CMTV 10-Q Quarterly Report June 30, 2019

COMMUNITY BANCORP /VT

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10-Q 1 cmtv_10qjune2019.htm JUNE 2019 10-Q FOR COMMUNITY BANCORP Blueprint

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 June 30, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ( X ) NO ( )

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

Large accelerated filer ( )	Accelerated filer ( X )
Non-accelerated filer ( )	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. ( )

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 August 5, 2019, there were 5,207,060 shares outstanding of the Corporation's common stock.

FORM 10-Q
I ndex
		Page
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4	Controls and Procedures	50

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	50
Item 1A	Risk Factors	50
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 6	Exhibits	51
	Signatures	52
	Exhibit Index	53

P ART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements (Unaudited)

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

Community Bancorp. and Subsidiary	June 30,	December 31,
Consolidated Balance Sheets	2019	2018
	(Unaudited)
Assets
Cash and due from banks	$ 18,977,402	$ 14,906,529
Federal funds sold and overnight deposits	10,558,075	53,028,286
Total cash and cash equivalents	29,535,477	67,934,815
Securities available-for-sale	47,557,774	39,366,831
Restricted equity securities, at cost	1,347,850	1,749,450
Loans held-for-sale	262,000	0
Loans	567,378,298	578,450,517
Allowance for loan losses	(5,723,753 )	(5,602,541 )
Deferred net loan costs	354,981	363,614
Net loans	562,009,526	573,211,590
Bank premises and equipment, net	10,943,412	9,713,455
Accrued interest receivable	2,193,025	2,300,841
Bank owned life insurance	4,857,969	4,814,099
Goodwill	11,574,269	11,574,269
Other real estate owned	92,084	201,386
Other assets	9,164,905	9,480,762
Total assets	$ 679,538,291	$ 720,347,498

Liabilities and Shareholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing	$ 110,870,636	$ 122,430,805
Interest-bearing transaction accounts	149,487,155	177,815,417
Money market funds	79,501,860	85,261,685
Savings	95,455,903	93,129,875
Time deposits, $250,000 and over	11,928,023	14,395,291
Other time deposits	108,906,051	115,783,492
Total deposits	556,149,628	608,816,565
Borrowed funds	7,650,000	1,550,000
Repurchase agreements	32,144,591	30,521,565
Junior subordinated debentures	12,887,000	12,887,000
Accrued interest and other liabilities	5,035,098	3,968,657
Total liabilities	613,866,317	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, 5,418,599
shares issued at 06/30/19 and 5,382,103 shares issued at 12/31/18	13,546,498	13,455,258
Additional paid-in capital	33,034,807	32,536,532
Retained earnings	20,055,870	17,882,282
Accumulated other comprehensive income (loss)	157,576	(647,584 )
Less: treasury stock, at cost; 210,101 shares at 06/30/19 and 12/31/18	(2,622,777 )	(2,622,777 )
Total shareholders' equity	65,671,974	62,603,711
Total liabilities and shareholders' equity	$ 679,538,291	$ 720,347,498

Book value per common share outstanding	$ 12.32	$ 11.72

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

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

Interest income
Interest and fees on loans	$ 7,829,008	$ 6,699,981
Interest on taxable debt securities	270,026	221,016
Dividends	26,788	30,857
Interest on federal funds sold and overnight deposits	136,600	77,005
Total interest income	8,262,422	7,028,859

Interest expense
Interest on deposits	1,280,259	719,389
Interest on borrowed funds	9,869	17,642
Interest on repurchase agreements	73,070	37,641
Interest on junior subordinated debentures	183,755	163,827
Total interest expense	1,546,953	938,499

Net interest income	6,715,469	6,090,360
Provision for loan losses	141,666	180,000
Net interest income after provision for loan losses	6,573,803	5,910,360

Non-interest income
Service fees	820,657	810,731
Income from sold loans	128,690	190,710
Other income from loans	223,509	198,351
Net realized loss on sale of securities AFS	0	(6,375 )
Other income	261,282	496,744
Total non-interest income	1,434,138	1,690,161

Non-interest expense
Salaries and wages	1,792,930	1,914,616
Employee benefits	806,340	722,302
Occupancy expenses, net	642,284	657,596
Other expenses	1,837,506	1,809,461
Total non-interest expense	5,079,060	5,103,975

Income before income taxes	2,928,881	2,496,546
Income tax expense	509,583	493,892
Net income	$ 2,419,298	$ 2,002,654

Earnings per common share	$ 0.46	$ 0.39
Weighted average number of common shares
used in computing earnings per share	5,197,045	5,130,809
Dividends declared per common share	$ 0.19	$ 0.19

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

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

Interest income
Interest and fees on loans	$ 15,039,818	$ 13,150,681
Interest on taxable debt securities	518,134	423,901
Dividends	52,747	59,548
Interest on federal funds sold and overnight deposits	350,091	171,567
Total interest income	15,960,790	13,805,697

Interest expense
Interest on deposits	2,563,219	1,406,451
Interest on borrowed funds	15,006	25,125
Interest on repurchase agreements	145,901	68,847
Interest on junior subordinated debentures	361,367	306,824
Total interest expense	3,085,493	1,807,247

Net interest income	12,875,297	11,998,450
Provision for loan losses	354,169	360,000
Net interest income after provision for loan losses	12,521,128	11,638,450

Non-interest income
Service fees	1,611,023	1,580,813
Income from sold loans	231,777	374,329
Other income from loans	362,253	410,621
Net realized loss on sale of securities AFS	0	(10,236 )
Other income	547,786	730,304
Total non-interest income	2,752,839	3,085,831

Non-interest expense
Salaries and wages	3,635,860	3,530,002
Employee benefits	1,582,680	1,396,304
Occupancy expenses, net	1,333,113	1,332,470
Other expenses	3,683,332	3,576,316
Total non-interest expense	10,234,985	9,835,092

Income before income taxes	5,038,982	4,889,189
Income tax expense	847,779	903,992
Net income	$ 4,191,203	$ 3,985,197

Earnings per common share	$ 0.80	$ 0.77
Weighted average number of common shares
used in computing earnings per share	5,188,735	5,123,947
Dividends declared per common share	$ 0.38	$ 0.36

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

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

Net income	$ 2,419,298	$ 2,002,654

Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities AFS arising during the period	447,432	(127,242 )
Reclassification adjustment for loss realized in income	0	6,375
Unrealized gain (loss) during the period	447,432	(120,867 )
Tax effect	(93,962 )	25,381
Other comprehensive income (loss), net of tax	353,470	(95,486 )
Total comprehensive income	$ 2,772,768	$ 1,907,168

	Six Months Ended June 30,
	2019	2018

Net income	$ 4,191,203	$ 3,985,197

Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities AFS arising during the period	1,019,191	(704,367 )
Reclassification adjustment for loss realized in income	0	10,236
Unrealized gain (loss) during the period	1,019,191	(694,131 )
Tax effect	(214,031 )	145,769
Other comprehensive income (loss), net of tax	805,160	(548,362 )
Total comprehensive income	$ 4,996,363	$ 3,436,835

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

Community Bancorp. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
	Six Months Ended June 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

	Six Months Ended June 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

*Accumulated other comprehensive (loss) income

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

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

Cash Flows from Operating Activities:
Net income	$ 4,191,203	$ 3,985,197
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization, bank premises and equipment	461,502	490,702
Provision for loan losses	354,169	360,000
Deferred income tax provision (credit)	23,318	(76,957 )
Net realized loss on sale of securities AFS	0	10,236
Gain on sale of loans	(63,259 )	(161,899 )
Gain on sale of bank premises and equipment	0	(264,087 )
Loss on sale of OREO	817	0
Income from CFS Partners	(333,359 )	(270,786 )
Amortization of bond premium, net	69,789	65,691
Write down on OREO	95,008	0
Proceeds from sales of loans held for sale	1,522,404	5,078,916
Originations of loans held for sale	(1,721,145 )	(3,879,730 )
(Decrease) increase in taxes payable	(41,593 )	82,207
Decrease in interest receivable	107,816	99,614
Decrease in mortgage servicing rights	71,305	49,607
Decrease in right-of-use assets	116,320	0
Decrease in operating lease liabilities	(111,916 )	0
Decrease (increase) in other assets	226,100	(559,365 )
Increase in cash surrender value of BOLI	(43,870 )	(45,864 )
Amortization of limited partnerships	156,054	188,742
Decrease (increase) in unamortized loan costs	8,633	(26,526 )
Decrease in interest payable	(17,271 )	(6,254 )
Decrease in accrued expenses	(140,451 )	(200,085 )
(Decrease) increase in other liabilities	(85,517 )	36,223
Net cash provided by operating activities	4,846,057	4,955,582

Cash Flows from Investing Activities:
Investments - AFS
Maturities, calls, pay downs and sales	2,459,484	5,187,588
Purchases	(9,701,025 )	(6,267,361 )
Proceeds from redemption of restricted equity securities	493,600	0
Purchases of restricted equity securities	(92,000 )	(730,400 )
Decrease in limited partnership contributions payable	0	(380,250 )
Decrease (increase) in loans, net	10,705,711	(2,289,690 )
Capital expenditures net of proceeds from sales of bank
premises and equipment	(317,000 )	400,558
Proceeds from sales of OREO	105,561	169,900
Recoveries of loans charged off	41,468	46,665
Net cash provided by (used in) investing activities	3,695,799	(3,862,990 )

	2019	2018

Cash Flows from Financing Activities:
Net decrease in demand and interest-bearing transaction accounts	(39,888,431 )	(11,555,232 )
Net decrease in money market and savings accounts	(3,433,797 )	(13,894,555 )
Net decrease in time deposits	(9,344,709 )	(8,266,282 )
Net increase in repurchase agreements	1,623,026	1,647,124
Net increase in short-term borrowings	6,100,000	21,000,000
Repayments on long-term borrowings	0	(2,000,000 )
Decrease in finance lease obligations	(61,117 )	(56,366 )
Redemption of preferred stock	(500,000 )	(500,000 )
Dividends paid on preferred stock	(48,125 )	(51,875 )
Dividends paid on common stock	(1,388,041 )	(1,259,104 )
Net cash used in financing activities	(46,941,194 )	(14,936,290 )

Net decrease in cash and cash equivalents	(38,399,338 )	(13,843,698 )
Cash and cash equivalents:
Beginning	67,934,815	42,653,501
Ending	$ 29,535,477	$ 28,809,803

Supplemental Schedule of Cash Paid During the Period:
Interest	$ 3,102,764	$ 1,813,501

Income taxes, net of refunds	$ 710,000	$ 710,000

Supplemental Schedule of Noncash Investing and Financing Activities:
Change in unrealized gain (loss) on securities AFS	$ 1,019,191	$ (694,131 )

Loans transferred to OREO	$ 92,084	$ 249,900

Common Shares Dividends Paid:
Dividends declared	$ 1,969,490	$ 1,843,120
Decrease (increase) in dividends payable attributable to dividends declared	8,066	(105,077 )
Dividends reinvested	(589,515 )	(478,939 )
	$ 1,388,041	$ 1,259,104

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, 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, 2019, or for any other interim period.

Certain amounts in the 2018 consolidated financial statements have been reclassified to conform to the 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	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
BIC:	Borrower-in-Custody	JNE:	Jobs for New England
Board:	Board of Directors	Jr:	Junior
BOLI:	Bank owned life insurance	LIBOR:	London Interbank Offered Rate
bp or bps:	Basis point(s)	MBS:	Mortgage-backed security
CBLR:	Community Bank Leverage Ratio	MPF:	Mortgage Partnership Finance
CDARS:	Certificate of Deposit Accounts Registry	MSRs:	Mortgage servicing rights
	Service of the Promontory Interfinancial	NII:	Net interest income
	Network	NMTC:	New Market Tax Credits
CDs:	Certificates of deposit	OCI:	Other comprehensive income (loss)
CDI:	Core deposit intangible	OREO:	Other real estate owned
CECL:	Current Expected Credit Loss	OTTI:	Other-than-temporary impairment
CFSG:	Community Financial Services Group, LLC	PMI:	Private mortgage insurance
CFS Partners:	Community Financial Services Partners,	RD:	USDA Rural Development
	LLC	SBA:	U.S. Small Business Administration
Company:	Community Bancorp. and Subsidiary	SEC:	U.S. Securities and Exchange Commission
CRE:	Commercial Real Estate	SERP:	Supplemental Employee Retirement Plan
DDA or DDAs:	Demand Deposit Account(s)	TDR:	Troubled-debt restructuring
DTC:	Depository Trust Company	USDA:	U.S. Department of Agriculture
DRIP:	Dividend Reinvestment Plan	VA:	U.S. Veterans Administration
Exchange Act:	Securities Exchange Act of 1934	2017 Tax Act:	Tax Cut and Jobs Act of 2017
FASB:	Financial Accounting Standards Board	2018	Economic Growth, Regulatory Relief and
FDIC:	Federal Deposit Insurance Corporation	Regulatory	Consumer Protection Act of 2018
FHLBB:	Federal Home Loan Bank of Boston	Relief Act:

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. 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. The ASU became effective for the Company on January 1, 2019. The impact of adopting this ASU was not material to the 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, 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. 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’s and the Bank's regulatory capital ratios. The Company has formed a committee to assess the implications of this new pronouncement and transitioned to a software solution for preparing the ALL calculation and related reports that management believes provides the Company with stronger data integrity, ease and efficiency in ALL preparation. The new software solution also provides numerous training opportunities for the appropriate personnel within the Company. The Company has gathered and is continuing to analyze the historical data to serve as a basis for estimating the ALL under CECL and continues to evaluate the impact of the adoption of the ASU on its consolidated financial statements. As initially proposed, t h e ASU was to be effec ti ve for fisca l years be g inn i n g aft er De c ember 15, 2019, in c lu d ing in teri m p e rio ds w i t hin t ho se fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018, including interim periods within such years. However, on July 17, 2019, the FASB announced its intention to propose an extended effective date of January 1, 2023 for compliance with the ASU by smaller reporting companies. The Company would qualify for this extension and management will evaluate its CECL compliance timetable in the event that the FASB finalizes its 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 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.

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.

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 Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements, but does not anticipate any material impact at this time.

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 June 30,	2019	2018

Net income, as reported	$ 2,419,298	$ 2,002,654
Less: dividends to preferred shareholders	20,625	23,750
Net income available to common shareholders	$ 2,398,673	$ 1,978,904
Weighted average number of common shares
used in calculating earnings per share	5,197,045	5,130,809
Earnings per common share	$ 0.46	$ 0.39

Six Months Ended June 30,	2019	2018

Net income, as reported	$ 4,191,203	$ 3,985,197
Less: dividends to preferred shareholders	48,125	51,875
Net income available to common shareholders	$ 4,143,078	$ 3,933,322
Weighted average number of common shares
used in calculating earnings per share	5,188,735	5,123,947
Earnings per common share	$ 0.80	$ 0.77

Note 4. Investment 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 ASC310 (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 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	Unrealized	Fair
	Cost	Gains	Losses	Value

June 30, 2019
U.S. GSE debt securities	$ 20,977,332	$ 84,133	$ 22,268	$ 21,039,197
Agency MBS	15,811,926	54,732	101,209	15,765,449
ABS and OAS	1,904,051	57,811	0	1,961,862
Other investments	8,665,000	127,598	1,332	8,791,266
Total	$ 47,358,309	$ 324,274	$ 124,809	$ 47,557,774

December 31, 2018
U.S. GSE debt securities	$ 14,010,100	$ 394	$ 259,391	$ 13,751,103
Agency MBS	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	8,167,000	8,472	120,398	8,055,074
Total	$ 40,186,557	$ 15,373	$ 835,099	$ 39,366,831

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

	Amortized	Fair
	Cost	Value

June 30, 2019	$ 47,358,309	$ 47,557,774
December 31, 2018	40,186,557	39,366,831

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

	Amortized	Fair
	Cost	Value
June 30, 2019
Due in one year or less	$ 496,000	$ 496,187
Due from one to five years	14,704,552	14,811,778
Due from five to ten years	15,368,394	15,504,360
Due after ten years	977,437	980,000
Agency MBS	15,811,926	15,765,449
Total	$ 47,358,309	$ 47,557,774

December 31, 2018
Due from one to five years	$ 12,714,642	$ 12,519,008
Due from five to ten years	11,451,023	11,273,298
Agency MBS	16,020,892	15,574,525
Total	$ 40,186,557	$ 39,366,831

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

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

	Less than 12 months		12 months or more		Total
	Fair	Unrealized	Fair	Unrealized	Number of	Fair	Unrealized
	Value	Loss	Value	Loss	Securities	Value	Loss
June 30, 2019
U.S. GSE debt securities	$ 0	$ 0	$ 7,505,284	$ 22,268	6	$ 7,505,284	$ 22,268
Agency MBS	1,225,362	2,656	10,014,594	98,553	21	11,239,956	101,209
Other investments	0	0	742,667	1,332	3	742,667	1,332
Total	$ 1,225,362	$ 2,656	$ 18,262,545	$ 122,153	30	$ 19,487,907	$ 124,809

December 31, 2018
U.S. GSE debt securities	$ 1,465,947	$ 6,752	$ 11,284,761	$ 252,639	11	$ 12,750,708	$ 259,391
Agency MBS	2,317,838	22,029	12,223,386	427,039	24	14,541,224	449,068
ABS and OAS	976,226	6,242	0	0	1	976,226	6,242
Other investments	1,956,914	20,086	4,113,688	100,312	25	6,070,602	120,398
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 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 June 30, 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 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:

	June 30,	December 31,
	2019	2018

Commercial & industrial	$ 85,469,062	$ 80,766,693
Commercial real estate	238,416,761	235,318,148
Municipal*	30,302,868	47,067,023
Residential real estate - 1st lien	164,798,474	165,665,175
Residential real estate - Jr lien	43,767,258	44,544,987
Consumer	4,623,875	5,088,491
Total loans	567,378,298	578,450,517
Deduct (add):
ALL	5,723,753	5,602,541
Deferred net loan costs	(354,981 )	(363,614 )
Net loans	$ 562,009,526	$ 573,211,590

*Prior to 2019, all loans in this category were reported as HTM securities as a component of 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	Total			Non-Accrual	More and
June 30, 2019	30-89 Days	or More	Past Due	Current	Total Loans	Loans	Accruing

Commercial & industrial	$ 198,284	$ 293,524	$ 491,808	$ 84,977,254	$ 85,469,062	$ 606,832	$ 0
Commercial real estate	852,655	411,734	1,264,389	237,152,372	238,416,761	1,946,457	0
Municipal	0	0	0	30,302,868	30,302,868	0	0
Residential real estate
- 1st lien	1,608,519	1,332,686	2,941,205	161,857,269	164,798,474	2,984,761	736,283
- Jr lien	312,942	240,320	553,262	43,213,996	43,767,258	287,499	108,365
Consumer	24,071	0	24,071	4,599,804	4,623,875	0	0
Totals	$ 2,996,471	$ 2,278,264	$ 5,274,735	$ 562,103,563	$ 567,378,298	$ 5,825,549	$ 844,648

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

Commercial & industrial	$ 217,385	$ 0	$ 217,385	$ 80,549,308	$ 80,766,693	$ 84,814	$ 0
Commercial real estate	1,509,839	190,789	1,700,628	233,617,520	235,318,148	1,742,993	0
Municipal	0	0	0	47,067,023	47,067,023	0	0
Residential real estate
- 1st lien	4,108,319	1,371,061	5,479,380	160,185,795	165,665,175	2,026,939	622,486
- Jr lien	484,855	353,914	838,769	43,706,218	44,544,987	408,540	104,959
Consumer	43,277	1,661	44,938	5,043,553	5,088,491	0	1,661
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

June 30, 2019	13	$ 861,821
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 that future payments of a loan balance are unlikely. Subsequent recoveries, if any, are credited to the allowance.

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, 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 CRE loans. This evaluation is inherently subjective as it requires estimates that are susceptible to revision as more information becomes available.

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

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

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

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

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

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

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

Specific component

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

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

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

Unallocated component

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

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

As of or for the three months ended June 30, 2019

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

ALL beginning balance	$ 676,764	$ 3,153,156	$ 0	$ 1,407,132	$ 265,003	$ 49,715	$ 176,072	5,727,842
Charge-offs	(3,573 )	(14,710 )	0	(19,790 )	(102,000 )	(26,830 )	0	(166,903 )
Recoveries	0	0	0	7,576	516	13,056	0	21,148
Provision (credit)	41,941	(43,665 )	0	32,439	124,465	17,469	(30,983 )	141,666
ALL ending balance	$ 715,132	$ 3,094,781	$ 0	$ 1,427,357	$ 287,984	$ 53,410	$ 145,089	$ 5,723,753

As of or for the six months ended June 30, 2019

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

ALL beginning balance	$ 697,469	$ 3,019,868	$ 0	$ 1,421,494	$ 273,445	$ 56,787	$ 133,478	$ 5,602,541
Charge-offs	(3,573 )	(14,710 )	0	(94,521 )	(102,000 )	(59,621 )	0	(274,425 )
Recoveries	9,078	0	0	10,073	1,001	21,316	0	41,468
Provision	12,158	89,623	0	90,311	115,538	34,928	11,611	354,169
ALL ending balance	$ 715,132	$ 3,094,781	$ 0	$ 1,427,357	$ 287,984	$ 53,410	$ 145,089	$ 5,723,753

ALL evaluated for impairment
Individually	$ 0	$ 0	$ 0	$ 110,375	$ 681	$ 0	$ 0	$ 111,056
Collectively	715,132	3,094,781	0	1,316,982	287,303	53,410	145,089	5,612,697
Total	$ 715,132	$ 3,094,781	$ 0	$ 1,427,357	$ 287,984	$ 53,410	$ 145,089	$ 5,723,753

Loans evaluated for impairment
Individually	$ 606,831	$ 2,052,270	$ 0	$ 5,229,099	$ 200,036	$ 0		$ 8,088,236
Collectively	84,862,231	236,364,491	30,302,868	159,569,375	43,567,222	4,623,875		559,290,062
Total	$ 85,469,062	$ 238,416,761	$ 30,302,868	$ 164,798,474	$ 43,767,258	$ 4,623,875		$ 567,378,298

As of or for the year ended December 31, 2018

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

ALL beginning balance	$ 675,687	$ 2,674,029	$ 0	$ 1,460,547	$ 316,982	$ 43,303	$ 267,551	$ 5,438,099
Charge-offs	(152,860 )	(124,645 )	0	(251,654 )	(69,173 )	(143,688 )	0	(742,020 )
Recoveries	60,192	0	0	26,832	1,420	38,018	0	126,462
Provision (credit)	114,450	470,484	0	185,769	24,216	119,154	(134,073 )	780,000
ALL ending balance	$ 697,469	$ 3,019,868	$ 0	$ 1,421,494	$ 273,445	$ 56,787	$ 133,478	$ 5,602,541

ALL evaluated for impairment
Individually	$ 0	$ 0	$ 0	$ 112,969	$ 1,757	$ 0	$ 0	$ 114,726
Collectively	697,469	3,019,868	0	1,308,525	271,688	56,787	133,478	5,487,815
Total	$ 697,469	$ 3,019,868	$ 0	$ 1,421,494	$ 273,445	$ 56,787	$ 133,478	$ 5,602,541

Loans evaluated for impairment
Individually	$ 60,846	$ 1,746,894	$ 0	$ 4,392,060	$ 319,321	$ 0		$ 6,519,121
Collectively	80,705,847	233,571,254	47,067,023	161,273,115	44,225,666	5,088,491		571,931,396
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 June 30, 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	$ 666,660	$ 2,666,704	$ 1,407,801	$ 289,292	$ 44,162	$ 266,601	$ 5,341,220
Charge-offs	(42,380 )	(3,645 )	(45,362 )	0	(39,758 )	0	(131,145 )
Recoveries	15,027	0	300	240	7,381	0	22,948
Provision (credit)	145,782	45,180	35,302	(1,930 )	39,850	(84,184 )	180,000
Ending balance	$ 785,089	$ 2,708,239	$ 1,398,041	$ 287,602	$ 51,635	$ 182,417	$ 5,413,023

As of or for the six months ended June 30, 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	$ 675,687	$ 2,674,029	$ 1,460,547	$ 316,982	$ 43,303	$ 267,551	$ 5,438,099
Charge-offs	(131,273 )	(124,645 )	(78,435 )	(24,000 )	(73,388 )	0	(431,741 )
Recoveries	20,041	0	9,158	675	16,791	0	46,665
Provision (credit)	220,634	158,855	6,771	(6,055 )	64,929	(85,134 )	360,000
Ending balance	$ 785,089	$ 2,708,239	$ 1,398,041	$ 287,602	$ 51,635	$ 182,417	$ 5,413,023

Impaired loans, by portfolio segment, were as follows:

	As of June 30, 2019
		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	$ 244,300	$ 162,867	$ 0
Residential real estate
- 1st lien	1,064,058	1,085,467	110,375	978,652	972,556	39,905
- Jr lien	6,674	6,654	681	6,803	6,959	335
Total with related allowance	1,070,732	1,092,121	111,056	1,238,755	1,142,382	40,240

No related allowance recorded
Commercial & industrial	606,831	610,660		323,209	235,754	213
Commercial real estate	2,053,151	2,342,542		1,883,114	1,838,184	9,178
Residential real estate
- 1st lien	4,182,285	4,853,328		3,889,301	3,747,907	115,477
- Jr lien	193,382	341,138		244,731	267,178	0
Total with no related allowance	7,035,649	8,147,668		6,340,355	6,089,023	124,868

Total impaired loans	$ 8,106,381	$ 9,239,789	$ 111,056	$ 7,579,110	$ 7,231,405	$ 165,108

(1) For the three months ended June 30, 2019

(2) For the six months ended June 30, 2019

In the table above, recorded investment in impaired loans as of June 30, 2019 includes accrued interest receivable and deferred net loan costs of $18,145.

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

Related allowance recorded
Commercial real estate	$ 0	$ 0	$ 0	$ 57,658	$ 0
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	60,846	80,894		120,924	0
Commercial real estate	1,748,323	1,975,831		1,663,794	13,131
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

Total impaired loans	$ 6,535,994	$ 7,461,116	$ 114,726	$ 6,489,999	$ 152,934

(1) For the year ended December 31, 2018

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 June 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	$ 41,823	$ 96,097	$ 0
Residential real estate
- 1st lien	789,471	831,434	129,488	791,676	793,859	31,785
- Jr lien	7,798	7,788	1,007	7,990	54,211	1,482
Total with related allowance	797,269	839,222	130,495	841,489	944,167	33,267

No related allowance recorded
Commercial & industrial	197,079	216,691		191,045	160,299	0
Commercial real estate	2,065,267	2,235,772		1,794,217	1,563,764	37,813
Residential real estate
- 1st lien	3,543,703	4,189,432		3,525,807	3,450,597	120,756
- Jr lien	297,575	298,931		280,965	238,682	0
Total with no related allowance	6,103,624	6,940,826		5,792,034	5,413,342	158,569

Total impaired loans	$ 6,900,893	$ 7,780,048	$ 130,495	$ 6,633,523	$ 6,357,509	$ 191,836

(1) For the three months ended June 30, 2018

(2) For the six months ended June 30, 2018

In the table above, recorded investment in impaired loans as of June 30, 2018 includes accrued interest receivable and deferred net loan costs of $18,773.

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

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

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

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

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

Credit risk ratings are dynamic and require updating whenever relevant information is received. Risk ratings are assessed on an ongoing basis and at various points, including at delinquency or at the time of other adverse events. For larger, more complex or adversely rated loans, risk ratings are also assessed at the time of annual or periodic review. Lenders are required to make immediate disclosure to the 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 June 30, 2019

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

Group A	$ 83,098,878	$ 226,974,452	$ 30,302,868	$ 159,998,274	$ 43,205,688	$ 4,623,875	$ 548,204,035
Group B	208,330	2,904,204	0	0	0	0	3,112,534
Group C	2,161,854	8,538,105	0	4,800,200	561,570	0	16,061,729
Total	$ 85,469,062	$ 238,416,761	$ 30,302,868	$ 164,798,474	$ 43,767,258	$ 4,623,875	$ 567,378,298

As of December 31, 2018

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

Group A	$ 78,585,348	$ 226,785,919	$ 47,067,023	$ 161,293,233	$ 43,817,872	$ 5,086,830	$ 562,636,225
Group B	90,763	246,357	0	224,992	0	0	562,112
Group C	2,090,582	8,285,872	0	4,146,950	727,115	1,661	15,252,180
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 June 30, 2019			Six months ended June 30, 2019
		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

Commercial & industrial	2	$ 49,217	$ 49,217	2	$ 49,217	$ 49,217
Commercial real estate	0	0	0	1	19,265	21,628
Residential real estate - 1st lien	3	413,446	441,833	4	509,345	538,202
Total	5	$ 462,663	$ 491,050	7	$ 577,827	$ 609,047

	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 June 30, 2018			Six months ended June 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	2	$ 215,772	$ 218,157	7	$ 898,563	$ 1,003,466

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

For the twelve months ended June 30, 2019

	Number of	Recorded
	Contracts	Investment

Commercial real estate	1	$ 384,791
Residential real estate - 1st lien	1	132,304
Total	2	$ 517,095

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

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

Residential real estate – 1st lien	3	$ 267,418

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

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

	June 30, 2019	December 31, 2018

Specific Allocation	$ 111,056	$ 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 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. As of December 31, 2018, the most recent evaluation, management concluded that no impairment existed.

Note 7. Leases

The Company adopted ASU No. 2016-02 on January 1, 2019 with no adjustment to prior periods presented or a 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 accounted for 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 June 30,	2019	2018

Operating lease cost	$ 63,869	$ 56,573

Finance lease cost:
Amortization of right-of-use assets	$ 17,667	$ 17,667
Interest on lease liabilities	4,499	7,467
Variable rent expense	8,485	8,485
Total finance lease cost	$ 30,651	$ 33,619

Six Months Ended June 30,	2019	2018

Operating lease cost	$ 125,738	$ 113,146

Finance lease cost:
Amortization of right-of-use assets	$ 35,333	$ 35,333
Interest on lease liabilities	9,614	14,364
Variable rent expense	16,970	16,970
Total finance lease cost	$ 61,917	$ 66,667

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:

Six Months Ended June 30,	2019	2018

Operating Leases	$ 1,455,829	$ 0

Supplemental balance sheet information related to leases was as follows:

	June 30, 2019	December 31, 2018
Operating Leases
Operating lease right-of-use assets	$ 1,374,459	$ 0

Operating lease liabilities	$ 1,378,863	$ 0

Finance Leases
Property, at cost	$ 991,014	$ 991,014
Accumulated depreciation	(812,668 )	(777,335 )
Property, net	$ 178,346	$ 213,679

Finance lease liabilities	$ 205,630	$ 266,747

	June 30, 2019	December 31, 2018
Weighted Average Remaining Lease Term
Operating Leases	5.0 Years	6.0 Years
Finance Leases	1.5 Years	2.0 Years

Weighted Average Discount Rate
Operating Leases	1.28%
Finance Leases	7.83%	7.86%

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

Operating Leases

2019	$ 125,346
2020	257,039
2021	210,350
2022	207,380
2023	210,232
Subsequent to 2023	435,872
Total	$ 1,446,219

Finance Leases

2019	$ 70,730
2020	110,460
2021	39,117
Total minimum lease payments	220,307
Less amount representing interest	(14,677 )
Present value of net minimum lease payments	$ 205,630

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

	Operating Leases	Finance Leases

Undiscounted cash flows	$ 1,446,219	$ 220,307
Discount effect of cash flows	(67,356 )	(14,677 )
Lease liabilities	$ 1,378,863	$ 205,630

Note 8. Fair Value

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

Level 1

Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasury, 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.

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

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

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

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

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

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.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis and reflected in the consolidated balance sheets at the dates presented, segregated by fair value hierarchy, are summarized below. There were no Level 1 or Level 3 assets or liabilities measured on a recurring basis as of the balance sheet dates presented, nor were there any transfers of assets between Levels during 2019 or 2018.

Level 2	June 30, 2019	December 31, 2018
Assets: (market approach)
U.S. GSE debt securities	$ 21,039,197	$ 13,751,103
Agency MBS	15,765,449	15,574,525
ABS and OAS	1,961,862	1,986,129
Other investments	8,791,266	8,055,074
Total	$ 47,557,774	$ 39,366,831

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 collateral-dependent impaired loans with a related specific ALL and are presented net of specific allowances as disclosed in Note 5. As of June 30, 2019 and December 31, 2018, there were no collateral-dependend impaired loans.

Assets measured at fair value on a non-recurring basis and reflected in the consolidated balance sheets at the dates presented, segregated by fair value hierarchy level, are summarized below. There were no Level 1 or Level 3 assets or liabilities measured on a non-recurring basis as of the balance sheet dates presented, nor were there any transfers of assets between levels during 2019 or 2018.

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

Loans held-for-sale	$ 262,000	$ 0
MSRs (1)	933,643	1,004,948
OREO	92,084	201,386

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

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

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

June 30, 2019		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	$ 29,535	$ 29,535	$ 0	$ 0	$ 29,535
Debt securities AFS	47,558	0	47,558	0	47,558
Restricted equity securities	1,348	0	1,348	0	1,348
Loans and loans held-for-sale, net of ALL
Commercial & industrial	84,731	0	0	84,729	84,729
Commercial real estate	235,258	0	0	237,025	237,025
Municipal (1)	30,303	0	0	30,112	30,112
Residential real estate - 1st lien	163,588	0	0	162,585	162,585
Residential real estate - Jr lien	43,467	0	0	43,467	43,467
Consumer	4,570	0	0	4,595	4,595
MSRs (2)	934	0	1,361	0	1,361
Accrued interest receivable	2,193	0	2,193	0	2,193

Financial liabilities:
Deposits
Other deposits	529,978	0	529,809	0	529,809
Brokered deposits	26,172	0	26,186	0	26,186
Short-term borrowings	6,100	0	6,100	0	6,100
Long-term borrowings	1,550	0	1,474	0	1,474
Repurchase agreements	32,145	0	32,145	0	32,145
Operating lease obligations	1,379	0	1,379	0	1,379
Finance lease obligations	206	0	206	0	206
Subordinated debentures	12,887	0	12,820	0	12,820
Accrued interest payable	96	0	96	0	96

(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 June 30, 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

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

Note 9. Loan Servicing

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

	Six Months Ended	Year Ended
	June 30, 2019	December 31, 2018

Balance at beginning of year	$ 1,004,948	$ 1,083,286
MSRs capitalized	18,107	110,209
MSRs amortized	(89,412 )	(188,547 )
Balance at end of period	$ 933,643	$ 1,004,948

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

Note 10. Legal Proceedings

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

Note 11. Subsequent 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 GAAP. On June 13, 2019, the Company’s Board declared a cash dividend of $0.19 per common share, payable August 1, 2019 to shareholders of record as of July 15, 2019. This dividend has been recorded in the Company’s consolidated financial statements as of the declaration date, including shares issuable under the D RIP.

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I TEM 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 June 30, 2019

The following discussion analyzes the consolidated financial condition of Community Bancorp. and its wholly-owned subsidiary, Community National Bank, as of June 30, 2019 and December 31, 2018, and its consolidated results of operations for the three- and six-month interim periods presented.

The following discussion should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in its 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 within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the results of operations, financial condition and business of the Company and its subsidiary. Words used in the discussion below such as "believes," "expects," "anticipates," "intends," "estimates," “projects”, "plans," “assumes”, "predicts," “may”, “might”, “will”, “could”, “should” and similar expressions, indicate that management of the Company is making forward-looking statements.

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

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

●

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

●

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

●

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

●

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

●

changes in federal or state tax laws or policy;

●

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

●

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

●

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

●

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

●

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

●

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

●

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;

●

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;

●

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) 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.

NON-GAAP FINANCIAL MEASURES

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

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

OVERVIEW

The Company’s consolidated assets on June 30, 2019 were $679,538,291, a decrease of $40,809,207, or 5.7%, from December 31, 2018. Net loans decreased $11,202,064, or 2.0%, since December 31, 2018. In addition to seasonal municipal loan runoff, this decrease is also due to the early payoff of a $10 million commercial real estate construction loan, as permanent financing was sought elsewhere. This resulted in a pre-payment penalty of $440,656, which partially offsets the interest income that will be lost as a result of the early payoff. The AFS portfolio increased $8,190,943, or 20.8%, from December 31, 2018. 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, resulting in the absence of the HTM portfolio previously presented on the Company’s balance sheet. Prior to the reclassification, municipal notes constituted the Company’s entire HTM investment portfolio.

Total deposits decreased $52,666,937 or 8.7%, since December 31, 2018 with a notable decrease in core deposits totaling $39,888,431, or 13.3%. This decrease is primarily due to the seasonal runoff of municipal deposits which decreased approximately $43 million year to date, including an anticipated runoff of a large balance account with one municipal customer in the first quarter of 2019. Increases in interest bearing transaction accounts are noted in the year over year comparison, particularly the account for the Company’s affiliate, CFSG and the reciprocal ICS accounts, while the increase in wholesale time deposits is predominantly due to the use of brokered deposits as an alternative to short term borrowing from the FHLBB.

Interest income increased $1,233,563, or 17.6%, for the second quarter of 2019 compared to the same quarter in 2018, and $2,155,093, or 15.6%, for the first six months of 2019 compared to the same period in 2018. Interest expense increased $608,454, or 64.8%, for the second quarter of 2019 compared to the same quarter in 2018, and $1,278,246, or 70.7%, for the first six months of 2019 compared to the same period in 2018. The increase in interest income is due in part to the prepayment penalty noted above, as well as the increases in short-term rates. While the increase in short-term rates is having a positive impact on interest income, it is also continuing to put upward pressure on interest rates paid on deposit accounts and other borrowings. Please refer to the interest rate sensitivity discussion in the Interest Rate Risk and Asset and Liability Management section for more information on the impact that FRB action and changes in the yield curve could have on net interest income.

Net interest income after the provision for loan losses improved by $663,443, or 11.2%, for the second quarter of 2019 compared to the same quarter in 2018, and $882,678, or 7.6%, year over year, despite a decrease in net interest spread of seven basis points, due to the combined effect of the receipt of a $440,000 prepayment penalty on early payoff of a commercial construction loan and an increase in average earning assets year over year. The charge to income for the provision for loan losses decreased $38,334, or 21.3%, for the second quarter of 2019, compared to the same period last year, and $5,831, or 1.6%, year over year. Please refer to the ALL and provisions discussion in the Credit Risk section for more information.

Net income for the second quarter of 2019 was $2,419,298, an increase of $416,644, or 20.8%, from net income of $2,002,654 for the second quarter of 2018. Net income for the first six months of 2019 increased $206,006, or 5.2%, from $3,985,197 for 2018 to $4,191,203 for 2019. Although net interest income was favorable, non-interest income decreased $256,023, or 15.2%, for the second quarter of 2019, and $332,992, or 10.8%, for the first six months of 2019. Non-interest expense decreased $24,915, or 0.5%, for the second quarter of 2019 and increased $399,893, or 4.1%, for the first six months of 2019, primarily due to increases in salaries and wages and employee benefits. Please refer to the Non-interest Income and Non-interest Expense sections for more information on these changes.

On May 1, 2019, the Company opened a loan production office in Lebanon, New Hampshire to better serve customers in Grafton County, New Hampshire and the greater White River Junction area in Windsor County, Vermont. These are areas that continue to provide commercial loan growth opportunities for the Company.

On June 13, 2019, the Company's Board declared a quarterly cash dividend of $0.19 per common share, payable on August 1, 2019 to shareholders of record on July 15, 2019.

The financial statements and capital sections of this report reflect a partial redemption of the Company’s outstanding Series A non-cumulative perpetual preferred stock. On March 31, 2019, the Company completed a second partial redemption of its preferred stock. Five shares were redeemed at par, at an aggregate redemption price of $500,000, plus accrued dividends. The Company completed a similar partial redemption of five shares of its preferred stock on 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, 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. The Company’s critical accounting policies govern:

● the ALL;

● OREO;

● OTTI of investment securities;

● valuation of residential MSRs; and

● the carrying value of goodwill.

These policies are described in the Company’s 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. There were no material changes during the first six months of 2019 in the Company’s critical accounting policies.

RESULTS OF OPERATIONS

Net income for the second quarter of 2019 was $2,419,298, or $0.46 per common share, compared to $2,002,654, or $0.39 per common share, for the same quarter of 2018. Net income for the first six months of 2019 was $4,191,203 or $0.80 per common share, compared to $3,985,197 or $0.77 per common share for 2018. Core earnings (NII) for the second quarter of 2019 increased $625,109, or 10.3%, compared to the same quarter in 2018, and $876,847, or 7.3%, year over year. The loan mix continued to shift in favor of higher yielding commercial loans, while the deposit mix experienced an increase in non-maturity deposits, both of which have benefited the Company’s net interest income. Interest paid on deposits, which is the major component of total interest expense, increased $560,870, or 78.0%, for the second quarter of 2019 compared to the same quarter of 2018, and $1,156,768, or 82.3%, 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 interest paid on repurchase agreements and on the junior subordinated debentures, contributing to the increase in interest expense in both comparison periods. The Company recorded a provision for loan losses of $141,666 for the second quarter of 2019 and $354,169 for the first six months of 2019, compared to $180,000 and $360,000, respectively in 2018. These decreases are due to the year to date decrease in the loan portfolio combined with the lower than anticipated loan charge off activity during the second quarter of 2019.

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

	June 30,	December 31,
	2019	2018
Balance Sheet Data
Net loans(1)	$ 562,009,526	$ 573,211,590
Total assets	679,538,291	720,347,498
Total deposits	556,149,628	608,816,565
Borrowed funds	7,650,000	1,550,000
Junior subordinated debentures	12,887,000	12,887,000
Total liabilities	613,866,317	657,743,787
Total shareholders' equity	65,671,974	62,603,711

Book value per common share outstanding	$ 12.32	$ 11.72

	Six Months Ended June 30,
	2019	2018
Operating Data
Total interest income	$ 15,960,790	$ 13,805,697
Total interest expense	3,085,493	1,807,247
Net interest income	12,875,297	11,998,450
Provision for loan losses	354,169	360,000
Net interest income after provision for loan losses	12,521,128	11,638,450

Non-interest income	2,752,839	3,085,831
Non-interest expense	10,234,985	9,835,092
Income before income taxes	5,038,982	4,889,189
Applicable income tax expense(2)	847,779	903,992
Net Income	$ 4,191,203	$ 3,985,197

Per Common Share Data
Earnings per common share (3)	$ 0.80	$ 0.77
Dividends declared per common share	$ 0.38	$ 0.36
Weighted average number of common shares outstanding	5,188,735	5,123,947
Number of common shares outstanding, period end	5,208,498	5,140,030

(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 presented.

	Three Months Ended June 30,
	2019	2018
Return on average assets	1.39 %	1.23 %
Return on average equity	15.13 %	13.66 %

	Six Months Ended June 30,
	2019	2018
Return on average assets	1.21 %	1.22 %
Return on average equity	13.28 %	13.73 %

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

The Company’s tax-exempt interest income of $311,574 and $312,488 for the three months ended June 30, 2019 and 2018, respectively, and $623,206 and $622,644 for the six months ended June 30, 2019 and 2018, respectively, was derived from loans to local municipalities of $30,302,868 and $32,205,722 at June 30, 2019 and 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 June 30,
	2019	2018

Net interest income as presented	$ 6,715,469	$ 6,090,360
Effect of tax-exempt income	82,823	83,066
Net interest income, tax equivalent	$ 6,798,292	$ 6,173,426

	Six Months Ended June 30,
	2019	2018

Net interest income as presented	$ 12,875,297	$ 11,998,450
Effect of tax-exempt income	165,662	165,513
Net interest income, tax equivalent	$ 13,040,959	$ 12,163,963

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

	Three Months Ended June 30,
		2019			2018
			Average			Average
	Average	Income/	Rate/	Average	Income/	Rate/
	Balance	Expense	Yield	Balance	Expense	Yield
Interest-Earning Assets
Loans (1)	$ 585,631,683	$ 7,911,831	5.42 %	$ 556,542,291	$ 6,783,047	4.89 %
Taxable investment securities	43,884,455	270,026	2.47 %	37,477,796	221,016	2.37 %
Sweep and interest-earning accounts	20,188,566	136,600	2.71 %	15,113,075	77,005	2.04 %
Other investments (2)	1,763,126	26,788	6.09 %	2,232,804	30,857	5.54 %
Total	$ 651,467,830	$ 8,345,245	5.14 %	$ 611,365,966	$ 7,111,925	4.67 %

Interest-Bearing Liabilities
Interest-bearing transaction accounts	$ 154,798,455	$ 375,645	0.97 %	$ 127,178,316	$ 128,935	0.41 %
Money market accounts	93,899,043	364,126	1.56 %	97,451,375	276,229	1.14 %
Savings deposits	95,599,896	40,713	0.17 %	99,755,031	31,512	0.13 %
Time deposits	121,342,236	499,775	1.65 %	110,111,222	282,713	1.03 %
Borrowed funds	2,561,769	5,370	0.84 %	4,998,681	10,745	0.86 %
Repurchase agreements	32,528,266	73,070	0.90 %	31,338,855	37,641	0.48 %
Finance lease obligations	216,192	4,499	8.32 %	335,077	6,897	8.23 %
Junior subordinated debentures	12,887,000	183,755	5.72 %	12,887,000	163,827	5.10 %
Total	$ 513,832,857	$ 1,546,953	1.21 %	$ 484,055,557	$ 938,499	0.78 %

Net interest income		$ 6,798,292			$ 6,173,426
Net interest spread (3)			3.93 %			3.89 %
Net interest margin (4)			4.19 %			4.05 %

(1) Included in gross loans are non-accrual loans with an average balance of $5,550,793 and $4,257,250 for the three

months ended June 30, 2019 and 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

$45,825,394 and $47,606,468 for the three months ended June 30, 2019 and 2018 respectively, which were

reclassified from the investment portfolio effective January 1, 2019, and restated for the 2018 comparison period. See

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

(2) Included in other investments is the Company’s FHLBB Stock with an average balance of $697,976 and $1,167,654

for the three months ended June 30, 2019 and 2018, respectively, and a dividend rate of approximately

6.22% and 5.46%, 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.

	Six Months Ended June 30,
		2019			2018
			Average			Average
	Average	Income/	Rate/	Average	Income/	Rate/
	Balance	Expense	Yield	Balance	Expense	Yield
Interest-Earning Assets
Loans (1)	$ 582,555,613	$ 15,205,480	5.26 %	$ 555,460,003	$ 13,316,194	4.83 %
Taxable investment securities	41,696,057	518,134	2.51 %	37,867,928	423,901	2.26 %
Sweep and interest-earning accounts	28,196,920	350,091	2.50 %	18,318,075	171,567	1.89 %
Other investments (2)	1,791,967	52,747	5.94 %	2,171,070	59,548	5.53 %
Total	$ 654,240,557	$ 16,126,452	4.97 %	$ 613,817,076	$ 13,971,210	4.59 %

Interest-Bearing Liabilities
Interest-bearing transaction accounts	$ 156,643,836	$ 779,184	1.00 %	$ 126,128,102	$ 231,067	0.37 %
Money market accounts	94,066,768	720,784	1.55 %	100,723,921	553,904	1.11 %
Savings deposits	94,975,891	80,823	0.17 %	98,504,902	61,817	0.13 %
Time deposits	123,955,061	982,428	1.60 %	111,871,677	559,663	1.01 %
Borrowed funds	2,059,348	5,392	0.53 %	4,279,006	10,761	0.51 %
Repurchase agreements	32,733,436	145,901	0.90 %	30,546,716	68,847	0.45 %
Finance lease obligations	231,379	9,614	8.31 %	349,137	14,364	8.23 %
Junior subordinated debentures	12,887,000	361,367	5.65 %	12,887,000	306,824	4.80 %
Total	$ 517,552,719	$ 3,085,493	1.20 %	$ 485,290,461	$ 1,807,247	0.75 %

Net interest income		$ 13,040,959			$ 12,163,963
Net interest spread (3)			3.77 %			3.84 %
Net interest margin (4)			4.02 %			4.00 %

(1) Included in gross loans are non-accrual loans with an average balance of $5,075,454 and $3,783,183 for the six
months ended June 30, 2019 and 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
$45,649,487 and $47,693,329 for the six months ended June 30, 2019 and 2018, respectively, which were
reclassified from the investment portfolio effective January 1, 2019, and restated for the 2018 comparison period. See
Notes 4 and 5 to the accompanying unaudited interim consolidated financial statements for additional information.
(2) Included in other investments is the Company’s FHLBB Stock with average balances of $726,817 and $1,141,721
respectively, and a dividend rate of approximately 6.44% and 5.77%, respectively, for the first six months of
2019 and 2018, respectively.
(3) Net interest spread is the difference between the average yield on average interest-earning assets and the average
rate paid on average interest-bearing liabilities.
(4) Net interest margin is net interest income divided by average earning assets.

The average volume of interest-earning assets for the three- and six-month periods ended June 30, 2019 increased 6.6% in both periods, compared to the same periods last year. The average yield on interest-earning assets for the second quarter increased 47 bps, to 5.14%, compared to 4.67% for the same period last year, and increased 38 bps for the six months ended June 30, 2019, to 4.97%, from 4.59% for the same period last year.

The average volume of loans increased over the three- and six-month comparison periods of 2019 versus 2018 by 5.2% and 4.9%, respectively, and the average yield on loans increased 53 bps for the second quarter, to 5.42%, compared to 4.89% for the second quarter of 2018, and 43 bps for the six months ended June 30, 2019, to 5.26%, from 4.83% for the same period in 2018. The increase in yield reflects 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 decreased in both comparison periods, comprising 94.8% and 94.3% for the three- and six-month comparison periods of 2019, versus 95.4% and 95.3% for the same periods last year.

The average volume of the taxable investment portfolio (classified as AFS) increased 17.1% during the second quarter of 2019 and 10.1% year to date, compared to the same periods last year. These increases are due primarily to management’s continued effort to incrementally grow the investment portfolio as the balance sheet grows in order to provide additional liquidity and pledge-quality assets. The average yield on the taxable investment portfolio increased 10 bps and 25 bps, respectively, during the three- and six-month comparison periods of 2019 compared to the same periods last year, due primarily to rising market rates, while the composition of the portfolio remained relatively stable.

The average volume of sweep and interest-earning accounts, which consists primarily of interest-bearing accounts at the FRBB and two correspondent banks, increased 33.6% during the three-month period and 53.9% during the six-month period ended June 30, 2019, compared to the same periods last year, and the average yield on these funds increased 67 bps and 61 bps, respectively. These increases in average volume are 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 reflects the effect of increases in the federal funds rate.

The average volume of interest-bearing liabilities for the three- and six-month periods ended June 30, 2019 increased 6.1% and 6.7%, respectively, compared to the same periods last year. The average rate paid on interest-bearing liabilities increased 43 bps for the three months ended June 30, 2019 and 45 bps during the first six months of 2019, compared to the same periods last year, reflecting the rising rate environment and competitive pressures in deposit pricing.

The average volume of interest-bearing transaction accounts increased 21.7% and 24.2%, respectively, during the three- and six-month period ended June 30, 2019, compared to the same periods last year, and the average rate paid on these accounts increased 56 bps and 63 bps, respectively. These increases are due to growth in high balance ICS DDA accounts, as well as increased deposit balances of affiliate Community Financial Services Group. The average volume of money market accounts decreased 3.7% during the three-month period and 6.6% during the six-month period ended June 30, 2019 compared to the same periods in 2018, while the average rate paid on these deposits increased 42 bps and 44 bps, respectively. The average volume of savings accounts decreased 4.2% for the three-month period and 3.4% for the six-month period ended June 30, 2019 versus the same periods in 2018. Following the most recent increase in short term rates, there has been more pressure for higher rates from the more rate sensitive deposit holders and the local market is now showing signs of a willingness to pay higher rates on deposit products. The average volume of time deposits increased 10.2% and 10.8%, respectively, during the three- and six-month periods ended June 30, 2019, compared to the same period last year, and the average rate paid on these accounts increased 62 bps and 59 bps, respectively, between periods. Compared to the same periods in 2018, the average volume of retail time deposits decreased 4.2% during the second quarter, and 4.3% year to date 2019. Average brokered time deposits increased 654.6% from an average volume of $3,468,472 for the second quarter of 2018 to $26,172,142 for the same period in 2019, and an increase of 424.8% is noted for the first six months of 2019, with average volumes of $5,496,329 for 2018 versus $28,828,043 for 2019. The increase in the average volume of brokered deposits between periods reflects wholesale deposit purchases during the third quarter of 2018 and the first quarter of 2019, net of maturities. The brokered deposit market is still considered a beneficial source of funding to help smooth out the fluctuations in core deposit balances without the need to disrupt deposit pricing in the Company’s local markets. These funds can be obtained relatively quickly on an as-needed basis, making them a valuable alternative to traditional term borrowings from the FHLBB.

The average volume of borrowed funds decreased 48.8% and 51.9%, respectively, for the three- and six-month comparison periods of 2019 versus 2018, while the average rate paid on these borrowings decreased two bps and increased two bps, respectively, between periods. The average volume of repurchase agreements increased 3.8% and 7.2%, respectively, for the three- and six-month comparison periods of 2019 versus 2018, and the average rate paid on repurchase agreements increased 42 bps and 45 bps, respectively, between periods.

In summary, between the three-month periods ended June 30, 2019 and 2018, the average yield on interest-earning assets increased 47 bps, while the average rate paid on interest-bearing liabilities increased 43 bps. Between the six months ended June 30, 2019 and 2018, the average yield on interest-earning assets increased 38 bps, while the average rate paid on interest-bearing liabilities increased 45 bps. Net interest spread for the second quarter of 2019 was 3.93%, an increase of four bps from 3.89% for the same period in 2018, and for the six-month comparison periods of 2019 and 2018 was 3.77% and 3.84%, respectively, a decrease of seven bps. Net interest margin increased 14 bps during second quarter of 2019 versus 2018, and two bps during the first six months of 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 2019 and 2018 resulting from volume changes in average assets and average liabilities and fluctuations in average rates earned and paid.

	Three Months Ended June 30,			Six Months Ended June 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 (2)	$ 774,140	$ 354,644	$ 1,128,784	$ 1,240,305	$ 648,981	$ 1,889,286
Taxable investment securities	11,155	37,855	49,010	51,331	42,902	94,233
Sweep and interest-earning accounts	33,781	25,814	59,595	85,936	92,588	178,524
Other investments	3,062	(7,131 )	(4,069 )	4,366	(11,167 )	(6,801 )
Total	$ 822,138	$ 411,182	$ 1,233,320	$ 1,381,938	$ 773,304	$ 2,155,242

Average Interest-Bearing Liabilities
Interest-bearing transaction accounts	$ 218,477	$ 28,233	$ 246,710	$ 492,127	$ 55,990	$ 548,117
Money market accounts	101,713	(13,816 )	87,897	218,049	(51,169 )	166,880
Savings deposits	10,962	(1,761 )	9,201	21,981	(2,975 )	19,006
Time deposits	188,221	28,841	217,062	362,245	60,520	422,765
Borrowed funds	(272 )	(5,103 )	(5,375 )	465	(5,834 )	(5,369 )
Repurchase agreements	34,006	1,423	35,429	72,174	4,880	77,054
Finance lease obligations	68	(2,466 )	(2,398 )	103	(4,853 )	(4,750 )
Junior subordinated debentures	19,928	0	19,928	54,543	0	54,543
Total	$ 573,103	$ 35,351	$ 608,454	$ 1,221,687	$ 56,559	$ 1,278,246

Changes in net interest income	$ 249,035	$ 375,831	$ 624,866	$ 160,251	$ 716,745	$ 876,996

(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 period. See Notes 4 and 5 to the Company’s

unaudited interim consolidated financial statements for additional information.

NON-INTEREST INCOME AND NON-INTEREST EXPENSE

Non-interest Income

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

	Three Months Ended				Six Months Ended
	June 30,		Change		June 30,		Change
	2019	2018	Income	Percent	2019	2018	Income	Percent

Service fees	$ 820,657	$ 810,731	$ 9,926	1.22 %	$ 1,611,023	$ 1,580,813	$ 30,210	1.91 %
Income from sold loans	128,690	190,710	(62,020 )	-32.52 %	231,777	374,329	(142,552 )	-38.08 %
Other income from loans	223,509	198,351	25,158	12.68 %	362,253	410,621	(48,368 )	-11.78 %
Net realized loss on sale of securities AFS	0	(6,375 )	6,375	-100.00 %	0	(10,236 )	10,236	-100.00 %
Other income
Income from CFSG Partners	155,940	142,603	13,337	9.35 %	333,359	270,786	62,573	23.11 %
Rental income	2,464	9,883	(7,419 )	-75.07 %	4,892	25,509	(20,617 )	-80.82 %
Gain on sale of property	0	263,118	(263,118 )	100.00 %	0	263,118	(263,118 )	100.00 %
VISA card commission	23,099	4,913	18,186	370.16 %	46,198	9,826	36,372	370.16 %
Other miscellaneous income	79,779	76,227	3,552	4.66 %	163,337	161,065	2,272	1.41 %
Total non-interest income	$ 1,434,138	$ 1,690,161	$ (256,023 )	-15.15 %	$ 2,752,839	$ 3,085,831	$ (332,992 )	-10.79 %

Total non-interest income decreased $256,023, or 15.2%, for the second quarter of 2019 and $332,992, or 10.8%, for the first six months of 2019 versus the same periods in 2018, with significant changes noted in the following:

●

Income from sold loans decreased 32.5% for the second quarter and 38.1% year over year, due to a lower volume of loans being sold into the secondary market.

●

Other income from loans increased 12.7% for the second quarter while decreasing 11.8% year over year. An uptick of commercial loan volume accounts for the increase for the second quarter, but the overall lower volume of commercial and residential portfolio loans year over year resulted in lower documentation fees collected at origination.

●

No investments were sold during the first six months of 2019, accounting for the absence of a gain or loss, compared to a realized loss on sale of AFS securities of $6,375 for the second quarter of 2018 and $10,236 for the first six months of 2018. The losses in 2018 in both comparison periods are the result of sales of low-yielding, short-duration securities held in the Company’s AFS portfolio which were replaced with higher-yielding investments available in the current market. As reflected in the table in the “Interest Income versus Interest Expense (Net Interest Income)” section, the higher interest income earned by the replacement securities has helped to recover the realized losses in 2018.

●

Income from CFS Partners increased 9.4% for the second quarter and 23.1% year over year, due to an increase in assets under management, upon which fee income is generally based.

●

Rental income decreased 75.1% for the second quarter and 80.8% year over year, due to the sale of the office condominium unit to CFSG in the second quarter of 2018.

●

Gain on sale of property of $263,118 in 2018 was attributable to the sale of an office condominium unit to the Company’s affiliate, CFSG. Prior to the sale, CFSG had rented this unit since its formation in 2002. There was no activity in 2019 that resulted in a gain on sale of property.

●

VISA card commission increased 370.2% in both periods, due to new incentive payments related to entering into a VISA principal vendor agreement.

Non-interest Expense

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

	Three Months Ended				Six Months Ended
	June 30,		Change		June 30,		Change
	2019	2018	Expense	Percent	2019	2018	Expense	Percent

Salaries and wages	$ 1,792,930	$ 1,914,616	$ (121,686 )	-6.36 %	$ 3,635,860	$ 3,530,002	$ 105,858	3.00 %
Employee benefits	806,340	722,302	84,038	11.63 %	1,582,680	1,396,304	186,376	13.35 %
Occupancy expenses, net	642,284	657,596	(15,312 )	-2.33 %	1,333,113	1,332,470	643	0.05 %
Other expenses
Service contracts - administrative	126,494	121,203	5,291	4.37 %	274,686	247,161	27,525	11.14 %
Audit Fees	58,075	108,849	(50,774 )	-46.65 %	202,733	216,475	(13,742 )	-6.35 %
Consultant services	64,225	78,153	(13,928 )	-17.82 %	140,760	143,236	(2,476 )	-1.73 %
Collection & non-accruing loan expense	47,587	40,213	7,374	18.34 %	109,770	93,499	16,271	17.40 %
Subsequent write downs on OREO	95,008	0	95,008	100.00 %	95,008	0	95,008	100.00 %
Other miscellaneous expenses	1,446,117	1,461,043	(14,926 )	-1.02 %	2,860,375	2,875,945	(15,570 )	-0.54 %
Total non-interest expense	$ 5,079,060	$ 5,103,975	$ (24,915 )	-0.49 %	$ 10,234,985	$ 9,835,092	$ 399,893	4.07 %

Total non-interest expense decreased $24,915, or 0.5%, for the second quarter of 2019, while increasing $399,893, or 4.1%, for the first six months of 2019 versus the same periods in 2018, with significant changes noted in the following:

●

Salaries and wages decreased 6.4% for the second quarter and increased 3.0% year over year . The second quarter decrease is attributable to differences in the timing of pay periods, while the increase year over year 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 11.6% for the second quarter and 13.4% year over year, due to an increase in the cost of the employee health insurance plan.

●

Service contracts – administrative increased 4.4% for the second quarter and 11.1% year over year, due to the increasing cost to support information technology and branch infrastructure.

●

A decrease of 46.7% is noted in Audit Fees for the second quarter and 6.4% is noted year over year due primarily to billable fees incurred in 2018 for consultation related to the audit of the Company’s internal control over financial reporting program, the deferred tax asset fair value calculation and the effects of the 2017 Tax Act. Also in 2018, the Company changed Information Security audit vendors which resulted in multiple audits during the 2018 calendar year.

●

Consultant services decreased 17.8% for the second quarter and 1.7% year over year, due to the completion of some technology projects in 2018.

●

Collection & non-accruing loan expense increased 18.3% for the second quarter and 17.4% year over year, due to an increase in the non-performing assets portfolio and the length of time it takes to go through the foreclosure process.

●

The Company recorded write downs on two OREO properties during the second quarter of 2019, which were subsequently sold in the same period, with no write downs recorded during the first six months of 2018.

APPLICABLE INCOME TAXES

The provision for income taxes increased by $15,691, or 3.2%, to $509,583 for the second quarter of 2019 compared to $493,892 for the same period in 2018, and decreased by $56,213, or 6.2% to $847,779 for the first six months of 2019 compared to $903,992 for the same period in 2018. A 17.3% increase in income before taxes for the second quarter of 2019 accounts for the increase over the second quarter of 2018. A modest 3.1% increase in income before taxes, together with an increase in tax credits for 2019 and a decrease in amortization expense (discussed below), are all contributing factors for the decrease in income tax expense for the first six months of 2019. Tax credits related to limited partnerships amounted to $103,776 and $100,140, respectively, for the second quarter of 2019 and 2018, and $207,552 and $200,280, respectively, for the first six months of 2019 and 2018.

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $78,027 and $94,371, respectively, for the second quarter of 2019 and 2018, and $156,054 and $188,742 for the first six months of 2019 and 2018, respectively. These investments provide tax benefits, including tax credits, and are designed to provide a targeted effective yield between 7% and 10%.

CHANGES IN FINANCIAL CONDITION

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

	June 30, 2019		December 31, 2018
Assets
Loans (1)	$ 567,378,298	83.49 %	$ 578,450,517	80.30 %
AFS Securities	47,557,774	7.00 %	39,366,831	5.46 %

Liabilities
Demand deposits	110,870,636	16.32 %	122,430,805	17.00 %
Interest-bearing transaction accounts	149,487,155	22.00 %	177,815,417	24.68 %
Money market accounts	79,501,860	11.70 %	85,261,685	11.84 %
Savings deposits	95,455,903	14.05 %	93,129,875	12.93 %
Time deposits	120,834,074	17.78 %	130,178,783	18.07 %
Long-term advances	1,550,000	0.23 %	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

$30,302,868 and $47,067,023 as of June 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 major categories of assets and liabilities disclosed in the table above:

	Change in Volume	Percent of Change
Assets
Loans (1)	$ (11,072,219 )	-1.91 %
AFS Securities	8,190,943	20.81 %

Liabilities
Demand deposits	(11,560,169 )	-9.44 %
Interest-bearing transaction accounts	(28,328,262 )	-15.93 %
Money market accounts	(5,759,825 )	-6.76 %
Savings deposits	2,326,028	2.50 %
Time deposits	(9,344,709 )	-7.18 %

(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

$30,302,868 and $47,067,023 as of June 30, 2019 and December 31, 2018, respectively. See Notes 4 and 5 to

the Company’s unaudited interim consolidated financial statements for additional information.

As assets have grown, management has sought to increase the AFS portfolio in order to maintain its size proportional to the overall asset 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 with a decrease of $9,830,560, or 11.7%. The decrease in interest-bearing transaction accounts is due in part to decreases of $14,104,318, or 40.5%, in the Government Agency deposit accounts and $24,659,191, or 54.0%, in ICS deposit accounts. These decreases were partially offset by an increase of $7,732,293, or 12.1% in other consumer interest-bearing transaction accounts. The decrease in money market accounts is attributable to a seasonal decrease in municipal deposits of $9,706,112, or 63.4%. The decrease in time deposits were primarily driven by a decrease in wholesale time deposits of $8,602,832, or 22.2% There were no overnight federal fund purchases for the periods presented, but there were outstanding long-term advances from the FHLBB of $1,550,000. See “Liquidity and 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 ALCO is made up of the Executive Officers and certain Vice Presidents of the Bank representing major business lines. The ALCO formulates strategies to manage interest rate risk by evaluating the impact on earnings and capital of such factors as current interest rate forecasts and economic indicators, potential changes in such forecasts and indicators, liquidity and various business strategies. The ALCO meets at least quarterly to review financial statements, liquidity levels, yields and spreads to better understand, measure, monitor and control the Company’s interest rate risk. In the ALCO process, the committee members apply policy limits set forth in the Asset Liability, Liquidity and Investment policies approved and periodically reviewed by the Company’s Board of Directors. The ALCO's methods for evaluating interest rate risk include an analysis of the effects of interest rate changes on net interest income and an analysis of the Company's interest rate sensitivity "gap", which provides a static analysis of the maturity and repricing characteristics of the entire balance sheet. The ALCO Policy also includes a contingency funding plan to help management prepare for unforeseen liquidity restrictions, including hypothetical severe liquidity crises.

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

Under the Company’s interest rate sensitivity modeling, with the continued asset sensitive balance sheet, in a rising rate environment, interest income is expected to trend upward as the short-term asset base (cash and adjustable rate loans) quickly cycle upward. However, as rates continue to rise, the cost of wholesale funds increases and pressure to increase rates paid on the retail funding base is increasing, putting pressure on NII and reducing the benefit to rising rates. In a falling rate environment, NII is expected to trend slightly downward compared with the current rate environment scenario for the first year of the simulation as asset yield erosion is not fully offset by decreasing funding costs. Thereafter, net interest income is projected to experience sustained downward pressure as funding costs reach their assumed floors and asset yields continue to reprice into the lower rate environment. Also the behavior of the long end of the yield curve will 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 June 30, 2019:

Rate Change	Percent Change in NII

Down 100 bps	-0.7%
Up 200 bps	0.3%

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.

As of June 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 reclassified to conform to this reclassification. These obligations have not historically generated any credit losses for the Company.

Residential mortgages represented 36.8% of the Company’s loan balances as of June 30, 2019. While increasing slightly from year-end, 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 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 21.2% of the residential mortgage portfolio with maximum loan-to-value ratios (including prior liens) of 80%. The Company also originates some home equity loans greater than 80% under an insured loan program with stringent underwriting criteria.

Consistent with the strategic focus on commercial lending, the commercial & industrial and CRE loan portfolios have seen solid growth over recent years. Commercial & industrial and CRE loans together comprised 57.1% of the Company’s loan portfolio at June 30, 2019 compared to 54.6% at December 31, 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 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 to include 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 $238 million CRE portfolio at June 30, 2019 were approximately $93.5 million in owner-occupied CRE and $80.5 million in non-owner occupied CRE.

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

	June 30, 2019		December 31, 2018

Commercial & industrial	$ 85,469,062	15.06 %	$ 80,766,693	13.96 %
Commercial real estate	238,416,761	42.02 %	235,318,148	40.68 %
Municipal (1)	30,302,868	5.34 %	47,067,023	8.14 %
Residential real estate - 1st lien	164,798,474	29.05 %	165,665,175	28.64 %
Residential real estate - Jr lien	43,767,258	7.71 %	44,544,987	7.70 %
Consumer	4,623,875	0.82 %	5,088,491	0.88 %
Total loans	567,378,298	100.00 %	578,450,517	100.00 %
Deduct (add):
ALL	5,723,753		5,602,541
Deferred net loan costs	(354,981 )		(363,614 )
Net loans	$ 562,009,526		$ 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 CRE loan portfolios is mitigated in part by government guarantees issued by federal agencies such as the SBA and RD. At June 30, 2019, the Company had $29,465,025 in guaranteed loans with guaranteed balances of $21,915,300, compared to $28,366,843 in guaranteed loans with guaranteed balances of $21,195,219 at December 31, 2018.

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

The Company’s non-performing assets increased $1,568,503, or 30.2%, during the first six months of 2019. The increase is attributable primarily to a combination of residential real estate loans and CRE loans moving into non-accrual status. Claims receivable on related government guarantees were $71,240 at June 30, 2019 compared to $200,948 at December 31, 2018, with three new claims pending settlement at the end of 2018. Non-performing loans as of June 30, 2019 carried RD and SBA guarantees totaling $364,276, compared to $376,289 at December 31, 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:

	June 30, 2019		December 31, 2018
Loans past due 90 days or more
and still accruing (1)
Residential real estate - 1st lien	$ 736,283	10.89 %	$ 622,486	11.98 %
Residential real estate - Jr lien	108,365	1.60 %	104,959	2.02 %
Consumer	0	0.00 %	1,661	0.03 %
Total	844,648	12.49 %	729,106	14.03 %

Non-accrual loans (1)
Commercial & industrial	606,832	8.97 %	84,814	1.63 %
Commercial real estate	1,946,457	28.79 %	1,742,993	33.56 %
Residential real estate - 1st lien	2,984,761	44.14 %	2,026,939	39.03 %
Residential real estate - Jr lien	287,499	4.25 %	408,540	7.87 %
Total	5,825,549	86.15 %	4,263,286	82.09 %

Other real estate owned	92,084	1.36 %	201,386	3.88 %

Total Non-Performing Assets	$ 6,762,281	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 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 June 30, 2019 and two commercial properties at December 31, 2018. The Company took control of the commercial properties, rather than obtaining them through the normal foreclosure process. The single OREO property held at June 30, 2019 is listed for sale.

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

The 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:

	June 30, 2019		December 31, 2018
	Number of	Principal	Number of	Principal
	Loans	Balance	Loans	Balance

Commercial & industrial	2	$ 49,217	1	$ 24,685
Commercial real estate	4	823,966	4	862,713
Residential real estate - 1st lien	15	1,446,729	12	1,082,187
Total	21	$ 2,319,912	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:

	June 30, 2019		December 31, 2018
	Number of	Principal	Number of	Principal
	Loans	Balance	Loans	Balance

Commercial real estate	2	$ 114,901	1	$ 102,292
Residential real estate - 1st lien	29	2,375,735	31	2,544,728
Residential real estate - Jr lien	1	6,654	1	7,248
Total	32	$ 2,497,290	33	$ 2,654,268

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, other than the municipal loans as there has never been a loss recorded in that loan segment. The Company applies numerous qualitative factors to each segment of the loan portfolio. Those factors include the levels of and trends in delinquencies and non-accrual loans, criticized and classified assets, volumes and terms of loans, and the impact of any loan policy changes. Experience, ability and depth of lending personnel, levels of policy and documentation exceptions, national and local economic trends, the competitive environment, and concentrations of credit are also factors considered.

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

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

	As of or Six Months Ended June 30,
	2019	2018

Loans outstanding, end of period (1)	$ 567,378,298	$ 553,297,665
Average loans outstanding during period (1)	$ 582,555,613	$ 555,460,003
Non-accruing loans, end of period	$ 5,825,549	$ 4,273,363
Non-accruing loans, net of government guarantees	$ 5,461,273	$ 3,876,179

ALL, beginning of period	$ 5,602,541	$ 5,438,099
Loans charged off:
Commercial & industrial	(3,573 )	(131,273 )
Commercial real estate	(14,710 )	(124,645 )
Residential real estate - 1st lien	(94,521 )	(78,435 )
Residential real estate - Jr lien	(102,000 )	(24,000 )
Consumer	(59,621 )	(73,388 )
Total loans charged off	(274,425 )	(431,741 )
Recoveries:
Commercial & industrial	9,078	20,041
Residential real estate - 1st lien	10,073	9,158
Residential real estate - Jr lien	1,001	675
Consumer	21,316	16,791
Total recoveries	41,468	46,665
Net loans charged off	(232,957 )	(385,076 )
Provision charged to income	354,169	360,000
ALL, end of period	$ 5,723,753	$ 5,413,023

Net charge offs to average loans outstanding	0.040 %	0.069 %
Provision charged to income as a percent of average loans	0.061 %	0.065 %
ALL to average loans outstanding	0.983 %	0.975 %
ALL to non-accruing loans	98.253 %	126.669 %
ALL to non-accruing loans net of government guarantees	104.806 %	139.648 %

(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 decreased $5,831, or 1.6%, for the first six months of 2019 compared to the same period in 2018. The lower 2019 provision level is due to the year to date decrease in the loan portfolio combined with lower than anticipated loan charge off activity.

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 second quarter ALL analysis shows the reserve balance of $5,723,753 at June 30, 2019 which is appropriate in management’s view to cover losses that are probable and estimable as of the measurement date, with an unallocated reserve of $145,089 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 industrial and CRE loans and the risk associated with the relatively new, unseasoned loans in those portfolios. The adequacy of the ALL is reviewed quarterly by the risk management committee of the Board and then presented to the full Board for approval.

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

LIQUIDITY AND CAPITAL RESOURCES

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

The Company recognizes that, at times, when loan demand exceeds deposit growth or the Company has other liquidity demands, it may be desirable to utilize alternative sources of deposit funding to augment retail deposits and borrowings. One-way deposits acquired through the CDARS program provide an alternative funding source when needed. At June 30, 2019, the Company had no one-way CDARS outstanding, compared to $723,774 at December 31, 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 FDIC deposit insurance to its customers in excess of account coverage limits by exchanging deposits with other 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 June 30, 2019, the Company reported $3,997,168 in reciprocal CDARS deposits, compared to $3,480,106 at December 31, 2018. The balance in ICS reciprocal money market deposits was $24,781,718 at June 30, 2019, compared to $23,862,324 at December 31, 2018, and the balance in ICS reciprocal demand deposits as of those dates was $20,992,357 and $45,651,548, respectively.

During the third quarter of 2018, the Company issued two blocks of DTC Brokered CDs totaling $30,000,000, with maturities in January 2019 and August 2020. During the first quarter of 2019, the Company partially replaced the $20,000,000 block that matured in January with purchases of two blocks of DTC Brokered CDs totaling $15,000,000 and having maturities in July, 2019 and January, 2020. 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 June 30, 2019 and December 31, 2018, borrowing capacity of $102,255,128 and $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. The Company also has an unsecured Federal Funds credit line with the FHLBB with an available balance of $500,000 and no outstanding advances during any of the respective comparison periods. Interest is chargeable at a rate determined daily, approximately 25 bps higher than the rate paid on federal funds sold.

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

	June 30, 2019	December 31, 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

Overnight Borrowings
Correspondent Banks, 2.65%	6,100,000	0

Total Advances	$ 7,650,000	$ 1,550,000

(1)

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

The Company has a 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 $51,442,915 and $50,913,351, respectively, at June 30, 2019 and December 31, 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 300 bps. The Company had no outstanding advances against this credit line during either of the periods presented.

The Company has unsecured lines of credit with three correspondent banks with aggregate available borrowing capacity totaling $21.5 million as of the balance sheet dates presented in this quarterly report. Outstanding advances against these lines totaled $6.1 million and $0 as of June 30, 2019 and December 31, 2018, respectively.

Securities sold under agreements to repurchase provide another funding source for the Company. At June 30, 2019 and December 31, 2018, the Company had outstanding repurchase agreement balances of $32,144,591 and $30,521,565, respectively. These repurchase agreements mature and are repriced daily.

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

Balance at December 31, 2018 (book value $11.72 per common share)	$ 62,603,711
Net income	4,191,203
Issuance of stock through the DRIP	589,515
Redemption of preferred stock	(500,000 )
Dividends declared on common stock	(1,969,490 )
Dividends declared on preferred stock	(48,125 )
Change in unrealized loss on securities AFS, net of tax	805,160
Balance at June 30, 2019 (book value $12.32 per common share)	$ 65,671,974

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

As described in more detail in Note 20 to the audited consolidated financial statements contained 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 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 was added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer was fully phased-in on January 1, 2019 at 2.5% of risk-weighted assets. A banking organization with a conservation buffer of less than 2.5% is subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. As of June 30, 2019, the Company and the Bank were fully compliant with a capital conservation buffer of 6.62% and 6.46%, respectively.

Under the 2018 Regulatory Relief Act, these capital requirements will be simplified for qualifying community banks and bank holding companies (that is, institutions with less than $10 billion in assets). The Act requires the federal banking regulators to develop a new CBLR set at between 8% and 10% of unweighted assets. The CBLR will be determined by dividing tangible equity capital by average total consolidated assets. If a community bank exceeds the CBLR threshold, it will be considered to have met the risk-based capital and leverage capital requirements that would otherwise apply, as well as any applicable “prompt correction action” capital requirements to be considered well capitalized. During the fourth quarter of 2018, the federal banking regulators proposed a CBLR of 9%. Final action on the proposal is expected later this year.

As of June 30, 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.

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		To Be Well
			For Capital		Capitalized Under
			Adequacy		Prompt Corrective
	Actual		Purposes:		Action Provisions(1):
	Amount	Ratio	Amount	Ratio	Amount	Ratio
	(Dollars in Thousands)
June 30, 2019
Common equity tier 1 capital
(to risk-weighted assets)
Company	$ 66,827	13.46 %	$ 22,349	4.50 %	N/A	N/A
Bank	$ 65,966	13.30 %	$ 22,327	4.50 %	$ 32,250	6.50 %
Tier 1 capital (to risk-weighted assets)
Company	$ 66,827	13.46 %	$ 29,799	6.00 %	N/A	N/A
Bank	$ 65,966	13.30 %	$ 29,770	6.00 %	$ 39,693	8.00 %
Total capital (to risk-weighted assets)
Company	$ 72,595	14.62 %	$ 39,732	8.00 %	N/A	N/A
Bank	$ 71,734	14.46 %	$ 39,693	8.00 %	$ 49,616	10.00 %
Tier 1 capital (to average assets)
Company	$ 66,827	9.76 %	$ 27,392	4.00 %	N/A	N/A
Bank	$ 65,966	9.64 %	$ 27,374	4.00 %	$ 34,217	5.00 %

December 31, 2018:
Common equity tier 1 capital
(to risk-weighted assets)
Company	$ 64,564	12.94 %	$ 22,446	4.50 %	N/A	N/A
Bank	$ 63,960	12.84 %	$ 22,419	4.50 %	$ 32,384	6.50 %
Tier 1 capital (to risk-weighted assets)
Company	$ 64,564	12.94 %	$ 29,928	6.00 %	N/A	N/A
Bank	$ 63,960	12.84 %	$ 29,893	6.00 %	$ 39,857	8.00 %
Total capital (to risk-weighted assets)
Company	$ 70,210	14.08 %	$ 39,904	8.00 %	N/A	N/A
Bank	$ 69,606	13.97 %	$ 39,857	8.00 %	$ 49,821	10.00 %
Tier 1 capital (to average assets)
Company	$ 64,564	9.26 %	$ 27,890	4.00 %	N/A	N/A
Bank	$ 63,960	9.18 %	$ 27,867	4.00 %	$ 34,834	5.00 %

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

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

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I TEM 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 2018 Annual Report on Form 10-K.

I TEM 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 Exchange Act. As of June 30, 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 June 30, 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 June 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

I TEM 1. Legal Proceedings

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

I TEM 1A. Risk Factors

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

I TEM 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 June 30, 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
	of Shares	Price Paid
For the period:	Purchased(1)(2)	Per Share

April 1 - April 30	910	$ 16.95
May 1 – May 31	4,477	16.75
June 1 - June 30	0	0
Total	5,387	$ 16.78

(1) All 5,387 shares were purchased for the account of participants invested in the Company Stock Fund under the Company’s Retirement Savings Plan by or on behalf of the Plan Trustee, the Human Resources Committee of the Bank. Such share purchases were facilitated through CFSG, which provides certain investment advisory services to the Plan. Both the Plan Trustee and CFSG may be considered affiliates of the Company under Rule 10b-18.

(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 DRIP.

I TEM 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 June 30, 2019 formatted in eXtensible Business Reporting Language (XBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three-month and six-month interim periods ended June 30, 2019 and 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 Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act.

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S IGNATURES

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

COMMUNITY BANCORP.

DATED: August 9, 2019	/s/Kathryn M. Austin
	Kathryn M. Austin, President
	& Chief Executive Officer
	(Principal Executive Officer)


DATED: August 9, 2019	/s/Louise M. Bonvechio
	Louise M. Bonvechio, Corporate
	Secretary & Treasurer
	(Principal Financial Officer)

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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2019

COMMUNITY BANCORP.

E XHIBITS

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 June 30, 2019 formatted in eXtensible Business Reporting Language (XBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three-month and six-month interim periods ended June 30, 2019 and 2018, (iii) the unaudited consolidated statements of comprehensive income, (iv) the unaudited consolidated statements of cash flows and (v) related notes.

TABLE OF CONTENTS

Part I. Financial Information Item 1. Financial Statements (unaudited)Note 1. Basis Of Presentation and Consolidation Note 2. Recent Accounting Developments Note 3. Earnings Per Common Share Note 4. Investment Securities Note 5. Loans, Allowance For Loan Losses and Credit Quality Note 6. Goodwill and Other Intangible Assets Note 7. Leases Note 8. Fair Value Note 9. Loan Servicing Note 10. Legal Proceedings Note 11. Subsequent Event Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 6. Exhibits

Exhibits

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*

CMTV 10-Q Quarter ended June 30, 2019

Exhibits