. The stock is nonmarketable, and redeemable at par value, subject to certain conditions. The Company classifies these securities as Level 2.

~~Loans and loans held-for-sale:~~ For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed rate residential, commercial real estate, and rental property mortgage loans, and commercial and industrial loans) are estimated using discounted cash flow analyses, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. Loan impairment is deemed to exist when full repayment of principal and interest according to the contractual terms of the loan is no longer probable. Impaired loans are reported based on one of three measures: the present value of expected future cash flows discounted at the loan’s effective interest rate; the loan’s observable market price; or the fair value of the collateral if the loan is collateral dependent. If the fair value is less than an impaired loan’s recorded investment, an impairment loss is recognized as part of the ALL. Accordingly, certain impaired loans may be subject to measurement at fair value on a non-recurring basis. Management has estimated the fair values of collateral-dependent loans using Level 2 inputs, such as the fair value of collateral based on independent third-party appraisals. ~~All other loans are valued using Level 3 inputs.~~

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.

OREO: Real estate acquired through or in lieu of foreclosure and bank properties no longer used as bank premises are initially recorded at fair value. The fair value of OREO is based on property appraisals and an analysis of similar properties currently available. The Company records OREO as non-recurring Level 2.

~~Deposits, repurchase agreements~~Assets and ~~borrowed funds:~~ ~~The~~Liabilities Recorded at Fair Value on a Recurring Basis

Assets measured at fair ~~values disclosed for demand deposits (for example, checking accounts~~value on a recurring basis and ~~savings accounts) are, by definition, equal to~~reflected in the ~~amount payable on demand~~consolidated balance sheets at the ~~reporting date (that is, their carrying amounts). The carrying value of repurchase agreements approximates~~dates presented, segregated by fair value ~~due to their short term. The fair values for certificates~~hierarchy, are summarized below. There were no Level 1 or Level 3 assets or liabilities measured on a recurring basis as of ~~deposit and borrowed funds are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates and indebtedness to a schedule~~the balance sheet dates presented, nor were there any transfers of ~~aggregated contractual maturities on such time deposits and indebtedness. The Company classifies deposits, repurchase agreements and borrowed funds as Level 2.~~assets between Levels during 2019 or 2018.

~~Capital lease obligations:~~ Fair value is determined using a discounted cash flow calculation using current rates. Based on current rates, carrying value approximates fair value. The Company classifies these obligations as Level 2.

Level 2	September 30, 2019	December 31, 2018
Assets: (market approach)
U.S. GSE debt securities	$16,807,975	$13,751,103
Agency MBS	15,038,495	15,574,525
ABS and OAS	1,885,349	1,986,129
Other investments	8,847,476	8,055,074
Total	$42,579,295	$39,366,831

~~Junior subordinated debentures:~~ ~~Fair value is estimated using current rates for debentures of similar maturity. The Company classifies these instruments as Level 2.~~

~~Table of Content~~

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

~~Accrued interest:~~The ~~carrying amounts~~following table includes assets measured at fair value on a non-recurring basis that have had a fair value adjustment since their initial recognition. Impaired loans measured at fair value only include collateral-dependent impaired loans with a related specific ALL and are presented net of ~~accrued interest approximate their fair values. The Company classifies accrued interest~~specific allowances as ~~Level 2.~~disclosed in Note 5.

~~Off-balance-sheet credit related instruments:~~ ~~Commitments to extend credit are evaluated and~~Assets measured at fair value ~~is estimated using~~on a non-recurring basis and reflected in the ~~fees currently charged to enter into similar agreements, taking into account~~consolidated balance sheets at the ~~remaining terms~~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 ~~agreements and the present credit-worthiness~~balance sheet dates presented, nor were there any transfers of ~~the counterparties. For fixed-rate loan commitments,~~assets between levels during 2019 or 2018.

Level 2	September 30, 2019	December 31, 2018
Assets: (market approach)

Impaired loans, net of related allowance	$66,385	$0
Loans held-for-sale	1,322,338	0
MSRs (1)	921,115	1,004,948
OREO	73,448	201,386

(1) Represents MSRs at lower of cost or fair ~~value also considers the difference between current levels of interest rates and the committed rates.~~value.

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

~~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:~~

~~September 30, 2017~~	~~Level 2~~
~~Assets: (market approach)~~
~~U.S. GSE debt securities~~	$~~15,256,844~~
~~Agency MBS~~	~~16,508,044~~
~~Other investments~~	~~4,954,785~~
	$~~36,719,673~~

~~December 31, 2016~~	~~Level 2~~
~~Assets: (market approach)~~
~~U.S. GSE debt securities~~	$~~17,317,328~~
~~Agency MBS~~	~~13,154,228~~
~~Other investments~~	~~3,243,495~~
	$~~33,715,051~~

~~September 30, 2016~~	~~Level 2~~
~~Assets: (market approach)~~
~~U.S. GSE debt securities~~	$~~13,843,494~~
~~Agency MBS~~	~~12,526,616~~
~~Other investments~~	~~3,042,106~~
	$~~29,412,216~~

~~There were no Level 1 or Level 3 assets or liabilities measured on a recurring basis as of the balance sheet dates presented.~~

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

The following table includes assets measured at fair value on a non-recurring basis that have had a fair value adjustment since their initial recognition. Impaired loans measured at fair value only include impaired loans with a related specific ALL and are presented net of specific allowances as disclosed in Note 5.

~~Table of Content~~

~~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, are summarized below:~~

~~September 30, 2017~~	~~Level 2~~
~~Assets: (market approach)~~
~~MSRs (1)~~	$~~1,113,034~~
~~Impaired loans, net of related allowance~~	0
~~OREO~~	~~324,235~~

~~December 31, 2016~~	~~Level 2~~
~~Assets: (market approach)~~
~~MSRs (1)~~	$~~1,210,695~~
~~Impaired loans, net of related allowance~~	~~508,872~~
~~OREO~~	~~394,000~~

~~September 30, 2016~~	~~Level 2~~
~~Assets: (market approach)~~
~~MSRs (1)~~	$~~1,215,311~~
~~Impaired loans, net of related allowance~~	~~663,343~~
~~OREO~~	~~409,000~~

(1) Represents MSRs at lower of cost or fair value, including MSRs deemed to be impaired and for which a valuation allowance was established to carry at fair value as of the balance sheet dates presented.

~~There were no Level 1 or Level 3 assets or liabilities measured on a non-recurring basis as of the balance sheet dates presented.~~

~~Table of Content~~

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 were as follows:

September 30, 2017		Fair
September 30, 2019							Fair
	Carrying	Value				Carrying	Value
	Amount	Level 1	Level 2	Level 3	Total	Amount	Level 1	Level 2	Level 3	Total
	(Dollars in Thousands)					(Dollars in Thousands)
Financial assets:
Cash and cash equivalents	$29,720		$0		$29,720	$46,599		$0		$46,599
Securities held-to-maturity	53,882	0	54,571	0	54,571
Securities available-for-sale	36,720	0	36,720	0	36,720
Debt securities AFS						42,579	0	42,579	0	42,579
Restricted equity securities	1,700	0	1,700	0	1,700	1,380	0	1,380	0	1,380
Loans and loans held-for-sale
Loans and loans held-for-sale, net of ALL
Commercial & industrial	76,890	0		77,533		91,797	0		91,297
Commercial real estate	208,232	0		209,648		246,322	0	66	245,833	245,899
Municipal(1)						51,935	0		51,688
Residential real estate - 1st lien	166,366	0		168,903		160,960	0	1,322	158,933	160,255
Residential real estate - Jr lien	43,555	0		43,931		43,875	0		43,863
Consumer	6,256	0		6,491		4,657	0		4,671
MSRs ~~(1)~~(2)	1,113	0	1,289	0	1,289	921	0	1,191	0	1,191
Accrued interest receivable	1,893	0	1,893	0	1,893	2,162	0	2,162	0	2,162

Financial liabilities:
Deposits
Other deposits	502,963	0	502,203	0	502,203	589,755	0	589,999	0	589,999
Brokered deposits	53,789	0	53,786	0	53,786	16,632	0	16,643	0	16,643
Long-term borrowings	3,550	0	3,219	0	3,219	1,550	0	1,487	0	1,487
Repurchase agreements	27,459	0	27,459	0	27,459	35,770	0	35,770	0	35,770
Capital lease obligations	409	0	409	0	409
Operating lease obligations						1,321	0	1,321	0	1,321
Finance lease obligations						174	0	174	0	174
Subordinated debentures	12,887	0	12,844	0	12,844	12,887	0	12,827	0	12,827
Accrued interest payable	109	0	109	0	109	146	0	146	0	146

(1)

Prior to reclassification to the loan portfolio effective January 1, 2019, all loans in this category were reported as HTM securities as a component of Investment Securities. All prior periods have been restated to conform to the reclassification.

(2)

Reported fair value represents all MSRs for loans serviced by the Company at September 30, ~~2017,~~2019, regardless of carrying amount.

December 31, 2018		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	$67,935	$67,935	$0	$0	$67,935
Debt securities AFS	39,367	0	39,367	0	39,367
Restricted equity securities	1,749	0	1,749	0	1,749
Loans and loans held-for-sale, net of ALL
Commercial & industrial	80,049	0	0	79,773	79,773
Commercial real estate	232,239	0	0	230,532	230,532
Municipal (1)	47,067	0	0	47,228	47,228
Residential real estate - 1st lien	164,202	0	0	161,068	161,068
Residential real estate - Jr lien	44,260	0	0	44,127	44,127
Consumer	5,031	0	0	5,063	5,063
MSRs (2)	1,005	0	1,481	0	1,481
Accrued interest receivable	2,301	0	2,301	0	2,301

Financial liabilities:
Deposits
Other deposits	573,525	0	571,952	0	571,952
Brokered deposits	35,292	0	35,247	0	35,247
Long-term borrowings	1,550	0	1,425	0	1,425
Repurchase agreements	30,522	0	30,522	0	30,522
Capital lease obligations	267	0	267	0	267
Subordinated debentures	12,887	0	12,807	0	12,807
Accrued interest payable	113	0	113	0	113

~~Table~~

(1)

Prior to reclassification to the loan portfolio effective January 1, 2019, all loans in this category were reported as HTM securities as a component of ~~Content~~

Investment Securities. All prior periods have been restated to conform to the reclassification.

(2)

December 31, 2016

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
$29,614
$29,614
$0
$0
$29,614
Securities held-to-maturity
  49,887
  0
  51,035
  0
  51,035
Securities available-for-sale
  33,715
  0
  33,715
  0
  33,715
Restricted equity securities
  2,756
  0
  2,756
  0
  2,756
Loans and loans held-for-sale





  Commercial & industrial
  67,972
  0
  48
  68,727
  68,775
  Commercial real estate
  199,136
  0
  601
  201,560
  202,161
  Residential real estate - 1st lien
  165,243
  0
  941
  166,858
  167,799
  Residential real estate - Jr lien
  42,536
  0
  109
  42,948
  43,057
  Consumer
  7,084
  0
  0
  7,371
  7,371
MSRs(1)
  1,211
  0
  1,302
  0
  1,302
Accrued interest receivable
  1,819
  0
  1,819
  0
  1,819






Financial liabilities:





Deposits





  Other deposits
  470,002
  0
  469,323
  0
  469,323
  Brokered deposits
  34,733
  0
  34,745
  0
  34,745
Short-term borrowings
  30,000
  0
  30,000
  0
  30,000
Long-term borrowings
  1,550
  0
  1,376
  0
  1,376
Repurchase agreements
  30,423
  0
  30,423
  0
  30,423
Capital lease obligations
  483
  0
  483
  0
  483
Subordinated debentures
  12,887
  0
  12,849
  0
  12,849
Accrued interest payable
  73
  0
  73
  0
  73

~~(1)~~ Reported fair value represents all MSRs for loans serviced by the Company at December 31, ~~2016,~~2018, regardless of carrying amount.

~~Table of Content~~

September 30, 2016

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
$12,380
$12,380
$0
$0
$12,380
Securities held-to-maturity
  56,837
  0
  57,592
  0
  57,592
Securities available-for-sale
  29,412
  0
  29,412
  0
  29,412
Restricted equity securities
  1,856
  0
  1,856
  0
  1,856
Loans and loans held-for-sale





  Commercial & industrial
  68,978
  0
  189
  69,957
  70,146
  Commercial real estate
  187,783
  0
  611
  192,329
  192,940
  Residential real estate - 1st lien
  160,552
  0
  1,046
  163,770
  164,816
  Residential real estate - Jr lien
  41,334
  0
  111
  41,826
  41,937
  Consumer
  7,069
  0
  0
  7,358
  7,358
MSRs (1)
  1,215
  0
  1,333
  0
  1,333
Accrued interest receivable
  1,650
  0
  1,650
  0
  1,650






Financial liabilities:





Deposits





  Other deposits
  470,587
  0
  470,785
  0
  470,785
  Brokered deposits
  33,220
  0
  33,223
  0
  33,223
Federal funds purchased and short-term borrowings
  5,245
  0
  5,245
  0
  5,245
Long-term borrowings
  550
  0
  503
  0
  503
Repurchase agreements
  25,834
  0
  25,834
  0
  25,834
Capital lease obligations
  494
  0
  494
  0
  494
Subordinated debentures
  12,887
  0
  12,852
  0
  12,852
Accrued interest payable
  44
  0
  44
  0
  44

~~(1) Reported fair value represents all MSRs for loans serviced by the Company at September 30, 2016, regardless of carrying amount.~~

Note 8.9. Loan Servicing

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

Nine Months Ended Year Ended Nine Months Ended
September 30, 2017 December 31, 2016 September 30, 2016

Balance at beginning of year $1,210,695 $1,293,079 $1,293,079
   Mortgage servicing rights capitalized 82,686 176,705 152,900
   Mortgage servicing rights amortized (180,347) (266,603) (208,706)
   Change in valuation allowance 0 7,514 (21,962)
Balance at end of period $1,113,034 $1,210,695 $1,215,311

	Nine Months Ended	Year Ended
	September 30, 2019	December 31, 2018

Balance at beginning of year	$1,004,948	$1,083,286
MSRs capitalized	50,302	110,209
MSRs amortized	(134,135)	(188,547)
Balance at end of period	$921,115	$1,004,948

There was no valuation allowance recorded for MSRs for the periods presented.

Note 9.10. Legal Proceedings

In the normal course of business, the Company ~~and its subsidiary are~~is involved in litigation that is considered incidental to ~~their~~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.~~11. Subsequent Event

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 US GAAP. On September ~~22, 2017,~~13, 2019, the ~~Company~~Company’s Board declared a cash dividend of ~~$0.17~~$0.19 per common share, payable November 1, ~~2017~~2019 to shareholders of record as of October 15, ~~2017.~~2019. This dividend ~~amounting to $864,746, was accrued at September 30, 2017.~~has been recorded in the Company’s consolidated financial statements as of the declaration date, including shares issuable under the DRIP.

~~Table of Content~~

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, ~~2017~~2019

The following discussion analyzes the consolidated financial condition of Community Bancorp. ~~(the Company)~~ and its wholly-owned subsidiary, Community National Bank, ~~(the Bank),~~ as of September 30, ~~2017,~~2019 and December 31, ~~2016 and September 30, 2016,~~2018, and its consolidated results of operations for the three- and nine-month interim periods presented. Under applicable regulations of the Securities and Exchange Commission (SEC), the Company is eligible for relief from certain disclosure requirements available to smaller reporting companies until it files its first quarterly report on Form 10-Q for 2018.

The following discussion should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in its ~~2016~~2018 Annual Report on Form 10-K filed with the SEC.

Capitalized terms, abbreviations and acronyms used throughout the following discussion are defined in Note 1 to the Company’s unaudited consolidated financial statements contained in Part I, Item 1 of this report.

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains certain forward-looking statements ~~about~~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," or“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. ~~Future results of the Company may differ materially from those expressed in these forward-looking statements.~~ Examples of forward looking statements included in this discussion include, but are not limited to, estimated contingent liability related to assumptions made within the asset/liability management process, management's expectations as to the future interest rate environment and the Company's related liquidity level, credit risk expectations relating to the Company's loan portfolio and its participation in the ~~Federal Home Loan Bank of Boston (FHLBB) Mortgage Partnership Finance (MPF)~~FHLBB MPF program, and management's general outlook for the future performance of the Company or the local or national economy. Although forward-looking statements are based on management's ~~current~~ expectations and estimates as of the date they are made, many of the factors that could influence or determine actual results are unpredictable and not within the Company's control.

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

●

general economic or business conditions, either nationally, regionally or locally, deteriorate, resulting in a decline in credit quality or a diminished demand for the Company's products and services;

●

competitive pressures increase among financial service providers in the Company's northern New England market area or in the financial services industry generally, including competitive pressures from non-bank financial service providers, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems;

●

interest rates change in such a way as to negatively affect the Company's net income, asset valuations or margins;

●

changes in laws or government rules, including the rules of the federal Consumer Financial Protection Bureau, or the way in which courts or government agencies interpret or implement those laws or rules, increase our costs of doing business, causing us to limit or change our product offerings or pricing, or otherwise adversely affect the Company's business;

●

changes in federal or state tax laws or policy;

●

changes in the level of nonperforming assets and charge-offs;

●

changes in applicable accounting policies, practices and standards, including, without limitation, implementation of pending changes to the measurement of credit losses in financial statements under US GAAP pursuant to the CECL model;

●

changes in consumer and business spending, borrowing and savings habits;

●

reductions in deposit levels, which necessitate increased borrowings to fund loans and investments;

●

the geographic concentration of the Company’s loan portfolio and deposit base;

●

losses due to the fraudulent or negligent conduct of third parties, including the Company’s service providers, customers and employees;

●

cybersecurity risks could adversely affect the Company’s business, financial performance or reputation and could result in financial liability for losses incurred by customers or others due to data breaches or other compromise of the Company’s information security systems;

●

higher-than-expected costs are incurred relating to information technology or difficulties arise in implementing technological enhancements;

●

management’s risk management measures may not be completely effective;

●

changes in the United States monetary and fiscal policies, including the interest rate policies of the FRB and its regulation of the money supply;

●

adverse changes in the credit rating of U.S. government debt; and

●

the planned phase out the London Interbank Offered Rate (LIBOR) by the end of 2021, which could adversely affect the Company’s interest costs in future periods on its $12,887,000 in principal amount of Junior Subordinated Debentures due December 12, 2037, which currently bear interest at a variable rate, adjusted quarterly, equal to 3-month LIBOR, plus 2.85%.

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.

Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities: (1) general economic 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; (2) 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; (3) interest rates change in such a way as to negatively affect the Company's net income, asset valuations or margins; (4) 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; (5) changes in federal or state tax policy; (6) changes in the level of nonperforming assets and charge-offs; (7) changes in estimates of future reserve requirements based upon relevant regulatory and accounting requirements; (8) changes in consumer and business spending, borrowing and savings habits; (9) reductions in deposit levels, which necessitate increased borrowings to fund loans and investments; (10) the geographic concentration of the Company’s loan portfolio and deposit base; (11) losses due to the fraudulent or negligent conduct of third parties, including the Company’s service providers, customers and employees; (12) the effect of changes to the calculation of the Company’s regulatory capital ratios which began in 2015 under the Basel III capital framework and which, among other things, requires additional regulatory capital, and changes the framework for risk-weighting of certain assets; (13) the effect of and changes in the United States monetary and fiscal policies, including the interest rate policies of the Federal Reserve Board (FRB) and its regulation of the money supply; and (14) adverse changes in the credit rating of U.S. government debt.

~~Table of Content~~

NON-GAAP FINANCIAL MEASURES

Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with ~~generally accepted accounting principles in the United States (US~~ GAAP ~~or 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 ~~(Net Interest Income)~~(NII)) and core earnings (as defined and discussed in the Results of Operations section), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G.

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

OVERVIEW

The Company’s consolidated assets on September 30, ~~2017~~2019 were ~~$661,539,071,~~$729,231,941, an increase of ~~$23,885,406,~~$8,884,443, or ~~3.8%~~1.2%, from December 31, ~~2016 and an increase of $55,748,641, or 9.2%, from September 30, 2016.~~2018. Net loans increased ~~$18,649,347,~~$25,372,446, or ~~3.9%~~4.4%, since December 31, ~~2016~~2018. This year-to-date growth is attributable to an increase of $11.9 million in commercial loans, $4.9 million increase in municipal loans and ~~$35,610,763,~~$14.3 million increase in commercial real estate loans. These increases were partially offset by a $5.0 million decrease in 1-4 Family residential loans. Growth in the commercial loan portfolio was enhanced with $7.5 million in purchased loans from BHG and the growth in the commercial real estate loans includes a $4.0 million loan participation with the ACBB. The securities AFS portfolio increased $3,212,464, or ~~7.7%~~8.2%, ~~since September 30, 2016.~~ from December 31, 2018.

The ~~year over year increase~~purchased loan volume mentioned above was through a new loan purchasing program with BHG. BHG originates 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. Average loan size is approximately $200,000, with average term of 100 months. With average duration expected to be slightly longer than the portfolio average, it reduces exposure to falling rates in the near term. This portfolio will serve to support asset growth and provide geographic diversification in the portfolio.

As discussed in Notes 4 and 5 to the accompanying unaudited interim consolidated financial statements, the Company chose to reclassify its municipal notes from the investment portfolio into the loan portfolio as of January 1, 2019, and to restate prior period information to conform to the change. Prior to the reclassification, municipal notes constituted the Company’s entire HTM investment portfolio. As a result, the HTM portfolio is ~~primarily attributable to growth in commercial loans and was funded primarily through an increase in deposit accounts and wholesale funding in~~no longer presented on the ~~form of brokered deposits.~~Company’s consolidated balance sheet.

Total deposits ~~increased $52,017,288,~~decreased $2,429,317 or ~~10.3%~~0.4%, since December 31, ~~2016 due to increases~~2018, reflecting the combined effect of a decrease in ~~most components including $11.5 million, or 11.0%, in~~core deposits, demand, non-interest bearing demand and interest-bearing transaction accounts, ~~$12.7 million,~~totaling $4,582,231, or ~~14.6%~~1.5%, an increase in MMA and savings accounts totaling $16,158,069, or 9.1%, and ~~$12.8 million,~~a decrease in time deposits of $14,005,155, or ~~13.2%,~~10.8%. Increases in ~~other time deposits. In the year over year comparison, deposits increased $52,945,414, or 10.5%. Core deposits saw increases in all areas~~interest bearing transaction accounts are noted in the year over year comparison for the nine month periods ended September 30, 2019 and ~~increases are noted~~2018, due in ~~money market~~particular to an account for the Company’s trust and investment management affiliate, CFSG and the reciprocal ICS accounts, ~~and~~while the decrease in wholesale time deposits ~~as well. Some of the increase in time deposits in both comparison periods is attributable~~was predominantly due to the ~~Company’s use~~maturity of brokered deposits ~~both from purchases~~that were not replaced due to the influx of cash on ~~the national certificate of deposit (CD) market and through the Certificate of Deposit Account Registry Service (CDARS).~~hand.

Despite four federal funds rate increases of 25 basis points each since December 2015, interest rates remain at historically low levels, and the yield curve is still not providing any meaningful relief on margin pressure as long-term rates have stayed in a tight range. Growth of the commercial loan portfolio in recent years, which typically carries higher yields than residential and consumer loans, has helped to maintain a stable level of interest income. This shift in asset mix is in line with the Company’s strategic plan to increase its concentration in commercial loans while maintaining a stable residential loan portfolio. While commercial loans inherently carry more risk, the Company has dedicated significant resources in the credit administration department to mitigate the additional risk. The opportunities for growth continue to be primarily in the Central Vermont market, where economic activity is more robust than in the Company’s Orleans and Caledonia county markets, and where the Company is increasing its presence and market share. The Company opened a loan production office in Chittenden County, Vermont’s most populous county and economic hub, during the first quarter of 2017, which should further drive commercial loan activity.

Interest income increased ~~$566,067,~~$389,432, or ~~9.1%~~5.2%, for the third quarter of ~~2017~~2019 compared to the same quarter in ~~2016,~~2018, and ~~$1,385,663,~~$2,544,526, or ~~7.7%~~11.9%, for the first nine months of ~~2017~~2019 compared to the same period in ~~2016.~~2018. Interest expense increased ~~$104,449,~~$288,888, or ~~15.1%~~23.7%, for the third quarter of ~~2017~~2019 compared to the same quarter in ~~2016,~~2018, and ~~$248,105,~~$1,567,134, or ~~12.2%~~51.8%, for the first nine months of ~~2017~~2019 compared to the same period in ~~2016.~~2018. The year to date increase in interest income ~~year over year reflects~~is due in part to a $440,000 prepayment penalty received in the ~~higher balances in net loans, which exceeded the prior year by $35.6 million, or 7.7%. While the~~second quarter of 2019, as well as increases in ~~interest income in both comparison periods are largely due to the increase in the asset base,~~short-term rates. While the increase in short-term rates ~~is starting to have an~~has had a positive impact ~~as well, as is reflected in~~on interest income, ~~for~~it has put upward pressure on interest rates paid on deposit accounts and other borrowings. This pressure is expected to lessen somewhat, at least in the ~~three months ended September 30, 2017 when compared~~near term, as short-term rates have declined in the third quarter. Please refer to the ~~three months ended September 30, 2016. The increase in~~ interest paid on deposits during the first three months and nine months of 2017 is partially attributable to a higher utilization of brokered time deposits, which carry higher rates than core non-maturity deposits, as well as to increasesrate sensitivity discussion in the ~~volume of all categories of interest-bearing deposits. The increases~~Interest Rate Risk and Asset and Liability Management section for more information on the impact that FRB action and changes in the ~~federal funds rate~~yield curve could have ~~also impacted~~on net interest ~~expense on borrowed funds and the Company’s junior subordinated debentures.~~income.

~~Table~~Growth of ~~Content~~

~~Net interest income after~~ the loan portfolio combined with charge off activity related to write-down adjustments on several loans in workout required a provision for loan losses ~~improved by $461,618, or 8.5%,~~of $412,499 for the third quarter of ~~2017~~2019 compared to ~~the same quarter in 2016, and $1,087,558, or 7.0%,~~$210,000 for ~~the nine months ended September 30, 2017 compared to~~ the same period in ~~2016.~~2018, an increase of 96.4%. The ~~charge~~year to ~~income for the~~date provision for loan losses ~~increased $50,000, or 12.5%,~~of $766,668 compares to $570,000 for the ~~nine month comparison~~same period ~~due to a combination~~in 2018, an increase of ~~a low level of losses in the first quarter of 2016 and the increase in the loan portfolio, year over year.~~34.5%. Please refer to the ~~Allowance for loan losses~~ALL and provisions discussion in the Credit Risk section for more ~~information.~~information on these increases.

Net income for the third quarter of ~~2017~~2019 was ~~$1,792,949, an increase~~$2,261,943, a decrease of ~~$277,049,~~$7,789, or ~~18.3%~~0.3%, ~~over~~from net income of ~~$1,515,900~~$2,269,732 for the ~~third~~same quarter of ~~2016.~~2018. Net income for the first nine months of ~~2017 was $4,706,679, an increase of $726,086,~~2019 increased $198,217, or ~~18.2%~~3.2%, ~~over~~from $6,254,929 for 2018 to $6,453,146 for 2019. Changes in net interest income are contributing factors to the change in net income ~~of $3,980,593~~ for the year to date results. The decline in net income for the quarter, compared with the same period ~~in 2016. As stated above, net interest income contributed significantly~~a year ago, is largely due to the ~~Company’s~~aforementioned increase in ~~earnings. A decrease in non-interest~~the provision for loan losses. Non-interest income ~~of $34,273,~~increased $54,539, or ~~2.3%~~3.5%, for the quarter and an increase of $161,126, or 4.0% year to date are noted, while total non-interest expense increased in both periods by $51,613, or 1.1%, for the quarter and $317,829, or 2.3%, year to date. The decrease in non-interest income for the third quarter of ~~2017~~2019, while a decrease of $278,455, or 6.0%, is attributable, in part, to activity associated with the Bank’s Supplemental Employee Retirement Program (SERP). While income was reported from fair market value adjustments of SERP assets in 2016, the Company reported a net loss on the liquidation of the SERP assets during the third quarter of 2017 following the final payout to the last retired participant. The increase in non-interest income year to date is attributable mostly to the courtesy overdraft program implemented in the third quarter of 2016. With the increase in market rates, the opportunity for refinancing has diminished and the mortgage business is primarily from new purchase financing, resulting in lower levels of residential mortgage lending activity in 2017 compared to 2016. Residential mortgage originations totaled $34,486,938noted for the first nine months of ~~2017~~2019. The year-over-year decrease is due to a combination of a decrease in income from gain on sale of loans sold in the secondary market in 2019 compared to ~~$35,257,580 for the same period~~2018 and a one-time gain on sale of ~~2016, which is also reflected~~property in 2018. Loan originations that were subsequently sold in the ~~decrease in the Company’s loan fee income. Of those originations during the first nine months of 2017,~~ secondary market ~~sales totaled $10,912,354, compared to $18,296,608~~were $7.5 million for the first nine months of ~~2016, providing points and premiums from~~2019 compared to $8.9 million for the ~~sales of these mortgages of $250,826 and $351,824, respectively,~~same period in 2018 resulting in a decrease in gain on sale of ~~28.7%~~loans of $107 thousand, or 40.3%. Also contributing to the year over year decrease was a one-time gain on sale of property of $263,118 in 2018 in connection with the sale of a condominium unit to the Company’s affiliate, CFSG. No similar gains were reported in 2019.

~~The~~Non-interest expense decreased $10,616, or 0.2%, for the third quarter of 2019 and increased $389,276, or 2.7%, for the first nine months of 2019. While increases are noted in ~~non-interest expenses are mostly attributable~~salaries, wages and employee benefits, both periods were positively impacted by a decrease in Other Expenses due to ~~increases~~the distribution of $164,007 in ~~occupancy expense, marketing expense and expenditures related to technology initiatives.~~Small Bank deposit-insurance assessment credits issued by the FDIC, representing 79.4% of the Company’s total FDIC assessment for the first nine months of 2019. Please refer to the Non-interest Income and Non-interest Expense sections for more ~~information.~~information on these changes.

On September ~~22, 2017,~~13, 2019, the Company's Board ~~of Directors~~ declared a quarterly cash dividend of ~~$0.17~~$0.19 per common share, payable on November 1, ~~2017~~2019 to shareholders of record on October 15, ~~2017. This represents an increase in the quarterly dividend~~2019.

The financial statements and capital sections of ~~$0.01 per share, compared to 2016 and is attributable to the Bank’s strong performance in 2016, demonstrating the confidence~~this report reflect a partial redemption of the ~~Board~~Company’s outstanding Series A non-cumulative perpetual preferred stock. On March 31, 2019, the Company completed a second partial redemption of ~~Directors and management team in the Company’s ability to generate shareholder value.~~its preferred stock. Five shares were redeemed at par, at an aggregate redemption price of $500,000, plus accrued dividends. The Company ~~is focused~~completed a similar partial redemption of five shares of its preferred stock on increasing the profitability of the balance sheet, and prudently managing operating expenses and risk, particularly credit risk, in order to remain a well-capitalized bank in this challenging interest rate environment.March 31, 2018.

CRITICAL ACCOUNTING POLICIES

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

The Company’s critical accounting policies govern:

● the ~~allowance for loan losses (ALL);~~ALL;

● ~~other real estate owned (OREO);~~OREO;

●OTTI of investment securities;

● valuation of residential ~~mortgage servicing rights (MSRs);~~

●~~other than temporary impairment of investment securities;~~MSRs; and

● the carrying value of goodwill.

These policies are described ~~further~~ in the Company’s ~~2016~~2018 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. Except for certain changes in the Company’s methodology for calculating the ALL, which were adopted during the second quarter of 2017 and which are described below in the Credit Risk section of this MD&A, and in Note 5 (Loans, Allowance for Loan Losses and Credit Quality), thereThere were no material changes during the first nine months of ~~2017~~2019 in the Company’s critical accounting policies.

~~Table of Content~~

RESULTS OF OPERATIONS

Net income for the third quarter of ~~2017~~2019 was ~~$1,792,949~~$2,261,943, or ~~$0.35~~$0.43 per common share, compared to ~~$1,515,900~~$2,269,732, or ~~$0.30~~$0.44 per common share, for the same quarter of ~~2016, and net~~2018. Net income for the first nine months of ~~2017~~2019 was ~~$4,706,679~~$6,453,146 or ~~$0.91~~$1.23 per common share, compared to ~~$3,980,593~~$6,254,929 or ~~$0.78~~$1.20 per common share for ~~the same period in 2016.~~2018. Core earnings ~~(net interest income)~~(NII) for the third quarter of ~~2017~~2019 increased ~~$461,618,~~$100,544, or ~~8.3%~~1.6%, compared to the same quarter in ~~2016~~2018, and ~~$1,137,558,~~$977,392, or ~~7.1%~~5.3%, ~~for the nine months ended September 30, 2017 compared to the prior~~year over year. In light of the continued pressure on net interest margin and spread in this flat yield curve environment, the Company is pleased with these increases. To help offset this pressure, the Company has focused on growing the commercial loan portfolio, and shifting a portion of the investment portfolio to higher yielding Small Business Administration securities (SBA) and agency mortgage-backed securities (Agency MBS) within its available-for-sale (AFS) portfolio. FDIC insured Certificates of Deposit have also been an attractive investment class that have seen increased volume. Compared to the same period last year, during the first nine months of 2017, theThe loan mix continued to shift in favor of higher yielding commercial loans, while the deposit mix experienced an increase in ~~lower cost~~ non-maturity deposits, both of which have ~~benefitted~~benefited the Company’s net interest income. Interest paid on deposits, which is the major component of total interest expense, increased ~~$124,364,~~$336,503, or ~~24.7%~~36.6%, for the third quarter of ~~2017~~2019 compared to the same quarter of ~~2016,~~2018, and ~~$204,967,~~$1,493,272, or ~~13.4%~~64.2%, year over year, reflecting the increases in short-term rates and higher average interest-bearing deposit balances. The continuing increases in short-term market rates also had an impact on the ~~first nine months of 2017 compared~~interest paid on repurchase agreements and on the junior subordinated debentures, contributing to the ~~same period of 2016, reflecting the increased deposit balances and increases~~increase in ~~rates on wholesale funds and brokered deposits.~~interest expense in both comparison periods. The Company recorded a provision for loan losses of ~~$150,000 for the third quarters of 2017 and 2016, and nine month provisions for loan losses of $450,000 and $400,000, respectively. Non-interest income decreased $34,273, or 2.3%,~~$412,499 for the third quarter of ~~2017 compared to the same quarter of 2016~~2019 and ~~increased $161,126, or 4.0%,~~$766,668 for the first nine months of ~~2017~~2019, compared to ~~2016. Non-interest expense increased $51,613, or 1.1%, for~~$210,000 and $570,000, respectively in 2018. These increases are due to the year to date increase in the loan portfolio, combined with an increase in loan charge off activity during the third quarter of ~~2017 compared to~~2019.

The following tables summarize certain balance sheet data and the ~~same quarter~~earnings performance of ~~2016 and $317,829, or 2.3%,~~the Company for the ~~first nine months of 2017 compared to the prior year. The section labeled Non-Interest Income and Non-Interest Expense provides a more detailed discussion on the significant components of these items.~~periods presented.

	September 30,	December 31,
	2019	2018
Balance Sheet Data
Net loans (1)	$598,584,036	$573,211,590
Total assets	729,231,941	720,347,498
Total deposits	606,387,248	608,816,565
Borrowed funds	1,550,000	1,550,000
Junior subordinated debentures	12,887,000	12,887,000
Total liabilities	661,910,653	657,743,787
Total shareholders' equity	67,321,288	62,603,711

Book value per common share outstanding	$12.60	$11.72

	Nine Months Ended September 30,
	2019	2018
Operating Data
Total interest income	$23,867,245	$21,322,719
Total interest expense	4,594,527	3,027,393
Net interest income	19,272,718	18,295,326

Provision for loan losses	766,668	570,000
Net interest income after provision for loan losses	18,506,050	17,725,326

Non-interest income	4,350,170	4,628,625
Non-interest expense	15,098,700	14,709,424
Income before income taxes	7,757,520	7,644,527
Applicable income tax expense(2)	1,304,374	1,389,598

Net Income	$6,453,146	$6,254,929

Per Common Share Data
Earnings per common share (3)	$1.23	$1.20
Dividends declared per common share	$0.57	$0.55
Weighted average number of common shares outstanding	5,196,630	5,131,654
Number of common shares outstanding, period end	5,222,708	5,157,258

(1) Net loans reflects reclassification of debt obligations of local municipalities from the investment portfolio into the loan

portfolio as of January 1, 2019 and conforming changes to the comparative 2018 information presented. See Notes

4 and 5 to the accompanying unaudited interim consolidated financial statements for additional information.

(2) Applicable income tax expense assumes a 21% tax rate for both periods.

(3) Computed based on the weighted average number of common shares outstanding during the periods presented.

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

The following table shows these ratios annualized for the comparison ~~periods.~~periods presented.

Three Months Ended September 30,

2017

2016

Return on Average Assets
  1.09%
  0.99%
Return on Average Equity
  12.53%
  11.29%

	Three Months Ended September 30,
	2019	2018

Return on average assets	1.28%	1.33%
Return on average equity	13.99%	14.99%

	Nine Months Ended September 30,
	2019	2018

Return on average assets	1.23%	1.26%
Return on average equity	13.36%	14.16%

Nine Months Ended September 30,

2017

2016

Return on Average Assets
  0.98%
  0.89%
Return on Average Equity
  11.29%
  10.08%

~~Table of Content~~

~~The following table summarizes the earnings performance and certain balance sheet data of the Company for the periods presented.~~

SELECTED FINANCIAL DATA (Unaudited)

September 30,

December 31,

September 30,

2017

2016

2016

Balance Sheet Data

Net loans
$500,930,258
$482,280,911
$465,319,495
Total assets
  661,539,071
  637,653,665
  605,790,430
Total deposits
  556,752,320
  504,735,032
  503,806,906
Borrowed funds
  3,550,000
  31,550,000
  5,795,000
Total liabilities
  604,318,331
  583,202,148
  551,946,796
Total shareholders' equity
  57,220,740
  54,451,517
  53,843,634




Book value per common share outstanding
$10.73
$10.27
$10.18

Nine Months Ended September 30,

2017

2016

Operating Data

Total interest income
$19,421,393
$18,035,730
Total interest expense
  2,280,105
  2,032,000
     Net interest income
  17,141,288
  16,003,730



Provision for loan losses
  450,000
  400,000
     Net interest income after provision for loan losses
  16,691,288
  15,603,730



Non-interest income
  4,201,196
  4,040,070
Non-interest expense
  14,465,802
  14,147,973
     Income before income taxes
  6,426,682
  5,495,827
Applicable income tax expense(1)
  1,720,003
  1,515,234



     Net Income
$4,706,679
$3,980,593



Per Common Share Data


Earnings per common share (2)
$0.91
$0.78
Dividends declared per common share
$0.51
$0.48
Weighted average number of common shares outstanding
  5,077,473
  5,016,191
Number of common shares outstanding, period end
  5,100,675
  5,042,989

~~(1) Applicable income tax expense assumes a 34% tax rate.~~

~~(2) Computed based on the weighted average number of common shares outstanding during the periods presented.~~

~~Table of Content~~

INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST INCOME)

The largest component of the Company’s operating income is net interest income, which is the difference between interest earned on loans and investments and the interest paid on deposits and other sources of funds (i.e. ~~other~~, 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 ~~from~~ changes in the yield earned and costs of funds (rate). A portion of the Company’s income from ~~municipal investments~~loans to local municipalities is not subject to income taxes. Because the proportion of tax-exempt items in the Company's ~~portfolio~~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. ~~Because the~~The Company’s corporate tax rate is ~~34%,~~21%; therefore, to equalize tax-free and taxable income in the comparison, we divide the tax-free income by ~~66%~~79%, with the result that every tax-free dollar is equivalent to ~~$1.52~~$1.27 in taxable ~~income.~~income for the periods presented.

The Company’s tax-exempt interest income of ~~$332,102~~$352,477 and $330,962 for the three months ended September 30, ~~2017~~2019 and ~~$992,831~~2018, respectively, and $975,683 and $953,606 for the ~~first~~ nine months ~~of 2017, compared to $339,999~~ended September 30, 2019 and ~~$942,246,~~2018, respectively, ~~for the same periods last year,~~ was derived from ~~municipal investments, which comprised the entire held-to-maturity (HTM) portfolio~~loans to local municipalities of ~~$53,882,287~~$51,935,005 and $50,801,932 at September 30, ~~2017,~~2019 and ~~$56,837,100 at September 30, 2016.~~2018, respectively.

The following table shows the reconciliation between reported net interest income and tax equivalent, net interest income for the comparison periods presented.

	Three Months Ended September 30,		Three Months Ended September 30,
	2017	2016	2019	2018

Net interest income as presented	$6,023,973	$5,562,355	$6,397,421	$6,296,877
Effect of tax-exempt income	171,083	175,151	93,696	87,977
Net interest income, tax equivalent	$6,195,056	$5,737,506	$6,491,117	$6,384,854

	Nine Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2019	2018

Net interest income as presented	$17,141,288	$16,003,730	$19,272,718	$18,295,326
Effect of tax-exempt income	511,458	485,399	259,359	253,490
Net interest income, tax equivalent	$17,652,746	$16,489,129	$19,532,077	$18,548,816

~~Table of Content~~

The following ~~tables present~~table presents average interest-earning assets and average interest-bearing liabilities supporting earning assets. Interest income (excluding interest on non-accrual loans) ~~and interest expense are both~~is expressed on a tax equivalent basis, both in dollars and as a rate/yield for the comparison periods presented.

	Three Months Ended September 30,						Three Months Ended September 30,
		2017			2016			2019			2018
			Average			Average			Average			Average
	Average	Income/	Rate/	Average	Income/	Rate/	Average	Income/	Rate/	Average	Income/	Rate/
	Balance	Expense	Yield	Balance	Expense	Yield	Balance	Expense	Yield	Balance	Expense	Yield
Interest-Earning Assets
Loans (1)	$506,853,347	$6,244,899	4.89%	$476,137,513	$5,732,855	4.79%	$592,727,371	$7,545,780	5.05%	$579,995,585	$7,254,391	4.96%
Taxable investment securities	35,519,175	171,880	1.92%	27,393,741	128,767	1.87%	44,951,993	302,063	2.67%	37,311,866	228,497	2.43%
Tax-exempt investment securities	49,608,712	503,185	4.02%	55,195,067	515,150	3.71%
Sweep and interest-earning accounts	10,355,461	29,964	1.15%	2,591,082	3,048	0.47%	19,760,186	128,006	2.57%	15,736,866	85,524	2.16%
Other investments (2)	2,195,121	41,320	7.47%	3,176,788	49,429	6.19%	1,764,415	24,301	5.46%	2,516,383	36,587	5.77%
	$604,531,816	$6,991,248	4.59%	$564,494,191	$6,429,249	4.53%
Total							$659,203,965	$8,000,150	4.81%	$635,560,700	$7,604,999	4.75%

Interest-Bearing Liabilities
Interest-bearing transaction accounts	$115,801,161	$91,951	0.32%	$107,853,436	$51,580	0.19%	$147,946,190	$322,573	0.87%	$129,329,266	$165,856	0.51%
Money market accounts	84,791,867	187,889	0.88%	81,796,244	209,212	1.02%	95,873,245	375,966	1.56%	84,309,511	283,388	1.33%
Savings deposits	99,061,882	32,277	0.13%	88,078,948	27,216	0.12%	97,642,149	40,456	0.16%	100,816,941	35,870	0.14%
Time deposits	133,068,701	316,417	0.94%	105,959,177	216,162	0.81%	121,880,627	517,869	1.69%	130,792,374	435,247	1.32%
Borrowed funds	4,535,815	3,644	0.32%	31,398,913	42,412	0.54%	1,725,772	2,436	0.56%	��11,699,457	58,759	1.99%
Repurchase agreements	27,263,645	20,564	0.30%	25,387,081	18,820	0.29%	33,142,782	74,510	0.89%	30,096,655	60,049	0.79%
Capital lease obligations	418,393	8,569	8.19%	501,328	10,992	8.77%
Finance lease obligations							185,024	3,868	8.36%	306,646	6,315	8.24%
Junior subordinated debentures	12,887,000	134,881	4.15%	12,887,000	115,349	3.56%	12,887,000	171,355	5.28%	12,887,000	174,661	5.38%
	$477,828,464	$796,192	0.66%	$453,862,127	$691,743	0.61%
Total							$511,282,789	$1,509,033	1.17%	$500,237,850	$1,220,145	0.97%

Net interest income		$6,195,056			$5,737,506			$6,491,117			$6,384,854
Net interest spread (3)			3.93%			3.92%			3.64%			3.78%
Net interest margin (4)			4.07%			4.04%			3.91%			3.99%

(1) Included in gross loans are non-accrual loans with an average balance of ~~$2,596,724~~$5,436,004 and ~~$2,958,744~~$4,185,018 for the three

months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively. Loans are stated before deduction of unearned discount and ALL, less loans held-for-sale and include tax-exempt loans to local municipalities with average balances of $48,357,864 and $49,106,752 for the three months ended September 30, 2019 and 2018, respectively, which were reclassified from the investment portfolio beginning in 2019, and restated for the 2018 comparison period. See Note 5 to the accompanying unaudited interim consolidated financial statements for additional information.

~~and allowance for loan losses, less loans held-for-sale.~~

(2) Included in other investments is the Company’s FHLBB Stock with an average balance of ~~$1,219,971~~$699,265 and ~~$2,201,638~~

$1,451,233 for the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and a dividend rate of approximately

~~4.22%~~ 6.04% and ~~3.65%~~5.87%, 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.

~~Table of Content~~

	Nine Months Ended September 30,						Nine Months Ended September 30,
		2017			2016			2019			2018
			Average			Average			Average			Average
	Average	Income/	Rate/	Average	Income/	Rate/	Average	Income/	Rate/	Average	Income/	Rate/
	Balance	Expense	Yield	Balance	Expense	Yield	Balance	Expense	Yield	Balance	Expense	Yield
Interest-Earning Assets
Loans (1)	$495,170,740	$17,737,531	4.79%	$465,314,118	$16,582,276	4.76%	$585,983,458	$22,751,262	5.19%	$563,728,405	$20,570,585	4.88%
Taxable investment securities	35,001,161	488,250	1.87%	29,210,491	384,413	1.76%	42,793,295	820,197	2.56%	37,680,536	652,398	2.31%
Tax-exempt investment securities	51,924,841	1,504,289	3.87%	50,577,436	1,427,645	3.77%
Sweep and interest-earning accounts	11,938,565	84,802	0.95%	5,225,968	18,654	0.48%	25,353,770	478,097	2.52%	17,448,217	257,091	1.97%
Other investments (2)	2,545,091	117,979	6.20%	2,766,541	108,141	5.22%	1,782,682	77,048	5.78%	2,287,439	96,135	5.62%
	$596,580,398	$19,932,851	4.47%	$553,094,554	$18,521,129	4.47%
Total							$655,913,205	$24,126,604	4.92%	$621,144,597	$21,576,209	4.64%

Interest-Bearing Liabilities
Interest-bearing transaction accounts	$116,594,941	$216,227	0.25%	$111,223,384	$155,413	0.19%	$153,712,761	$1,101,758	0.96%	$127,206,882	$396,923	0.42%
Money market accounts	85,819,418	595,162	0.93%	84,974,840	637,818	1.00%	94,675,544	1,096,750	1.55%	95,192,325	837,291	1.18%
Savings deposits	96,382,338	91,597	0.13%	85,668,159	79,225	0.12%	95,874,410	121,279	0.17%	99,284,051	97,688	0.13%
Time deposits	125,015,108	831,446	0.89%	107,919,364	657,009	0.81%	123,255,984	1,500,297	1.63%	118,247,883	994,910	1.12%
Borrowed funds	12,140,165	65,311	0.72%	18,588,663	74,046	0.53%	1,946,934	7,828	0.54%	6,779,670	69,520	1.37%
Repurchase agreements	28,768,193	64,326	0.30%	25,393,136	56,125	0.30%	32,871,384	220,411	0.90%	30,395,047	128,896	0.57%
Capital lease obligations	442,977	27,181	8.18%	522,708	32,761	8.36%
Finance lease obligations							215,758	13,482	8.33%	334,817	20,679	8.23%
Junior subordinated debentures	12,887,000	388,855	4.03%	12,887,000	339,603	3.52%	12,887,000	532,722	5.53%	12,887,000	481,486	5.00%
	$478,050,140	$2,280,105	0.64%	$447,177,254	$2,032,000	0.61%
Total							$515,439,775	$4,594,527	1.19%	$490,327,675	$3,027,393	0.83%

Net interest income		$17,652,746			$16,489,129			$19,532,077			$18,548,816
Net interest spread (3)			3.83%			3.86%			3.73%			3.81%
Net interest margin (4)			3.96%			3.98%			3.98%			3.99%

(1) Included in gross loans are non-accrual loans with an average balance of ~~$2,565,181~~$5,195,637 and ~~$3,384,345~~$3,917,128 for the nine

months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively. Loans are stated before deduction of unearned discount and ALL, less loans held-for-sale and includes tax-exempt loans to local municipalities with average balances of $46,562,200 and $48,169,647 for the nine months ended September 30, 2019 and 2018, respectively, which were reclassified from the investment portfolio beginning in 2019, and restated for the 2018 comparison period. See Note 5 to the accompanying unaudited interim consolidated financial statements for additional information.

~~and allowance for loan losses, less loans held-for-sale.~~

(2) Included in other investments is the Company’s FHLBB Stock with average balances of ~~$1,569,941~~$717,532 and ~~$1,791,391~~

$1,246,025, respectively, and a dividend rate of approximately ~~4.19%~~6.25% and ~~4.84%~~5.92%, respectively, for the first nine months of 2019 and 2018, respectively.

~~2017 and 2016, 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.

~~Table of Content~~

The average volume of interest-earning assets for the three- and nine-month periods ended September 30, ~~2017~~2019 increased ~~7.1%~~3.7% and ~~7.9%~~5.6%, respectively, compared to the same periods last year. ~~Average~~The average yield on interest-earning assets for the third quarter increased six ~~basis points,~~bps, to ~~4.59%~~4.81%, compared to ~~4.53%~~4.75% for the same period last year, and ~~remained unchanged at 4.47%~~increased 28 bps for the nine months ended September 30, ~~2017, compared~~2019, to 4.92%, from 4.64% for the same period last year.

The average volume of loans increased over the three- and nine-month comparison periods of ~~2017~~2019 versus ~~2016,~~2018 by ~~6.5%~~2.2% and ~~6.4%~~4.0%, respectively, ~~while~~and the average yield on loans increased ~~10 basis points~~nine bps for the third quarter, to ~~4.89%~~5.05%, compared to ~~4.79%~~4.96% for the ~~third~~same quarter of ~~2016,~~2018, and ~~increased three basis points~~31 bps for the nine months ended September 30, ~~2017,~~2019, to ~~4.79% compared to 4.76%~~5.19%, from 4.88% for the same period in ~~2016. These~~2018. The third quarter and year-to-date increases ~~were due to~~in average yield reflect a combination of the ~~steadily increasing~~higher federal funds rate over the periods noted, and a shift in asset mix toward commercial loans; however, this has been partially offset by continued pressure on medium term (5-10 year) fixed rates. Interest earned on the loan portfolio as a percentage of total interest income ~~increased~~decreased slightly in both comparison periods, comprising 94.8% for the ~~third quarter~~three- and ~~decreased slightly for the~~ nine-month ~~period ended September 30, 2017, comprising approximately 89.3%~~comparison periods of 2019, versus 95.4% and ~~89.0% of total interest income in the two periods respectively, versus 89.2% and 89.5%~~95.3%, respectively, for the same periods last year.

The average volume of the taxable investment portfolio (classified as ~~available-for-sale)~~AFS) increased ~~29.7%~~20.5% during the ~~third quarter~~three-month comparison period of ~~2017~~2019 and ~~19.8% year to date, compared to~~13.6% during the ~~same periods last year. Average yields on the taxable investment portfolio increased five basis points and 11 basis points, for the third quarter~~nine-month comparison period of ~~2017 and year to date, respectively,~~2019, compared to the same periods last year. These increases are due primarily to anmanagement’s continued effort ~~to continue~~ to incrementally grow the investment portfolio as the balance sheet grows in order to provide additional liquidity and ~~pledge quality~~pledge-quality assets. The average volume of the tax exempt portfolio (classified as held-to-maturity and consisting of municipal securities) decreased 10.1% during the third quarter of 2017 and increased 2.7% year to date, compared to the same periods last year. The average tax-equivalent yield on the ~~tax exempt~~taxable investment portfolio increased ~~31 basis points~~24 bps and 25 bps, respectively, during the ~~third quarter~~three- and nine-month comparison periods of ~~2017 and increased 10 basis points for the nine-month period ended September 30, 2017,~~2019 compared to the same periods last year, ~~reflecting~~due primarily to rising market rates, while the ~~increases in short term market rates.~~composition of the portfolio remained relatively stable.

The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing ~~account~~accounts at the ~~Federal Reserve Bank of Boston (FRBB)~~FRBB and two correspondent banks, increased ~~299.7%~~25.6% during the three-month period and ~~128.5%~~45.3% during the nine-month period ended September 30, ~~2017~~2019, compared to the same periods last year, and the average yield on these funds increased ~~68 basis points~~41 bps and ~~47 basis points,~~55 bps, respectively. ~~This increase~~These increases in average volume isare attributable to a higher balance of cash periodically held on hand in anticipation of funding loan growth and other liquidity needs. The increases in the average yield between periods reflect the effect of increases in the federal funds rate.

The average volume of interest-bearing liabilities for the three- and nine-month periods ended September 30, ~~2017~~2019 increased ~~5.4%~~2.3% and ~~6.9%~~5.1%, respectively, compared to the same periods last year. The average rate paid on interest-bearing liabilities increased ~~five basis points during~~28 bps for the ~~third quarter of 2017~~three months ended September 30, 2019 and ~~three basis points~~36 bps during the first nine months of ~~2017,~~2019, compared to the same periods last ~~year.~~year, reflecting the rising rate environment and competitive pressures in deposit pricing.

The average volume of interest-bearing transaction accounts increased ~~7.4%~~14.4% and ~~4.8%~~20.8%, respectively, during the ~~third quarter~~three- and ~~first nine months of 2017,~~nine-month period ended September 30, 2019, compared to the same periods last year, and the average rate paid on these accounts increased ~~13 basis points~~36 bps and ~~six basis points,~~54 bps, respectively. These increases are due to growth in high balance ICS DDA accounts, as well as higher deposit balances of the Company’s affiliate CFSB. The average volume of money market accounts increased ~~3.7%~~13.7% during the three-month period, ~~ended September 30, 2017, and 1.0%~~but decreased 0.5% during the nine-month period ended September 30, ~~2017,~~2019 compared to the same periods in ~~2016, and~~2018, while the average rate paid on these deposits ~~decreased 14 basis points during the third quarter of 2017~~increased in both periods by 23 bps and ~~seven basis points in the year to date comparison periods.~~37 bps, respectively. The average volume of savings accounts ~~increased by 12.5%~~decreased 3.2% for the three-month period and ~~nine-month comparison periods of 2017 versus 2016, partially due to several escrow accounts for deposits held~~3.4% for the ~~future purchase of properties in the Stowe area which account for approximately half of the increase~~. ~~Some of the increase is due in part to the continued shift in product mix from retail time deposits to savings accounts as consumers anticipate higher rates in the near future. Compared to~~nine-month period ended September 30, 2019 versus the same periods in ~~2016,~~2018. Following the average volume of retail time deposits increased 0.6% during the third quarter, and decreased 0.4% year to date 2017, while the average volume of wholesale time deposits increased during both the three- and nine-month comparison periodsincrease in ~~2017~~. ~~With the recent increases in short term~~short-term rates through 2018, there has been ~~modest~~more pressure for higher rates from the more rate sensitive deposit ~~holders. Otherwise,~~holders and the local market is ~~not yet~~now showing ~~any~~ signs of a willingness to pay higher rates ~~being paid~~ on deposit products. ~~Wholesale~~This pressure is expected to lessen somewhat, at least in the near term, as short-term rates have declined in the third quarter. The average volume of time deposits ~~have been~~decreased 6.8% and increased 4.2%, respectively, during the three- and nine month periods ended September 30, 2019, compared to the same periods last year, and the average rate paid on these accounts increased 37 bps and 51 bps, respectively, between periods. Compared to the same periods in 2018, the average volume of retail time deposits decreased 1.7% during the third quarter, and 3.5% year to date in 2019. Average brokered time deposits increased 21.6% from an ~~increasingly beneficial source~~average volume of ~~funding throughout 2016~~$21,141,988 for the third quarter of 2018 to $25,707,533 for the same period in 2019, and ~~into 2017 as they have provided large blocks~~increased 157.9% for the first nine months of funding without the need to disrupt pricing in the Company’s local markets. These funds can be obtained relatively quickly on an as-needed basis, making them a valuable alternative to traditional term borrowings from the FHLBB.

~~Table~~2019, with average volumes of ~~Content~~

$10,766,870 for 2018 versus $27,776,442 for 2019.

The average volume of borrowed funds decreased ~~85.6%~~85.3% and ~~34.7%~~71.3%, respectively, for the ~~three-month~~three- and nine-month comparison periods of ~~2017~~2019 versus ~~2016. The~~2018, while the average rate paid on these ~~accounts~~borrowings decreased ~~22 basis points for the three month period~~143 bps and ~~increased 19 basis points for the nine month period as compared to 2016.~~83 bps, respectively, between periods. The average volume of repurchase agreements increased ~~7.4%~~10.1% and ~~13.3%~~8.2%, respectively, for the three- and nine-month comparison periods ~~ended September 30, 2017, compared to the same periods in 2016, while~~of 2019 versus 2018, and the average rate paid on repurchase agreements increased ~~one basis point during~~10 bps and 33 bps, respectively, between periods.

In summary, between the three-month ~~period~~periods ended September 30, ~~2017, but remained flat for the first nine months of 2017, compared to the same periods in 2016.~~

~~For the three months ended September 30, 2017~~2019 and ~~2016,~~2018, the average yield on interest-earning assets increased six ~~basis points,~~bps, while the average rate paid on interest-bearing liabilities increased ~~five basis points. For~~20 bps. Between the ~~nine months~~nine-month periods ended September 30, ~~2017~~2019 and ~~2016,~~2018, the average yield on interest-earning assets ~~remained flat, while~~increased 28 bps, and the average rate paid on interest-bearing liabilities increased ~~three basis points.~~36 bps. Net interest spread for the third quarter of ~~2017~~2019 was ~~3.93%~~3.64%, ~~an increase~~a decrease of ~~one basis point~~14 bps from ~~3.92%~~3.78% for the same period in ~~2016,~~2018, and ~~fell three basis points~~ for the ~~first nine months~~nine-month comparison periods of ~~2017 to 3.83%~~2019 and 2018 was 3.73% and 3.81%, ~~from 3.86% for the same period last year.~~respectively, a decrease of eight bps. Net interest margin ~~increased three basis points~~decreased eight bps during ~~the~~ third quarter of ~~2017 to 4.07%, compared to 4.04% for the third quarter of 2016,~~2019 versus 2018, and ~~decreased two basis points~~one bp during the first nine months of ~~2017 compared to the same period last year.~~2019 versus 2018.

The following table summarizes the variances in interest income and interest expense on a fully tax-equivalent basis for the periods presented for ~~2017~~2019 and ~~2016~~2018 resulting from volume changes in average assets and average liabilities and fluctuations in average rates earned and paid.

Changes in Interest Income and Interest Expense

	Three Months Ended September 30,			Nine Months Ended September 30,			Three Months Ended September 30,			Nine Months Ended September 30,
	Variance			Variance			Variance			Variance
	Due to		Total	Due to		Total	Due to		Total	Due to		Total
	Rate (1)	Volume (1)	Variance	Rate (1)	Volume (1)	Variance	Rate (1)	Volume (1)	Variance	Rate (1)	Volume (1)	Variance
Average Interest-Earning Assets
Loans	$142,212	$369,832	$512,044	$91,315	$1,063,940	$1,155,255
Loans (2)							$132,217	$159,172	$291,389	$1,368,374	$812,303	$2,180,677
Taxable investment securities	4,919	38,194	43,113	27,539	76,298	103,837	26,771	46,795	73,566	79,463	88,336	167,799
Tax-exempt investment securities	44,639	(56,604)	(11,965)	38,616	38,028	76,644
Sweep and interest-earning accounts	17,743	9,173	26,916	42,027	24,121	66,148	20,578	21,904	42,482	104,521	116,485	221,006
Other investments	10,374	(18,483)	(8,109)	20,107	(10,269)	9,838	(1,937)	(10,349)	(12,286)	2,734	(21,821)	(19,087)
	$219,887	$342,112	$561,999	$219,604	$1,192,118	$1,411,722
Total							$177,629	$217,522	$395,151	$1,555,092	$995,303	$2,550,395

Average Interest-Bearing Liabilities
Interest-bearing transaction accounts	$36,575	$3,796	$40,371	$53,173	$7,641	$60,814	$132,785	$23,932	$156,717	$621,570	$83,265	$704,835
Money market accounts	(29,004)	7,681	(21,323)	(48,979)	6,323	(42,656)	53,813	38,765	92,578	265,450	(5,991)	259,459
Savings deposits	1,748	3,313	5,061	2,747	9,625	12,372	5,866	(1,280)	4,586	27,926	(4,335)	23,591
Time deposits	45,058	55,197	100,255	70,770	103,667	174,437	120,584	(37,962)	82,622	463,434	41,953	505,387
Borrowed funds	(17,101)	(21,667)	(38,768)	25,991	(34,726)	(8,735)	(42,245)	(14,078)	(56,323)	(42,173)	(19,519)	(61,692)
Repurchase agreements	376	1,368	1,744	621	7,580	8,201	8,395	6,066	14,461	80,958	10,557	91,515
Capital lease obligations	(711)	(1,712)	(2,423)	(702)	(4,878)	(5,580)
Finance lease obligations							116	(2,563)	(2,447)	221	(7,418)	(7,197)
Junior subordinated debentures	19,532	0	19,532	49,252	0	49,252	(3,306)	0	(3,306)	51,236	0	51,236
	$56,473	$47,976	$104,449	$152,873	$95,232	$248,105
Total							$276,008	$12,880	$288,888	$1,468,622	$98,512	$1,567,134

Changes in net interest income	$163,414	$294,136	$457,550	$66,731	$1,096,886	$1,163,617	$(98,379)	$204,642	$106,263	$86,470	$896,791	$983,261

(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

(2) Reflects reclassification of obligations of local municipalities from investment securities to loans effective January 1, 2019, and restated for the 2018 comparison periods. See Notes 4 and 5 to the Company’s unaudited interim consolidated financial statements for additional information.

~~Table of Content~~

NON-INTEREST INCOME AND NON-INTEREST EXPENSE

Non-interest Income

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

	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,		Change		September 30,		Change		September 30,		Change		September 30,		Change
	2017	2016	Income	Percent	2017	2016	Income	Percent	2019	2018	Income	Percent	2019	2018	Income	Percent

Service fees	$773,419	$719,341	$54,078	7.52%	$2,293,773	$1,992,560	$301,213	15.12%	$867,688	$820,956	$46,732	5.69%	$2,478,711	$2,401,769	$76,942	3.20%
Income from sold loans	185,844	230,623	(44,779)	-19.42%	560,210	683,114	(122,904)	-17.99%	203,175	212,105	(8,930)	-4.21%	434,951	586,434	(151,483)	-25.83%
Other income from loans	222,026	209,882	12,144	5.79%	616,931	616,473	458	0.07%	235,883	232,485	3,398	1.46%	598,136	643,107	(44,971)	-6.99%
Net realized gain on sale of
securities available-for-sale	1,246	0	1,246	100.00%	4,647	0	4,647	100.00%
Net realized gain (loss) on sale of securities AFS									331	(9,741)	10,072	-103.40%	331	(19,977)	20,308	-101.66%
Other income
Income from CFSG Partners	116,059	143,095	(27,036)	-18.89%	314,573	326,676	(12,103)	-3.70%	148,826	159,000	(10,174)	-6.40%	482,185	429,786	52,399	12.19%
Currency exchange income	22,000	27,000	(5,000)	-18.52%	66,500	78,500	(12,000)	-15.29%
SERP fair value adjustment	(2,179)	32,352	(34,531)	-106.74%	45,312	46,758	(1,446)	-3.09%
Other income	130,832	121,227	9,605	7.92%	299,250	295,989	3,261	1.10%
Rental income									2,464	2,428	36	1.48%	7,356	27,937	(20,581)	-73.67%
Gain on sale of property									0			0%	0	263,118	(263,118)	100.00%
VISA card commission									23,099	4,913	18,186	370.16%	69,297	14,739	54,558	370.16%
Other miscellaneous income									115,866	120,647	(4,781)	-3.96%	279,203	281,712	(2,509)	-0.89%
Total non-interest income	$1,449,247	$1,483,520	$(34,273)	-2.31%	$4,201,196	$4,040,070	$161,126	3.99%	$1,597,332	$1,542,793	$54,539	3.54%	$4,350,170	$4,628,625	$(278,455)	-6.02%

Total non-interest income ~~decreased $34,273,~~increased $54,539, or ~~2.3%~~3.5%, for the third quarter of ~~2017 and increased $161,126,~~2019 while decreasing $278,455, or ~~4.0%~~6.0%, for the first nine months of ~~2017~~2019 versus the same periods in ~~2016,~~2018, with significant changes noted in the following:

●

~~Service fees on deposit accounts increased $54,078, or 7.5%,~~Income from sold loans decreased 4.2% for the third quarter and ~~$301,213, or 15.1%,~~25.8% year over year, due ~~primarily~~ to a slowdown in residential mortgage lending activity, resulting in a lower volume of loans being sold into the ~~implementation of the Bank’s new courtesy overdraft protection program at the beginning of~~secondary market.

●

Other income from loans increased 1.5% for the third quarter ~~in 2016, which provided an~~while decreasing 7.0% year over year. An uptick of commercial loan volume accounts for the increase ~~in overdraft fees of $39,327, or 15.6% and $264,731, or 43.4%, compared to~~for the third quarter, but the overall lower volume of commercial and residential portfolio loans year over year resulted in lower documentation fees collected at origination.

●

Net realized gains on sale of securities AFS of $331 during the third quarter of 2019, compared to realized losses of $9,741 for the third quarter of 2018 and $19,977 for the first nine months of ~~2016, respectively.~~2018 are the result of sales of low-yielding, short-duration securities held in the Company’s AFS portfolio during 2018 which were replaced with higher-yielding investments available in the current market. The higher interest income earned by the replacement securities during 2019 has helped to recover the realized losses in 2018.

●

Income from ~~sold loans~~CFS Partners decreased ~~$44,779, or 19.4%,~~6.4% for the third quarter ~~and $122,904, or 18.0%,~~while increasing 12.3% year over year, due to ~~a decrease in the volume of secondary market sales year over year, resulting from the~~an increase in ~~market rates as mentioned in the Overview and the diminishing volume of residential mortgage loan refinancings following a long period of low rates.~~assets under management, upon which fee income is generally based.

●

~~Income from CFSG Partners decreased $27,036, or 18.9%,~~Rental income increased 1.5% for the third quarter ~~and $12,103, or 3.7%, year over year. The decrease for the third quarter and~~while decreasing 73.7% year over year, ~~reflects a one-time mark-to-market adjustment~~due to the Company’s sale of an office condominium unit to CFSG ~~Partners’ investment portfolio during~~in the ~~third~~second quarter of ~~2016 of approximately $85,000, partially offset by an increase~~2018. Prior to the sale, CFSG had rented this unit since its formation in ~~income of $57,964 for the quarter and $72,897 year over year.~~2002.

●

~~Currency exchange income decreased $5,000, or 18.5% when comparing the third quarter 2017 to 2016 and decreased $12,000, or 15.3%, year over year due to fluctuations~~Gain on sale of property of $263,118 in ~~the currency rates as the U.S. dollar strengthened in relation~~2018 was attributable to the ~~Canadian dollar.~~Company’s sale of an office condominium unit to the Company’s affiliate, CFSG. There was no activity in 2019 that resulted in a gain on sale of property.

●

~~SERP fair value adjustment decreased $34,531, or 106.7%, for the third quarter and $1,446, or 3.09%, year over year. The final payment of SERP benefits~~VISA card commission income increased 370.2% in both periods, due to ~~the last participant was made on July 1, 2017 and the~~new incentive payments related asset was liquidated shortly thereafter. A net loss of $2,179 was recognized in the third quarter of 2017 for the change in fair value of the assets during the quarter. There will no longer be an impact to ~~earnings from this line item in future periods.~~entering into a VISA principal vendor agreement.

~~Table of Content~~

Non-interest Expense

The components of non-interest expense for the periods presented ~~are~~were as follows:

	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,		Change		September 30,		Change		September 30,		Change		September 30,		Change
	2017	2016	Expense	Percent	2017	2016	Expense	Percent	2019	2018	Expense	Percent	2019	2018	Expense	Percent

Salaries and wages	$1,653,751	$1,725,000	$(71,249)	-4.13%	$5,068,626	$5,175,000	$(106,374)	-2.06%	$1,817,931	$1,730,386	$87,545	5.06%	$5,453,791	$5,260,388	$193,403	3.68%
Employee benefits	682,944	679,762	3,182	0.47%	2,016,923	2,049,926	(33,003)	-1.61%	785,187	695,735	89,452	12.86%	2,367,866	2,092,039	275,827	13.18%
Occupancy expenses, net	614,817	605,378	9,439	1.56%	1,963,543	1,857,482	106,061	5.71%	606,629	629,389	(22,760)	-3.62%	1,939,742	1,961,859	(22,117)	-1.13%
Other expenses
Computer outsourcing	130,938	128,910	2,028	1.57%	408,044	376,885	31,159	8.27%
Service contracts - administrative	116,863	106,747	10,116	9.48%	313,526	292,663	20,863	7.13%	137,248	133,177	4,071	3.06%	411,934	380,338	31,596	8.31%
Marketing expense	135,498	98,339	37,159	37.79%	382,996	283,139	99,857	35.27%
FDIC insurance									(65,806)	73,750	(139,556)	-189.23%	64,079	206,668	(142,589)	-68.99%
Audit fees									98,625	82,653	15,972	19.32%	301,358	299,128	2,230	0.75%
Consultant services	61,113	51,833	9,280	17.90%	162,935	116,293	46,642	40.11%	43,071	59,368	(16,297)	-27.45%	183,831	202,604	(18,773)	-9.27%
Collection & non-accruing loan
expense	15,455	46,500	(31,045)	-66.76%	36,165	84,500	(48,335)	-57.20%
Miscellaneous computer expense	54,010	28,383	25,627	90.29%	110,822	54,246	56,576	104.30%
OREO expense	5,240	5,498	(258)	-4.69%	18,044	37,467	(19,423)	-51.84%
Collection & non-accruing loan expense									36,942	25,755	11,187	43.44%	146,712	119,254	27,458	23.02%
Subsequent write downs on OREO									0			0.00%	95,008	0	95,008	100.00%
Other miscellaneous expenses	1,371,487	1,314,153	57,334	4.36%	3,984,178	3,820,372	163,806	4.29%	1,403,889	1,444,119	(40,230)	-2.79%	4,134,379	4,187,146	(52,767)	-1.26%
Total non-interest expense	$4,842,116	$4,790,503	$51,613	1.08%	$14,465,802	$14,147,973	$317,829	2.25%	$4,863,716	$4,874,332	$(10,616)	-0.22%	$15,098,700	$14,709,424	$389,276	2.65%

Total non-interest expense ~~increased $51,613,~~decreased $10,616, or ~~1.1%~~0.2%, for the third quarter of ~~2017 and $317,829,~~2019, while increasing $389,276, or ~~2.3%~~2.7%, for the first nine months of ~~2017 compared to~~2019 versus the same periods in ~~2016~~2018, with significant changes noted in the following:

●

Salaries and wages ~~decreased $71,249, or 4.1%,~~increased 5.1% for the third quarter and ~~$106,374, or 2.1%,~~3.7% year over year. The increase in both periods is due to normal cost of living increases to employees as well as a $0.25 increase per hour to all employees, other than executive officers, that was effective in September of 2018. The current year salary budget also includes a newly created position for an Information Security Officer.

●

Employee benefits increased 12.9% for the third quarter and 13.2% year over year, due to an increase in the cost of the employee health insurance plan.

●

Service contracts – administrative increased 3.1% for the third quarter and 8.3% year over year, due to the increasing cost to support information technology and branch infrastructure.

●

FDIC insurance decreased 189.2% for the second quarter and 69.0% year over year, due to the “Small Bank Assessment Credit” issued during the third quarter of 2019. This credit eliminates the assessments due during the third and fourth quarters of 2019, and the remainder will be applied to the assessment due in the first quarter of 2020.

●

Audit fees increased 19.3% for the third quarter and 0.8% year over year due primarily to ~~the retirement of an executive employee that was partially offset by a new hire~~billable fees incurred in ~~information technology and normal salary increases.~~

●

~~Occupancy expenses increased $9,439, or 1.6%~~2018 for ~~the third quarter and $106,061, or 5.7%, year over year, due in part~~consultation related to the ~~fact that~~audit of the ~~region experienced a shift to more seasonable winter conditions compared to~~Company’s internal control over financial reporting program, the ~~past few years causing an increase~~deferred tax asset fair value calculation and the effects of the 2017 Tax Act. Also in ~~heating costs and maintenance costs for snow removal. The~~2018, the Company ~~has also seen a higher level of repairs and service to HVAC and sprinkler systems and expenses for general maintenance and repair of branch premises. Also~~changed Information Security audit vendors which resulted in multiple audits during the 2018 calendar year, contributing to the modest increase ~~in occupancy expense is the cost of the lease on the Burlington loan production office that opened in the first quarter of 2017 in the amount of $25,425 for the first nine months of 2017.~~

●

~~Computer outsourcing increased $2,028, or 1.6%, for the third quarter and $31,159, or 8.3%,~~ year over ~~year due in part to an increase in purchased electronic technology services from the Company’s core vendor, particularly in the area of electronic and mobile banking.~~

●

Marketing expense increased $37,159, or 37.8%, for the third quarter and $99,857, or 35.3%, year over year, due to the Company’s strategic decision to enhance marketing efforts, including a shift to television ads from paper and radio, in the 2017 calendar year.

●

Consultant services ~~increased $9,280, or 17.9%,~~decreased 27.5% for the third quarter and ~~$46,642, or 40.1%,~~9.3% year over year, ~~partly~~ due to ~~a contract with a consultant for~~the completion of some technology ~~related projects.~~projects in 2018.

●

Collection & non-accruing loan expense ~~decreased $31,045, or 66.8%,~~increased 43.4% for the third quarter and ~~$48,335, or 57.2%~~23.0% year over ~~year. The variance in both comparison periods is~~year, due ~~primarily~~ to ~~non-recurring recovery of expenses of approximately $28,000~~an increase in the ~~third quarter~~non-performing assets portfolio and ~~$30,000 in~~ the ~~first quarter~~length of ~~2017.~~time it takes to go through the foreclosure process.

●

Miscellaneous computer expense increased $25,627, or 90.3%, for the third quarter and $56,576, or 104.3%, year over year, partly due to an upgrade of the devices used for board and management reporting which has eliminated the use and distribution of paper reports. As the cost of some technology decreases, individual items are below the depreciable threshold and become a direct expense.

~~Table of Content~~

●

The Company recorded write-downs on two OREO ~~expense decreased $258, or 4.7% for the third quarter and $19,423, or 51.8%, year over year. During~~properties during the second quarter of ~~2016, a $26,000 write-down was taken on an OREO property, although it was offset by approximately $15,000 in condominium association fees recouped on a former OREO property~~2019, which were subsequently sold in the same period, with no write downs recorded during the first ~~quarter, the net effect contributed to higher OREO expense in 2016 compared to 2017.~~nine months of 2018.

APPLICABLE INCOME TAXES

The provision for income taxes ~~increased $98,683,~~decreased by $29,011, or ~~16.7%~~6.0%, to ~~$688,155~~$456,595 for the third quarter of ~~2017~~2019 compared to ~~$589,472~~$485,606 for the same period in ~~2016~~2018, and ~~$204,769,~~by $85,224, or ~~13.5%,~~6.1% to ~~$1,720,003~~$1,304,374 for the first nine months of ~~2017~~2019 compared to ~~$1,515,234~~$1,389,598 for the first nine months of 2016. These increases are due primarily to an increase in income before taxes of $375,732, or 17.9%, for the third quarter of 2017 compared to the same quarter in 2016, and an increase of $930,855, or 16.9%, for the first nine months of 2017 compared to the same period in ~~2016.~~2018. An increase in tax credits for 2019 and a decrease in amortization expense (discussed below), are all contributing factors to the decrease in income tax expense for both periods. Tax credits related to limited partnerships amounted to ~~$106,599~~$103,776 and ~~$98,475,~~$100,140, respectively, for the third quarter of ~~2017~~2019 and ~~2016,~~2018, and ~~$319,797~~$311,328 and ~~$295,425~~$300,420, respectively, for the first nine months of ~~2017~~2019 and ~~2016.~~2018.

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to ~~$105,414~~$78,027 and ~~$102,006,~~$94,371, respectively, for the third quarter of ~~2017~~2019 and ~~2016,~~2018, and ~~$316,242~~$234,081 and ~~$306,018~~$283,113 for the first nine months of ~~2017~~2019 and ~~2016,~~2018, respectively. These investments provide tax benefits, including tax credits, and are designed to provide ana targeted effective yield of between 8%7% and 10%.

CHANGES IN FINANCIAL CONDITION

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

	September 30, 2017		December 31, 2016		September 30, 2016		September 30, 2019		December 31, 2018
Assets
Loans(1)	$506,048,119	76.50%	$487,249,226	76.41%	$470,186,895	77.62%	$604,107,288	82.84%	$578,450,517	80.30%
Securities available-for-sale	36,719,673	5.55%	33,715,051	5.29%	29,412,216	4.86%
Securities held-to-maturity	53,882,287	8.14%	49,886,631	7.82%	56,837,100	9.38%
AFS Securities							42,579,295	5.84%	39,366,831	5.46%

Liabilities
Demand deposits	115,930,899	17.52%	104,472,268	16.38%	101,259,470	16.72%	128,574,014	17.63%	122,430,805	17.00%
Interest-bearing transaction accounts	127,426,517	19.26%	118,053,360	18.51%	119,981,648	19.81%	167,089,977	22.91%	177,815,417	24.68%
Money market accounts	85,947,545	12.99%	79,042,619	12.40%	76,976,376	12.71%	96,309,501	13.21%	85,261,685	11.84%
Savings deposits	99,439,616	15.03%	86,776,856	13.61%	91,274,380	15.07%	98,240,128	13.47%	93,129,875	12.93%
Time deposits	128,007,743	19.35%	116,389,929	18.25%	114,315,032	18.87%	116,173,628	15.93%	130,178,783	18.07%
Borrowed Funds	0	0.00%	0	0.00%	5,245,000	0.87%
Short-term advances	0	0.00%	30,000,000	4.70%	0	0.00%
Long-term advances	3,550,000	0.54%	1,550,000	0.24%	550,000	0.09%	1,550,000	0.21%	1,550,000	0.22%

(1) Gross loans include obligations of local municipalities reclassified from the investment portfolio to the loan portfolio effective January 1, 2019, with prior periods restated to conform to the reclassification, and having balances of $51,935,005 and $47,067,023 as of September 30, 2019 and December 31, 2018, respectively. See Notes 4 and 5 to the Company’s unaudited interim consolidated financial statements for additional information.

The following table reflects the changes in the composition of the Company's ~~total~~major categories of assets and liabilities disclosed in the table above:

	Change in Volume	Percent of Change
Assets
Loans (1)	$25,656,771	4.44%
AFS Securities	3,212,464	8.16%

Liabilities
Demand deposits	6,143,209	5.02%
Interest-bearing transaction accounts	(10,725,440)	-6.03%
Money market accounts	11,047,816	12.96%
Savings deposits	5,110,253	5.49%
Time deposits	(14,005,155)	-10.76%

(1) Gross loans include obligations of local municipalities reclassified from the investment portfolio to the loan portfolio ateffective January 1, 2019, with prior periods restated to conform to the reclassification, and having balances of $30,302,868 and $51,935,005 as of September 30, ~~2017 increased $18,798,893, or 3.9%, from~~2019 and December 31, ~~2016~~2018, respectively. See Notes 4 and ~~$35,861,224, or 7.6%, year over year. Securities available-for-sale (AFS) increased $3,004,622 or 8.9%, year~~5 to ~~date,~~the Company’s unaudited interim consolidated financial statements for additional information.

Contributing to loan growth during the third quarter of 2019 was the addition of a loan purchasing program through BHG. The Company purchased 36 loans totaling $7,413,483 during the quarter, meeting management’s targeted allocation to this asset class for the near future. Average loan size is approximately $200,000, with an average term of 100 months. This portfolio will serve to support asset growth and ~~$7,307,457, or 24.8%, year over year. Securities held-to-maturity increased $3,995,656 or 8.0%, year~~provide geographic diversification, and with average duration expected to ~~date,~~be slightly longer than the Company’s average, it is expected to reduce exposure to falling rates in the near term. The Bank has established conservative credit parameters and ~~decreased $2,954,813, or 5.2%, year over year. Held-to-maturity securities are made up~~expects a low risk of ~~investments~~default in this portfolio.

The Company further supplemented its commercial loan activity during the third quarter of 2019 with the purchase of a $4,000,000 CRE loan participation from the ~~Company’s municipal customers in its service areas. While~~ACBB.

As assets have grown, management has sought to increase the ~~Company has used maturing~~ securities ~~to fund loan growth in recent periods, the liquidity provided by these investments is very important~~. ~~As a result, the~~ AFS portfolio ~~has been expanding~~ in ~~recent periods~~order to ~~keep the Company’s on-balance-sheet liquidity~~maintain its size proportional to the overall asset ~~base.~~

~~Total~~base, as this portfolio serves an important role in the Company’s liquidity position. Business checking accounts account for most of the fluctuation in demand deposits, ~~increased $52,017,288,~~with a year to date increase of $7,482,190, or ~~10.3%~~8.9%. The decrease in interest-bearing transaction accounts is due in part to decreases of $5,023,123, or 14.4%, ~~from December 31, 2016 to September 30, 2017,~~in the Government Agency deposit accounts and $23,077,903, or 50.6%, in ICS deposit accounts. These decreases were partially offset by an increase of ~~$52,945,414,~~$10,565,560, or ~~10.5%~~16.6%, in other consumer interest-bearing transaction accounts. The increase in money market accounts is ~~noted year over year. Demand~~attributable, in part, to a seasonal increase in municipal deposits ~~increased $11,458,631,~~of $4,363,912, or ~~11.0%, year to date and $14,671,429, or 14.5%, year over year, split between growth in business checking ($13.5 million, or 21.8%) and consumer checking ($1.2 million, or 3.1%)~~28.5%. The ~~Company is seeing growth~~decrease in the business customer base and improvements in financial health of existing business customers. Money market accounts increased $6,904,926, or 8.7%, year to date, and $8,971,169, or 11.7% year over year. Savingstime deposits increased significantly in both periods, with increases of $12,662,760, or 14.6%, year to date and $8,165,236, or 9.0%, year over year. As mentioned earlier, this is partially due to multiple construction escrow accounts. Time deposits increased $11,617,814, or 10.0%, year to date and $13,692,711, or 12.0%, year over year, which is entirely attributable to an increasewas primarily driven by a decrease in wholesale ~~purchased~~ time ~~deposits.~~deposits of $16,384,191, or 42.3%. There were no overnight federal funds purchases ~~and short-term advances from~~as of the ~~FHLBB at September 30, 2017, $30,000,000 at December 31, 2016 and $5,245,000 at September 30, 2016. In addition,~~balance sheet dates, but there were outstanding long-term advances from the FHLBB of ~~$3,550,000 at September 30, 2017, $1,550,000 at December 31, 2016,~~$1,550,000. See “Liquidity and ~~$550,000 at September 30, 2016.~~

~~Table of Content~~

Capital Resources” section for additional information on the Company’s long-term advances.

Interest Rate Risk and Asset and Liability Management - Management actively monitors and manages the Company’s interest rate risk exposure and attempts to structure the balance sheet to maximize net interest income while controlling its exposure to interest rate risk. The Company's ~~Asset/Liability Management Committee (ALCO)~~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 ~~net interest income (NII),~~NII, the primary component of the Company’s earnings. Fluctuations in interest rates can also have an impact on liquidity. The ALCO uses an outside consultant to perform rate shock simulations to the Company's net interest income, as well as a variety of other analyses. It is the ALCO’s function to provide the assumptions used in the modeling process. Assumptions used in prior period simulation models are regularly tested by comparing projected NII with actual NII. The ALCO utilizes the results of the simulation model to quantify the estimated exposure of NII and liquidity to sustained interest rate changes. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on the Company’s balance sheet. The model also simulates the balance sheet’s sensitivity to a prolonged flat rate environment. All rate scenarios are simulated assuming a parallel shift of the yield curve; however further simulations are performed utilizing non-parallel changes in the yield curve. The results of this sensitivity analysis are compared to the ALCO policy limits which specify a maximum tolerance level for NII exposure over a 1-year horizon, assuming no balance sheet growth, given a 200 ~~basis point (bp)~~bps shift upward and a 100 bpbps 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~~interest income is expected to trend upward as the short-term asset base (cash and adjustable rate loans) quickly cycle ~~upward while~~upward. However, as rates continue to rise, the cost of wholesale funds increases and pressure to increase rates paid on the retail funding base ~~(deposits) lags~~is increasing, putting pressure on NII and reducing the ~~market. If rates paid on deposits have to be increased more and/or more quickly than projected, the expected~~ benefit to rising ~~rates would be reduced.~~rates. In a falling rate environment, NII is expected to trend slightly downward compared with the current rate environment scenario for the first year of the simulation as asset yield erosion is not fully offset by decreasing funding costs. Thereafter, net interest income is projected to experience sustained downward pressure as funding costs reach their assumed floors and asset yields continue to reprice into the lower rate environment. The ~~recent increases in the federal funds rate have generated a positive impact to the Company’s NII in 2017 as variable rate loans reprice; however the behavior of the long end~~slope of the yield curve will ~~also~~ be very important to the Company’s margins going ~~forward, as funding costs continue to rise and the long end remains relatively anchored.~~forward.

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, ~~2017:~~2019:

Rate Change	Percent Change in NII

Down 100 ~~basis points~~bps	~~-2.8~~% -1.2%
Up 200 ~~basis points~~bps	~~3.7~~% 1.6%

The amounts shown in the table are well within the ALCO Policy limits. However, those amounts do not represent a forecast and should not be relied upon as indicative of future results. While assumptions used in the ALCO process, including the interest rate simulation analyses, are developed based upon current economic and local market conditions, and expected future conditions, the Company cannot provide any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

~~Table~~As of ~~Content~~

September 30, 2019, the Company had outstanding $12,887,000 in principal amount of Junior Subordinated Debentures due December 15, 2037, which bear a quarterly floating rate of interest equal to the 3-month London Interbank Offered Rate (LIBOR), plus 2.85%. During 2017, the financial authorities in the United Kingdom that administer LIBOR announced that LIBOR will be phased out by the end of 2021. The Company has reviewed the pertinent language in the Indenture governing the Debentures and believes that the Debenture Trustee has sufficient authority under the Indenture to establish a substitute interest rate benchmark without the need to amend the Indenture. However, the Debenture Trustee has not yet informed the Company as to how it intends to proceed. Aside from the Debentures, the Company does not have any other exposures to the phase out of LIBOR. The Company has not generally utilized LIBOR as an interest rate benchmark for its variable rate commercial, residential or other loans and does not utilize derivatives or other financial instruments tied to LIBOR for hedging or investment purposes. Accordingly, management expects that the Company’s exposure to the phase out of LIBOR will be limited to the effect on the interest rate paid on its Debentures.

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 interest, 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.

As discussed in Note 5 to the accompanying unaudited interim consolidated financial statements, as of January 1, 2019, the Company chose to reclassify its obligations of local municipalities from the investment portfolio, where they were classified as HTM, into the loan portfolio. All prior periods presented have been restated to conform to this reclassification. These obligations have not historically generated any credit losses for the Company.

Residential mortgages ~~represent a little less than half~~represented 34.0% of the Company’s loan ~~balances;~~balances as of September 30, 2019, a level that ~~level~~ has been on a gradual decline in recent years, consistent with athe Company’s strategic shift to commercial lending. The Company maintains a mortgage loan portfolio of traditional mortgage products and does not engage in higher risk loans such as option adjustable rate mortgage products, high loan-to-value products, interest only mortgages, subprime loans and products with deeply discounted teaser rates. Residential mortgages with loan-to-values exceeding 80% are generally covered by ~~private mortgage insurance (“PMI”).~~PMI. A 90% loan-to-value residential mortgage product without PMI is only available to borrowers with excellent credit and low debt-to-income ratios and has not been widely originated. Junior lien home equity products make up ~~20.8%~~21.5% of the residential mortgage portfolio with maximum loan-to-value ratios (including prior liens) of 80%. The Company also originates some home equity loans greater than 80% under an insured loan program with stringent underwriting criteria.

Consistent with the strategic focus on commercial lending, ~~both segments saw~~the commercial & industrial and CRE loan portfolios have seen solid growth ~~during 2016 despite some significant loan payoffs during the year. The 2016 growth included balances being drawn on commercial construction loans~~over recent years. Commercial & industrial and higher balances on commercial lines of credit. Commercial and commercial real estate loan demand has continued into 2017 and is increasing with the funding of construction projects and draws on lines of credit. Commercial and commercial real estateCRE loans together comprised ~~57.0%~~56.7% of the Company’s loan portfolio at September 30, ~~2017, 55.5%~~2019, compared to 54.6% at December 31, ~~2016~~2018.

Growth in the CRE portfolio in recent years has enhanced the geographic diversification of the loan portfolio as it has been principally driven by new loan volume in Chittenden County and ~~55.3%~~northern Windsor County around the White River Junction, I91-I93 interchange area. Credits in the Chittenden County market are being managed by two commercial lenders out of the Company’s Burlington loan production office that know the area well, while Windsor County is being served by a commercial lender from the St. Johnsbury office with previous lending experience serving the greater White River Junction area. On May 1, 2019, the Company opened a loan production office in Lebanon, New Hampshire to provide a presence in the greater White River Junction area including Grafton County, New Hampshire. Larger transactions continue to be centrally underwritten and monitored through the Company’s commercial credit department. The types of CRE transactions driving the growth have been a mix of construction, land and development, multifamily, and other non-owner occupied CRE properties including hotels, retail, office, and industrial properties. The largest components of the $250 million CRE portfolio at September 30, ~~2016. The increase~~2019 were approximately $93.2 million in ~~the absolute~~owner-occupied CRE and ~~relative size of the commercial loan portfolio has also increased geographic diversification, with much of the growth~~$85.0 million in ~~commercial loans occurring along the I-89 corridor from White River Junction through Chittenden County.~~non-owner occupied CRE.

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

	September 30, 2017		December 31, 2016		September 30, 2016		September 30, 2019		December 31, 2018

Commercial & industrial	$77,604,260	15.33%	$68,730,573	14.11%	$69,791,331	14.84%	$92,644,869	15.33%	$80,766,693	13.96%
Commercial real estate	210,983,668	41.69%	201,728,280	41.40%	190,246,590	40.46%	249,599,721	41.32%	235,318,148	40.68%
1 - 4 family residential - 1st lien	167,185,874	33.04%	166,691,962	34.21%	161,277,406	34.30%
1 - 4 family residential - Jr lien	43,962,578	8.69%	42,927,335	8.81%	41,739,827	8.88%
Municipal							51,935,005	8.60%	47,067,023	8.14%
Residential real estate - 1st lien							161,056,228	26.66%	165,665,175	28.64%
Residential real estate - Jr lien							44,161,727	7.31%	44,544,987	7.70%
Consumer	6,311,739	1.25%	7,171,076	1.47%	7,131,741	1.52%	4,709,738	0.78%	5,088,491	0.88%
Total loans	506,048,119	100.00%	487,249,226	100.00%	470,186,895	100.00%	604,107,288	100.00%	578,450,517	100.00%
Deduct (add):
Allowance for loan losses	5,436,313		5,278,445		5,179,965
ALL							5,883,642		5,602,541
Deferred net loan costs	(318,452)		(310,130)		(312,565)		(360,390)		(363,614)
Net loans	$500,930,258		$482,280,911		$465,319,495		$598,584,036		$573,211,590

(1) Reflects reclassification of obligations of local municipalities from the investment portfolio to the loan portfolio as of January 1, 2019, and conforming changes to the comparative 2018 information presented. See Notes 4 and 5 to the accompanying unaudited interim consolidated financial statements for additional information.

Risk in the Company’s commercial & industrial and ~~commercial real estate~~CRE loan portfolios is mitigated in part by government guarantees issued by federal agencies such as the ~~U.S. Small Business Administration (SBA)~~SBA and ~~U.S. Department of Agriculture (USDA) Rural Development.~~RD. At September 30, ~~2017,~~2019, the Company had ~~$26,557,438~~$29,055,505 in guaranteed loans with guaranteed balances of ~~$19,693,638,~~$21,484,337, compared to ~~$23,929,426~~$28,366,843 in guaranteed loans with guaranteed balances of ~~$18,128,676~~$21,195,219 at December 31, ~~2016 and $26,476,719 in guaranteed loans with guaranteed balances of $20,070,993 at September 30, 2016.~~2018.

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

~~Table of Content~~

The Company’s non-performing assets ~~decreased $135,656,~~increased $1,369,103, or ~~3.4%~~26.4%, during the first nine months of ~~2017.~~2019. The ~~change in non-performing assets was due~~increase is attributable primarily to a ~~shift~~combination of residential ~~mortgage loans moving out of ninety days past due and into non-accrual, which was offset, in part, by a decrease in commercial & industrial loans and commercial~~ real estate loans ~~in the~~and CRE loans moving into non-accrual ~~portfolio.~~status. Claims receivable on related government guarantees were $0$19,691 at September 30, ~~2017~~2019 compared to ~~$56,319~~$200,948 at December 31, ~~2016 and $0~~2018, with three new claims pending settlement at ~~September 30, 2016, with numerous USDA and SBA claims settled and paid throughout 2016 and 2017.~~the end of 2018. Non-performing loans as of September 30, ~~2017~~2019 carried ~~USDA~~RD and SBA guarantees totaling ~~$49,153,~~$355,400, compared to ~~$146,323~~$376,289 at December 31, ~~2016 and $168,861 at September 30, 2016.~~2018.

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

	September 30, 2017		December 31, 2016		September 30, 2016
							September 30, 2019		December 31, 2018
Loans past due 90 days or more
and still accruing
Commercial & industrial	$0	0.00%	$26,042	0.65%	$116,720	2.79%
Commercial real estate	15,011	0.39%	0	0.00%	227,302	5.43%
and still accruing (1)
Residential real estate - 1st lien	725,581	18.81%	1,068,083	26.75%	744,379	17.78%	$969,072	14.77%	$622,486	11.98%
Residential real estate - Jr lien	64,292	1.67%	27,905	0.70%	91,420	2.18%	181,477	2.76%	104,959	2.02%
Consumer	2,777	0.07%	2,176	0.05%	0	0.00%	0	0.00%	1,661	0.03%
	807,661	20.94%	1,124,206	28.15%	1,179,821	28.18%
Total							1,150,549	17.53%	729,106	14.03%

Non-accrual loans (1)
Commercial & industrial	48,385	1.25%	143,128	3.59%	205,358	4.90%	570,171	8.69%	84,814	1.63%
Commercial real estate	714,720	18.53%	765,584	19.17%	759,332	18.13%	1,746,986	26.62%	1,742,993	33.56%
Residential real estate - 1st lien	1,511,891	39.20%	1,227,220	30.74%	1,289,968	30.81%	2,754,912	41.98%	2,026,939	39.03%
Residential real estate - Jr lien	450,192	11.67%	338,602	8.48%	343,766	8.21%	266,815	4.06%	408,540	7.87%
	2,725,188	70.65%	2,474,534	61.98%	2,598,424	62.05%
Total							5,338,884	81.35%	4,263,286	82.09%

Other real estate owned	324,235	8.41%	394,000	9.87%	409,000	9.77%	73,448	1.12%	201,386	3.88%

	$3,857,084	100.00%	$3,992,740	100.00%	$4,187,245	100.00%
Total Non-Performing Assets							$6,562,881	100.00%	$5,193,778	100.00%

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

The Company’s OREO portfolio consisted of one commercial property at September 30, ~~2017 consisted of one residential property~~2019 and ~~one~~two commercial ~~property compared to two residential~~ properties at December 31, ~~2016 and two residential properties at September 30, 2016. All~~2018. The Company took control of the ~~residential~~commercial properties, ~~were acquired~~rather than obtaining them through the normal foreclosure process. The ~~Company took control of two commercial properties in 2017, one in January and the other in March. One of the commercial properties sold in April, 2017 and the other failed to sell~~single OREO property held at ~~auction in May, 2017 and is~~September 30, 2019 will be listed for ~~sale.~~sale upon approval of a court order.

The Company’s ~~troubled debt restructurings (TDRs)~~TDRs are principally a result of extending loan repayment terms to relieve cash flow difficulties. The Company has only infrequently reduced interest rates below the current market rate. The Company has not forgiven principal or reduced accrued interest within the terms of original restructurings. Management evaluates each TDR situation on its own merits and does not foreclose the granting of any particular type of concession.

~~Table of Content~~

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

							September 30, 2019		December 31, 2018
	September 30, 2017		December 31, 2016		September 30, 2016		Number of	Principal	Number of	Principal
	Number of	Principal	Number of	Principal	Number of	Principal	Loans	Balance	Loans	Balance
	Loans	Balance	Loans	Balance	Loans	Balance
Commercial & industrial	1	$48,385	2	$143,127	3	$191,919	3	$312,722	1	$24,685
Commercial real estate	2	329,149	2	354,811	2	373,767	4	797,935	4	862,713
Residential real estate - 1st lien	7	343,519	9	516,886	10	684,636	13	1,236,948	12	1,082,187
Residential real estate - Jr lien	0		2	117,158	1	52,130
	10	$721,053	15	$1,131,982	16	$1,302,452
Total							20	$2,347,605	17	$1,969,585

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

	September 30, 2017		December 31, 2016		September 30, 2016		September 30, 2019		December 31, 2018
	Number of	Principal	Number of	Principal	Number of	Principal	Number of	Principal	Number of	Principal
	Loans	Balance	Loans	Balance	Loans	Balance	Loans	Balance	Loans	Balance
Commercial & industrial	0	$0	0	$0	2	$35,340

Commercial real estate	5	1,291,887	5	1,350,480	5	1,391,990	2	$111,293	1	$102,292
Residential real estate - 1st lien	53	2,811,263	28	2,722,973	27	2,558,079	31	2,574,524	31	2,544,728
Residential real estate - Jr lien	1	8,645	2	63,971	3	132,822	1	6,343	1	7,248
	59	$4,111,795	35	$4,137,424	37	$4,118,231
Total							34	$2,692,160	33	$2,654,268

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

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

When establishing the ALL each quarter, the Company applies a combination of historical loss factors and qualitative factors to loan segments, including residential first and junior lien mortgages, commercial real estate, commercial & industrial, and consumer loan ~~portfolios.~~portfolios, other than the municipal loans as there has never been a loss recorded in that loan segment. The Company applies numerous qualitative factors to each segment of the loan portfolio. Those factors include the levels of and trends in delinquencies and non-accrual loans, criticized and classified assets, volumes and terms of loans, and the impact of any loan policy changes. Experience, ability and depth of lending personnel, levels of policy and documentation exceptions, national and local economic trends, the competitive environment, and concentrations of credit are also factors considered.

Specific allocations to the ALL are made for certain impaired loans. Impaired loans include all troubled debt restructurings regardless of amount, and all loans to a borrower that in aggregate are greater than $100,000 and that are in non-accrual status. A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due, including interest and principal, according to the contractual terms of the loan agreement. The Company ~~will review~~reviews all the facts and circumstances surrounding non-accrual loans and on a case-by-case basis may consider loans below the threshold as impaired when such treatment is material to the financial statements. See Note 5 to the accompanying unaudited interim consolidated financial statements for information on the recorded investment in impaired loans and their related allocations.

During the second quarter of 2017, the Company transitioned to a software solution for preparing the ALL calculation and related reports, replacing previously used Excel spreadsheets. The software solution provides the Company with stronger data integrity, ease and efficiency in ALL preparation, and helps ready the Company for the future transition to the Current Expected Credit Loss (CECL) model. During the implementation and testing of the software, several changes to the underlying ALL methodology were made. Those changes included (i) removing the government guaranteed balances from the calculation of the ALL for both the pooled loans and impaired loans, (ii) treating all TDRs as impaired regardless of size, and (iii) using a fixed look back period for historical losses based on loss history and economic conditions rather than applying the highest look back period of the last 5 years. The Company has a solid history of collection of government guarantees; removal of the guaranteed portion of the loan balance from the ALL calculation for government guaranteed loans reduces the amount of reserves that would otherwise be required against those loans. Management expects the change to the historical loss methodology will eliminate sharp increases or decreases in loss ratios resulting from isolated losses rolling into or out of the look back period and is more reflective of the Company’s loss history during periods of economic stability. Although the inclusion of all TDRs in the impaired calculation now requires the individual analysis of a significantly larger number of loans than was the case under the previous ALL methodology, the ability to individually analyze a greater number of loans is facilitated by the new software. Compared to the prior ALL methodology, the net impact of the foregoing methodology changes reduced required reserves by approximately $247,000 for the quarter ended June 30, 2017, the quarter during which the changes were first implemented.

~~Table of Content~~

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

	As of or for the Nine Months Ended September 30,		As of or Nine Months Ended September 30,
	2017	2016	2019	2018

Loans outstanding, end of period(1)	$506,048,119	$470,186,895	$604,107,288	$581,304,855
Average loans outstanding during period(1)	$495,170,740	$465,314,118	$585,983,458	$563,728,405
Non-accruing loans, end of period	$2,725,188	$2,598,424	$5,338,884	$4,347,401
Non-accruing loans, net of government guarantees	$2,676,035	$2,429,563	$4,983,484	$3,963,319

Allowance, beginning of period	$5,278,445	$5,011,878
ALL, beginning of period			$5,602,541	$5,438,099
Loans charged off:
Commercial & industrial	0	(12,194)	(10,368)	(131,273)
Commercial real estate	(160,207)	0	(116,186)	(124,645)
Residential real estate - 1st lien	(88,833)	(234,549)	(242,244)	(79,025)
Residential real estate - Jr lien	(15,311)	0	(102,000)	(36,174)
Consumer loans	(99,617)	(38,412)
Consumer			(70,959)	(110,715)
Total loans charged off	(363,968)	(285,155)	(541,757)	(481,832)
Recoveries:
Commercial & industrial	23,469	22,650	10,768	54,858
Commercial real estate	231	0
Residential real estate - 1st lien	14,838	9,660	11,131	26,511
Residential real estate - Jr lien	180		1,486	935
Consumer loans	33,118	20,752
Consumer			32,805	32,656
Total recoveries	71,836	53,242	56,190	114,960
Net loans charged off	(292,132)	(231,913)	(485,567)	(366,872)
Provision charged to income	450,000	400,000	766,668	570,000
Allowance, end of period	$5,436,313	$5,179,965
ALL, end of period			$5,883,642	$5,641,227

Net charge offs to average loans outstanding	0.059%	0.050%	0.083%	0.065%
Provision charged to income as a percent of average loans	0.091%	0.086%	0.131%	0.101%
Allowance to average loans outstanding	1.098%	1.113%
Allowance to non-accruing loans	199.484%	199.350%
Allowance to non-accruing loans net of government guarantees	203.148%	213.206%
ALL to average loans outstanding			1.004%	1.001%
ALL to non-accruing loans			110.204%	129.761%
ALL to non-accruing loans net of government guarantees			118.063%	142.336%

(1) Includes obligations of local municipalities reclassified from the investment portfolio into the loan portfolio as of January 1, 2019 and conforming changes to the comparative 2018 information presented. See Notes 4 and 5 of the accompanying unaudited interim financial statements for additional information.

The provision increased ~~$50,000,~~$196,668, or ~~12.5%~~34.5%, for the first nine months of ~~2017~~2019 compared to the same period in ~~2016.~~2018. The ~~lower~~increased 2019 provision ~~in 2016 was principally related~~level is due to the ~~comparatively low level of net~~year to date increase in the loan ~~losses experienced~~portfolio combined with higher than anticipated loan charge off activity during the ~~first three months~~third quarter of 2016. The first quarter 2017 provision supported higher losses driven by one particular commercial real estate charge off. The decrease in the size of the overall portfolio at March 31, 2017 compared to year-end precluded the need for any additional first quarter provision. The second and third quarters of 2017 saw modest loan losses coupled with strong loan growth and as such the provision remained on budget at $450,000 year-to-date.

~~Table of Content~~

2019.

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

The third quarter ALL analysis shows the reserve balance of ~~$5,436,313~~$5,883,642 at September 30, ~~2017~~2019 which is ~~sufficient~~appropriate in management’s view to cover losses that are probable and estimable as of the measurement date, with an unallocated reserve of ~~$261,957.~~$24,765 compared to $133,478 at December 31, 2018. The reserve balance and unallocated amount continue to be directionally consistent with the overall risk profile of the Company’s loan portfolio and credit risk appetite. The portion of the ALL termed "unallocated" is established to absorb inherent losses that exist as of the measurement date although not specifically identified through management's process for estimating credit losses. While the ALL is described as consisting of separate allocated portions, the entire ALL is available to support loan losses, regardless of category. Unallocated reserves are considered by management to be appropriate in light of the Company’s continued growth strategy and shift in the portfolio from residential loans to commercial and ~~commercial real estate~~industrial and CRE loans and the risk associated with the relatively new, unseasoned loans in those portfolios. The adequacy of the ALL is reviewed quarterly by the risk management committee of the Board ~~of Directors~~ and then presented to the full Board ~~of Directors~~ for approval.

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

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 ~~2017,~~2019, the Company did not engage in any activity that created any additional types of off-balance sheet risk.

The Company generally requires collateral or other security to support financial instruments with credit risk. The Company's financial instruments whose contract amount represents credit risk were as follows:

Contract or Notional Amount

September 30,

December 31,

2017

2016

Unused portions of home equity lines of credit
$28,640,161
$25,535,104
Residential construction lines of credit
  4,160,338
  3,676,176
Commercial real estate and other construction lines of credit
  30,022,030
  25,951,345
Commercial and industrial commitments
  35,776,104
  36,227,213
Other commitments to extend credit
  52,666,605
  42,459,454
Standby letters of credit and commercial letters of credit
  1,651,759
  2,009,788
Recourse on sale of credit card portfolio
  309,155
  258,555
MPF credit enhancement obligation, net of liability recorded
  596,642
  748,239

~~Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.~~

In connection with its 2007 trust preferred securities financing, the Company guaranteed the payment obligations under the $12,500,000 of capital securities of its subsidiary, CMTV Statutory Trust I. The source of funds for payments by the Trust on its capital securities is payments made by the Company on its debentures issued to the Trust. The Company's obligation under those debentures is fully reflected in the Company's balance sheet, in the gross amount of $12,887,000 for each of the comparison periods, of which $12,500,000 represents external financing through the issuance to investors of capital securities by CMTV Statutory Trust I.

~~Table of Content~~

LIQUIDITY AND CAPITAL RESOURCES

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

The Company recognizes that, at times, when loan demand exceeds deposit growth or the Company has other liquidity demands, it may be desirable to utilize alternative sources of deposit funding to augment retail deposits and borrowings. One-way deposits acquired through the CDARS program provide an alternative funding source when needed. ~~Such deposits are generally considered a form of brokered deposits.~~ At September 30, ~~2017,~~2019, the Company had one-way CDARS outstanding totaling ~~$17,906,763~~$9,257,459, compared to ~~no one way CDARS~~$723,774 at December 31, ~~2016 and $10,000,000 at September 30, 2016.~~2018. In addition, two-way (that is, reciprocal) CDARS deposits, as well as reciprocal ICS money market and demand deposits, allow the Company to provide ~~Federal Deposit Insurance Corporation (FDIC)~~FDIC deposit insurance to its customers in excess of account coverage limits by exchanging deposits with other ~~CDARS members.~~participating FDIC-insured financial institutions. Until 2018, these reciprocal deposits were considered a form of brokered deposits, which are treated less favorably than other deposits for certain purposes; however, a provision of the 2018 Regulatory Relief Act provides that reciprocal deposits held by a well-capitalized and well managed bank are no longer classified as brokered deposits. At September 30, ~~2017,~~2019, the Company reported ~~$2,809,923~~$5,756,456 in ~~two-way~~reciprocal CDARS deposits, ~~representing exchanged deposits with other CDARS participating banks,~~ compared to ~~$3,141,773~~$3,480,106 at December 31, ~~2016 and $3,213,916 at September 30, 2016.~~2018. The balance in ~~insured cash sweep (ICS)~~ICS reciprocal money market deposits was ~~$14,920,480~~$24,147,305 at September 30, ~~2017,~~2019, compared to ~~$11,909,300~~$23,862,324 at December 31, ~~2016 and $11,559,412 at September 30, 2016,~~2018, and the balance in ICS reciprocal demand deposits as of those dates was ~~$8,116,095, $5,706,882~~$22,573,645 and ~~$7,205,672,~~$45,651,548, respectively.

During the third quarter of 2018, the Company issued two blocks of DTC Brokered CDs totaling $30.0 million, with maturities in January 2019 and August 2019. During the first quarter of 2019, the Company partially replaced the $20.0 million block that matured in January with purchases of two blocks of DTC Brokered CDs totaling $15.0 million and having maturities in July, 2019 and January, 2020. The Company did not replace the blocks that matured in July and August of 2019, leaving $6.2 million outstanding as of September 30, 2019. Wholesale deposit funding through DTC is an important supplemental source of liquidity that has proven efficient, flexible and cost-effective when compared with other borrowing methods.

At September 30, ~~2017,~~2019 and December 31, ~~2016 and September 30, 2016,~~2018, borrowing capacity of ~~$112,919,448, $68,163,543~~$101,684,650 and ~~$67,359,726,~~$108,736,234, 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. During the second quarter of 2017, the Company began pledging residential mortgage loans in a detail listing instead of a summary listing, and also began pledging qualifying multifamily and other commercial real estate loans, accounting for the increase in the portfolio of qualifying loans in 2017 compared to both periods in 2016. The Company also has an unsecured Federal Funds credit line with the FHLBB with an available balance of $500,000 and no outstanding advances during any of the respective comparison periods. Interest is chargeable at a rate determined daily, approximately 25 ~~basis points~~bps higher than the rate paid on federal funds sold.

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

September 30,

December 31,

September 30,

2017

2016

2016

Long-Term Advances(1)

FHLBB term advance, 0.00%, due February 26, 2021
$350,000
$350,000
$350,000
FHLBB term advance, 0.00%, due November 22, 2021
  1,000,000
  1,000,000
  0
FHLBB term advance, 0.00%, due June 09, 2022
  2,000,000
  0
  0
FHLBB term advance, 0.00%, due September 22, 2023
  200,000
  200,000
  200,000

  3,550,000
  1,550,000
  550,000




Short-Term Advances







FHLBB term advance 0.77% fixed rate, due February 8, 2017
  0
  10,000,000
  0
FHLBB term advance 0.77% fixed rate, due February 24, 2017
  0
  10,000,000
  0
FHLBB term advance 0.92% fixed rate, due June 14, 2017
  0
  10,000,000
  0

  0
  30,000,000
  0
Overnight Borrowings



Federal funds purchased (FHLBB), 0.51%
  0
  0
  5,245,000





$3,550,000
$31,550,000
$5,795,000

	September 30,	December 31,
	2019	2018
Long-Term Advances(1)
FHLBB term advance, 0.00%, due February 26, 2021	$350,000	$350,000
FHLBB term advance, 0.00%, due November 22, 2021	1,000,000	1,000,000
FHLBB term advance, 0.00%, due September 22, 2023	200,000	200,000
	$1,550,000	$1,550,000

(1)

The ~~Company has borrowed a total of $3,550,000 under the FHLBB’s Jobs for New England (JNE) program, a program dedicated to supporting job growth and economic development throughout New England. The~~ FHLBB ~~is providing~~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.

~~Table of Content~~

The Company has a ~~Borrower-in-Custody (BIC)~~BIC arrangement with the FRBB secured by eligible commercial & industrial loans, ~~commercial real estate~~CRE loans and home equity loans, resulting in an available credit line of ~~$66,804,404, $77,862,708,~~$55,480,117 and ~~$71,326,693,~~$50,913,351, respectively, at September 30, ~~2017,~~2019 and December 31, ~~2016 and September 30, 2016.~~2018. 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 ~~175 basis points.~~300 bps. The Company had no outstanding advances against this credit line during ~~any~~either of the periods presented.

The Company has unsecured lines of credit with three correspondent banks with aggregate available borrowing capacity totaling ~~$12,500,000~~$21.5 million as of ~~September 30, 2017 and December 31, 2016 and unsecured lines of credit with two correspondent banks with aggregate available borrowing capacity of $7,500,000 as of September 30, 2016. There were~~the balance sheet dates presented in this quarterly report. The Company had no outstanding advances against any of these credit lines during ~~any~~either of the ~~respective comparison periods.~~periods presented.

Securities sold under agreements to repurchase provide another funding source for the Company. At September 30, ~~2017,~~2019 and December 31, ~~2016 and September 30, 2016,~~2018, the Company had outstanding repurchase agreement balances of ~~$27,458,927, $30,423,195~~$35,769,931 and ~~$25,834,249,~~$30,521,565, respectively. These repurchase agreements mature and are repriced daily.

The following table illustrates the changes in shareholders' equity from December 31, ~~2016~~2018 to September 30, ~~2017:~~2019, including a partial redemption of the Company’s Series A non-cumulative perpetual preferred stock, effective March 31, 2019:

Balance at December 31, ~~2016~~2018 (book value ~~$10.27~~$11.72 per common share)	$~~54,451,517~~62,603,711
Net income	~~4,706,679~~6,453,146
Issuance of stock through the ~~Dividend Reinvestment Plan~~DRIP	~~712,899~~829,297
Redemption of preferred stock	(500,000)
Dividends declared on common stock	(~~2,586,973~~2,958,831)
Dividends declared on preferred stock	(~~75,000~~68,750)
~~Unrealized gain~~Change in AOCI on ~~available-for-sale~~AFS securities, ~~during the period,~~ net of tax	~~11,618~~962,715
Balance at September 30, ~~2017~~2019 (book value ~~$10.73~~$12.60 per common share)	$~~57,220,740~~67,321,288

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

As described in more detail in ~~the Company’s 2016 Annual Report on Form 10-K in~~ Note 20 to the audited consolidated financial statements contained ~~therein~~in the Company’s 2018 Annual Report on Form 10-K and under the caption “LIQUIDITY AND CAPITAL RESOURCES” in the MD&A section of ~~such~~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.

Beginning in 2016, an additional capital conservation buffer ~~has been~~was added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer ~~will be~~was fully phased-in on January 1, 2019 at ~~2.5 percent.~~2.5% of risk-weighted assets. A banking organization with a conservation buffer of less than ~~2.5 percent (or the required phase-in amount in years prior to 2019)~~2.5% is subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. ~~The Company’s and the Bank’s capital conservation buffer was 5.65% and 5.51%, respectively, at September 30, 2017.~~ As of September 30, ~~2017, both~~2019, the Company and the Bank ~~exceeded the required~~were fully compliant with a capital conservation buffer of ~~1.25%~~6.42% and 6.30%, respectively.

Under the 2018 Regulatory Relief Act, these capital requirements have been simplified for qualifying community banks and bank holding companies. In September 2019, the OCC and the other federal bank regulators approved a final joint rule that permits a qualifying community banking organization to opt in to a simplified regulatory capital framework. A qualifying institution that elects to utilize the simplified framework must maintain a community bank leverage ratio (CBLR) in excess of 9%, and will thereby be deemed to have satisfied the generally applicable risk-based and other leverage capital requirements and (if applicable) the FDIC’s prompt corrective action framework. In order to utilize the CBLR framework, in addition to maintaining a CBLR of over 9%,a community banking organization must have less than $10 billion in total consolidated assets and must meet certain other criteria such as limitations on the amount of off-balance sheet exposures and on trading assets and liabilities. The CBLR will be calculated by dividing tangible equity capital by average total consolidated assets. The final rule will become effective on January 1, 2020. Management believes that the Company and Bank would qualify to utilize the CBLR framework on a pro forma basis ~~would be compliant with the fully phased-in capital conservation buffer requirement.~~as of September 30, 2019 had it been in effect on that date.

As of September 30, ~~2017,~~2019, the Bank was considered well capitalized under the regulatory capital framework for Prompt Corrective Action and the Company exceeded currently applicable consolidated regulatory guidelines for capital adequacy.

~~Table of Content~~

The following table shows the Company’s actual capital ratios and those of its subsidiary, as well as currently applicable regulatory capital requirements, as of the dates indicated.

					Minimum						Minimum
			Minimum		To Be Well				Minimum		To Be Well
			For Capital		Capitalized Under				For Capital		Capitalized Under
			Adequacy		Prompt Corrective				Adequacy		Prompt Corrective
	Actual		Purposes:		Action Provisions(1):		Actual		Purposes:		Action Provisions(1):
	Amount	Ratio	Amount	Ratio	Amount	Ratio	Amount	Ratio	Amount	Ratio	Amount	Ratio
	(Dollars in Thousands)						(Dollars in Thousands)
September 30, 2017

September 30, 2019
Common equity tier 1 capital
(to risk-weighted assets)
Company	$58,585	12.48%	$21,121	4.50%	N/A		$68,319	13.27%	$23,166	4.50%	N/A
Bank	$57,837	12.34%	$21,093	4.50%	$30,468	6.50%	$67,597	13.15%	$23,141	4.50%	$33,426	6.50%

Tier 1 capital (to risk-weighted assets)
Company	$58,585	12.48%	$28,161	6.00%	N/A		$68,319	13.27%	$30,888	6.00%	N/A
Bank	$57,837	12.34%	$28,124	6.00%	$37,499	8.00%	$67,597	13.15%	$30,855	6.00%	$41,139	8.00%

Total capital (to risk-weighted assets)
Company	$64,065	13.65%	$37,548	8.00%	N/A		$74,246	14.42%	$41,184	8.00%	N/A
Bank	$63,317	13.51%	$37,499	8.00%	$46,874	10.00%	$73,525	14.30%	$41,139	8.00%	$51,424	10.00%

Tier 1 capital (to average assets)
Company	$58,585	9.18%	$25,524	4.00%	N/A		$68,319	9.88%	$27,670	4.00%	N/A
Bank	$57,837	9.07%	$25,502	4.00%	$31,877	5.00%	$67,597	9.78%	$27,650	4.00%	$34,563	5.00%

December 31, 2016:

December 31, 2018:
Common equity tier 1 capital
(to risk-weighted assets)
Company	$55,690	12.34%	$20,304	4.50%	N/A		$64,564	12.94%	$22,446	4.50%	N/A
Bank	$55,120	12.23%	$20,274	4.50%	$29,285	6.50%	$63,960	12.84%	$22,419	4.50%	$32,384	6.50%

Tier 1 capital (to risk-weighted assets)
Company	$55,690	12.34%	$27,072	6.00%	N/A		$64,564	12.94%	$29,928	6.00%	N/A
Bank	$55,120	12.23%	$27,032	6.00%	$36,043	8.00%	$63,960	12.84%	$29,893	6.00%	$39,857	8.00%

Total capital (to risk-weighted assets)
Company	$61,012	13.52%	$36,096	8.00%	N/A		$70,210	14.08%	$39,904	8.00%	N/A
Bank	$60,443	13.42%	$36,043	8.00%	$45,054	10.00%	$69,606	13.97%	$39,857	8.00%	$49,821	10.00%

Tier 1 capital (to average assets)
Company	$55,690	9.17%	$24,305	4.00%	N/A		$64,564	9.26%	$27,890	4.00%	N/A
Bank	$55,120	9.08%	$24,281	4.00%	$30,351	5.00%	$63,960	9.18%	$27,867	4.00%	$34,834	5.00%

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

~~Table of Content~~

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.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

The Company's management of the credit, liquidity and market risk inherent in its business operations is discussed in Part 1, Item 2 of this report under the captions "CHANGES IN FINANCIAL CONDITION", “COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET ARRANGEMENTS” and “LIQUIDITY & CAPITAL RESOURCES”, which are incorporated herein by reference. Management does not believe that there have been any material changes in the nature or categories of the Company's risk exposures from those disclosed in the Company’s ~~2016~~2018 Annual Report on Form 10-K.

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”).~~Act. As of September 30, ~~2017,~~2019, an evaluation was performed under the supervision and with the participation of management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, management concluded that its disclosure controls and procedures as of September 30, ~~2017~~2019 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, ~~2017~~2019 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

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

ITEM 1A. Risk Factors

~~The~~In management’s view, the Risk Factors identified in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, continue to represent the most significant risks to the Company's future results of operations and financial condition.

~~Table of Content~~

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

The following table provides information as to the purchases of the Company’s common stock during the three months ended September 30, ~~2017,~~2019, by the Company or by any affiliated purchaser (as defined in SEC Rule 10b-18). During the monthly periods presented, the Company did not have any publicly announced repurchase plans or programs.

	Total Number	Average	Total Number	Average
	of Shares	Price Paid	of Shares	Price Paid
For the period:	Purchased(1)(2)	Per Share	Purchased(1)(2)	Per Share

July 1 - July 31	1,494	$18.95	0	$0.00
August 1 - August 31	0	0.00	0	0.00
September 1 - September 30	3,021	18.20	6,000	16.25
Total	4,515	$18.45	6,000	$16.25

(1) All ~~4,515~~6,000 shares were purchased for the account of participants invested in the Company Stock Fund under the Company’s Retirement Savings Plan by or on behalf of the Plan Trustee, the Human Resources Committee of ~~Community National~~the Bank. Such share purchases were facilitated through CFSG, which provides certain investment advisory services to the Plan. Both the Plan Trustee and CFSG may be considered affiliates of the Company under Rule 10b-18.

(2) Shares purchased during the period do not include fractional shares repurchased from time to time in connection with the participant's election to discontinue participation in the Company's ~~Dividend Reinvestment Plan.~~DRIP.

ITEM 6. Exhibits

The following exhibits are filed with this report:

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

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

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

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

Exhibit 101--The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2017~~2019 formatted in eXtensible Business Reporting Language (XBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the ~~three~~three-month and ~~nine month~~nine-month interim periods ended September 30, ~~2017~~2019 and ~~2016,~~2018, (iii) the unaudited consolidated statements of comprehensive income, (iv) the unaudited consolidated statements of cash flows and (v) related notes.

* This exhibit shall not be deemed “filed” for purposes of Section 18 of the ~~Securities~~ Exchange Act, ~~of 1934,~~ 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 ~~Securities~~ Exchange ~~Act of 1934.~~Act.

~~Table of Content~~

SIGNATURES

Pursuant to the requirements of the ~~Securities~~ Exchange Act, ~~of 1934,~~ the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COMMUNITY BANCORP.

DATED: November ~~09, 2017~~7, 2019	/s/Kathryn M. Austin
	Kathryn M. Austin, President
	& Chief Executive Officer
	(Principal Executive Officer)


DATED: November ~~09, 2017~~7, 2019	/s/Louise M. Bonvechio
	Louise M. Bonvechio, Corporate
	Secretary & Treasurer
	(Principal Financial Officer)

~~Table of Content~~

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, ~~2017~~2019

COMMUNITY BANCORP.

EXHIBITS

EXHIBIT INDEX

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

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

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

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


~~Exhibit 101~~	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 formatted in eXtensible Business Reporting Language (XBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three and nine month interim periods ended September 30, 2017 and 2016, (iii) the unaudited consolidated statements of comprehensive income, (iv) the unaudited consolidated statements of cash flows and (v) related notes.

* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, 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 Securities Exchange Act of 1934.

~~Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).~~

~~YES ( ) NO(X)~~

~~At November 02, 2017, there were 5,099,479 shares outstanding of the Corporation's common stock.~~

F~~ORM 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~~	31
~~Item 3~~	~~Quantitative and Qualitative Disclosures About Market Risk~~	53
~~Item 4~~	~~Controls and Procedures~~	53

~~PART II~~	~~OTHER INFORMATION~~

~~Item 1~~	~~Legal Proceedings~~	53
~~Item 1A~~	~~Risk Factors~~	53
~~Item 2~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	54
~~Item 6~~	~~Exhibits~~	54
	~~Signatures~~	55
	~~Exhibit Index~~	56

~~Table of Content~~

P~~ART I. FINANCIAL INFORMATION~~

~~ITEM 1. Financial Statements (Unaudited)~~

~~The following are the unaudited consolidated financial statements for Community Bancorp. and Subsidiary, "the Company".~~

~~The accompanying notes are an integral part of these consolidated financial statements~~

~~Table of Content~~

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

~~Table of Content~~

Community Bancorp. and Subsidiary

Nine Months Ended September 30,

Consolidated Statements of Income

2017

2016

(Unaudited)

Interest income

   Interest and fees on loans
$17,737,531
$16,582,276
   Interest on debt securities


     Taxable
  488,250
  384,413
     Tax-exempt
  992,831
  942,246
   Dividends
  117,979
  108,141
   Interest on federal funds sold and overnight deposits
  84,802
  18,654
        Total interest income
  19,421,393
  18,035,730



Interest expense


   Interest on deposits
  1,734,432
  1,529,465
   Interest on borrowed funds
  92,492
  106,807
   Interest on repurchase agreements
  64,326
  56,125
   Interest on junior subordinated debentures
  388,855
  339,603
        Total interest expense
  2,280,105
  2,032,000



     Net interest income
  17,141,288
  16,003,730
Provision for loan losses
  450,000
  400,000
     Net interest income after provision for loan losses
  16,691,288
  15,603,730



Non-interest income


   Service fees
  2,293,773
  1,992,560
   Income from sold loans
  560,210
  683,114
   Other income from loans
  616,931
  616,473
   Net realized gain on sale of securities available-for-sale
  4,647
  0
   Other income
  725,635
  747,923
        Total non-interest income
  4,201,196
  4,040,070



Non-interest expense


   Salaries and wages
  5,068,626
  5,175,000
   Employee benefits
  2,016,923
  2,049,926
   Occupancy expenses, net
  1,963,543
  1,857,482
   Other expenses
  5,416,710
  5,065,565
        Total non-interest expense
  14,465,802
  14,147,973



    Income before income taxes
  6,426,682
  5,495,827
Income tax expense
  1,720,003
  1,515,234
        Net income
$4,706,679
$3,980,593



Earnings per common share
$0.91
$0.78
Weighted average number of common shares


  used in computing earnings per share
  5,077,473
  5,016,191
Dividends declared per common share
$0.51
$0.48

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

~~Table of Content~~

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

~~Table of Content~~

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

~~Table of Content~~

~~Notes to Consolidated Financial Statements~~

~~Note 1. 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, 2016 contained in the Company's Annual Report on Form 10-K. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full annual period ending December 31, 2017, or for any other interim period.

Certain amounts in the 2016 unaudited consolidated income statements have been reclassified to conform to the 2017 presentation. Reclassifications had no effect on prior period net income or shareholders’ equity.

~~Note 2. Recent Accounting Developments~~

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases~~ (Topic 842). The ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in the ASU is permitted for all entities. The Company is currently evaluating the impact of the adoption of the ASU on its consolidated financial statements.

~~In June 2016, the FASB issued ASU No. 2016-13,Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~. Under the new guidance, which will replace the existing incurred loss model for recognizing credit losses, banks and other lending institutions will be required to recognize the full amount of expectedcredit losses. The new guidance, which is referred to as the Current Expected Credit Loss (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.A modified version of these requirements also applies to debt securities classified as available for sale, which will require that credit losses on those securities be recorded through an allowance for credit losses rather than a write-down. Th~~e ASU~~i~~s effec~~ti~~ve forfiscal years be~~g~~inn~~in~~g after De~~c~~ember 15, 2019, in~~clud~~ing interim p~~e~~riods w~~it~~hin~~those~~fiscalyears.Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within such years. The Company is evaluating the impactof the adoption of the ASU on its consolidated financial statements.~~ The ASU may have a material impact on the Company's consolidated financial statements upon adoption as it will require a change in the Company's methodology for calculating its ALL and allowance on unused commitments. The Company will transition from an incurred loss model to an expected loss model, which will likely result in an increase in the ALL upon adoption and may negatively impact the Company and the Bank's regulatory capital ratios. Additionally, ASU No. 2016-13 may reduce the carrying value of the Company's HTM investment securities as it will require an allowance for the expected losses over the life of these securities to be recorded upon adoption. The Company has formed a committee to assess the implications of this new pronouncement and transitioned to a software solution for preparing the ALL calculation and related reports that provides the Company with stronger data integrity, ease and efficiency in ALL preparation. The new software solution also provides numerous training opportunities for the appropriate personnel within the Company. The Company has gathered and will analyze the historical data to serve as a basis for estimating the ALL under CECL.

~~In January 2017, the FASB issued ASU No. 2017-04, Intangibles -~~ ~~Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment~~. The ASU was issued to reduce the cost and complexity of the goodwill impairment test. To simplify the subsequent measurement of goodwill, step two of the goodwill impairment test was eliminated. Instead, a Company will recognize an impairment of goodwill should the carrying value of a reporting unit exceed its fair value (i.e. step one). The ASU will be effective for the Company on January 1, 2020 and will be applied prospectively.

~~Table of Content~~

The Company has goodwill from its acquisition of LyndonBank in 2007 and performs an impairment test annually or more frequently if circumstances warrant (see Note 6). The Company is currently evaluating the impact of the adoption of the ASU on its consolidated financial statements, but does not anticipate any material impact at this time.

~~Note 3. Earnings per Common Share~~

~~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,

2017

2016

Net income, as reported
$1,792,949
$1,515,900
Less: dividends to preferred shareholders
  26,562
  21,875
Net income available to common shareholders
$1,766,387
$1,494,025
Weighted average number of common shares


   used in calculating earnings per share
  5,091,283
  5,032,156
Earnings per common share
$0.35
$0.30

Nine Months Ended September 30,

2017

2016

Net income, as reported
$4,706,679
$3,980,593
Less: dividends to preferred shareholders
  75,000
  65,625
Net income available to common shareholders
$4,631,679
$3,914,968
Weighted average number of common shares


   used in calculating earnings per share
  5,077,473
  5,016,191
Earnings per common share
$0.91
$0.78

~~Table of Content~~

~~Note 4. Investment Securities~~

~~Securities AFS and HTM as of the balance sheet dates consisted of the following:~~

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Securities AFS

Cost

Gains

Losses

Value

September 30, 2017

U.S. Government sponsored enterprise (GSE) debt securities
$15,316,323
$9,140
$68,619
$15,256,844
Agency mortgage-backed securities (Agency MBS)
  16,568,291
  29,716
  89,963
  16,508,044
Other investments
  4,955,000
  11,831
  12,046
  4,954,785

$36,839,614
$50,687
$170,628
$36,719,673





December 31, 2016




U.S. GSE debt securities
$17,365,805
$24,854
$73,331
$17,317,328
Agency MBS
  13,265,790
  3,896
  115,458
  13,154,228
Other investments
  3,221,000
  24,947
  2,452
  3,243,495

$33,852,595
$53,697
$191,241
$33,715,051





September 30, 2016




U.S. GSE debt securities
$13,751,867
$96,874
$5,247
$13,843,494
Agency MBS
  12,380,416
  164,771
  18,571
  12,526,616
Other investments
  2,973,000
  69,106
  0
  3,042,106

$29,105,283
$330,751
$23,818
$29,412,216

*Method used to determine fair value of HTM securities rounds values to nearest thousand.

Investments pledged as collateral for repurchase agreements consisted of U.S. GSE debt securities, Agency MBS securities and certificates of deposit (CDs). These repurchase agreements mature daily. These investments as of the balance sheet dates were as follows:

Amortized

Fair

Cost

Value

September 30, 2017
$36,839,614
$36,719,673
December 31, 2016
  33,604,595
  33,469,254
September 30, 2016
  29,105,283
  29,412,216

~~Table of Content~~

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

Amortized

Fair

Cost

Value

September 30, 2017

Due in one year or less
$2,250,000
$2,245,258
Due from one to five years
  13,029,323
  13,009,642
Due from five to ten years
  4,992,000
  4,956,729
Agency MBS
  16,568,291
  16,508,044

$36,839,614
$36,719,673



December 31, 2016


Due in one year or less
$2,006,027
$2,010,287
Due from one to five years
  17,335,778
  17,329,503
Due from five to ten years
  1,245,000
  1,221,033
Agency MBS
  13,265,790
  13,154,228

$33,852,595
$33,715,051



September 30, 2016


Due in one year or less
$1,000,000
$1,001,865
Due from one to five years
  14,479,867
  14,630,210
Due from five to ten years
  1,245,000
  1,253,525
Agency MBS
  12,380,416
  12,526,616

$29,105,283
$29,412,216

Because the actual maturities of Agency MBS usually differ from their contractual maturities due to the right of borrowers to prepay the underlying mortgage loans, usually without penalty, those securities are not presented in the table by contractual maturity date.

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

*Method used to determine fair value of HTM securities rounds values to nearest thousand.

~~Table of Content~~

There were no debt securities HTM in an unrealized loss position as of the balance sheet dates. Debt securities AFS with unrealized losses as of the balance sheet dates are presented in the table below.

Less than 12 months

12 months or more

Total

Fair

Unrealized

Fair

Unrealized

Number of

Fair

Unrealized

Value

Loss

Value

Loss

Securities

Value

Loss

September 30, 2017

U.S. GSE debt securities
$9,702,979
$41,405
$1,972,786
$27,214
  10
$11,675,765
$68,619
Agency MBS
  11,618,020
  86,230
  209,545
  3,733
  15
  11,827,565
  89,963
Other investments
  1,969,953
  12,046
  0
  0
  8
  1,969,953
  12,046

$23,290,952
$139,681
$2,182,331
$30,947
  33
$25,473,283
$170,628








December 31, 2016







U.S. GSE debt securities
$5,176,669
$73,331
$0
$0
  4
$5,176,669
$73,331
Agency MBS
  10,704,717
  115,458
  0
  0
  15
  10,704,717
  115,458
Other investments
  493,548
  2,452
  0
  0
  2
  493,548
  2,452

$16,374,934
$191,241
$0
$0
  21
$16,374,934
$191,241








September 30, 2016







U.S. GSE debt securities
$1,994,753
$5,247
$0
$0
  1
$1,994,753
$5,247
Agency MBS
  2,054,035
  18,571
  0
  0
  4
  2,054,035
  18,571

$4,048,788
$23,818
$0
$0
  5
$4,048,788
$23,818

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions, or adverse developments relating to the issuer, warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than the carrying value, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies or other adverse developments in the status of the securities have occurred, and the results of reviews of the issuer's financial condition. As of September 30, 2017, there were no declines in the fair value of any of the securities reflected in the table above that were deemed by management to be other than temporary.

~~Note 5. Loans, Allowance for Loan Losses and Credit Quality~~

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

September 30,

December 31,

September 30,

2017

2016

2016

Commercial & industrial
$77,604,260
$68,730,573
$69,791,331
Commercial real estate
  210,983,668
  201,728,280
  190,246,590
Residential real estate - 1st lien
  167,185,874
  166,691,962
  161,277,406
Residential real estate - Junior (Jr) lien
  43,962,578
  42,927,335
  41,739,827
Consumer
  6,311,739
  7,171,076
  7,131,741
     Gross Loans
  506,048,119
  487,249,226
  470,186,895
Deduct (add):



Allowance for loan losses
  5,436,313
  5,278,445
  5,179,965
Deferred net loan costs
  (318,452)
  (310,130)
  (312,565)
     Net Loans
$500,930,258
$482,280,911
$465,319,495

~~Table of Content~~

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

90 Days or

90 Days

Total

Non-Accrual

More and

September 30, 2017

30-89 Days

or More

Past Due

Current

Total Loans

Loans

Accruing

Commercial & industrial
$76,185
$0
$76,185
$77,528,075
$77,604,260
$48,385
$0
Commercial real estate
  1,186,687
  228,621
  1,415,308
  209,568,360
  210,983,668
  714,720
  15,011
Residential real estate







- 1st lien
  1,366,466
  1,823,490
  3,189,956
  163,995,918
  167,185,874
  1,511,891
  725,581
- Jr lien
  454,613
  261,256
  715,869
  43,246,709
  43,962,578
  450,192
  64,292
Consumer
  53,597
  2,777
  56,374
  6,255,365
  6,311,739
  0
  2,777

$3,137,548
$2,316,144
$5,453,692
$500,594,427
$506,048,119
$2,725,188
$807,661

90 Days or

90 Days

Total

Non-Accrual

More and

September 30, 2016

30-89 Days

or More

Past Due

Current

Total Loans

Loans

Accruing

Commercial & industrial
$236,510
$116,720
$353,230
$69,438,101
$69,791,331
$205,358
$116,720
Commercial real estate
  655,874
  249,749
  905,623
  189,340,967
  190,246,590
  759,332
  227,302
Residential real estate







- 1st lien
  1,837,612
  1,005,342
  2,842,954
  158,434,452
  161,277,406
  1,289,968
  744,379
- Jr lien
  203,174
  91,420
  294,594
  41,445,233
  41,739,827
  343,766
  91,420
Consumer
  66,776
  0
  66,776
  7,064,965
  7,131,741
  0
  0

$2,999,946
$1,463,231
$4,463,177
$465,723,718
$470,186,895
$2,598,424
$1,179,821

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

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

Number of loans

Balance

September 30, 2017
  7
$443,099
December 31, 2016
  8
  322,663
September 30, 2016
  6
  250,413

~~Allowance for loan losses~~

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

~~Table of Content~~

~~General component~~

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

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

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

~~Commercial Real Estate –~~ Loans in this segment are principally made to businesses and are generally secured by either owner-occupied, or non-owner occupied commercial real estate. A relatively small portion of this segment includes farm loans secured by farm land and buildings. As with commercial and industrial loans, repayment of owner-occupied commercial real estate 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 commercial real estate 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. Commercial real estate 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. Commercial real estate lending also carries a higher degree of environmental risk than other real estate lending.

~~Table of Content~~

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

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

~~Specific component~~

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

A TDR occurs when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that would otherwise not be granted. TDRs may include the transfer of assets to the Company in partial satisfaction of a troubled loan, a modification of a loan’s terms, or a combination of the two.

~~Unallocated component~~

~~ALL methodology changes implemented as of June 30, 2017~~

~~Table of Content~~

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

~~As of or for the three months ended September 30, 2017~~

Residential

Residential

Commercial

Commercial

Real Estate

Real Estate

& Industrial

Real Estate

1st Lien

Jr Lien

Consumer

Unallocated

Total

Allowance for loan losses

Beginning balance
$695,663
$2,530,215
$1,363,324
$374,364
$51,295
$359,517
$5,374,378
  Charge-offs
  0
  0
  (84,098)
  0
  (35,825)
  0
  (119,923)
  Recoveries
  19,151
  0
  4,621
  60
  8,026
  0
  31,858
  Provision (credit)
  (41,481)
  113,047
  136,764
  11,115
  28,115
  (97,560)
  150,000
Ending balance
$673,333
$2,643,262
$1,420,611
$385,539
$51,611
$261,957
$5,436,313

~~As of or for the nine months ended September 30, 2017~~

Residential

Residential

Commercial

Commercial

Real Estate

Real Estate

& Industrial

Real Estate

1st Lien

Jr Lien

Consumer

Unallocated

Total

Allowance for loan losses

Beginning balance
$726,848
$2,496,085
$1,369,757
$371,176
$83,973
$230,606
$5,278,445
  Charge-offs
  0
  (160,207)
  (88,833)
  (15,311)
  (99,617)
  0
  (363,968)
  Recoveries
  23,469
  231
  14,838
  180
  33,118
  0
  71,836
  Provision (credit)
  (76,984)
  307,153
  124,849
  29,494
  34,137
  31,351
  450,000
Ending balance
$673,333
$2,643,262
$1,420,611
$385,539
$51,611
$261,957
$5,436,313








Allowance for loan losses







Evaluated for impairment







  Individually
$0
$65,150
$153,570
$119,224
$0
$0
$337,944
  Collectively
  673,333
  2,578,112
  1,267,041
  266,315
  51,611
  261,957
  5,098,369

$673,333
$2,643,262
$1,420,611
$385,539
$51,611
$261,957
$5,436,313

Loans evaluated for impairment







  Individually
$48,385
$1,936,399
$3,760,913
$379,777
$0

$6,125,474
  Collectively
  77,555,875
  209,047,269
  163,424,961
  43,582,801
  6,311,739

  499,922,645

$77,604,260
$210,983,668
$167,185,874
$43,962,578
$6,311,739

$506,048,119

~~Table of Content~~

~~As of or for the year ended December 31, 2016~~

Residential

Residential

Commercial

Commercial

Real Estate

Real Estate

& Industrial

Real Estate

1st Lien

Jr Lien

Consumer

Unallocated

Total

Allowance for loan losses

Beginning balance
$712,902
$2,152,678
$1,368,028
$422,822
$75,689
$279,759
$5,011,878
  Charge-offs
  (49,009)
  0
  (244,149)
  0
  (15,404)
  0
  (308,562)
  Recoveries
  36,032
  0
  23,712
  240
  15,145
  0
  75,129
  Provision (credit)
  26,923
  343,407
  222,166
  (51,886)
  8,543
  (49,153)
  500,000
Ending balance
$726,848
$2,496,085
$1,369,757
$371,176
$83,973
$230,606
$5,278,445








Allowance for loan losses







Evaluated for impairment







  Individually
$0
$86,400
$6,200
$114,800
$0
$0
$207,400
  Collectively
  726,848
  2,409,685
  1,363,557
  256,376
  83,973
  230,606
  5,071,045

$726,848
$2,496,085
$1,369,757
$371,176
$83,973
$230,606
$5,278,445

Loans evaluated for impairment







  Individually
$48,385
$687,495
$946,809
$224,053
$0

$1,906,742
  Collectively
  68,682,188
  201,040,785
  165,745,153
  42,703,282
  7,171,076

  485,342,484

$68,730,573
$201,728,280
$166,691,962
$42,927,335
$7,171,076

$487,249,226

~~As of or for the three months ended September 30, 2016~~

Residential

Residential

Commercial

Commercial

Real Estate

Real Estate

& Industrial

Real Estate

1st Lien

Jr Lien

Consumer

Unallocated

Total

Allowance for loan losses

Beginning balance
$825,242
$2,316,966
$1,294,272
$414,082
$80,560
$146,298
$5,077,420
  Charge-offs
  (1,358)
  0
  (42,000)
  0
  (14,438)
  0
  (57,796)
  Recoveries
  2,174
  0
  3,974
  60
  4,133
  0
  10,341
  Provision (credit)
  (54,384)
  34,435
  82,396
  (32,861)
  (11,915)
  132,329
  150,000
Ending balance
$771,674
$2,351,401
$1,338,642
$381,281
$58,340
$278,627
$5,179,965

~~As of or for the nine months ended September 30, 2016~~

~~Table of Content~~

~~Impaired loans, by portfolio segment, were as follows:~~

As of September 30, 2017

Unpaid

Average

Average

Interest

Recorded

Principal

Related

Recorded

Recorded

Income

Investment

Balance

Allowance

Investment (1)

Investment (2)

Recognized (2)




Related allowance recorded




   Commercial real estate
$204,645
$225,681
$65,150
$207,572
$212,451
$0
   Residential real estate






    - 1st lien
  1,071,713
  1,108,286
  153,570
  1,055,232
  608,943
  20,535
    - Jr lien
  224,957
  293,638
  119,224
  254,291
  238,679
  305

  1,501,315
  1,627,605
  337,944
  1,517,095
  1,060,073
  20,840







No related allowance recorded






   Commercial & industrial
  48,385
  62,498

  91,882
  70,133
  0
   Commercial real estate
  1,735,982
  2,305,028

  1,749,498
  1,105,573
  50,123
   Residential real estate






    - 1st lien
  2,705,775
  3,006,813

  2,630,926
  1,587,592
  87,720
    - Jr lien
  154,839
  154,918

  145,830
  107,120
  0

  4,644,981
  5,529,257

  4,618,136
  2,870,418
  137,843








$6,146,296
$7,156,862
$337,944
$6,135,231
$3,930,491
$158,683

~~(1) For the three months ended September 30, 2017~~

~~(2) For the nine months ended September 30, 2017~~

~~In the table above, recorded investment of impaired loans as of September 30, 2017 includes accrued interest receivable and deferred net loan costs of $20,822.~~

As of December 31, 2016

2016

Unpaid

Average

Recorded

Principal

Related

Recorded

Investment

Balance

Allowance

Investment

Related allowance recorded

   Commercial real estate
$220,257
$232,073
$86,400
$89,664
   Residential real estate - 1st lien
  271,962
  275,118
  6,200
  350,709
   Residential real estate - Jr lien
  224,053
  284,342
  114,800
  241,965

  716,272
  791,533
  207,400
  682,338





No related allowance recorded




   Commercial & industrial
  48,385
  62,498

  183,925
   Commercial real estate
  467,238
  521,991

  1,059,542
   Residential real estate - 1st lien
  674,847
  893,741

  877,237
   Residential real estate - Jr lien
  0
  0

  15,888

  1,190,470
  1,478,230

  2,136,592






$1,906,742
$2,269,763
$207,400
$2,818,930

~~Table of Content~~

~~(1) For the three months ended September 30, 2016~~

~~(2) For the nine months ended September 30, 2016~~

~~Interest income recognized on impaired loans was immaterial for the December 31, 2016 and September 30, 2016 periods presented.~~

~~Credit Quality Grouping~~

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

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

~~Group B loans – Management Involved~~ - are loans that require greater attention than the acceptable 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.

~~Table of Content~~

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

Credit risk ratings are dynamic and require updating whenever relevant information is received. The risk ratings of larger or more complex loans, and Group B and C rated loans, are assessed at the time of their respective annual reviews, during quarterly updates, in action plans or at any other time that relevant information warrants update. Lenders are required to make immediate disclosure to the Chief Credit Officer of any known increase in loan risk, even if considered temporary in nature.

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

~~As of September 30, 2017~~

Residential

Residential

Commercial

Commercial

Real Estate

Real Estate

& Industrial

Real Estate

1st Lien

Jr Lien

Consumer

Total

Group A
$74,066,398
$201,257,154
$164,684,918
$43,235,529
$6,308,962
$489,552,961
Group B
  277,046
  877,021
  0
  154,942
  0
  1,309,009
Group C
  3,260,816
  8,849,493
  2,500,956
  572,107
  2,777
  15,186,149

$77,604,260
$210,983,668
$167,185,874
$43,962,578
$6,311,739
$506,048,119

~~As of December 31, 2016~~

~~Table of Content~~

~~As of September 30, 2016~~

Residential

Residential

Commercial

Commercial

Real Estate

Real Estate

& Industrial

Real Estate

1st Lien

Jr Lien

Consumer

Total

Group A
$67,062,235
$179,855,087
$158,989,152
$41,124,097
$7,131,741
$454,162,312
Group B
  1,551,890
  3,270,984
  451,736
  146,896
  0
  5,421,506
Group C
  1,177,206
  7,120,519
  1,836,518
  468,834
  0
  10,603,077

$69,791,331
$190,246,590
$161,277,406
$41,739,827
$7,131,741
$470,186,895

~~Modifications of Loans and TDRs~~

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

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

●

~~Reduced accrued interest;~~

●

~~Reduced the original contractual interest rate to a rate that is below the current market rate for the borrower;~~

●

~~Converted a variable-rate loan to a fixed-rate loan;~~

●

~~Extended the term of the loan beyond an insignificant delay;~~

●

~~Deferred or forgiven principal in an amount greater than three months of payments; or~~

●

~~Performed a refinancing and deferred or forgiven principal on the original loan.~~

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

Three months ended September 30, 2017 Nine months ended September 30, 2017
Pre- Post- Pre- Post-
Modification Modification Modification Modification
Outstanding Outstanding Outstanding Outstanding
Number of Recorded Recorded Number of Recorded Recorded
Contracts Investment Investment Contracts Investment Investment

Residential real estate
- 1st lien 1 $80,323 $87,844 2 $122,180 $145,262

~~Table of Content~~

~~The TDR’s for which there was a payment default during the twelve month periods presented were as follows:~~

Twelve months ended September 30, 2017

Number of

Recorded

Contracts

Investment

Residential real estate – 1st lien
1
$87,844

Twelve months ended December 31, 2016

Number of

Recorded

Contracts

Investment

Residential real estate - 1st lien
  2
$93,230
Residential real estate - Jr lien
  1
  54,557

  3
$147,787

~~Table of Content~~

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

September 30,

December 31,

September 30,

2017

2016

2016

Specific Allocation(1)
$216,939
$92,600
$98,600

~~(1) The increase in specific allocations at September 30, 2017 is principally related to the change in methodology during the second quarter of 2017 that recognized all TDR’s as impaired.~~

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 Small Business Administration (SBA) guaranteed line of credit to a borrower whose lending relationship was previously restructured.

~~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. The goodwill is not amortizable and is not deductible for tax purposes.~~

Management evaluates goodwill for impairment annually and the core deposit intangible for impairment if conditions warrant. As of the date of the most recent evaluation (December 31, 2016), management concluded that no impairment existed in either category.

~~Note 7. Fair Value~~

Certain assets and liabilities are recorded at fair value to provide additional insight into the Company’s quality of earnings. 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~~

~~Level 2~~

~~Level 3~~

~~Table of Content~~

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

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

~~Restricted equity securities:~~ Restricted equity securities are comprised of Federal Reserve Bank of Boston (FRBB) stock and Federal Home Loan Bank of Boston (FHLBB) stock. These securities are carried at cost, which is believed to approximate fair value, based on the redemption provisions of the FRBB and the FHLBB. The stock is nonmarketable, and redeemable at par value, subject to certain conditions. The Company classifies these securities as Level 2.

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.

~~OREO:~~ Real estate acquired through or in lieu of foreclosure and bank properties no longer used as bank premises are initially recorded at fair value. The fair value of OREO is based on property appraisals and an analysis of similar properties currently available. The Company records OREO as non-recurring Level 2.

~~Deposits, repurchase agreements and borrowed funds:~~ The fair values disclosed for demand deposits (for example, checking accounts and savings accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying value of repurchase agreements approximates fair value due to their short term. The fair values for certificates of deposit and borrowed funds are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates and indebtedness to a schedule of aggregated contractual maturities on such time deposits and indebtedness. The Company classifies deposits, repurchase agreements and borrowed funds as Level 2.

~~Junior subordinated debentures:~~ ~~Fair value is estimated using current rates for debentures of similar maturity. The Company classifies these instruments as Level 2.~~

~~Table of Content~~

~~Accrued interest:~~ ~~The carrying amounts of accrued interest approximate their fair values. The Company classifies accrued interest as Level 2.~~

~~Off-balance-sheet credit related instruments:~~ Commitments to extend credit are evaluated and fair value is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit-worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

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

~~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:~~

~~September 30, 2017~~	~~Level 2~~
~~Assets: (market approach)~~
~~U.S. GSE debt securities~~	$~~15,256,844~~
~~Agency MBS~~	~~16,508,044~~
~~Other investments~~	~~4,954,785~~
	$~~36,719,673~~

~~December 31, 2016~~	~~Level 2~~
~~Assets: (market approach)~~
~~U.S. GSE debt securities~~	$~~17,317,328~~
~~Agency MBS~~	~~13,154,228~~
~~Other investments~~	~~3,243,495~~
	$~~33,715,051~~

~~September 30, 2016~~	~~Level 2~~
~~Assets: (market approach)~~
~~U.S. GSE debt securities~~	$~~13,843,494~~
~~Agency MBS~~	~~12,526,616~~
~~Other investments~~	~~3,042,106~~
	$~~29,412,216~~

~~There were no Level 1 or Level 3 assets or liabilities measured on a recurring basis as of the balance sheet dates presented.~~

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

~~Table of Content~~

~~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, are summarized below:~~

~~September 30, 2017~~	~~Level 2~~
~~Assets: (market approach)~~
~~MSRs (1)~~	$~~1,113,034~~
~~Impaired loans, net of related allowance~~	0
~~OREO~~	~~324,235~~

~~December 31, 2016~~	~~Level 2~~
~~Assets: (market approach)~~
~~MSRs (1)~~	$~~1,210,695~~
~~Impaired loans, net of related allowance~~	~~508,872~~
~~OREO~~	~~394,000~~

~~September 30, 2016~~	~~Level 2~~
~~Assets: (market approach)~~
~~MSRs (1)~~	$~~1,215,311~~
~~Impaired loans, net of related allowance~~	~~663,343~~
~~OREO~~	~~409,000~~

~~There were no Level 1 or Level 3 assets or liabilities measured on a non-recurring basis as of the balance sheet dates presented.~~

~~Table of Content~~

September 30, 2017

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
$29,720
$29,720
$0
$0
$29,720
Securities held-to-maturity
  53,882
  0
  54,571
  0
  54,571
Securities available-for-sale
  36,720
  0
  36,720
  0
  36,720
Restricted equity securities
  1,700
  0
  1,700
  0
  1,700
Loans and loans held-for-sale





  Commercial & industrial
  76,890
  0
  0
  77,533
  77,533
  Commercial real estate
  208,232
  0
  0
  209,648
  209,648
  Residential real estate - 1st lien
  166,366
  0
  0
  168,903
  168,903
  Residential real estate - Jr lien
  43,555
  0
  0
  43,931
  43,931
  Consumer
  6,256
  0
  0
  6,491
  6,491
MSRs (1)
  1,113
  0
  1,289
  0
  1,289
Accrued interest receivable
  1,893
  0
  1,893
  0
  1,893






Financial liabilities:





Deposits





  Other deposits
  502,963
  0
  502,203
  0
  502,203
  Brokered deposits
  53,789
  0
  53,786
  0
  53,786
Long-term borrowings
  3,550
  0
  3,219
  0
  3,219
Repurchase agreements
  27,459
  0
  27,459
  0
  27,459
Capital lease obligations
  409
  0
  409
  0
  409
Subordinated debentures
  12,887
  0
  12,844
  0
  12,844
Accrued interest payable
  109
  0
  109
  0
  109

~~(1) Reported fair value represents all MSRs for loans serviced by the Company at September 30, 2017, regardless of carrying amount.~~

~~Table of Content~~

~~(1) Reported fair value represents all MSRs for loans serviced by the Company at December 31, 2016, regardless of carrying amount.~~

~~Table of Content~~

~~(1) Reported fair value represents all MSRs for loans serviced by the Company at September 30, 2016, regardless of carrying amount.~~

~~Note 8. Loan Servicing~~

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

~~Note 9. Legal Proceedings~~

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

~~Note 10. Subsequent Event~~

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 US GAAP. On September 22, 2017, the Company declared a cash dividend of $0.17 per common share payable November 1, 2017 to shareholders of record as of October 15, 2017. This dividend, amounting to $864,746, was accrued at September 30, 2017.

~~Table of Content~~

~~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, 2017~~

The following discussion analyzes the consolidated financial condition of Community Bancorp. (the Company) and its wholly-owned subsidiary, Community National Bank (the Bank), as of September 30, 2017, December 31, 2016 and September 30, 2016, and its consolidated results of operations for the nine-month interim periods presented. Under applicable regulations of the Securities and Exchange Commission (SEC), the Company is eligible for relief from certain disclosure requirements available to smaller reporting companies until it files its first quarterly report on Form 10-Q for 2018.

The following discussion should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in its 2016 Annual Report on Form 10-K filed with the SEC.

~~FORWARD-LOOKING STATEMENTS~~

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains certain forward-looking statements about 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," "plans," "predicts," or 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. Future results of the Company may differ materially from those expressed in these forward-looking statements. Examples of forward looking statements included in this discussion include, but are not limited to, estimated contingent liability related to assumptions made within the asset/liability management process, management's expectations as to the future interest rate environment and the Company's related liquidity level, credit risk expectations relating to the Company's loan portfolio and its participation in the Federal Home Loan Bank of Boston (FHLBB) Mortgage Partnership Finance (MPF) program, and management's general outlook for the future performance of the Company or the local or national economy. Although forward-looking statements are based on management's current expectations and estimates, many of the factors that could influence or determine actual results are unpredictable and not within the Company's control. 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.

~~Table of Content~~

~~NON-GAAP FINANCIAL MEASURES~~

Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with generally accepted accounting principles in the United States (US GAAP or 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 (Net Interest Income)) 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.

~~OVERVIEW~~

The Company’s consolidated assets on September 30, 2017 were $661,539,071, an increase of $23,885,406, or 3.8%, from December 31, 2016 and an increase of $55,748,641, or 9.2%, from September 30, 2016. Net loans increased $18,649,347, or 3.9%, since December 31, 2016 and $35,610,763, or 7.7%, since September 30, 2016. The year over year increase in the loan portfolio is primarily attributable to growth in commercial loans and was funded primarily through an increase in deposit accounts and wholesale funding in the form of brokered deposits.

Total deposits increased $52,017,288, or 10.3%, since December 31, 2016 due to increases in most components including $11.5 million, or 11.0%, in non-interest bearing demand accounts, $12.7 million, or 14.6%, in savings accounts, and $12.8 million, or 13.2%, in other time deposits. In the year over year comparison, deposits increased $52,945,414, or 10.5%. Core deposits saw increases in all areas in the year over year comparison, and increases are noted in money market accounts and time deposits as well. Some of the increase in time deposits in both comparison periods is attributable to the Company’s use of brokered deposits, both from purchases on the national certificate of deposit (CD) market and through the Certificate of Deposit Account Registry Service (CDARS).

Interest income increased $566,067, or 9.1%, for the third quarter of 2017 compared to the same quarter in 2016, and $1,385,663, or 7.7%, for the first nine months of 2017 compared to the same period in 2016. Interest expense increased $104,449, or 15.1%, for the third quarter of 2017 compared to the same quarter in 2016, and $248,105, or 12.2%, for the first nine months of 2017 compared to the same period in 2016. The increase in interest income year over year reflects the higher balances in net loans, which exceeded the prior year by $35.6 million, or 7.7%. While the increases in interest income in both comparison periods are largely due to the increase in the asset base, the increase in short-term rates is starting to have an impact as well, as is reflected in interest income for the three months ended September 30, 2017 when compared to the three months ended September 30, 2016. The increase in interest paid on deposits during the first three months and nine months of 2017 is partially attributable to a higher utilization of brokered time deposits, which carry higher rates than core non-maturity deposits, as well as to increases in the volume of all categories of interest-bearing deposits. The increases in the federal funds rate have also impacted interest expense on borrowed funds and the Company’s junior subordinated debentures.

~~Table of Content~~

Net interest income after the provision for loan losses improved by $461,618, or 8.5%, for the third quarter of 2017 compared to the same quarter in 2016, and $1,087,558, or 7.0%, for the nine months ended September 30, 2017 compared to the same period in 2016. The charge to income for the provision for loan losses increased $50,000, or 12.5%, for the nine month comparison period due to a combination of a low level of losses in the first quarter of 2016 and the increase in the loan portfolio, year over year. Please refer to the Allowance for loan losses and provisions discussion in the Credit Risk section for more information.

Net income for the third quarter of 2017 was $1,792,949, an increase of $277,049, or 18.3%, over net income of $1,515,900 for the third quarter of 2016. Net income for the first nine months of 2017 was $4,706,679, an increase of $726,086, or 18.2%, over net income of $3,980,593 for the same period in 2016. As stated above, net interest income contributed significantly to the Company’s increase in earnings. A decrease in non-interest income of $34,273, or 2.3%, for the quarter and an increase of $161,126, or 4.0% year to date are noted, while total non-interest expense increased in both periods by $51,613, or 1.1%, for the quarter and $317,829, or 2.3%, year to date. The decrease in non-interest income for the third quarter of 2017 is attributable, in part, to activity associated with the Bank’s Supplemental Employee Retirement Program (SERP). While income was reported from fair market value adjustments of SERP assets in 2016, the Company reported a net loss on the liquidation of the SERP assets during the third quarter of 2017 following the final payout to the last retired participant. The increase in non-interest income year to date is attributable mostly to the courtesy overdraft program implemented in the third quarter of 2016. With the increase in market rates, the opportunity for refinancing has diminished and the mortgage business is primarily from new purchase financing, resulting in lower levels of residential mortgage lending activity in 2017 compared to 2016. Residential mortgage originations totaled $34,486,938 for the first nine months of 2017 compared to $35,257,580 for the same period of 2016, which is also reflected in the decrease in the Company’s loan fee income. Of those originations during the first nine months of 2017, secondary market sales totaled $10,912,354, compared to $18,296,608 for the first nine months of 2016, providing points and premiums from the sales of these mortgages of $250,826 and $351,824, respectively, a decrease of 28.7%.

The increases in non-interest expenses are mostly attributable to increases in occupancy expense, marketing expense and expenditures related to technology initiatives. Please refer to the Non-interest Income and Expense sections for more information.

On September 22, 2017, the Company's Board of Directors declared a quarterly cash dividend of $0.17 per common share, payable on November 1, 2017 to shareholders of record on October 15, 2017. This represents an increase in the quarterly dividend of $0.01 per share, compared to 2016 and is attributable to the Bank’s strong performance in 2016, demonstrating the confidence of the Board of Directors and management team in the Company’s ability to generate shareholder value. The Company is focused on increasing the profitability of the balance sheet, and prudently managing operating expenses and risk, particularly credit risk, in order to remain a well-capitalized bank in this challenging interest rate environment.

~~CRITICAL ACCOUNTING POLICIES~~

The Company’s significant accounting policies are fundamental to understanding the Company’s results of operations and financial condition because they require management to use estimates and assumptions that may affect the value of the Company’s assets or liabilities and financial results. These policies are considered by management to be critical because they require subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. The Company’s critical accounting policies govern:

●~~the allowance for loan losses (ALL);~~

●~~other real estate owned (OREO);~~

●~~valuation of residential mortgage servicing rights (MSRs);~~

●~~other than temporary impairment of investment securities; and~~

●~~the carrying value of goodwill.~~

These policies are described further in the Company’s 2016 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. Except for certain changes in the Company’s methodology for calculating the ALL, which were adopted during the second quarter of 2017 and which are described below in the Credit Risk section of this MD&A, and in Note 5 (Loans, Allowance for Loan Losses and Credit Quality), there were no material changes during the first nine months of 2017 in the Company’s critical accounting policies.

~~Table of Content~~

~~RESULTS OF OPERATIONS~~

Net income for the third quarter of 2017 was $1,792,949 or $0.35 per common share, compared to $1,515,900 or $0.30 per common share for the same quarter of 2016, and net income for the first nine months of 2017 was $4,706,679 or $0.91 per common share, compared to $3,980,593 or $0.78 per common share for the same period in 2016. Core earnings (net interest income) for the third quarter of 2017 increased $461,618, or 8.3% compared to the same quarter in 2016 and $1,137,558, or 7.1%, for the nine months ended September 30, 2017 compared to the prior year. In light of the continued pressure on net interest margin and spread in this flat yield curve environment, the Company is pleased with these increases. To help offset this pressure, the Company has focused on growing the commercial loan portfolio, and shifting a portion of the investment portfolio to higher yielding Small Business Administration securities (SBA) and agency mortgage-backed securities (Agency MBS) within its available-for-sale (AFS) portfolio. FDIC insured Certificates of Deposit have also been an attractive investment class that have seen increased volume. Compared to the same period last year, during the first nine months of 2017, the loan mix continued to shift in favor of higher yielding commercial loans, while the deposit mix experienced an increase in lower cost non-maturity deposits, both of which have benefitted the Company’s net interest income. Interest paid on deposits, which is the major component of total interest expense, increased $124,364, or 24.7%, for the third quarter of 2017 compared to the same quarter of 2016, and $204,967, or 13.4%, in the first nine months of 2017 compared to the same period of 2016, reflecting the increased deposit balances and increases in rates on wholesale funds and brokered deposits. The Company recorded a provision for loan losses of $150,000 for the third quarters of 2017 and 2016, and nine month provisions for loan losses of $450,000 and $400,000, respectively. Non-interest income decreased $34,273, or 2.3%, for the third quarter of 2017 compared to the same quarter of 2016 and increased $161,126, or 4.0%, for the first nine months of 2017 compared to 2016. Non-interest expense increased $51,613, or 1.1%, for the third quarter of 2017 compared to the same quarter of 2016 and $317,829, or 2.3%, for the first nine months of 2017 compared to the prior year. The section labeled Non-Interest Income and Non-Interest Expense provides a more detailed discussion on the significant components of these items.

~~The following table shows these ratios annualized for the comparison periods.~~

Three Months Ended September 30,

2017

2016

Return on Average Assets
  1.09%
  0.99%
Return on Average Equity
  12.53%
  11.29%

Nine Months Ended September 30,

2017

2016

Return on Average Assets
  0.98%
  0.89%
Return on Average Equity
  11.29%
  10.08%

~~Table of Content~~

~~The following table summarizes the earnings performance and certain balance sheet data of the Company for the periods presented.~~

~~(1) Applicable income tax expense assumes a 34% tax rate.~~

~~(2) Computed based on the weighted average number of common shares outstanding during the periods presented.~~

~~Table of Content~~

~~INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST INCOME)~~

The largest component of the Company’s operating income is net interest income, which is the difference between interest earned on loans and investments and the interest paid on deposits and other sources of funds (i.e. other 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 from changes in the yield earned and costs of funds (rate). A portion of the Company’s income from municipal investments is not subject to income taxes. Because the proportion of tax-exempt items in the Company's portfolio 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. Because the Company’s corporate tax rate is 34%, to equalize tax-free and taxable income in the comparison, we divide the tax-free income by 66%, with the result that every tax-free dollar is equivalent to $1.52 in taxable income.

The Company’s tax-exempt interest income of $332,102 for the three months ended September 30, 2017 and $992,831 for the first nine months of 2017, compared to $339,999 and $942,246, respectively, for the same periods last year, was derived from municipal investments, which comprised the entire held-to-maturity (HTM) portfolio of $53,882,287 at September 30, 2017, and $56,837,100 at September 30, 2016.

~~The following table shows the reconciliation between reported net interest income and tax equivalent, net interest income for the comparison periods presented.~~

Three Months Ended September 30,

2017

2016

Net interest income as presented
$6,023,973
$5,562,355
Effect of tax-exempt income
  171,083
  175,151
   Net interest income, tax equivalent
$6,195,056
$5,737,506

Nine Months Ended September 30,

2017

2016

Net interest income as presented
$17,141,288
$16,003,730
Effect of tax-exempt income
  511,458
  485,399
   Net interest income, tax equivalent
$17,652,746
$16,489,129

~~Table of Content~~

The following tables present average interest-earning assets and average interest-bearing liabilities supporting earning assets. Interest income (excluding interest on non-accrual loans) and interest expense are both expressed on a tax equivalent basis, both in dollars and as a rate/yield for the comparison periods presented.

Three Months Ended September 30,

2017

2016

Average

Average

Average

Income/

Rate/

Average

Income/

Rate/

Balance

Expense

Yield

Balance

Expense

Yield

Interest-Earning Assets

Loans (1)
$506,853,347
$6,244,899
  4.89%
$476,137,513
$5,732,855
  4.79%
Taxable investment securities
  35,519,175
  171,880
  1.92%
  27,393,741
  128,767
  1.87%
Tax-exempt investment securities
  49,608,712
  503,185
  4.02%
  55,195,067
  515,150
  3.71%
Sweep and interest-earning accounts
  10,355,461
  29,964
  1.15%
  2,591,082
  3,048
  0.47%
Other investments (2)
  2,195,121
  41,320
  7.47%
  3,176,788
  49,429
  6.19%

$604,531,816
$6,991,248
  4.59%
$564,494,191
$6,429,249
  4.53%







Interest-Bearing Liabilities






Interest-bearing transaction accounts
$115,801,161
$91,951
  0.32%
$107,853,436
$51,580
  0.19%
Money market accounts
  84,791,867
  187,889
  0.88%
  81,796,244
  209,212
  1.02%
Savings deposits
  99,061,882
  32,277
  0.13%
  88,078,948
  27,216
  0.12%
Time deposits
  133,068,701
  316,417
  0.94%
  105,959,177
  216,162
  0.81%
Borrowed funds
  4,535,815
  3,644
  0.32%
  31,398,913
  42,412
  0.54%
Repurchase agreements
  27,263,645
  20,564
  0.30%
  25,387,081
  18,820
  0.29%
Capital lease obligations
  418,393
  8,569
  8.19%
  501,328
  10,992
  8.77%
Junior subordinated debentures
  12,887,000
  134,881
  4.15%
  12,887,000
  115,349
  3.56%

$477,828,464
$796,192
  0.66%
$453,862,127
$691,743
  0.61%







Net interest income

$6,195,056


$5,737,506

Net interest spread (3)


  3.93%


  3.92%
Net interest margin (4)


  4.07%


  4.04%

~~(1) Included in gross loans are non-accrual loans with an average balance of $2,596,724 and $2,958,744 for the three~~

~~months ended September 30, 2017 and 2016, respectively. Loans are stated before deduction of unearned discount~~

~~and allowance for loan losses, less loans held-for-sale.~~

~~(2) Included in other investments is the Company’s FHLBB Stock with an average balance of $1,219,971 and $2,201,638~~

~~for the three months ended September 30, 2017 and 2016, respectively, and a dividend rate of approximately~~

~~4.22% and 3.65%, 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.~~

~~Table of Content~~

Nine Months Ended September 30,

2017

2016

Average

Average

Average

Income/

Rate/

Average

Income/

Rate/

Balance

Expense

Yield

Balance

Expense

Yield

Interest-Earning Assets

Loans (1)
$495,170,740
$17,737,531
  4.79%
$465,314,118
$16,582,276
  4.76%
Taxable investment securities
  35,001,161
  488,250
  1.87%
  29,210,491
  384,413
  1.76%
Tax-exempt investment securities
  51,924,841
  1,504,289
  3.87%
  50,577,436
  1,427,645
  3.77%
Sweep and interest-earning accounts
  11,938,565
  84,802
  0.95%
  5,225,968
  18,654
  0.48%
Other investments (2)
  2,545,091
  117,979
  6.20%
  2,766,541
  108,141
  5.22%

$596,580,398
$19,932,851
  4.47%
$553,094,554
$18,521,129
  4.47%







Interest-Bearing Liabilities






Interest-bearing transaction accounts
$116,594,941
$216,227
  0.25%
$111,223,384
$155,413
  0.19%
Money market accounts
  85,819,418
  595,162
  0.93%
  84,974,840
  637,818
  1.00%
Savings deposits
  96,382,338
  91,597
  0.13%
  85,668,159
  79,225
  0.12%
Time deposits
  125,015,108
  831,446
  0.89%
  107,919,364
  657,009
  0.81%
Borrowed funds
  12,140,165
  65,311
  0.72%
  18,588,663
  74,046
  0.53%
Repurchase agreements
  28,768,193
  64,326
  0.30%
  25,393,136
  56,125
  0.30%
Capital lease obligations
  442,977
  27,181
  8.18%
  522,708
  32,761
  8.36%
Junior subordinated debentures
  12,887,000
  388,855
  4.03%
  12,887,000
  339,603
  3.52%

$478,050,140
$2,280,105
  0.64%
$447,177,254
$2,032,000
  0.61%







Net interest income

$17,652,746


$16,489,129

Net interest spread (3)


  3.83%


  3.86%
Net interest margin (4)


  3.96%


  3.98%

~~(1) Included in gross loans are non-accrual loans with an average balance of $2,565,181 and $3,384,345 for the nine~~

~~months ended September 30, 2017 and 2016, respectively. Loans are stated before deduction of unearned discount~~

~~and allowance for loan losses, less loans held-for-sale.~~

~~(2) Included in other investments is the Company’s FHLBB Stock with average balances of $1,569,941 and $1,791,391~~

~~respectively, and a dividend rate of approximately 4.19% and 4.84%, respectively, for the first nine months of~~

~~2017 and 2016, 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.~~

~~Table of Content~~

The average volume of interest-earning assets for the three- and nine-month periods ended September 30, 2017 increased 7.1% and 7.9%, respectively, compared to the same periods last year. Average yield on interest-earning assets for the third quarter increased six basis points, to 4.59%, compared to 4.53% for the same period last year, and remained unchanged at 4.47% for the nine months ended September 30, 2017, compared to the same period last year.

The average volume of loans increased over the three- and nine-month comparison periods of 2017 versus 2016, by 6.5% and 6.4%, respectively, while the average yield on loans increased 10 basis points for the third quarter, to 4.89%, compared to 4.79% for the third quarter of 2016, and increased three basis points for the nine months ended September 30, 2017, to 4.79% compared to 4.76% for the same period in 2016. These increases were due to a combination of the steadily increasing federal funds rate over the periods noted, and a shift in asset mix toward commercial loans; however, this has been partially offset by continued pressure on medium term (5-10 year) fixed rates. Interest earned on the loan portfolio as a percentage of total interest income increased slightly for the third quarter and decreased slightly for the nine-month period ended September 30, 2017, comprising approximately 89.3% and 89.0% of total interest income in the two periods respectively, versus 89.2% and 89.5%, respectively, for the same periods last year.

The average volume of the taxable investment portfolio (classified as available-for-sale) increased 29.7% during the third quarter of 2017 and 19.8% year to date, compared to the same periods last year. Average yields on the taxable investment portfolio increased five basis points and 11 basis points, for the third quarter of 2017 and year to date, respectively, compared to the same periods last year. These increases are due primarily to an effort to continue to incrementally grow the investment portfolio as the balance sheet grows in order to provide additional liquidity and pledge quality assets. The average volume of the tax exempt portfolio (classified as held-to-maturity and consisting of municipal securities) decreased 10.1% during the third quarter of 2017 and increased 2.7% year to date, compared to the same periods last year. The average tax-equivalent yield on the tax exempt portfolio increased 31 basis points during the third quarter of 2017 and increased 10 basis points for the nine-month period ended September 30, 2017, compared to the same periods last year, reflecting the increases in short term market rates.

The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing account at the Federal Reserve Bank of Boston (FRBB) and two correspondent banks, increased 299.7% during the three-month period and 128.5% during the nine-month period ended September 30, 2017 compared to the same periods last year, and the average yield on these funds increased 68 basis points and 47 basis points, respectively. This increase in volume is attributable to a higher balance of cash periodically held on hand in anticipation of funding loan growth and other liquidity needs.

The average volume of interest-bearing liabilities for the three- and nine-month periods ended September 30, 2017 increased 5.4% and 6.9%, respectively, compared to the same periods last year. The average rate paid on interest-bearing liabilities increased five basis points during the third quarter of 2017 and three basis points during the first nine months of 2017, compared to the same periods last year.

The average volume of interest-bearing transaction accounts increased 7.4% and 4.8%, respectively, during the third quarter and first nine months of 2017, compared to the same periods last year, and the average rate paid on these accounts increased 13 basis points and six basis points, respectively. The average volume of money market accounts increased 3.7% during the three-month period ended September 30, 2017, and 1.0% during the nine-month period ended September 30, 2017, compared to the same periods in 2016, and the average rate paid on these deposits decreased 14 basis points during the third quarter of 2017 and seven basis points in the year to date comparison periods. The average volume of savings accounts increased by 12.5% for the three-month and nine-month comparison periods of 2017 versus 2016, partially due to several escrow accounts for deposits held for the future purchase of properties in the Stowe area which account for approximately half of the increase. Some of the increase is due in part to the continued shift in product mix from retail time deposits to savings accounts as consumers anticipate higher rates in the near future. Compared to the same periods in 2016, the average volume of retail time deposits increased 0.6% during the third quarter, and decreased 0.4% year to date 2017, while the average volume of wholesale time deposits increased during both the three- and nine-month comparison periods in 2017. With the recent increases in short term rates, there has been modest pressure for higher rates from the more rate sensitive deposit holders. Otherwise, the local market is not yet showing any signs of higher rates being paid on deposit products. Wholesale time deposits have been an increasingly beneficial source of funding throughout 2016 and into 2017 as they have provided large blocks of funding without the need to disrupt pricing in the Company’s local markets. These funds can be obtained relatively quickly on an as-needed basis, making them a valuable alternative to traditional term borrowings from the FHLBB.

~~Table of Content~~

The average volume of borrowed funds decreased 85.6% and 34.7%, respectively, for the three-month and nine-month comparison periods of 2017 versus 2016. The average rate paid on these accounts decreased 22 basis points for the three month period and increased 19 basis points for the nine month period as compared to 2016. The average volume of repurchase agreements increased 7.4% and 13.3%, respectively, for three- and nine-month periods ended September 30, 2017, compared to the same periods in 2016, while the average rate paid on repurchase agreements increased one basis point during the three-month period ended September 30, 2017, but remained flat for the first nine months of 2017, compared to the same periods in 2016.

For the three months ended September 30, 2017 and 2016, the average yield on interest-earning assets increased six basis points, while the average rate paid on interest-bearing liabilities increased five basis points. For the nine months ended September 30, 2017 and 2016, the average yield on interest-earning assets remained flat, while the average rate paid on interest-bearing liabilities increased three basis points. Net interest spread for the third quarter of 2017 was 3.93%, an increase of one basis point from 3.92% for the same period in 2016, and fell three basis points for the first nine months of 2017 to 3.83%, from 3.86% for the same period last year. Net interest margin increased three basis points during the third quarter of 2017 to 4.07%, compared to 4.04% for the third quarter of 2016, and decreased two basis points during the first nine months of 2017 compared to the same period last year.

The following table summarizes the variances in interest income and interest expense on a fully tax-equivalent basis for the periods presented for 2017 and 2016 resulting from volume changes in average assets and average liabilities and fluctuations in average rates earned and paid.

Changes in Interest Income and Interest Expense

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
$142,212
$369,832
$512,044
$91,315
$1,063,940
$1,155,255
Taxable investment securities
  4,919
  38,194
  43,113
  27,539
  76,298
  103,837
Tax-exempt investment securities
  44,639
  (56,604)
  (11,965)
  38,616
  38,028
  76,644
Sweep and interest-earning accounts
  17,743
  9,173
  26,916
  42,027
  24,121
  66,148
Other investments
  10,374
  (18,483)
  (8,109)
  20,107
  (10,269)
  9,838

$219,887
$342,112
$561,999
$219,604
$1,192,118
$1,411,722







Average Interest-Bearing Liabilities






Interest-bearing transaction accounts
$36,575
$3,796
$40,371
$53,173
$7,641
$60,814
Money market accounts
  (29,004)
  7,681
  (21,323)
  (48,979)
  6,323
  (42,656)
Savings deposits
  1,748
  3,313
  5,061
  2,747
  9,625
  12,372
Time deposits
  45,058
  55,197
  100,255
  70,770
  103,667
  174,437
Borrowed funds
  (17,101)
  (21,667)
  (38,768)
  25,991
  (34,726)
  (8,735)
Repurchase agreements
  376
  1,368
  1,744
  621
  7,580
  8,201
Capital lease obligations
  (711)
  (1,712)
  (2,423)
  (702)
  (4,878)
  (5,580)
Junior subordinated debentures
  19,532
  0
  19,532
  49,252
  0
  49,252

$56,473
$47,976
$104,449
$152,873
$95,232
$248,105







       Changes in net interest income
$163,414
$294,136
$457,550
$66,731
$1,096,886
$1,163,617

~~(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~~

~~Table of Content~~

~~NON-INTEREST INCOME AND NON-INTEREST EXPENSE~~

~~Non-interest Income~~

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

Three Months Ended

Nine Months Ended

September 30,

Change

September 30,

Change

2017

2016

Income

Percent

2017

2016

Income

Percent

Service fees
$773,419
$719,341
$54,078
  7.52%
$2,293,773
$1,992,560
$301,213
  15.12%
Income from sold loans
  185,844
  230,623
  (44,779)
  -19.42%
  560,210
  683,114
  (122,904)
  -17.99%
Other income from loans
  222,026
  209,882
  12,144
  5.79%
  616,931
  616,473
  458
  0.07%
Net realized gain on sale of








securities available-for-sale
  1,246
  0
  1,246
  100.00%
  4,647
  0
  4,647
  100.00%
Income from CFSG Partners
  116,059
  143,095
  (27,036)
  -18.89%
  314,573
  326,676
  (12,103)
  -3.70%
Currency exchange income
  22,000
  27,000
  (5,000)
  -18.52%
  66,500
  78,500
  (12,000)
  -15.29%
SERP fair value adjustment
  (2,179)
  32,352
  (34,531)
  -106.74%
  45,312
  46,758
  (1,446)
  -3.09%
Other income
  130,832
  121,227
  9,605
  7.92%
  299,250
  295,989
  3,261
  1.10%
     Total non-interest income
$1,449,247
$1,483,520
$(34,273)
  -2.31%
$4,201,196
$4,040,070
$161,126
  3.99%

Total non-interest income decreased $34,273, or 2.3%, for the third quarter of 2017 and increased $161,126, or 4.0%, for the first nine months of 2017 versus the same periods in 2016, with significant changes noted in the following:

●

Service fees on deposit accounts increased $54,078, or 7.5%, for the third quarter and $301,213, or 15.1%, year over year due primarily to the implementation of the Bank’s new courtesy overdraft protection program at the beginning of the third quarter in 2016, which provided an increase in overdraft fees of $39,327, or 15.6% and $264,731, or 43.4%, compared to the third quarter and first nine months of 2016, respectively.

●

Income from sold loans decreased $44,779, or 19.4%, for the third quarter and $122,904, or 18.0%, year over year, due to a decrease in the volume of secondary market sales year over year, resulting from the increase in market rates as mentioned in the Overview and the diminishing volume of residential mortgage loan refinancings following a long period of low rates.

●

Income from CFSG Partners decreased $27,036, or 18.9%, for the third quarter and $12,103, or 3.7%, year over year. The decrease for the third quarter and year over year reflects a one-time mark-to-market adjustment to CFSG Partners’ investment portfolio during the third quarter of 2016 of approximately $85,000, partially offset by an increase in income of $57,964 for the quarter and $72,897 year over year.

●

Currency exchange income decreased $5,000, or 18.5% when comparing the third quarter 2017 to 2016 and decreased $12,000, or 15.3%, year over year due to fluctuations in the currency rates as the U.S. dollar strengthened in relation to the Canadian dollar.

●

SERP fair value adjustment decreased $34,531, or 106.7%, for the third quarter and $1,446, or 3.09%, year over year. The final payment of SERP benefits to the last participant was made on July 1, 2017 and the related asset was liquidated shortly thereafter. A net loss of $2,179 was recognized in the third quarter of 2017 for the change in fair value of the assets during the quarter. There will no longer be an impact to earnings from this line item in future periods.

~~Table of Content~~

~~Non-interest Expense~~

~~The components of non-interest expense for the periods presented are as follows:~~

Three Months Ended

Nine Months Ended

September 30,

Change

September 30,

Change

2017

2016

Expense

Percent

2017

2016

Expense

Percent

Salaries and wages
$1,653,751
$1,725,000
$(71,249)
  -4.13%
$5,068,626
$5,175,000
$(106,374)
  -2.06%
Employee benefits
  682,944
  679,762
  3,182
  0.47%
  2,016,923
  2,049,926
  (33,003)
  -1.61%
Occupancy expenses, net
  614,817
  605,378
  9,439
  1.56%
  1,963,543
  1,857,482
  106,061
  5.71%
Other expenses








  Computer outsourcing
  130,938
  128,910
  2,028
  1.57%
  408,044
  376,885
  31,159
  8.27%
  Service contracts - administrative
  116,863
  106,747
  10,116
  9.48%
  313,526
  292,663
  20,863
  7.13%
   Marketing expense
  135,498
  98,339
  37,159
  37.79%
  382,996
  283,139
  99,857
  35.27%
   Consultant services
  61,113
  51,833
  9,280
  17.90%
  162,935
  116,293
  46,642
  40.11%
  Collection & non-accruing loan








    expense
  15,455
  46,500
  (31,045)
  -66.76%
  36,165
  84,500
  (48,335)
  -57.20%
  Miscellaneous computer expense
  54,010
  28,383
  25,627
  90.29%
  110,822
  54,246
  56,576
  104.30%
  OREO expense
  5,240
  5,498
  (258)
  -4.69%
  18,044
  37,467
  (19,423)
  -51.84%
  Other miscellaneous expenses
  1,371,487
  1,314,153
  57,334
  4.36%
  3,984,178
  3,820,372
  163,806
  4.29%
     Total non-interest expense
$4,842,116
$4,790,503
$51,613
  1.08%
$14,465,802
$14,147,973
$317,829
  2.25%

Total non-interest expense increased $51,613, or 1.1%, for the third quarter of 2017 and $317,829, or 2.3%, for the first nine months of 2017 compared to the same periods in 2016 with significant changes noted in the following:

●

Salaries and wages decreased $71,249, or 4.1%, for the third quarter and $106,374, or 2.1%, year over year, due primarily to the retirement of an executive employee that was partially offset by a new hire in information technology and normal salary increases.

●

Occupancy expenses increased $9,439, or 1.6% for the third quarter and $106,061, or 5.7%, year over year, due in part to the fact that the region experienced a shift to more seasonable winter conditions compared to the past few years causing an increase in heating costs and maintenance costs for snow removal. The Company has also seen a higher level of repairs and service to HVAC and sprinkler systems and expenses for general maintenance and repair of branch premises. Also contributing to the increase in occupancy expense is the cost of the lease on the Burlington loan production office that opened in the first quarter of 2017 in the amount of $25,425 for the first nine months of 2017.

●

Computer outsourcing increased $2,028, or 1.6%, for the third quarter and $31,159, or 8.3%, year over year due in part to an increase in purchased electronic technology services from the Company’s core vendor, particularly in the area of electronic and mobile banking.

●

~~Consultant services increased $9,280, or 17.9%, for the third quarter and $46,642, or 40.1%, year over year partly due to a contract with a consultant for technology related projects.~~

●

Collection & non-accruing loan expense decreased $31,045, or 66.8%, for the third quarter and $48,335, or 57.2% year over year. The variance in both comparison periods is due primarily to non-recurring recovery of expenses of approximately $28,000 in the third quarter and $30,000 in the first quarter of 2017.

●

~~Table of Content~~

●

OREO expense decreased $258, or 4.7% for the third quarter and $19,423, or 51.8%, year over year. During the second quarter of 2016, a $26,000 write-down was taken on an OREO property, although it was offset by approximately $15,000 in condominium association fees recouped on a former OREO property in the first quarter, the net effect contributed to higher OREO expense in 2016 compared to 2017.

~~APPLICABLE INCOME TAXES~~

The provision for income taxes increased $98,683, or 16.7%, to $688,155 for the third quarter of 2017 compared to $589,472 for the same period in 2016 and $204,769, or 13.5%, to $1,720,003 for the first nine months of 2017 compared to $1,515,234 for the first nine months of 2016. These increases are due primarily to an increase in income before taxes of $375,732, or 17.9%, for the third quarter of 2017 compared to the same quarter in 2016, and an increase of $930,855, or 16.9%, for the first nine months of 2017 compared to the same period in 2016. Tax credits related to limited partnerships amounted to $106,599 and $98,475, respectively, for the third quarter of 2017 and 2016, and $319,797 and $295,425 for the first nine months of 2017 and 2016.

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $105,414 and $102,006, respectively, for the third quarter of 2017 and 2016, and $316,242 and $306,018 for the first nine months of 2017 and 2016, respectively. These investments provide tax benefits, including tax credits, and are designed to provide an effective yield of between 8% and 10%.

~~CHANGES IN FINANCIAL CONDITION~~

September 30, 2017

December 31, 2016

September 30, 2016

Assets

Loans
$506,048,119
  76.50%
$487,249,226
  76.41%
$470,186,895
  77.62%
Securities available-for-sale
  36,719,673
  5.55%
  33,715,051
  5.29%
  29,412,216
  4.86%
Securities held-to-maturity
  53,882,287
  8.14%
  49,886,631
  7.82%
  56,837,100
  9.38%







Liabilities






Demand deposits
  115,930,899
  17.52%
  104,472,268
  16.38%
  101,259,470
  16.72%
Interest-bearing transaction accounts
  127,426,517
  19.26%
  118,053,360
  18.51%
  119,981,648
  19.81%
Money market accounts
  85,947,545
  12.99%
  79,042,619
  12.40%
  76,976,376
  12.71%
Savings deposits
  99,439,616
  15.03%
  86,776,856
  13.61%
  91,274,380
  15.07%
Time deposits
  128,007,743
  19.35%
  116,389,929
  18.25%
  114,315,032
  18.87%
Borrowed Funds
  0
  0.00%
  0
  0.00%
  5,245,000
  0.87%
Short-term advances
  0
  0.00%
  30,000,000
  4.70%
  0
  0.00%
Long-term advances
  3,550,000
  0.54%
  1,550,000
  0.24%
  550,000
  0.09%

The Company's total loan portfolio at September 30, 2017 increased $18,798,893, or 3.9%, from December 31, 2016 and $35,861,224, or 7.6%, year over year. Securities available-for-sale (AFS) increased $3,004,622 or 8.9%, year to date, and $7,307,457, or 24.8%, year over year. Securities held-to-maturity increased $3,995,656 or 8.0%, year to date, and decreased $2,954,813, or 5.2%, year over year. Held-to-maturity securities are made up of investments from the Company’s municipal customers in its service areas. While the Company has used maturing securities to fund loan growth in recent periods, the liquidity provided by these investments is very important. ~~As a result, the AFS portfolio has been expanding in recent periods to keep the Company’s on-balance-sheet liquidity proportional to the overall asset base.~~

Total deposits increased $52,017,288, or 10.3%, from December 31, 2016 to September 30, 2017, and an increase of $52,945,414, or 10.5%, is noted year over year. Demand deposits increased $11,458,631, or 11.0%, year to date and $14,671,429, or 14.5%, year over year, split between growth in business checking ($13.5 million, or 21.8%) and consumer checking ($1.2 million, or 3.1%). The Company is seeing growth in the business customer base and improvements in financial health of existing business customers. Money market accounts increased $6,904,926, or 8.7%, year to date, and $8,971,169, or 11.7% year over year. Savings deposits increased significantly in both periods, with increases of $12,662,760, or 14.6%, year to date and $8,165,236, or 9.0%, year over year. As mentioned earlier, this is partially due to multiple construction escrow accounts. Time deposits increased $11,617,814, or 10.0%, year to date and $13,692,711, or 12.0%, year over year, which is entirely attributable to an increase in wholesale purchased time deposits. There were no overnight purchases and short-term advances from the FHLBB at September 30, 2017, $30,000,000 at December 31, 2016 and $5,245,000 at September 30, 2016. In addition, there were outstanding long-term advances from the FHLBB of $3,550,000 at September 30, 2017, $1,550,000 at December 31, 2016, and $550,000 at September 30, 2016.

~~Table of Content~~

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

Under the Company’s interest rate sensitivity modeling, with the continued asset sensitive balance sheet, in a rising rate environment NII is expected to trend upward as the short-term asset base (cash and adjustable rate loans) quickly cycle upward while the retail funding base (deposits) lags the market. If rates paid on deposits have to be increased more and/or more quickly than projected, 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 recent increases in the federal funds rate have generated a positive impact to the Company’s NII in 2017 as variable rate loans reprice; however the behavior of the long end of the yield curve will also be very important to the Company’s margins going forward, as funding costs continue to rise and the long end remains relatively anchored.

~~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, 2017:~~

~~Rate Change~~	~~Percent Change in NII~~

~~Down 100 basis points~~	~~-2.8~~%
~~Up 200 basis points~~	~~3.7~~%

~~Table of Content~~

~~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 interest, loans to industry segments, and the geographic distribution of commercial real estate loans. Loans are reviewed periodically by an independent loan review firm to help ensure accuracy of the Company's internal risk ratings and compliance with various internal policies, procedures and regulatory guidance.

Residential mortgages represent a little less than half of the Company’s loan balances; that level has been on a gradual decline in recent years, with a strategic shift to commercial lending. The Company maintains a mortgage loan portfolio of traditional mortgage products and does not engage in higher risk loans such as option adjustable rate mortgage products, high loan-to-value products, interest only mortgages, subprime loans and products with deeply discounted teaser rates. Residential mortgages with loan-to-values exceeding 80% are generally covered by private mortgage insurance (“PMI”). A 90% loan-to-value residential mortgage product without PMI is only available to borrowers with excellent credit and low debt-to-income ratios and has not been widely originated. Junior lien home equity products make up 20.8% of the residential mortgage portfolio with maximum loan-to-value ratios (including prior liens) of 80%. The Company also originates some home equity loans greater than 80% under an insured loan program with stringent underwriting criteria.

Consistent with the strategic focus on commercial lending, both segments saw solid growth during 2016 despite some significant loan payoffs during the year. The 2016 growth included balances being drawn on commercial construction loans and higher balances on commercial lines of credit. Commercial and commercial real estate loan demand has continued into 2017 and is increasing with the funding of construction projects and draws on lines of credit. Commercial and commercial real estate loans together comprised 57.0% of the Company’s loan portfolio at September 30, 2017, 55.5% at December 31, 2016 and 55.3% at September 30, 2016. The increase in the absolute and relative size of the commercial loan portfolio has also increased geographic diversification, with much of the growth in commercial loans occurring along the I-89 corridor from White River Junction through Chittenden County.

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

September 30, 2017

December 31, 2016

September 30, 2016

Commercial & industrial
$77,604,260
  15.33%
$68,730,573
  14.11%
$69,791,331
  14.84%
Commercial real estate
  210,983,668
  41.69%
  201,728,280
  41.40%
  190,246,590
  40.46%
1 - 4 family residential - 1st lien
  167,185,874
  33.04%
  166,691,962
  34.21%
  161,277,406
  34.30%
1 - 4 family residential - Jr lien
  43,962,578
  8.69%
  42,927,335
  8.81%
  41,739,827
  8.88%
Consumer
  6,311,739
  1.25%
  7,171,076
  1.47%
  7,131,741
  1.52%
     Total loans
  506,048,119
  100.00%
  487,249,226
  100.00%
  470,186,895
  100.00%
Deduct (add):






Allowance for loan losses
  5,436,313

  5,278,445

  5,179,965

Deferred net loan costs
  (318,452)

  (310,130)

  (312,565)

      Net loans
$500,930,258

$482,280,911

$465,319,495

Risk in the Company’s commercial & industrial and commercial real estate loan portfolios is mitigated in part by government guarantees issued by federal agencies such as the U.S. Small Business Administration (SBA) and U.S. Department of Agriculture (USDA) Rural Development. At September 30, 2017, the Company had $26,557,438 in guaranteed loans with guaranteed balances of $19,693,638, compared to $23,929,426 in guaranteed loans with guaranteed balances of $18,128,676 at December 31, 2016 and $26,476,719 in guaranteed loans with guaranteed balances of $20,070,993 at September 30, 2016.

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

~~Table of Content~~

The Company’s non-performing assets decreased $135,656, or 3.4%, during the first nine months of 2017. The change in non-performing assets was due to a shift of residential mortgage loans moving out of ninety days past due and into non-accrual, which was offset, in part, by a decrease in commercial & industrial loans and commercial real estate loans in the non-accrual portfolio. Claims receivable on related government guarantees were $0 at September 30, 2017 compared to $56,319 at December 31, 2016 and $0 at September 30, 2016, with numerous USDA and SBA claims settled and paid throughout 2016 and 2017. Non-performing loans as of September 30, 2017 carried USDA and SBA guarantees totaling $49,153, compared to $146,323 at December 31, 2016 and $168,861 at September 30, 2016.

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

September 30, 2017

December 31, 2016

September 30, 2016

Loans past due 90 days or more

and still accruing

  Commercial & industrial
$0
  0.00%
$26,042
  0.65%
$116,720
  2.79%
  Commercial real estate
  15,011
  0.39%
  0
  0.00%
  227,302
  5.43%
  Residential real estate - 1st lien
  725,581
  18.81%
  1,068,083
  26.75%
  744,379
  17.78%
  Residential real estate - Jr lien
  64,292
  1.67%
  27,905
  0.70%
  91,420
  2.18%
  Consumer
  2,777
  0.07%
  2,176
  0.05%
  0
  0.00%

  807,661
  20.94%
  1,124,206
  28.15%
  1,179,821
  28.18%







Non-accrual loans (1)






  Commercial & industrial
  48,385
  1.25%
  143,128
  3.59%
  205,358
  4.90%
  Commercial real estate
  714,720
  18.53%
  765,584
  19.17%
  759,332
  18.13%
  Residential real estate - 1st lien
  1,511,891
  39.20%
  1,227,220
  30.74%
  1,289,968
  30.81%
  Residential real estate - Jr lien
  450,192
  11.67%
  338,602
  8.48%
  343,766
  8.21%

  2,725,188
  70.65%
  2,474,534
  61.98%
  2,598,424
  62.05%







Other real estate owned
  324,235
  8.41%
  394,000
  9.87%
  409,000
  9.77%








$3,857,084
  100.00%
$3,992,740
  100.00%
$4,187,245
  100.00%

~~(1) No consumer loans were in non-accrual status as of the consolidated balance sheet dates. In accordance with Company policy, delinquent consumer loans are charged off at 120 days past due.~~

The Company’s OREO portfolio at September 30, 2017 consisted of one residential property and one commercial property compared to two residential properties at December 31, 2016 and two residential properties at September 30, 2016. All of the residential properties were acquired through the normal foreclosure process. The Company took control of two commercial properties in 2017, one in January and the other in March. One of the commercial properties sold in April, 2017 and the other failed to sell at auction in May, 2017 and is listed for sale.

The Company’s troubled debt restructurings (TDRs) are principally a result of extending loan repayment terms to relieve cash flow difficulties. The Company has only infrequently reduced interest rates below the current market rate. The Company has not forgiven principal or reduced accrued interest within the terms of original restructurings. Management evaluates each TDR situation on its own merits and does not foreclose the granting of any particular type of concession.

~~Table of Content~~

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

September 30, 2017

December 31, 2016

September 30, 2016

Number of

Principal

Number of

Principal

Number of

Principal

Loans

Balance

Loans

Balance

Loans

Balance

Commercial & industrial
  1
$48,385
  2
$143,127
  3
$191,919
Commercial real estate
  2
  329,149
  2
  354,811
  2
  373,767
Residential real estate - 1st lien
  7
  343,519
  9
  516,886
  10
  684,636
Residential real estate - Jr lien
  0
  0
  2
  117,158
  1
  52,130

  10
$721,053
  15
$1,131,982
  16
$1,302,452

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

September 30, 2017

December 31, 2016

September 30, 2016

Number of

Principal

Number of

Principal

Number of

Principal

Loans

Balance

Loans

Balance

Loans

Balance

Commercial & industrial
  0
$0
  0
$0
  2
$35,340
Commercial real estate
  5
  1,291,887
  5
  1,350,480
  5
  1,391,990
Residential real estate - 1st lien
  53
  2,811,263
  28
  2,722,973
  27
  2,558,079
Residential real estate - Jr lien
  1
  8,645
  2
  63,971
  3
  132,822

  59
$4,111,795
  35
$4,137,424
  37
$4,118,231

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

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

When establishing the ALL each quarter, the Company applies a combination of historical loss factors and qualitative factors to loan segments, including residential first and junior lien mortgages, commercial real estate, commercial & industrial, and consumer loan portfolios. The Company applies numerous qualitative factors to each segment of the loan portfolio. Those factors include the levels of and trends in delinquencies and non-accrual loans, criticized and classified assets, volumes and terms of loans, and the impact of any loan policy changes. Experience, ability and depth of lending personnel, levels of policy and documentation exceptions, national and local economic trends, the competitive environment, and concentrations of credit are also factors considered.

Specific allocations to the ALL are made for certain impaired loans. Impaired loans include all troubled debt restructurings regardless of amount, and all loans to a borrower that in aggregate are greater than $100,000 and that are in non-accrual status. A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due, including interest and principal, according to the contractual terms of the loan agreement. The Company will review all the facts and circumstances surrounding non-accrual loans and on a case-by-case basis may consider loans below the threshold as impaired when such treatment is material to the financial statements. See Note 5 to the accompanying unaudited interim consolidated financial statements for information on the recorded investment in impaired loans and their related allocations.

During the second quarter of 2017, the Company transitioned to a software solution for preparing the ALL calculation and related reports, replacing previously used Excel spreadsheets. The software solution provides the Company with stronger data integrity, ease and efficiency in ALL preparation, and helps ready the Company for the future transition to the Current Expected Credit Loss (CECL) model. During the implementation and testing of the software, several changes to the underlying ALL methodology were made. Those changes included (i) removing the government guaranteed balances from the calculation of the ALL for both the pooled loans and impaired loans, (ii) treating all TDRs as impaired regardless of size, and (iii) using a fixed look back period for historical losses based on loss history and economic conditions rather than applying the highest look back period of the last 5 years. The Company has a solid history of collection of government guarantees; removal of the guaranteed portion of the loan balance from the ALL calculation for government guaranteed loans reduces the amount of reserves that would otherwise be required against those loans. Management expects the change to the historical loss methodology will eliminate sharp increases or decreases in loss ratios resulting from isolated losses rolling into or out of the look back period and is more reflective of the Company’s loss history during periods of economic stability. Although the inclusion of all TDRs in the impaired calculation now requires the individual analysis of a significantly larger number of loans than was the case under the previous ALL methodology, the ability to individually analyze a greater number of loans is facilitated by the new software. Compared to the prior ALL methodology, the net impact of the foregoing methodology changes reduced required reserves by approximately $247,000 for the quarter ended June 30, 2017, the quarter during which the changes were first implemented.

~~Table of Content~~

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

As of or for the Nine Months Ended September 30,

2017

2016

Loans outstanding, end of period
$506,048,119
$470,186,895
Average loans outstanding during period
$495,170,740
$465,314,118
Non-accruing loans, end of period
$2,725,188
$2,598,424
Non-accruing loans, net of government guarantees
$2,676,035
$2,429,563



Allowance, beginning of period
$5,278,445
$5,011,878
Loans charged off:


  Commercial & industrial
  0
  (12,194)
  Commercial real estate
  (160,207)
  0
  Residential real estate - 1st lien
  (88,833)
  (234,549)
  Residential real estate - Jr lien
  (15,311)
  0
  Consumer loans
  (99,617)
  (38,412)
       Total loans charged off
  (363,968)
  (285,155)
Recoveries:


  Commercial & industrial
  23,469
  22,650
  Commercial real estate
  231
  0
  Residential real estate - 1st lien
  14,838
  9,660
  Residential real estate - Jr lien
  180
  180
  Consumer loans
  33,118
  20,752
        Total recoveries
  71,836
  53,242
Net loans charged off
  (292,132)
  (231,913)
Provision charged to income
  450,000
  400,000
Allowance, end of period
$5,436,313
$5,179,965



Net charge offs to average loans outstanding
  0.059%
  0.050%
Provision charged to income as a percent of average loans
  0.091%
  0.086%
Allowance to average loans outstanding
  1.098%
  1.113%
Allowance to non-accruing loans
  199.484%
  199.350%
Allowance to non-accruing loans net of government guarantees
  203.148%
  213.206%

The provision increased $50,000, or 12.5%, for the first nine months of 2017 compared to the same period in 2016. The lower provision in 2016 was principally related to the comparatively low level of net loan losses experienced during the first three months of 2016. The first quarter 2017 provision supported higher losses driven by one particular commercial real estate charge off. The decrease in the size of the overall portfolio at March 31, 2017 compared to year-end precluded the need for any additional first quarter provision. The second and third quarters of 2017 saw modest loan losses coupled with strong loan growth and as such the provision remained on budget at $450,000 year-to-date.

~~Table of Content~~

The third quarter ALL analysis shows the reserve balance of $5,436,313 at September 30, 2017 is sufficient to cover losses that are probable and estimable, with an unallocated reserve of $261,957. The reserve balance and unallocated amount continue to be directionally consistent with the overall risk profile of the Company’s loan portfolio and credit risk appetite. The portion of the ALL termed "unallocated" is established to absorb inherent losses that exist as of the measurement date although not specifically identified through management's process for estimating credit losses. While the ALL is described as consisting of separate allocated portions, the entire ALL is available to support loan losses, regardless of category. Unallocated reserves are considered by management to be appropriate in light of the Company’s continued growth strategy and shift in the portfolio from residential loans to commercial and commercial real estate loans and the risk associated with the relatively new, unseasoned loans in those portfolios. The adequacy of the ALL is reviewed quarterly by the risk management committee of the Board of Directors and then presented to the full Board of Directors for approval.

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

~~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 2017, the Company did not engage in any activity that created any additional types of off-balance sheet risk.

~~Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.~~

~~Table of Content~~

~~LIQUIDITY AND CAPITAL RESOURCES~~

At September 30, 2017, December 31, 2016 and September 30, 2016, borrowing capacity of $112,919,448, $68,163,543 and $67,359,726, 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. During the second quarter of 2017, the Company began pledging residential mortgage loans in a detail listing instead of a summary listing, and also began pledging qualifying multifamily and other commercial real estate loans, accounting for the increase in the portfolio of qualifying loans in 2017 compared to both periods in 2016. The Company also has an unsecured Federal Funds credit line with the FHLBB with an available balance of $500,000 and no outstanding advances during any of the respective comparison periods. Interest is chargeable at a rate determined daily, approximately 25 basis points higher than the rate paid on federal funds sold.

~~The following table reflects the Company’s outstanding FHLBB advances against the respective lines as of the dates indicated:~~

~~(1)~~

The Company has borrowed a total of $3,550,000 under the FHLBB’s Jobs for New England (JNE) program, a program dedicated to supporting job growth and economic development throughout New England. The FHLBB is providing 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.

~~Table of Content~~

The Company has a Borrower-in-Custody (BIC) arrangement with the FRBB secured by eligible commercial loans, commercial real estate loans and home equity loans, resulting in an available credit line of $66,804,404, $77,862,708, and $71,326,693, respectively, at September 30, 2017, December 31, 2016 and September 30, 2016. 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 175 basis points. The Company had no outstanding advances against this credit line during any of the periods presented.

The Company has unsecured lines of credit with three correspondent banks with aggregate available borrowing capacity totaling $12,500,000 as of September 30, 2017 and December 31, 2016 and unsecured lines of credit with two correspondent banks with aggregate available borrowing capacity of $7,500,000 as of September 30, 2016. There were no outstanding advances against any of these lines during any of the respective comparison periods.

Securities sold under agreements to repurchase provide another funding source for the Company. At September 30, 2017, December 31, 2016 and September 30, 2016, the Company had outstanding repurchase agreement balances of $27,458,927, $30,423,195 and $25,834,249, respectively. These repurchase agreements mature and are repriced daily.

~~The following table illustrates the changes in shareholders' equity from December 31, 2016 to September 30, 2017:~~

~~Balance at December 31, 2016 (book value $10.27 per common share)~~	$~~54,451,517~~
~~Net income~~	~~4,706,679~~
~~Issuance of stock through the Dividend Reinvestment Plan~~	~~712,899~~
~~Dividends declared on common stock~~	~~(2,586,973~~)
~~Dividends declared on preferred stock~~	~~(75,000~~)
~~Unrealized gain on available-for-sale securities during the period, net of tax~~	~~11,618~~
~~Balance at September 30, 2017 (book value $10.73 per common share)~~	$~~57,220,740~~

As described in more detail in the Company’s 2016 Annual Report on Form 10-K in Note 20 to the audited consolidated financial statements contained therein and under the caption “LIQUIDITY AND CAPITAL RESOURCES” in the MD&A section of such 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.

Beginning in 2016, an additional capital conservation buffer has been added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer will be fully phased-in on January 1, 2019 at 2.5 percent. A banking organization with a conservation buffer of less than 2.5 percent (or the required phase-in amount in years prior to 2019) is subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The Company’s and the Bank’s capital conservation buffer was 5.65% and 5.51%, respectively, at September 30, 2017. As of September 30, 2017, both the Company and the Bank exceeded the required capital conservation buffer of 1.25% and, on a pro forma basis, would be compliant with the fully phased-in capital conservation buffer requirement.

As of September 30, 2017, the Bank was considered well capitalized under the regulatory capital framework for Prompt Corrective Action and the Company exceeded applicable consolidated regulatory guidelines for capital adequacy.

~~Table of Content~~

~~The following table shows the Company’s actual capital ratios and those of its subsidiary, as well as applicable regulatory capital requirements, as of the dates indicated.~~

Minimum

Minimum

To Be Well

For Capital

Capitalized Under

Adequacy

Prompt Corrective

Actual

Purposes:

Action Provisions(1):

Amount

Ratio

Amount

Ratio

Amount

Ratio

(Dollars in Thousands)

September 30, 2017

Common equity tier 1 capital

  (to risk-weighted assets)

   Company
$58,585
  12.48%
$21,121
  4.50%
  N/A
  N/A
   Bank
$57,837
  12.34%
$21,093
  4.50%
$30,468
  6.50%







Tier 1 capital (to risk-weighted assets)






   Company
$58,585
  12.48%
$28,161
  6.00%
  N/A
  N/A
   Bank
$57,837
  12.34%
$28,124
  6.00%
$37,499
  8.00%







Total capital (to risk-weighted assets)






   Company
$64,065
  13.65%
$37,548
  8.00%
  N/A
  N/A
   Bank
$63,317
  13.51%
$37,499
  8.00%
$46,874
  10.00%







Tier 1 capital (to average assets)






   Company
$58,585
  9.18%
$25,524
  4.00%
  N/A
  N/A
   Bank
$57,837
  9.07%
$25,502
  4.00%
$31,877
  5.00%







December 31, 2016:













Common equity tier 1 capital






  (to risk-weighted assets)






   Company
$55,690
  12.34%
$20,304
  4.50%
  N/A
  N/A
   Bank
$55,120
  12.23%
$20,274
  4.50%
$29,285
  6.50%







Tier 1 capital (to risk-weighted assets)






   Company
$55,690
  12.34%
$27,072
  6.00%
  N/A
  N/A
   Bank
$55,120
  12.23%
$27,032
  6.00%
$36,043
  8.00%







Total capital (to risk-weighted assets)






   Company
$61,012
  13.52%
$36,096
  8.00%
  N/A
  N/A
   Bank
$60,443
  13.42%
$36,043
  8.00%
$45,054
  10.00%







Tier 1 capital (to average assets)






   Company
$55,690
  9.17%
$24,305
  4.00%
  N/A
  N/A
   Bank
$55,120
  9.08%
$24,281
  4.00%
$30,351
  5.00%

~~(1) Applicable to banks, but not bank holding companies.~~

~~Table of Content~~

~~ITEM 3. Quantitative and Qualitative Disclosures about Market Risk~~

~~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, 2017, an evaluation was performed under the supervision and with the participation of management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, management concluded that its disclosure controls and procedures as of September 30, 2017 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.

~~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, 2017 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~~

The Risk Factors identified in our Annual Report on Form 10-K for the year ended December 31, 2016, continue to represent the most significant risks to the Company's future results of operations and financial condition.

~~Table of Content~~

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

The following table provides information as to the purchases of the Company’s common stock during the three months ended September 30, 2017, by the Company or by any affiliated purchaser (as defined in SEC Rule 10b-18). During the monthly periods presented, the Company did not have any publicly announced repurchase plans or programs.

Total Number

Average

of Shares

Price Paid

For the period:

Purchased(1)(2)

Per Share

July 1 - July 31
  1,494
$18.95
August 1 - August 31
  0
  0.00
September 1 - September 30
  3,021
  18.20
     Total
  4,515
$18.45

(1) All 4,515 shares were purchased for the account of participants invested in the Company Stock Fund under the Company’s Retirement Savings Plan by or on behalf of the Plan Trustee, the Human Resources Committee of Community National Bank. Such share purchases were facilitated through CFSG, which provides certain investment advisory services to the Plan. Both the Plan Trustee and CFSG may be considered affiliates of the Company under Rule 10b-18.

~~ITEM 6. Exhibits~~

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

Exhibit 101--The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 formatted in eXtensible Business Reporting Language (XBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three and nine month interim periods ended September 30, 2017 and 2016, (iii) the unaudited consolidated statements of comprehensive income, (iv) the unaudited consolidated statements of cash flows and (v) related notes.

~~Table of Content~~

~~SIGNATURES~~

~~Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~

~~COMMUNITY BANCORP.~~

~~DATED: November 09, 2017~~	~~/s/Kathryn M. Austin~~
	~~Kathryn M. Austin, President~~
	~~& Chief Executive Officer~~
	~~(Principal Executive Officer)~~


~~DATED: November 09, 2017~~	~~/s/Louise M. Bonvechio~~
	~~Louise M. Bonvechio, Corporate~~
	~~Secretary & Treasurer~~
	~~(Principal Financial Officer)~~

~~Table of Content~~

~~SECURITIES AND EXCHANGE COMMISSION~~

~~Washington, DC 20549~~

~~FORM 10-Q~~

~~[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)~~

~~OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For the Quarterly Period Ended September 30, 2017~~

~~COMMUNITY BANCORP.~~

~~EXHIBITS~~

~~EXHIBIT INDEX~~

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

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

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

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


Exhibit 101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2017~~2019 formatted in eXtensible Business Reporting Language (XBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the ~~three~~three-month and ~~nine month~~nine-month interim periods ended September 30, ~~2017~~2019 and ~~2016,~~2018, (iii) the unaudited consolidated statements of comprehensive income, (iv) the unaudited consolidated statements of cash flows and (v) related notes.

	As of September 30, 2016
		Unpaid		Average	Average
	Recorded	Principal	Related	Recorded	Recorded
	Investment	Balance	Allowance	Investment(1)	Investment(2)

Related allowance recorded
Commercial real estate	$228,062	$235,152	$92,900	$0	$45,612
Residential real estate
- 1st lien	436,191	579,182	19,000	435,802	296,316
- Jr lien	226,590	284,314	115,600	262,589	197,154
	890,843	1,098,648	227,500	698,391	539,082

No related allowance recorded
Commercial & industrial	188,528	262,297		198,137	174,248
Commercial real estate	475,790	523,245		901,468	966,095
Residential real estate
- 1st lien	628,561	729,602		918,378	742,267
- Jr lien	0	0		39,721	15,888
	1,292,879	1,515,144		2,057,704	1,898,498

	$2,183,722	$2,613,792	$227,500	$2,756,095	$2,437,580

Year ended December 31, 2016		Pre-	Post-
		Modification	Modification
		Outstanding	Outstanding
	Number of	Recorded	Recorded
	Contracts	Investment	Investment

Residential real estate
- 1st lien	8	$572,418	$598,030
- Jr lien	2	62,819	64,977
	10	$635,237	$663,007

	Three months ended September 30, 2016			Nine months ended September 30, 2016
		Pre-	Post-		Pre-	Post-
		Modification	Modification		Modification	Modification
		Outstanding	Outstanding		Outstanding	Outstanding
	Number of	Recorded	Recorded	Number of	Recorded	Recorded
	Contracts	Investment	Investment	Contracts	Investment	Investment

Residential real estate
- 1st lien	3	$177,182	$185,107	8	$572,418	$598,030
- Jr lien	0	0	0	2	62,819	64,977
	3	$177,182	$185,107	10	$635,237	$663,007

Twelve months ended September 30, 2017	Number of	Recorded
	Contracts	Investment
Residential real estate – 1st lien	1	$87,844

Twelve months ended December 31, 2016	Number of	Recorded
	Contracts	Investment
Residential real estate - 1st lien	2	$93,230
Residential real estate - Jr lien	1	54,557
	3	$147,787

Twelve months ended September 30, 2016	Number of	Recorded
	Contracts	Investment
Commercial	1	$71,808
Commercial real estate	1	228,063
Residential real estate - 1st lien	2	94,004
Residential real estate - Jr lien	1	54,557
	5	$448,432

SELECTED FINANCIAL DATA (Unaudited)

	September 30,	December 31,	September 30,
	2017	2016	2016
Balance Sheet Data
Net loans	$500,930,258	$482,280,911	$465,319,495
Total assets	661,539,071	637,653,665	605,790,430
Total deposits	556,752,320	504,735,032	503,806,906
Borrowed funds	3,550,000	31,550,000	5,795,000
Total liabilities	604,318,331	583,202,148	551,946,796
Total shareholders' equity	57,220,740	54,451,517	53,843,634

Book value per common share outstanding	$10.73	$10.27	$10.18

	Contract or Notional Amount
	September 30,	December 31,
	2017	2016

Unused portions of home equity lines of credit	$28,640,161	$25,535,104
Residential construction lines of credit	4,160,338	3,676,176
Commercial real estate and other construction lines of credit	30,022,030	25,951,345
Commercial and industrial commitments	35,776,104	36,227,213
Other commitments to extend credit	52,666,605	42,459,454
Standby letters of credit and commercial letters of credit	1,651,759	2,009,788
Recourse on sale of credit card portfolio	309,155	258,555
MPF credit enhancement obligation, net of liability recorded	596,642	748,239