UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~June 30, 2021~~March 31, 2022

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ~~___________~~ to ~~___________~~

Commission File Number 000-16435

COMMUNITY BANCORP /VT

~~COMMUNITY BANCORP /VT~~

~~(Exact~~ (Exact name of Registrant as Specified in its Charter)

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

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

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

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

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

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

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

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

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

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

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

At ~~August 05, 2021,~~May 4, 2022, there were ~~5,348,968~~5,391,518 shares outstanding of the Corporation’s common stock.

FORM 10-Q

Index

~~Index~~		Page

PART I	FINANCIAL INFORMATION

Item 1	Financial Statements	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2928
Item 3	Quantitative and Qualitative Disclosures About Market Risk	5145
Item 4	Controls and Procedures	5146

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	5247
Item 1A	Risk Factors	5247
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	5247
Item 6	Exhibits	5348
	Signatures	5449
	Exhibit Index	5550

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements (Unaudited)

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

Community Bancorp. and Subsidiary	June 30,			December 31,			March 31,			December 31,
Consolidated Balance Sheets	2021			2020			2022			2021
	(Unaudited)						(Unaudited)

Assets
Cash and due from banks	$	36,375,914		$	10,850,787		$	17,330,851		$	17,839,374
Federal funds sold and overnight deposits		59,930,620			104,199,133			67,121,921			92,519,552
Total cash and cash equivalents		96,306,534			115,049,920			84,452,772			110,358,926
Securities available-for-sale		91,556,135			60,705,178			185,755,566			182,342,459
Restricted equity securities, at cost		1,447,150			1,446,550			1,390,950			1,434,450
Loans held-for-sale		793,544			130,400			246,000			339,000
Loans		704,201,276			709,355,330			696,293,182			689,988,533
Allowance for loan losses		(7,719,257	)		(7,208,485	)		(7,890,648	)		(7,710,256	)
Deferred net loan fees		(2,799,132	)		(1,195,741	)
Deferred net loan cost (fees)								274,346			(37,972	)
Net loans		693,682,887			700,951,104			688,676,880			682,240,305
Bank premises and equipment, net		12,478,958			10,209,869			13,503,142			13,767,328
Accrued interest receivable		3,040,833			2,987,977			2,719,138			2,400,560
Bank owned life insurance		5,030,987			4,988,236			5,093,288			5,073,228
Goodwill		11,574,269			11,574,269			11,574,269			11,574,269
Other assets		9,587,341			10,189,781			11,778,865			9,575,274
Total assets	$	925,498,638		$	918,233,284		$	1,005,190,870		$	1,019,105,799

Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Demand, non-interest bearing	$	204,616,899		$	185,954,976		$	203,661,459		$	209,465,151
Interest-bearing transaction accounts		232,134,055			242,902,715			258,401,561			265,513,937
Money market funds		111,345,535			115,546,064			130,731,075			129,728,954
Savings		143,739,953			124,555,124			177,994,875			168,390,905
Time deposits, $250,000 and over		15,951,519			16,488,963			17,106,871			17,463,871
Other time deposits		92,105,434			96,842,998			89,404,604			88,837,135
Total deposits		799,893,395			782,290,840			877,300,445			879,399,953
Borrowed funds		2,300,000			2,800,000			1,300,000			1,300,000
Repurchase agreements		23,516,636			38,727,312			28,744,011			32,609,875
Junior subordinated debentures		12,887,000			12,887,000			12,887,000			12,887,000
Accrued interest and other liabilities		6,174,518			4,239,419			7,514,626			8,148,703
Total liabilities		844,771,549			840,944,571			927,746,082			934,345,531

Shareholders’ Equity
Preferred stock, 1,000,000 shares authorized, 15 shares issued and outstanding
at 06/30/21 and 12/31/20 ($100,000 liquidation value, per share)		1,500,000			1,500,000
Common stock - $2.50 par value; 15,000,000 shares authorized, 5,559,867
shares issued at 06/30/21 and 5,527,380 shares issued at 12/31/20		13,899,668			13,818,450
Preferred stock, 1,000,000 shares authorized, 15 shares issued and outstanding at 03/31/22 and 12/31/21 ($100,000 liquidation value, per share)								1,500,000			1,500,000
Common stock - $2.50 par value; 15,000,000 shares authorized, 5,602,178 shares issued at 03/31/22 and 5,587,939 shares issued at 12/31/21								14,005,445			13,969,848
Additional paid-in capital		34,783,343			34,309,646			35,559,149			35,322,063
Retained earnings		33,072,970			29,368,046			38,914,579			37,758,105
Accumulated other comprehensive income		93,885			915,348
Less: treasury stock, at cost; 210,101 shares at 06/30/21 and 12/31/20		(2,622,777	)		(2,622,777	)
Accumulated other comprehensive loss								(9,911,608	)		(1,166,971	)
Less: treasury stock, at cost; 210,101 shares at 03/31/22 and 12/31/21								(2,622,777	)		(2,622,777	)
Total shareholders’ equity		80,727,089			77,288,713			77,444,788			84,760,268
Total liabilities and shareholders’ equity	$	925,498,638		$	918,233,284		$	1,005,190,870		$	1,019,105,799

Book value per common share outstanding	$	14.81		$	14.25		$	14.08		$	15.48

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

Table of Contents

Community Bancorp. and Subsidiary	Three Months Ended June 30,				Three Months Ended March 31,
Consolidated Statements of Income	2021		2020		2022		2021
(Unaudited)

Interest income
Interest and fees on loans	$	7,888,423	$	7,842,397	$	7,487,200	$	8,253,296
Interest on taxable debt securities		293,731		253,178
Interest on debt securities						667,226		265,112
Dividends		14,981		21,400		16,460		10,619
Interest on federal funds sold and overnight deposits		80,006		74,467		80,660		87,883
Total interest income		8,277,141		8,191,442		8,251,546		8,616,910

Interest expense
Interest on deposits		631,093		1,027,208		551,959		705,244
Interest on borrowed funds		14,449		3,733		21,965		14,941
Interest on repurchase agreements		20,509		59,006		21,040		35,442
Interest on junior subordinated debentures		99,916		116,962		98,352		98,795
Total interest expense		765,967		1,206,909		693,316		854,422

Net interest income		7,511,174		6,984,533		7,558,230		7,762,488
Provision for loan losses		267,501		307,499		862,500		267,497
Net interest income after provision for loan losses		7,243,673		6,677,034		6,695,730		7,494,991

Non-interest income
Service fees		856,631		721,521		862,887		788,623
Income from sold loans		277,061		396,291		203,842		185,006
Other income from loans		246,716		301,129		271,260		183,274
Net realized gain on sale of securities AFS		0		39,086
Other income		388,127		304,075		348,440		415,328
Total non-interest income		1,768,535		1,762,102		1,686,429		1,572,231

Non-interest expense
Salaries and wages		1,944,999		1,928,421		2,040,000		1,975,003
Employee benefits		824,210		734,441		772,052		831,210
Occupancy expenses, net		652,202		637,269		753,364		744,720
Other expenses		1,847,985		1,687,322		1,888,172		1,814,118
Total non-interest expense		5,269,396		4,987,453		5,453,588		5,365,051

Income before income taxes		3,742,812		3,451,683		2,928,571		3,702,171
Income tax expense		696,406		609,372		523,029		676,470
Net income	$	3,046,406	$	2,842,311	$	2,405,542	$	3,025,701

Earnings per common share	$	0.57	$	0.54	$	0.44	$	0.57
Weighted average number of common shares used in computing earnings per share		5,338,502		5,263,189		5,382,678		5,322,404
Dividends declared per common share	$	0.22	$	0.19	$	0.23	$	0.22

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

Table of Contents

Community Bancorp. and Subsidiary

Six Months Ended June 30,

Consolidated Statements of Income

2021

2020

(Unaudited)

Interest income

Interest and fees on loans

$ 16,141,719

$ 15,208,358

Interest on taxable debt securities

558,844

537,934

Dividends

25,600

45,825

Interest on federal funds sold and overnight deposits

167,888

171,477

Total interest income

16,894,051

15,963,594

Interest expense

Interest on deposits

1,336,337

2,276,745

Interest on borrowed funds

29,390

16,528

Interest on repurchase agreements

55,951

118,541

Interest on junior subordinated debentures

198,711

271,488

Total interest expense

1,620,389

2,683,302

Net interest income

15,273,662

13,280,292

Provision for loan losses

534,998

684,002

Net interest income after provision for loan losses

14,738,664

12,596,290

Non-interest income

Service fees

1,645,255

1,527,732

Income from sold loans

462,067

536,754

Other income from loans

429,989

521,596

Net realized gain on sale of securities AFS

0

39,086

Other income

803,455

490,641

Total non-interest income

3,340,766

3,115,809

Non-interest expense

Salaries and wages

3,920,002

3,814,737

Employee benefits

1,655,420

1,532,882

Occupancy expenses, net

1,396,922

1,320,504

Other expenses

3,662,103

3,412,550

Total non-interest expense

10,634,447

10,080,673

Income before income taxes

7,444,983

5,631,426

Income tax expense

1,372,876

927,876

Net income

$ 6,072,107

$ 4,703,550

Earnings per common share

$ 1.13

$ 0.89

Weighted average number of common shares used in computing earnings per share

5,330,497

5,254,202

Dividends declared per common share

$ 0.44

$ 0.38

Community Bancorp. and Subsidiary
Consolidated Statements of Comprehensive Income
(Unaudited)	Three Months Ended March 31,
	2022			2021

Net income	$	2,405,542		$	3,025,701

Other comprehensive loss, net of tax:
Unrealized holding loss on securities AFS arising during the period		(11,069,161	)		(1,660,640	)
Tax effect		2,324,524			348,735
Other comprehensive loss, net of tax		(8,744,637	)		(1,311,905	)
Total comprehensive (loss) income	$	(6,339,095	)	$	1,713,796

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

~~Table of Contents~~

Community Bancorp. and Subsidiary

Consolidated Statements of Comprehensive Income

(Unaudited)

Three Months Ended June 30,

2021

2020

Net income

$ 3,046,406

$ 2,842,311

Other comprehensive income, net of tax:

Unrealized holding gain on securities AFS arising during the period

620,812

246,634

Reclassification adjustment for gain realized in income

0

(39,086 )
Unrealized gain during the period

620,812

207,548

Tax effect

(130,370 )

(43,586 )
Other comprehensive income, net of tax

490,442

163,962

Total comprehensive income

$ 3,536,848

$ 3,006,273

Six Months Ended June 30,

2021

2020

Net income

$ 6,072,107

$ 4,703,550

Other comprehensive (loss) income, net of tax:

Unrealized holding (loss) gain on securities AFS arising during the period

(1,039,828 )

989,223

Reclassification adjustment for gain realized in income

0

(39,086 )
Unrealized (loss) gain during the period

(1,039,828 )

950,137

Tax effect

218,365

(199,529 )
Other comprehensive (loss) income, net of tax

(821,463 )

750,608

Total comprehensive income

$ 5,250,644

$ 5,454,158

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

Table of Contents

Community Bancorp. and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

	Six Months Ended June 30, 2021																Three Months Ended March 31, 2022
					Additional									Total							Additional											Total
	Common		Preferred		paid-in		Retained						Treasury	shareholders’			Common		Preferred		paid-in		Retained						Treasury			shareholders’
	Stock		Stock		capital		earnings			AOCI*			stock	equity			Stock		Stock		capital		earnings			AOCI*			stock			equity

January 1, 2021	$	13,818,450	$	1,500,000	$	34,309,646	$	29,368,046		$	915,348		($2,622,777)	$	77,288,713
January 1, 2022																	$	13,969,848	$	1,500,000	$	35,322,063	$	37,758,105		$	(1,166,971	)	$	(2,622,777	)	$	84,760,268

Issuance of common stock		42,523				222,256									264,779			35,597				237,086											272,683
Cash dividends declared
Common stock								(1,169,555	)						(1,169,555	)								(1,236,880	)								(1,236,880	)
Preferred stock								(12,188	)						(12,188	)								(12,188	)								(12,188	)
Comprehensive income
Net income								3,025,701							3,025,701									2,405,542									2,405,542
Other comprehensive loss											(1,311,905	)			(1,311,905	)											(8,744,637	)					(8,744,637	)
March 31, 2021	$	13,860,973	$	1,500,000	$	34,531,902	$	31,212,004		($396,557)			($2,622,777)	$	78,085,545

Issuance of common stock		38,695				251,441									290,136
Cash dividends declared
Common stock								(1,173,253	)						(1,173,253	)
Preferred stock								(12,187	)						(12,187	)
Comprehensive income
Net income								3,046,406							3,046,406
Other comprehensive income											490,442				490,442
June 30, 2021	$	13,899,668	$	1,500,000	$	34,783,343	$	33,072,970		$	93,885		($2,622,777)	$	80,727,089
March 31, 2022																	$	14,005,445	$	1,500,000	$	35,559,149	$	38,914,579		$	(9,911,608	)	$	(2,622,777	)	$	77,444,788

	Six Months Ended June 30, 2020															Three Months Ended March 31, 2021
					Additional								Total							Additional											Total
	Common		Preferred		paid-in		Retained					Treasury	shareholders’			Common		Preferred		paid-in		Retained						Treasury			shareholders’
	Stock		Stock		capital		earnings			AOCI*		stock	equity			Stock		Stock		capital		earnings			AOCI*			stock			equity

January 1, 2020	$	13,624,643	$	1,500,000	$	33,464,381	$	22,667,949		$	260,483	($2,622,777)	$	68,894,679
January 1, 2021																$	13,818,450	$	1,500,000	$	34,309,646	$	29,368,046		$	915,348		$	(2,622,777	)	$	77,288,713

Issuance of common stock		40,465				213,812								254,277			42,523				222,256											264,779
Cash dividends declared
Common stock								(995,536	)					(995,536	)								(1,169,555	)								(1,169,555	)
Preferred stock								(17,813	)					(17,813	)								(12,188	)								(12,188	)
Comprehensive income
Net income								1,861,239						1,861,239									3,025,701									3,025,701
Other comprehensive income											586,646			586,646
March 31, 2020	$	13,665,108	$	1,500,000	$	33,678,193	$	23,515,839		$	847,129	($2,622,777)	$	70,583,492

Issuance of common stock		47,752				214,135								261,887
Cash dividends declared
Common stock								(998,899	)					(998,899	)
Preferred stock								(12,187	)					(12,187	)
Comprehensive income
Net income								2,842,311						2,842,311
Other comprehensive income											163,962			163,962
June 30, 2020	$	13,712,860	$	1,500,000	$	33,892,328	$	25,347,064		$	1,011,091	($2,622,777)	$	72,840,566
Other comprehensive loss																										(1,311,905	)					(1,311,905	)
March 31, 2021																$	13,860,973	$	1,500,000	$	34,531,902	$	31,212,004		$	(396,557	)	$	(2,622,777	)	$	78,085,545

~~____________~~

*Accumulated other comprehensive (loss) income

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

Table of Contents

Community Bancorp. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)	Three Months Ended March 31,
	2022			2021

Cash Flows from Operating Activities:
Net income	$	2,405,542		$	3,025,701
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, bank premises and equipment		285,202			259,449
Provision for loan losses		862,500			267,497
Deferred income tax		47,344			16,608
Gain on sale of loans		(102,945	)		(114,211	)
(Income) loss from CFS Partners		(225,870	)		1,693,014
Amortization of bond premium, net		186,967			95,456
Proceeds from sales of loans held for sale		4,425,711			2,145,611
Originations of loans held for sale		(4,229,766	)		(2,435,200	)
Increase in taxes payable		408,593			569,100
Increase in interest receivable		(318,578	)		(250,630	)
(Increase) decrease in mortgage servicing rights		(2,374	)		38,280
Decrease in right-of-use assets		49,669			49,031
Decrease in operating lease liabilities		(51,283	)		(49,198	)
Increase in other assets		(173,852	)		(148,665	)
Increase in cash surrender value of BOLI		(20,060	)		(21,673	)
Amortization of limited partnerships		67,092			90,762
Change in net deferred loan fees and costs		(312,318	)		1,076,424
Decrease in interest payable		(1,332	)		(12,953	)
Decrease in accrued expenses		(567,062	)		(420,431	)
(Decrease) increase in other liabilities		(24,896	)		3,175
Net cash provided by operating activities		2,708,284			5,877,147

Cash Flows from Investing Activities:
Investments - AFS
Maturities, calls, pay downs and sales		4,434,388			4,383,743
Purchases		(19,103,623	)		(27,371,666	)
Proceeds from redemption of restricted equity securities		43,500			0
Decrease in limited partnership contributions payable		0			(150,000	)
Increase in loans, net		(6,998,537	)		(20,167,317	)
Capital expenditures net of proceeds from sales of bank premises and equipment		(70,686	)		(2,657,300	)
Recoveries of loans charged off		11,780			25,314
Net cash used in investing activities		(21,683,178	)		(45,937,226	)

Table of Contents

Community Bancorp. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended June 30,

2021

2020

Cash Flows from Operating Activities:

Net income

$ 6,072,107

$ 4,703,550

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization, bank premises and equipment

527,106

457,594

Provision for loan losses

534,998

684,002

Deferred income tax

(118,016 )

(89,331 )
Net realized gain on sale of securities AFS

0

(39,086 )
Gain on sale of loans

(256,724 )

(321,125 )
Gain on sale of bank premises and equipment

(9,800 )

0

Gain on sale of OREO

0

(23,372 )
Loss (income) from CFS Partners

1,405,942

(311,167 )
Amortization of bond premium, net

227,051

34,968

Proceeds from sales of loans held for sale

6,720,974

19,557,165

Originations of loans held for sale

(7,127,394 )

(19,645,640 )
(Decrease) increase in taxes payable

(502,632 )

838,865

Increase in interest receivable

(52,856 )

(1,362,460 )
Decrease in mortgage servicing rights

12,816

11,844

Decrease in right-of-use assets

98,078

121,650

Decrease in operating lease liabilities

(98,407 )

(120,438 )
Increase in other assets

(158,830 )

(115,557 )
Increase in cash surrender value of BOLI

(42,751 )

(41,744 )
Amortization of limited partnerships

181,524

168,342

Change in net deferred loan fees and costs

1,603,391

2,944,294

Decrease in interest payable

(25,382 )

(30,765 )
Decrease in accrued expenses

(217,439 )

(1,762 )
Decrease in other liabilities

(65,366 )

(71,837 )
Net cash provided by operating activities

8,708,390

7,347,990

Cash Flows from Investing Activities:

Investments - AFS

Maturities, calls, pay downs and sales

9,522,747

10,957,147

Purchases

(41,640,583 )

(8,096,136 )
Proceeds from redemption of restricted equity securities

0

522,400

Purchases of restricted equity securities

(600 )

(503,400 )
Decrease in limited partnership contributions payable

(150,000 )

(288,000 )
Decrease (increase) in loans, net

5,097,834

(114,075,128 )
Capital expenditures net of proceeds from sales of bank premises and equipment

(2,884,472 )

(154,595 )
Proceeds from sales of OREO

0

282,319

Recoveries of loans charged off

31,994

54,457

Net cash used in investing activities

(30,023,080 )

(111,300,936 )

~~Table of Contents~~

	2021			2020			2022			2021

Cash Flows from Financing Activities:
Net increase in demand and interest-bearing transaction accounts		7,893,263			68,461,978
Net (decrease) increase in demand and interest-bearing transaction accounts								(12,916,068	)		7,863,790
Net increase in money market and savings accounts		14,984,300			22,856,626			10,606,091			19,474,878
Net decrease in time deposits		(5,275,008	)		(6,975,213	)
Net increase (decrease) in time deposits								210,469			(3,639,187	)
Net decrease in repurchase agreements		(15,210,676	)		(4,731,553	)		(3,865,864	)		(6,627,854	)
Net increase in short-term borrowings		0			2,000,000
Repayments on long-term borrowings		(500,000	)		0			0			(500,000	)
Increase (decrease) in finance lease obligations		2,340,406			(30,256	)
(Decrease) increase in finance lease obligations								(52,807	)		2,388,819
Dividends paid on preferred stock		(24,375	)		(30,000	)		(12,188	)		(12,188	)
Dividends paid on common stock		(1,636,606	)		(1,467,707	)		(900,893	)		(743,679	)
Net cash provided by financing activities		2,571,304			80,083,875
Net cash (used in) provided by financing activities								(6,931,260	)		18,204,579

Net decrease in cash and cash equivalents		(18,743,386	)		(23,869,071	)		(25,906,154	)		(21,855,500	)
Cash and cash equivalents:
Beginning		115,049,920			48,562,212			110,358,926			115,049,920
Ending	$	96,306,534		$	24,693,141		$	84,452,772		$	93,194,420

Supplemental Schedule of Cash Paid During the Period:
Interest	$	1,645,771		$	2,714,067		$	694,648		$	867,375

Income taxes, net of refunds	$	1,812,000		$	10,000

Supplemental Schedule of Noncash Investing and Financing Activities:
Change in unrealized (loss) gain on securities AFS	($1,039,828)			$	950,137
Change in unrealized loss on securities AFS							$	(11,069,161	)	$	(1,660,640	)

Common Shares Dividends Paid:
Dividends declared	$	2,342,808		$	1,994,435		$	1,236,880		$	1,169,555
Increase in dividends payable attributable to dividends declared		(151,287	)		(10,564	)		(63,304	)		(161,097	)
Dividends reinvested		(554,915	)		(516,164	)		(272,683	)		(264,779	)
	$	1,636,606		$	1,467,707
Total dividends paid							$	900,893		$	743,679

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

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Notes to Consolidated Financial Statements

Note 1. Basis of Presentation and Consolidation and Certain Definitions

Basis of Presentation and Consolidation. The interim consolidated financial statements of Community Bancorp. and Subsidiary are unaudited. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments necessary for the fair presentation of the consolidated financial condition and results of operations of the Company and its subsidiary, Community National Bank (the Bank), contained herein have been made. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, ~~2020~~2021 contained in the Company’s Annual Report on Form 10-K. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for any other interim period or the full annual period ending December 31, ~~2021.~~2022.

There were no reclassifications to the consolidated financial statements for the periods presented.

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

~~Table of Contents~~

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

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

119

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Note 2. ~~Risks and Uncertainties~~

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

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

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

~~Note 3.~~ Recent Accounting Developments

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under the new guidance, which will replace the existing incurred loss model for recognizing credit losses, banks and other lending institutions will be required to recognize the full amount of expected credit losses over the life of a loan. The new guidance, which is referred to as the current expected credit loss, or CECL model, requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses over the life of the loans. A modified version of these requirements also applies to debt securities classified as available for sale, which will require that credit losses on those securities be recorded through an allowance for credit losses rather than a write-down. The ASU may have a material impact on the Company’s consolidated financial statements upon adoption as it will require a change in the Company’s methodology for calculating its ALL and allowance on unused commitments. The Company will transition from an incurred loss model to an expected loss model, which may result in an increase in the ALL upon adoption and may negatively impact the Company’s and the Bank’s regulatory capital ratios. The Company has formed a committee to assess the implications of this new pronouncement and transitioned to a software solution for preparing the ALL calculation and related reports that management believes provides the Company with stronger data integrity, ease and efficiency in ALL preparation. The new software solution also provides numerous training opportunities for the appropriate personnel within the Company. The Company has gathered and is continuing to analyze the historical data to serve as a basis for estimating the ALL under CECL and continues to evaluate the anticipated impact of the adoption of the ASU on its consolidated financial statements. ~~As initially proposed,~~The ASU will become effective for the ~~ASU was to be effective for~~Company beginning with the 2023 fiscal ~~years beginning after December 15, 2019,~~year including interim ~~periods~~periods. Parallel calculations under the existing ALL methodology and the CECL model will be run throughout 2022 in preparation for the transition to CECL.

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The guidance amends Topic 326 (CECL) to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, under the CECL model creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to Topic 326 require that an entity disclose current-period gross write-offs by year of origination within ~~those~~the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance will become effective for the Company beginning with the fiscal ~~years, with early adoption permitted for fiscal years beginning after December 15, 2018,~~year 2023, including interim periods within such years. However, on October 16, 2019, the FASB approved an extended effective date for compliance with the ASU by smaller reporting companies, which are now required to comply with the ASU for fiscal years beginning after December 15, 2022, with early adoption permitted.periods. The Company ~~qualifies for this extension and~~is currently assessing the impact of ASU No. 2022-02 but does not ~~intend to early adopt~~expect that its adoption will have a material impact on the ~~ASU at this time. Management will continue to evaluate the Company’s CECL compliance and implementation timetable in light of the extension.~~consolidated financial statements.

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

~~Table of Contents~~

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

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Note 4.3. 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,

2021

2020

Net income, as reported

$ 3,046,406

$ 2,842,311

Less: dividends to preferred shareholders

12,187

12,187

Net income available to common shareholders

$ 3,034,219

$ 2,830,124

Weighted average number of common shares used in calculating earnings per share

5,338,502

5,263,189

Earnings per common share

$ 0.57

$ 0.54

Six Months Ended June 30,

2021

2020

Net income, as reported

$ 6,072,107

$ 4,703,550

Less: dividends to preferred shareholders

24,375

30,000

Net income available to common shareholders

$ 6,047,732

$ 4,673,550

Weighted average number of common shares used in calculating earnings per share

5,330,497

5,254,202

Earnings per common share

$ 1.13

$ 0.89

~~Table of Contents~~

Three Months Ended March 31,	2022		2021

Net income, as reported	$	2,405,542	$	3,025,701
Less: dividends to preferred shareholders		12,188		12,188
Net income available to common shareholders	$	2,393,354	$	3,013,513
Weighted average number of common shares
used in calculating earnings per share		5,382,678		5,322,404
Earnings per common share	$	0.44	$	0.57

Note 5.4. Investment Securities

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

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

June 30, 2021
March 31, 2022
U.S. GSE debt securities	$	10,004,550	$	98,563	$	96,712	$	10,006,401	$	12,001,306	$	0	$	764,922	$	11,236,384
U.S. Government securities		5,565,064		12,582		1,964		5,575,682		39,497,938		0		1,868,539		37,629,399
Taxable Municipal securities										300,000		0		26,323		273,677
Tax-Exempt Municipal securities										4,644,229		0		336,281		4,307,948
Agency MBS		66,145,762		323,573		549,374		65,919,961		132,398,698		23,491		9,482,071		122,940,118
ABS and OAS		2,306,445		114,118		0		2,420,563		1,847,185		4,332		22,855		1,828,662
CMO		977,473		0		15,955		961,518		1,422,549		0		115,921		1,306,628
Other investments		6,438,000		234,010		0		6,672,010		6,190,000		68,665		25,915		6,232,750
Total	$	91,437,294	$	782,846	$	664,005	$	91,556,135	$	198,301,905	$	96,488	$	12,642,827	$	185,755,566

December 31, 2020
											Gross		Gross
									Amortized		Unrealized		Unrealized		Fair
									Cost		Gains		Losses		Value

December 31, 2021
U.S. GSE debt securities	$	8,007,142	$	165,934	$	3,245	$	8,169,831	$	12,001,978	$	36,024	$	209,504	$	11,828,498
U.S. Government securities										32,374,935		0		333,894		32,041,041
Taxable Municipal securities										300,000		0		1,267		298,733
Tax-Exempt Municipal securities										830,279		1,167		67		831,379
Agency MBS		40,861,370		547,930		30,951		41,378,349		128,291,487		184,002		1,342,968		127,132,521
ABS and OAS		2,508,997		160,999		0		2,669,996		2,131,610		82,414		0		2,214,024
CMO										1,451,349		0		30,891		1,420,458
Other investments		8,169,000		318,002		0		8,487,002		6,438,000		142,199		4,394		6,575,805
Total	$	59,546,509	$	1,192,865	$	34,196	$	60,705,178	$	183,819,638	$	445,806	$	1,922,985	$	182,342,459

Table of Contents

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

Amortized

Fair

Cost

Value

June 30, 2021

$ 70,804,826

$ 70,677,931

December 31, 2020

59,546,509

60,705,178

	Amortized		Fair
	Cost		Value

March 31, 2022	$	60,664,506	$	56,148,099
December 31, 2021		63,045,599		62,256,702

~~Proceeds from~~There were no sales of debt securities ~~were $884,137~~ for the first ~~six~~three months of ~~2020, with gains of $39,086. There were no sales for the first six months of~~2022 or 2021.

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

Amortized

Fair

Cost

Value

June 30, 2021

Due in one year or less

$ 2,481,000

$ 2,522,966

Due from one to five years

7,463,374

7,659,499

Due from five to ten years

14,343,837

14,426,569

Due after ten years

1,003,321

1,027,140

Agency MBS

66,145,762

65,919,961

Total

$ 91,437,294

$ 91,556,135

December 31, 2020

Due in one year or less

$ 2,227,000

$ 2,247,603

Due from one to five years

5,942,000

6,239,399

Due from five to ten years

9,511,476

9,801,921

Due after ten years

1,004,663

1,037,906

Agency MBS

40,861,370

41,378,349

Total

$ 59,546,509

$ 60,705,178

~~Table of Contents~~

	Amortized		Fair
	Cost		Value
March 31, 2022
Due in one year or less	$	3,718,000	$	3,739,035
Due from one to five years		45,449,014		43,386,569
Due from five to ten years		10,790,658		10,173,219
Due after ten years		5,945,535		5,516,625
Agency MBS		132,398,698		122,940,118
Total	$	198,301,905	$	185,755,566

December 31, 2021
Due in one year or less	$	3,470,000	$	3,508,582
Due from one to five years		36,860,731		36,619,130
Due from five to ten years		13,065,163		12,942,726
Due after ten years		2,132,257		2,139,500
Agency MBS		128,291,487		127,132,521
Total	$	183,819,638	$	182,342,459

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						Less than 12 months				12 months or more				Totals
	Fair		Unrealized		Fair		Unrealized		Number of		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Number of		Fair		Unrealized
	Value		Loss		Value		Loss		Securities		Value		Loss		Value		Loss		Value		Loss		Securities		Value		Loss
June 30, 2021
March 31, 2022
U.S. GSE debt securities	$	4,904,518	$	96,712	$	0	$	0		5	$	4,904,518	$	96,712	$	6,718,245	$	283,061	$	4,518,139	$	481,861		11	$	11,236,384	$	764,922
U.S. Government securities		1,997,649		1,964		0		0		5		1,997,649		1,964		37,629,399		1,868,539		0		0		52		37,629,399		1,868,539
Taxable Municipal securities																273,677		26,323		0		0		1		273,677		26,323
Tax-Exempt Municipal securities																4,307,948		336,281		0		0		9		4,307,948		336,281
Agency MBS		45,410,219		543,987		285,062		5,387		34		45,695,281		549,374		91,645,963		6,483,880		29,071,931		2,998,191		106		120,717,894		9,482,071
ABS and OAS																1,277,498		22,855		0		0		2		1,277,498		22,855
CMO		961,518		15,955		0		0		6		961,518		15,955		449,231		29,845		857,397		86,076		3		1,306,628		115,921
Other investments																470,085		25,915		0		0		2		470,085		25,915
Total	$	53,273,904	$	658,618	$	285,062	$	5,387		50	$	53,558,966	$	664,005	$	142,772,046	$	9,076,699	$	34,447,467	$	3,566,128		186	$	177,219,513	$	12,642,827

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

Table of Contents

	Less than 12 months				12 months or more				Totals
	Fair		Unrealized		Fair		Unrealized		Number of		Fair		Unrealized
	Value		Loss		Value		Loss		Securities		Value		Loss
December 31, 2021
U.S. GSE debt securities	$	5,869,117	$	130,883	$	1,921,379	$	78,621		7	$	7,790,496	$	209,504
U.S. Government securities		32,041,041		333,894		0		0		46		32,041,041		333,894
Taxable Municipal securities		298,733		1,267		0		0		1		298,733		1,267
Tax-Exempt Municipal securities		330,212		67		0		0		1		330,212		67
Agency MBS		107,061,452		1,128,587		8,809,493		214,381		84		115,870,945		1,342,968
CMO		1,420,458		30,891		0		0		3		1,420,458		30,891
Other investments		491,606		4,394		0		0		2		491,606		4,394
Total	$	147,512,619	$	1,629,983	$	10,730,872	$	293,002		144	$	158,243,491	$	1,922,985

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

Management evaluates its debt securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions, or adverse developments relating to the issuer, warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than the carrying value, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies or other adverse developments in the status of the securities have occurred, and the results of reviews of the issuer’s financial condition. As of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, there were no declines in the fair value of any of the securities reflected in the table above that were deemed by management to be OTTI.

Note 6.5. Loans, Allowance for Loan Losses and Credit Quality

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

	June 30,			December 31,			March 31,			December 31,
	2021			2020			2022			2021

Commercial & industrial	$	172,804,158		$	161,067,501		$	121,473,157		$	120,933,470
Commercial real estate		284,946,461			280,544,550			308,311,734			300,958,931
Municipal		35,807,161			54,807,367			48,660,440			47,955,231
Residential real estate - 1st lien		170,113,951			170,507,263			181,610,294			181,316,345
Residential real estate - Jr lien		36,355,567			38,147,659			33,066,989			34,359,864
Consumer		4,173,978			4,280,990			3,170,568			4,464,692
Total loans		704,201,276			709,355,330			696,293,182			689,988,533

ALL		(7,719,257	)		(7,208,485	)		(7,890,648	)		(7,710,256	)
Deferred net loan fees		(2,799,132	)		(1,195,741	)
Deferred net loan cost (fees)								274,346			(37,972	)
Net loans	$	693,682,887		$	700,951,104		$	688,676,880		$	682,240,305

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

											Non-		90 Days or				90 Days		Total						Non-Accrual		90 Days or More and
			90 Days		Total				Total		Accrual		More and
June 30, 2021	30-89 Days		or More		Past Due		Current		Loans		Loans		Accruing
March 31, 2022															30-89 Days		or More		Past Due		Current		Total Loans		Loans		Accruing

Commercial & industrial	$	83,651	$	0	$	83,651	$	172,720,507	$	172,804,158	$	394,901	$	0	$	233,764	$	141,700	$	375,464	$	121,097,693	$	121,473,157	$	222,236	$	0
Commercial real estate		514,911		2,873,734		3,388,645		281,557,816		284,946,461		1,836,177		623,734		1,546,310		1,640,382		3,186,692		305,125,042		308,311,734		3,708,593		0
Municipal		0		0		0		35,807,161		35,807,161		0		0		0		0		0		48,660,440		48,660,440		0		0
Residential real estate
- 1st lien		623,692		1,145,153		1,768,845		168,345,106		170,113,951		1,274,249		533,391		1,221,885		611,883		1,833,768		179,776,526		181,610,294		1,343,723		561,440
- Jr lien		208,953		112,574		321,527		36,034,040		36,355,567		184,924		35,098		82,115		93,374		175,489		32,891,500		33,066,989		140,411		93,374
Consumer		9,567		0		9,567		4,164,411		4,173,978		0		0		4,028		0		4,028		3,166,540		3,170,568		0		0
Totals	$	1,440,774	$	4,131,461	$	5,572,235	$	698,629,041	$	704,201,276	$	3,690,251	$	1,192,223	$	3,088,102	$	2,487,339	$	5,575,441	$	690,717,741	$	696,293,182	$	5,414,963	$	654,814

											Non-		90 Days or				90 Days		Total						Non-Accrual		90 Days or More and
			90 Days		Total				Total		Accrual		More and
December 31, 2020	30-89 Days		or More		Past Due		Current		Loans		Loans		Accruing
December 31, 2021															30-89 Days		or More		Past Due		Current		Total Loans		Loans		Accruing

Commercial & industrial	$	119,413	$	0	$	119,413	$	160,948,088	$	161,067,501	$	434,196	$	0	$	833,875	$	0	$	833,875	$	120,099,595	$	120,933,470	$	98,661	$	0
Commercial real estate		127,343		567,957		695,300		279,849,250		280,544,550		1,875,942		0		49,450		2,400,514		2,449,964		298,508,967		300,958,931		4,517,839		0
Municipal		0		0		0		54,807,367		54,807,367		0		0		0		0		0		47,955,231		47,955,231		0		0
Residential real estate
- 1st lien		1,872,439		828,344		2,700,783		167,806,480		170,507,263		2,173,315		390,288		1,190,300		608,775		1,799,075		179,517,270		181,316,345		1,180,563		506,827
- Jr lien		18,322		180,711		199,033		37,948,626		38,147,659		191,311		98,889		51,837		86,476		138,313		34,221,551		34,359,864		143,566		86,476
Consumer		14,388		0		14,388		4,266,602		4,280,990		0		0		9,741		0		9,741		4,454,951		4,464,692		0		0
Totals	$	2,151,905	$	1,577,012	$	3,728,917	$	705,626,413	$	709,355,330	$	4,674,764	$	489,177	$	2,135,203	$	3,095,765	$	5,230,968	$	684,757,565	$	689,988,533	$	5,940,629	$	593,303

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:~~following residential mortgage loans:

Number of loans

Balance

June 30, 2021

5

$ 157,640

December 31, 2020

6

312,807

~~A state-imposed moratorium on residential foreclosure proceedings adopted in April 2020 in response to the COVID-19 pandemic, remained in effect in Vermont as of June 30, 2021.~~

	Number of loans		Balance

March 31, 2022		4	$	153,054
December 31, 2021		5		195,082

Allowance for loan losses

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

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

Table of Contents

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.

~~Table of Contents~~

General component

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

Loss ratios are calculated by loan segment using appropriate look back periods. Management uses an average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment in the current economic climate. During periods of economic stability, a relatively longer period (e.g., five years) may be appropriate. During periods of significant expansion or contraction, the Company may appropriately shorten the historical time period. Due primarily to the effects of COVID-19, during 2020 the Company shortened its look back period to one year, ~~which remained in effect as~~however, during the first quarter of ~~June 30, 2021.~~2022, the look back period was lengthened to two 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.

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

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

Specific component

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

Impaired loans also include troubled loans that are restructured. A TDR occurs when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that would otherwise not be granted. TDRs may include the transfer of assets to the Company in partial satisfaction of a troubled loan, a modification of a loan’s terms, or a combination of the two. As described above in Note 3,2, under March 2020 guidance from the federal banking agencies and concurrence by the FASB, certain short-term loan accommodations made in good faith prior to January 1, 2022 for borrowers experiencing financial difficulties due to the COVID-19 health emergency ~~will~~are not be considered TDRs.

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

Unallocated component

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

Table of Contents

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,~~March 31, 2022

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

ALL beginning balance	$	939,047		$	4,151,760		$	76,728	$	1,765,892	$	182,014		$	55,698		$	539,117		$	7,710,256
Charge-offs		(17,650	)		(667,474	)		0		0		0			(8,764	)		0			(693,888	)
Recoveries		0			0			0		2,276		1,210			8,294			0			11,780
Provision (credit)		117,903			1,159,995			10,861		46,289		(4,671	)		(19,036	)		(448,841	)		862,500
ALL ending balance	$	1,039,300		$	4,644,281		$	87,589	$	1,814,457	$	178,553		$	36,192		$	90,276		$	7,890,648

ALL evaluated for impairment
Individually	$	0		$	0		$	0	$	115,614	$	0		$	0		$	0		$	115,614
Collectively		1,039,300			4,644,281			87,589		1,698,843		178,553			36,192			90,276			7,775,034
Total	$	1,039,300		$	4,644,281		$	87,589	$	1,814,457	$	178,553		$	36,192		$	90,276		$	7,890,648

Loans evaluated for impairment
Individually	$	222,236		$	3,713,169		$	0	$	3,910,848	$	85,691		$	0					$	7,931,944
Collectively		121,250,921			304,598,565			48,660,440		177,699,446		32,981,298			3,170,568						688,361,238
Total	$	121,473,157		$	308,311,734		$	48,660,440	$	181,610,294	$	33,066,989		$	3,170,568					$	696,293,182

As of or for the year ended December 31, 2021

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

ALL beginning balance	$	888,631	$	3,823,685	$	83,531		$	1,667,594		$	203,312		$	39,622		$	761,913	$	7,468,288		$	842,547		$	3,854,153		$	82,211		$	1,735,304		$	234,896		$	60,461		$	398,913	$	7,208,485
Charge-offs		0		0		0			0			0			(23,212	)		0		(23,212	)		(18,847	)		(22,000	)		0			(98,704	)		0			(87,651	)		0		(227,202	)
Recoveries		0		0		0			759			432			5,489			0		6,680			4,761			27,160			0			7,636			10,821			54,430			0		104,808
Provision (credit)		10,532		109,161		(26,239	)		(13,310	)		(2,475	)		39,325			150,507		267,501			110,586			292,447			(5,483	)		121,656			(63,703	)		28,458			140,204		624,165
ALL ending balance	$	899,163	$	3,932,846	$	57,292		$	1,655,043		$	201,269		$	61,224		$	912,420	$	7,719,257		$	939,047		$	4,151,760		$	76,728		$	1,765,892		$	182,014		$	55,698		$	539,117	$	7,710,256

ALL evaluated for impairment
Individually																						$	0		$	0		$	0		$	79,978		$	0		$	0		$	0	$	79,978
Collectively																							939,047			4,151,760			76,728			1,685,914			182,014			55,698			539,117		7,630,278
Total																						$	939,047		$	4,151,760		$	76,728		$	1,765,892		$	182,014		$	55,698		$	539,117	$	7,710,256

Loans evaluated for impairment
Individually																						$	93,362		$	4,553,734		$	0		$	3,720,503		$	88,563		$	0				$	8,456,162
Collectively																							120,840,108			296,405,197			47,955,231			177,595,842			34,271,301			4,464,692					681,532,371
Total																						$	120,933,470		$	300,958,931		$	47,955,231		$	181,316,345		$	34,359,864		$	4,464,692				$	689,988,533

Table of Contents

As of or for the three months ended March 31, 2021

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

ALL beginning balance	$	842,547		$	3,854,153		$	82,211		$	1,735,304		$	234,896		$	60,461		$	398,913	$	7,208,485
Charge-offs		(18,847	)		0			0			0			0			(14,161	)		0		(33,008	)
Recoveries		4,761			7,000			0			1,567			528			11,458			0		25,314
Provision (credit)		60,170			(37,468	)		1,320			(69,277	)		(32,112	)		(18,136	)		363,000		267,497
ALL ending balance	$	888,631		$	3,823,685		$	83,531		$	1,667,594		$	203,312		$	39,622		$	761,913	$	7,468,288

ALL evaluated for impairment
Individually	$	0		$	0		$	0		$	119,306		$	255		$	0		$	0	$	119,561
Collectively		888,631			3,823,685			83,531			1,548,288			203,058			39,621			761,913		7,348,727
Total	$	888,631		$	3,823,685		$	83,531		$	1,667,594		$	203,313		$	39,621		$	761,913	$	7,468,288

Loans evaluated for impairment
Individually	$	420,974		$	1,645,678		$	0		$	4,394,274		$	143,333		$	0				$	6,604,259
Collectively		188,022,649			276,837,413			52,207,213			165,415,944			36,735,240			3,666,921					722,885,380
Total	$	188,443,623		$	278,483,091		$	52,207,213		$	169,810,218		$	36,878,573		$	3,666,921				$	729,489,639

Impaired loans, by portfolio segment, were as follows:

	As of March 31, 2022
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment(1)		Balance		Allowance		Investment(1)(2)		Recognized(2)

Related allowance recorded
Residential real estate
1st lien	$	1,113,112	$	1,129,082	$	115,614	$	907,849	$	14,387
Jr lien		0		0		0		0		51
Total with related allowance		1,113,112		1,129,082		115,614		907,849		14,438

No related allowance recorded
Commercial & industrial		222,236		261,011				157,799		204
Commercial real estate		3,713,309		4,861,145				4,133,691		1,670
Residential real estate
1st lien		2,836,069		3,845,577				2,943,358		42,714
Jr lien		85,697		131,069				87,133		37
Total with no related allowance		6,857,311		9,098,802				7,321,981		44,625

Total impaired loans	$	7,970,423	$	10,227,884	$	115,614	$	8,229,830	$	59,063

(1)	Recorded investment in impaired loans as of March 31, 2022 includes accrued interest receivable of $38,479.
(2)	For the three months ended March 31, 2022.

Table of Contents

~~As of or for the six months ended June 30, 2021~~

Residential

Residential

Commercial

Commercial

Real Estate

Real Estate

& Industrial

Real Estate

Municipal

1st Lien

Jr Lien

Consumer

Unallocated

Total

ALL beginning balance

$ 842,547

$ 3,854,153

$ 82,211

$ 1,735,304

$ 234,896

$ 60,461

$ 398,913

$ 7,208,485

Charge-offs

(18,847 )

0

0

0

0

(37,373 )

0

(56,220 )
Recoveries

4,761

7,000

0

2,326

960

16,947

0

31,994

Provision (credit)

70,702

71,693

(24,919 )

(82,587 )

(34,587 )

21,189

513,507

534,998

ALL ending balance

$ 899,163

$ 3,932,846

$ 57,292

$ 1,655,043

$ 201,269

$ 61,224

$ 912,420

$ 7,719,257

ALL evaluated for impairment

Individually

$ 0

$ 0

$ 0

$ 98,503

$ 233

$ 0

$ 0

$ 98,736

Collectively

899,163

3,932,846

57,292

1,556,540

201,036

61,224

912,420

7,620,521

Total

$ 899,163

$ 3,932,846

$ 57,292

$ 1,655,043

$ 201,269

$ 61,224

$ 912,420

$ 7,719,257

Loans evaluated for impairment

Individually

$ 382,207

$ 1,880,249

$ 0

$ 4,153,955

$ 139,919

$ 0

$ 6,556,330

Collectively

172,421,951

283,066,212

35,807,161

165,959,996

36,215,648

4,173,978

697,644,946

Total

$ 172,804,158

$ 284,946,461

$ 35,807,161

$ 170,113,951

$ 36,355,567

$ 4,173,978

$ 704,201,276

~~As of or for the year ended December 31, 2020~~

Residential

Residential

Commercial

Commercial

Real Estate

Real Estate

& Industrial

Real Estate

Municipal

1st Lien

Jr Lien

Consumer

Unallocated

Total

ALL beginning balance

$ 836,766

$ 3,181,646

$ 0

$ 1,388,564

$ 289,684

$ 51,793

$ 178,038

$ 5,926,491

Charge-offs

(39,148 )

(34,200 )

0

(203,623 )

(28,673 )

(74,327 )

0

(379,971 )
Recoveries

1,087

20,000

0

12,856

5,809

33,213

0

72,965

Provision (credit)

43,842

686,707

82,211

537,507

(31,924 )

49,782

220,875

1,589,000

ALL ending balance

$ 842,547

$ 3,854,153

$ 82,211

$ 1,735,304

$ 234,896

$ 60,461

$ 398,913

$ 7,208,485

ALL evaluated for impairment

Individually

$ 0

$ 0

$ 0

$ 108,474

$ 307

$ 0

$ 0

$ 108,781

Collectively

842,547

3,854,153

82,211

1,626,830

234,589

60,461

398,913

7,099,704

Total

$ 842,547

$ 3,854,153

$ 82,211

$ 1,735,304

$ 234,896

$ 60,461

$ 398,913

$ 7,208,485

Loans evaluated for impairment

Individually

$ 414,266

$ 1,943,723

$ 0

$ 4,657,050

$ 135,053

$ 0

$ 7,150,092

Collectively

160,653,235

278,600,827

54,807,367

165,850,213

38,012,606

4,280,990

702,205,238

Total

$ 161,067,501

$ 280,544,550

$ 54,807,367

$ 170,507,263

$ 38,147,659

$ 4,280,990

$ 709,355,330

~~As of or for the three months ended June 30, 2020~~

	As of December 31, 2021
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment(1)		Balance		Allowance		Investment(1)(2)		Recognized(2)

Related allowance recorded
Residential real estate
1st lien	$	702,586	$	716,118	$	79,978	$	858,124	$	60,769
Jr lien		0		0		0		3,452		243
Total with related allowance		702,586		716,118		79,978		861,576		61,012

No related allowance recorded
Commercial & industrial		93,362		115,414				290,181		204
Commercial real estate		4,554,074		5,108,557				2,747,193		120,996
Residential real estate
1st lien		3,050,647		4,076,352				3,331,971		205,514
Jr lien		88,570		132,802				124,803		186
Total with no related allowance		7,786,653		9,433,125				6,494,148		326,900

Total impaired loans	$	8,489,239	$	10,149,243	$	79,978	$	7,355,724	$	387,912

~~Table of Contents~~

~~As of or for the six months ended June 30, 2020~~

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

As of June 30, 2021

Recorded
Investment(1)

Unpaid
Principal
Balance

Related
Allowance

Average
Recorded
Investment(1)(2)

Average
Recorded
Investment(1)(3)

Interest
Income
Recognized(3)

Related allowance recorded

Residential real estate

1st lien

$ 819,752

$ 826,472

$ 98,503

$ 967,850

$ 945,427

$ 32,518

Jr lien

4,181

4,174

233

4,323

4,475

228

Total with related allowance

823,933

830,646

98,736

972,173

949,902

32,746

No related allowance recorded

Commercial & industrial

382,207

452,976

401,591

405,816

204

Commercial real estate

1,880,489

2,369,692

1,763,205

1,823,474

4,299

Residential real estate

1st lien

3,371,491

4,290,817

3,342,168

3,491,101

111,079

Jr lien

135,745

179,768

137,307

134,964

0

Total with no related allowance

5,769,932

7,293,253

5,644,271

5,855,355

115,582

Total impaired loans

$ 6,593,865

$ 8,123,899

$ 98,736

$ 6,616,444

$ 6,805,257

$ 148,328

~~_____________________~~

	~~(1)~~	~~Recorded investment in impaired loans as of June 30, 2021 includes accrued interest receivable and deferred net loan costs of $37,535.~~
	~~(2)~~	~~For the three months ended June 30, 2021.~~
	~~(3)~~	~~For the six months ended June 30, 2021.~~

~~Table of Contents~~

As of December 31, 2020

Unpaid

Average

Interest

Recorded

Principal

Related

Recorded

Income

Investment(1)

Balance

Allowance

Investment(1)(2)

Recognized(2)

Related allowance recorded

Residential real estate

1st lien

$ 900,581

$ 950,063

$ 108,474

$ 889,262

$ 72,713

Jr lien

4,777

4,775

307

5,416

541

Total with related allowance

905,358

954,838

108,781

894,678

73,254

No related allowance recorded

Commercial & industrial

414,266

471,405

397,136

6,396

Commercial real estate

1,944,013

2,394,284

1,746,430

14,139

Residential real estate

1st lien

3,788,965

4,607,848

3,878,829

230,838

Jr lien

130,279

169,720

163,750

4,524

Total with no related allowance

6,277,523

7,643,257

6,186,145

255,897

Total impaired loans

$ 7,182,881

$ 8,598,095

$ 108,781

$ 7,080,823

$ 329,151

	(1)	Recorded investment in impaired loans as of December 31, ~~2020~~2021 includes accrued interest receivable and deferred net loan costs of ~~$32,789.~~$33,077.
	(2)	For the year ended December 31, ~~2020.~~2021.

As of June 30, 2020

Recorded
Investment(1)

Unpaid
Principal
Balance

Related
Allowance

Average
Recorded
Investment(1)(2)

Average
Recorded
Investment(1)(3)

Interest
Income
Recognized(3)

Related allowance recorded

Residential real estate

1st lien

$ 864,493

$ 903,869

$ 119,841

$ 916,476

$ 903,797

$ 39,735

Jr lien

5,414

5,411

445

5,550

5,740

282

Total with related allowance

869,907

909,280

120,286

922,026

909,537

40,017

No related allowance recorded

Commercial & industrial

383,737

417,734

387,962

398,952

213

Commercial real estate

1,614,105

1,983,282

1,632,676

1,655,041

7,339

Residential real estate

1st lien

4,231,160

5,011,883

4,032,707

3,893,458

117,120

Jr lien

86,831

120,377

197,834

181,880

0

Total with no related allowance

6,315,833

7,533,276

6,251,179

6,129,331

124,672

Total impaired loans

$ 7,185,740

$ 8,442,556

$ 120,286

$ 7,173,205

$ 7,038,868

$ 164,689

~~__________________~~

	As of March 31, 2021
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment(1)		Balance		Allowance		Investment(1)(2)		Recognized(2)

Related allowance recorded
Residential real estate
1st lien	$	1,159,129	$	1,196,306	$	119,306	$	1,029,855	$	18,650
Jr lien		4,466		4,463		255		4,622		117
Total with related allowance		1,163,595		1,200,769		119,561		1,034,477		18,767

No related allowance recorded
Commercial & industrial		420,975		485,396				417,620		204
Commercial real estate		1,645,921		2,103,732				1,794,967		2,044
Residential real estate
1st lien		3,269,662		4,132,986				3,529,314		46,958
Jr lien		138,870		180,547				134,574		0
Total with no related allowance		5,475,428		6,902,661				5,876,475		49,206

Total impaired loans	$	6,639,023	$	8,103,430	$	119,561	$	6,910,952	$	67,973

	(1)	Recorded investment in impaired loans as of ~~June 30, 2020~~March 31, 2021 includes accrued interest receivable and deferred net loan costs of ~~$37,485.~~$34,764.
	(2)	For the three months ended ~~June 30, 2020.~~
	~~(3)~~	~~For the six months ended June 30, 2020.~~March 31, 2021.

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

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Credit Quality Grouping

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

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

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

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

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

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

2220

Table of Contents

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

As of ~~June 30, 2021~~March 31, 2022

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

Group A	$	168,967,061	$	268,988,333	$	35,807,161	$	168,019,516	$	36,076,944	$	4,173,978	$	682,032,993	$	118,322,106	$	299,401,050	$	48,660,440	$	177,592,027	$	32,631,970	$	3,170,568	$	679,778,161
Group B		749,301		8,365,384		0		0		0		0		9,114,685		579,664		2,422,197		0		0		0		0		3,001,861
Group C		3,087,796		7,592,744		0		2,094,435		278,623		0		13,053,598		2,571,387		6,488,487		0		4,018,267		435,019		0		13,513,160
Total	$	172,804,158	$	284,946,461	$	35,807,161	$	170,113,951	$	36,355,567	$	4,173,978	$	704,201,276	$	121,473,157	$	308,311,734	$	48,660,440	$	181,610,294	$	33,066,989	$	3,170,568	$	696,293,182

As of December 31, ~~2020~~2021

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

Group A	$	156,748,590	$	261,932,833	$	54,807,367	$	167,478,918	$	37,850,056	$	4,280,990	$	683,098,754	$	117,607,773	$	285,732,365	$	47,955,231	$	177,456,149	$	34,166,076	$	4,464,692	$	667,382,286
Group B		998,641		12,784,078		0		0		0		0		13,782,719		693,084		6,550,335		0		0		0		0		7,243,419
Group C		3,320,270		5,827,639		0		3,028,345		297,603		0		12,473,857		2,632,613		8,676,231		0		3,860,196		193,788		0		15,362,828
Total	$	161,067,501	$	280,544,550	$	54,807,367	$	170,507,263	$	38,147,659	$	4,280,990	$	709,355,330	$	120,933,470	$	300,958,931	$	47,955,231	$	181,316,345	$	34,359,864	$	4,464,692	$	689,988,533

Modifications of Loans and TDRs

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

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

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

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

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

The Company has adopted the TDR guidance issued by the federal banking agencies in March and April 2020 regarding the treatment of certain short-term loan modifications relating to the COVID-19 pandemic (See Note 3)2). Under this guidance, qualifying concessions and modifications are not considered TDRs. ~~As of June 30, 2021,~~In total, throughout the pandemic, the Company ~~had~~ granted short term loan concessions and/or modifications within the terms of this guidance to ~~525 borrowers,~~595 borrowers. Of those loans, 351 remained on the books with ~~respect to loans having~~ an aggregate principal balance of ~~$111.0 million. These loans may bear a higher risk~~$103.2 million as of ~~default in future periods.~~March 31, 2022.

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Table of Contents

~~There were no new TDRs during the three months ended June 30, 2021.~~ New TDRs, by portfolio segment, during the periods presented were as follows:

Six months ended June 30, 2021

Pre-

Post-

Modification

Modification

Outstanding

Outstanding

Number of

Recorded

Recorded

Contracts

Investment

Investment

Commercial & industrial

1

$ 41,751

$ 41,751

Three months ended March 31, 2022

Pre-

Post-

Modification

Outstanding

Number of

Recorded

Contracts

Investment

Residential real estate - 1st lien

292,592

Year ended December 31, 2020

Pre-

Post-

Modification

Modification

Outstanding

Outstanding

Number of

Recorded

Recorded

Contracts

Investment

Investment

Residential real estate - 1st lien

6

$ 591,826

$ 687,751

	Year ended December 31, 2021
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment

Commercial & industrial		1	$	41,751	$	41,751
Commercial real estate		2		3,153,402		3,153,402
Residential real estate – 1st lien		1		67,007		67,007
		4	$	3,262,160	$	3,262,160

Three months ended June 30, 2020

Six months ended June 30, 2020

Pre-

Post-

Pre-

Post-

Modification

Modification

Modification

Modification

Outstanding

Outstanding

Outstanding

Outstanding

Number of

Recorded

Recorded

Number of

Recorded

Recorded

Contracts

Investment

Investment

Contracts

Investment

Investment

Residential real estate

- 1st lien

3

$ 477,189

$ 545,515

6

$ 645,298

$ 741,993

Three months ended March 31, 2021

Pre-

Post-

Modification

Outstanding

Number of

Recorded

Contracts

Investment

Commercial & industrial

41,751

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

For the twelve months ended ~~June 30, 2021~~March 31, 2022

Number of

Recorded

Contracts

Investment

Commercial & industrial

1

$ 39,876

	Number of		Recorded
	Contracts		Investment

Commercial real estate		2	$	2,422,965

For the twelve months ended December 31, ~~2020~~2021

Number of

Recorded

Contracts

Investment

Residential real estate - 1st lien

1

$ 165,168

~~For the twelve months ended June 30, 2020~~

Number of

Recorded

Contracts

Investment

Commercial & industrial

4

$ 267,450

Residential real estate - 1st lien

3

289,790

Residential real estate - Jr lien

1

51,733

8

$ 608,973

	Number of		Recorded
	Contracts		Investment

Commercial & industrial		1	$	38,001
Commercial real estate		2		3,081,810
		3	$	3,119,811

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Table of Contents

For the twelve months ended March 31, 2021

	Number of		Recorded
	Contracts		Investment

Commercial & industrial		1	$	41,001
Residential real estate - 1st lien		1		162,821
		2	$	203,822

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

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

June 30,

December 31,

2021

2020

Specific Allocation

$ 98,736

$ 108,781

	March 31,		December 31,
	2022		2021

Specific Allocation	$	115,614	$	79,978

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

Note 7.6. 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.

As of December 31, ~~2020,~~2021, the most recent evaluation, management concluded that no impairment existed. Management evaluates its goodwill intangible for impairment at least annually, or more frequently as circumstances warrant, including, as applicable, circumstances arising out of the COVID-19 pandemic, including the disruptions to the economy and increased volatility in the financial markets and related impacts on the Company’s business.

Note 8.7. Fair Value

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

Level 1.1	Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasury and other U.S. Government debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2.2	Observable inputs other than Level 1 prices such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes MSRs, collateral-dependent impaired loans and OREO.

Level 3.3	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.

2523

Table of Contents

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

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

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

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

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis and reflected in the consolidated balance sheets at the dates presented, segregated by fair value hierarchy, are summarized below. There were no Level 3 assets or liabilities measured on a recurring basis as of the balance sheet dates presented, nor were there any transfers of assets between Levels during either ~~2021~~2022 or ~~2020.~~2021.

	June 30,		December 31,		March 31,		December 31,
Assets: (market approach)	2021		2020		2022		2021

Level 1
U.S. Government securities	$	5,575,682	$	0	$	37,629,399	$	32,041,041

Level 2
U.S. GSE debt securities	$	10,006,401	$	8,169,831	$	11,236,384	$	11,828,498
Taxable Municipal securities						273,677		298,733
Tax-Exempt Municipal securities						4,307,948		831,379
Agency MBS		65,919,961		41,378,349		122,940,118		127,132,521
ABS and OAS		2,420,563		2,669,996		1,828,662		2,214,024
CMO		961,518		0		1,306,628		1,420,458
Other investments		6,672,010		8,487,002		6,232,750		6,575,805
Total Level 2 Assets	$	85,980,453	$	60,705,178
Level 2 Total					$	148,126,167	$	150,301,418

Total Assets	$	91,556,135	$	60,705,178
Grand Total					$	185,755,566	$	182,342,459

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

The following table includes assets measured at fair value on a non-recurring basis that have had a fair value adjustment since their initial recognition. Impaired loans measured at fair value only include impaired loans with a partial write-down or with a related specific ALL and are presented net of the specific allowances as disclosed in Note 6.5. Assets measured at fair value on a non-recurring basis and reflected in the consolidated balance sheets at the dates presented, segregated by fair value hierarchy level, are summarized below. There were no Level 1 or Level 3 assets or liabilities measured on a non-recurring basis as of the balance sheet dates presented, nor were there any transfers of assets between levels during either ~~2021~~2022 or ~~2020.~~2021.

	June 30,		December 31,		March 31,		December 31,
Level 2	2021		2020		2022		2021
Assets: (market approach)
Impaired loans, net of related allowance	$	319,542	$	323,645	$	1,792,892	$	177,523
Loans held-for-sale		793,544		130,400		246,000		339,000
MSRs (1)		909,330		922,146		900,094		897,720

(1)

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

~~Table of Contents~~

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.

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

June 30, 2021			Fair		Fair		Fair		Fair
March 31, 2022													Fair		Fair		Fair		Fair
	Carrying		Value		Value		Value		Value		Carrying		Value		Value		Value		Value
	Amount		Level 1		Level 2		Level 3		Total		Amount		Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)										(Dollars in Thousands)
Financial assets:
Cash and cash equivalents	$	96,307	$	96,307	$	0	$	0	$	96,307	$	84,453	$	84,453	$	0	$	0	$	84,453
Debt securities AFS		91,556		5,576		85,980		0		91,556		185,756		37,630		148,126		0		185,756
Restricted equity securities		1,447		0		1,447		0		1,447		1,391		0		1,391		0		1,391
Loans and loans held-for-sale, net of ALL
Commercial & industrial		168,496		0		0		172,264		172,264		120,196		0		96		120,247		120,343
Commercial real estate		280,599		0		208		281,563		281,771		303,589		0		1,571		303,512		305,083
Municipal		35,703		0		0		37,137		37,137		48,566		0		0		48,136		48,136
Residential real estate - 1st lien		169,463		0		112		170,469		170,581		180,554		0		126		176,286		176,412
Residential real estate - Jr lien		36,108		0		0		36,177		36,177		32,884		0		0		32,865		32,865
Consumer		4,107		0		0		4,133		4,133		3,134		0		0		3,175		3,175
MSRs (1)		909		0		940		0		940		900		0		995		0		995
Accrued interest receivable		3,041		0		3,041		0		3,041		2,719		0		2,719		0		2,719

Financial liabilities:
Deposits
Other deposits		799,444		0		800,620		0		800,620		877,051		0		875,756		0		875,756
Brokered deposits		449		0		440		0		440		249		0		235		0		235
Long-term borrowings		2,300		0		2,197		0		2,197		1,300		0		1,112		0		1,112
Repurchase agreements		23,517		0		23,517		0		23,517		28,744		0		28,744		0		28,744
Operating lease obligations		962		0		962		0		962		812		0		812		0		812
Finance lease obligations		2,379		0		2,379		0		2,379		3,805		0		3,805		0		3,805
Subordinated debentures		12,887		0		12,872		0		12,872		12,887		0		12,826		0		12,826
Accrued interest payable		61		0		61		0		61		58		0		58		0		58

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

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December 31, 2020			Fair		Fair		Fair		Fair
December 31, 2021													Fair		Fair		Fair		Fair
	Carrying		Value		Value		Value		Value		Carrying		Value		Value		Value		Value
	Amount		Level 1		Level 2		Level 3		Total		Amount		Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)										(Dollars in Thousands)
Financial assets:
Cash and cash equivalents	$	115,050	$	115,050	$	0	$	0	$	115,050	$	110,359	$	110,359	$	0	$	0	$	110,359
Debt securities AFS		60,705		0		60,705		0		60,705		182,342		32,041		150,301		0		182,342
Restricted equity securities		1,447		0		1,447		0		1,447		1,434		0		1,434		0		1,434
Loans and loans held-for-sale, net of ALL
Commercial & industrial		158,601		0		0		160,371		160,371		119,382		0		0		120,146		120,146
Commercial real estate		276,476		0		208		279,281		279,489		296,528		0		29		297,339		297,368
Municipal		54,694		0		0		55,601		55,601		47,841		0		0		49,419		49,419
Residential real estate - 1st lien		169,201		0		116		170,385		170,501		180,271		0		149		180,302		180,451
Residential real estate - Jr lien		37,892		0		0		37,991		37,991		34,151		0		0		34,189		34,189
Consumer		4,218		0		0		4,238		4,238		4,406		0		0		4,436		4,436
MSRs (1)		922		0		922		0		922		898		0		995		0		995
Accrued interest receivable		2,988		0		2,988		0		2,988		2,401		0		2,401		0		2,401

Financial liabilities:
Deposits
Other deposits		778,085		0		779,824		0		779,824		879,151		0		879,545		0		879,545
Brokered deposits		4,206		0		4,208		0		4,208		249		0		246		0		246
Long-term borrowings		2,800		0		2,724		0		2,724		1,300		0		1,179		0		1,179
Repurchase agreements		38,727		0		38,727		0		38,727		32,610		0		32,610		0		32,610
Operating lease obligations		1,060		0		1,060		0		1,060		864		0		864		0		864
Finance lease obligations		38		0		38		0		38		3,858		0		3,858		0		3,858
Subordinated debentures		12,887		0		12,876		0		12,876		12,887		0		12,868		0		12,868
Accrued interest payable		86		0		86		0		86		59		0		59		0		59

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

Note 9.8. Loan Servicing

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

	Six Months Ended			Year Ended			Three Months Ended			Year Ended
	June 30, 2021			December 31, 2020			March 31, 2022			December 31, 2021

Balance at beginning of year	$	922,146		$	939,577		$	897,720		$	922,146
MSRs capitalized		51,897			292,654			45,304			147,328
MSRs amortized		(118,363	)		(256,435	)		(42,930	)		(225,404	)
Change in valuation allowance		53,650			(53,650	)		0			53,650
Balance at end of period	$	909,330		$	922,146		$	900,094		$	897,720

Note ~~10.~~9. Legal Proceedings

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

Note ~~11.~~10. Subsequent Events

The Company has evaluated events and transactions through the date that the financial statements were issued for potential recognition or disclosure in these financial statements, as required by GAAP. On ~~June 10, 2021,~~March 16, 2022, the Company’s Board declared a cash dividend of ~~$0.22~~$0.23 per common share, payable ~~August~~May 1, ~~2021~~2022 to shareholders of record as of ~~July~~April 15, ~~2021.~~2022. This dividend has been recorded in the Company’s consolidated financial statements as of the declaration date, including shares issuable under the DRIP.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Period Ended ~~June 30, 2021~~March 31, 2022

The following discussion analyzes the consolidated financial condition of Community Bancorp. and its wholly-owned subsidiary, Community National Bank, as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, and its consolidated results of operations for the ~~three-~~three-month interim period and ~~six-month interim periods~~one year period presented. The Company is considered a “smaller reporting company” and a “non-accelerated filer” under the disclosure rules of the SEC. Accordingly, the Company has elected to provide its audited statements of income, comprehensive income, cash flows and changes in shareholders’ equity for a two year, rather than a three year, period and intends to provide smaller reporting company scaled disclosures where management deems it appropriate. ~~Additionally, beginning with the 2020 Annual Report on Form 10-K, the Company is considered a non-accelerated filer under the amended disclosure rules of the SEC.~~

The following discussion should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in its ~~2020~~2021 Annual Report on Form 10-K filed with the SEC. Please refer to Note 1 in the accompanying audited consolidated financial statements for a listing of acronyms and defined terms used throughout the following discussion.

FORWARD-LOOKING STATEMENTS

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

Forward-looking statements are not guarantees of future performance. They necessarily involve risks, uncertainties and assumptions. Examples of forward looking statements included in this discussion include, but are not limited to, statements regarding the potential ~~continued~~ effects of the COVID-19 pandemic on our business, financial condition, results of operations and prospects; the estimated contingent liability related to assumptions made within the asset/liability management process; management’s expectations as to the future interest rate environment and the Company’s related liquidity level; credit risk expectations relating to the Company’s loan ~~portfolio and its participation in the FHLBB MPF program;~~portfolio; 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 USU.S. GAAP pursuant to the CECL model;
	·	changes in consumer and business spending, borrowing and savings habits;
	·	reductions in deposit levels, which necessitate increased borrowings to fund loans and investments;
	·	the geographic concentration of the Company’s loan portfolio and deposit base;
	·	losses due to the fraudulent or negligent conduct of third parties, including the Company’s service providers, customers and employees;

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	·	cybersecurity risks could adversely affect the Company’s business, financial performance or reputation and could result in financial liability for losses incurred by customers or others due to data breaches or other compromise of the Company’s information security systems;
	·	higher-than-expected costs are incurred relating to information technology or difficulties arise in implementing technological enhancements;
	·	management’s risk management measures may not be completely effective;
	·	changes in the United States monetary and fiscal policies, including the interest rate policies of the FRB and its regulation of the money supply;
	·	adverse changes in the credit rating of U.S. government debt;
	·	the planned phase out ~~the~~of three month LIBOR by ~~the end of 2021,~~June 30, 2023, which could adversely affect the Company’s interest costs in future periods on its $12,887,000 in principal amount of Junior Subordinated Debentures due December 12, 2037, which currently bear interest at a variable rate, adjusted quarterly, equal to 3-month LIBOR, plus 2.85%;
	·	continuing the ~~effect~~effects of COVID-19 and emerging variants of the virus on our Company, the communities where we have branches and loan production offices, the State of Vermont and the national and global economies and overall stability of the financial markets;
	·	the continuing effects of government and regulatory responses to the COVID-19 ~~pandemic and emerging threats from variants of the virus;~~ pandemic;
	·	operational and internal system failures due to changes in normal business practices, including remote working for Company staff;
	·	increased cybercrime and payment system risk due to increase usage by customers of online and other remote banking channels;
	·	~~rising unemployment rates in our markets due to~~ the ~~COVID-19 related business shutdowns, delays~~impact of inflation on the Company’s customers and ~~setbacks in scheduled re-openings~~on its financial results and ~~other economic disruptions, which reduce our borrowers’ ability to repay their loans~~performance; and ~~reduce customer demand for our products and services; and~~
	·	the ~~short-term and long-term effects of government interventions in the U.S. economy and financial system in response~~ongoing challenges to the COVID-19 pandemic and emerging variants of the virus, including the effects of recent legislative, tax, accounting and regulatory actions and reforms, such as passage of the CARES Act, the actions of the Federal Reserve affecting monetary policy, and the temporary moratorium on foreclosures imposed by the State of Vermont in responsefind qualified workers to ~~the COVID-19 emergency.~~ maintain a stable workforce.

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, 2021~~March 31, 2022 were ~~$925,498,638~~$1,005,190,870 compared to ~~$918,233,284~~$1,019,105,799 at December 31, ~~2020, an increase~~2021, a decrease of ~~0.8%~~1.4%. ~~Changes~~Significant changes in the asset base ~~included~~were a decrease of $25.9 million, or 23.5%, in cash and cash equivalents, which was partially offset by an increase in net loans of $6.4 million, or 0.9%, and an increase in the available for sale investment portfolio of $3.4 million. The decrease in cash also reflects deposit runoff, primarily in business and municipal accounts, in the first quarter. The increase in the loan portfolio was primarily attributable to an increase of ~~$30,850,957, or 50.8%,~~$7.8 million in ~~securities AFS,~~commercial & industrial loans and $6.1 million in CRE loans, which was partially offset by a $7.0 million decrease in ~~cash and due from banks~~PPP loan balances.

Total deposits on March 31, 2022 were $877,300,445 compared to $879,399,953 on December 31, 2021, a decrease of ~~$18,743,386,~~$2.1 million, or ~~16.3%~~0.2%, reflecting the combined effect of decreases in core deposits (demand deposit accounts, non-interest bearing) of $5.8 million, or 2.8%, and a decrease in ~~net loans~~interest-bearing transaction accounts of ~~$7,268,217,~~$7.1 million, or ~~1.0%. The growth~~2.7%, partially offset by an increase in ~~the securities AFS portfolio was due to purchases~~money market funds totaling ~~$41.6~~$1.0 million, ~~during the first six months~~or 0.8%, and an increase in savings accounts of 2021, which was funded in part by the decrease in cash and due from banks. The decrease in loans was primarily attributable to a seasonal decrease in the municipal loan portfolio related to the June 30 municipal fiscal year cycle. Approximately $16.5$9.6 million, ~~matured on June 30, 2021 and were replaced with approximately $18.0 million during the first two weeks of July, 2021.~~or 5.7%.

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Total deposits on June 30, 2021 were $799,893,395 compared to $782,290,840 on December 31, 2020, an increase of $17.6 million, or 2.3%, reflecting the combined effect of increases in core deposits (demand deposit accounts, non-interest bearing) of $18.7 million, or 10.0%, and savings accounts of $19.2 million, or 15.4%, and partially offset by decreases of $10.8 million, or 4.4%, in interest-bearing transaction accounts due to municipal deposits that run off related to the maturing loans mentioned above. A decrease of $4.2 million, or 3.6%, is noted in money market funds, as well as a decrease of $5.3 million, or 4.7%, in time deposits. The increase in core deposits was driven in part by PPP loan funds that were deposited in business checking accounts as well as increases in customer checking accounts likely from stimulus payments, unemployment benefits and deferral or forbearance agreements on residential mortgage and student loans.

Consolidated net income during the second quarter of 2021 increased $204,095, or 7.2%, while year to date consolidated net income increased $1.4 million, or 29.1%, from $4.7 million for the first six months of 2020 to $6.1 million for the same period in 2021. PPP loan processing fees from the SBA and a significant decrease in interest expense were the main drivers in the increase in net income for the three- and six-month comparison periods. Please refer to the Non-interest Income and Non-interest Expense sections for more information on these and other changes for the three- and six-month periods ended June 30, 2021.

~~Total interest income increased $85,699,~~first three months of 2022 decreased $620,159, or ~~1.1%, for the second quarter of 2021, compared to the same quarter in 2020, and increased $930,457, or 5.8%, year to date for June 30, 2021,~~20.5% compared to the same period in ~~2020. An increase~~2021. A $927,248 decrease in ~~interest earned on~~ the ~~investment portfolio, and the recognition~~amortization of PPP loan processing fees from the SBA was partially offset by an increase of ~~$835,999~~$407,954 in investment income from the Company’s debt securities portfolio and adjustments to interest income totaling $177,000, which is primarily from loans coming out of non-accrual status. Also contributing to the offset was a decrease of $54,257 in interest expense on savings and money market deposits, and a decrease of $103,849 in interest expense from time deposits. These changes and other significant changes are discussed in the appropriate income sections of this MD&A.

Total interest income decreased $365,364, or 4.2%, year over year, due to the changes discussed in the previous paragraph related to PPP loan processing fees and investment and loan income. The investment portfolio has increased considerably year over year accounting for the ~~second quarter and $2.1~~increase in investment income. The amortization of the SBA PPP fees was $295,769 for the first three months of 2022, compared to $1.2 million for the ~~first six months of 2021 contributed to the increase~~same period in ~~both periods.~~2021. Those processing fees represented ~~91.0%~~73.2% and ~~93.4%~~92.9%, respectively, of the total of fees on loans of ~~$918,304~~$404,326 for the ~~second quarter~~first three months of ~~2021,~~2022, and ~~$2.2~~$1.3 million for the ~~six~~first three months ~~ended June 30, 2021, compared to total fees on loans~~ of ~~$584,077 and $609,630, respectively, for the same periods in 2020. The opportunity for an increase in interest income from the loan growth was curbed by the mandated 1% interest rate on SBA PPP loans.~~2021.

~~Significantly impacting earnings during the comparison periods were decreases in total~~Total interest expense ~~of $440,942,~~decreased $161,106, or ~~36.5%, for the second quarter of 2021 compared to 2020, and $1.1 million, or 39.6%~~18.9%, for the first ~~six~~three months of ~~2021,~~2022 compared to the same period in ~~2020, despite a 14.4% increase~~2021. A decrease in ~~total~~time deposits year over ~~year. The 150 basis point~~year is a contributing factor to the decrease in ~~short-term rates initiated by the FRB in March, 2020 in response to the COVID-19 pandemic resulted in a decrease in most components of~~ interest expense, as ~~rates paid on deposit accounts were reduced to reflect~~well as the ~~changes in market rates.~~prolonged low interest rate environment that prevailed throughout 2021 and most of the first quarter of 2022. 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~~the actions of the FRB’s FOMC in regulating interest rates, and changes in the yield curve could have on net interest income.

The provision for loan losses for the ~~second~~first quarter of 2022 was $862,500 compared to $267,497 for the same quarter of 2021, ~~was $267,501 compared to $307,499 for the second quarter of 2020, and $534,998 for the first six months of 2021, compared to $684,002 for the same period in 2020,~~ resulting in ~~decreases~~an increase of ~~13.0% and 21.8%~~$595,003, or 222.4%, ~~respectively,~~ between periods. ~~These decreases~~This increase to the provision ~~in both periods were~~was driven primarily ~~due to higher than anticipated~~by a write-down on a non-performing CRE loan ~~charge off activity as well as loan growth~~totaling $667,474 during the first six months of 2020 while net charge off activity in 2021 has been negligible and much of the loan growth for the quarter was attributable to PPP loans, which bear a 100% SBA guarantee, subject to borrower eligibility requirements.March 2022. Please refer to the ALL and provisions discussion in the Credit Risk section for more ~~information on these decreases.~~

During 2020 and the first six months of 2021, the Company navigated through the new challenges presented by the COVID-19 pandemic, including the granting of loan payment deferrals to customers impacted by the pandemic. As of June 30, 2021, 525 business and retail customer portfolio loans, with unpaid principal balances of $111.0 million, remained modified to provide temporary debt relief to customers impacted by the COVID-19 pandemic. These short term concessions were made in accordance with guidance from the federal banking regulators, confirmed by them with the FASB, and are therefore not considered to be impaired under GAAP (see Note 6 to the accompanying unaudited interim consolidated financial statements for additional information).

As of June 30, 2021, the Company had originated 1,843 PPP loans totaling $163.6 million, and expects to earn approximately $7.0 million in loan fees over the life of the related loans, of which $4.2 million had been recognized as of June 30, 2021. These loans are eligible to be forgiven to the extent that the funds are used for payroll costs and other permissible expenses. Borrowers can apply for forgiveness after a specified covered period. PPP loan forgiveness applications are processed by the lender, with forgiveness requests for loans in excess of $2.0 million reviewed by the SBA. Neither the government nor lenders are permitted to charge the borrowers any fees on PPP loans. These loans carry a fixed rate of 1.00% and are 100% guaranteed by the SBA, subject to borrower eligibility requirements. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. As of June 30, 2021, the Company had reviewed and submitted 939 PPP loans with total balances of approximately $102.3 million to the SBA for forgiveness consideration. Of these totals, 875 loans totaling $95.9 million had been forgiven as of June 30, 2021. Beginning in the second quarter of 2020, participation in the PPP has had a significant impact on our asset mix, liquidity position and net interest margin.

~~Table of Contents~~

We maintain access to multiple sources of liquidity, including access to the PPPLF of the FRB, which was established by the FRB to facilitate funding of PPP lending activity by banks and other eligible lenders. Under the PPPLF, lenders may pledge pools of PPP loans having the same maturity date, with the maturity date of the lender’s advance matching the maturity date of the pool. There are no fees for PPPLF advances, which bear an annual rate of 35 bps. As of June 30, 2021, the Company had no PPPLF advances. FRBB announced on June 25, 2021 that it was extending, for a final time, its PPPLF by an additional month to July 30, 2021. The Company did not exercise its right to use this facility before its expiration.information.

Equity capital ~~grew~~decreased to ~~$80.7~~$77.4 million, with a book value per share of ~~$14.81~~$14.08 as of ~~June 30, 2021,~~March 31, 2022, compared to equity capital of ~~$77.3~~$84.8 million and a book value of ~~$14.25~~$15.48 as of December 31, ~~2020.~~ 2021. This decrease in equity is directly related to the increase of unrealized losses in the investment portfolio, reflecting rising bond rates, which resulted in an increase of $8,744,637, net of tax, in the accumulated other comprehensive loss in the shareholders’ equity portion of the balance sheet. This position is considered temporary and does not impact the Company’s regulatory capital ratios.

On ~~June 10, 2021,~~March 16, 2022, the Company’s Board of Directors declared a quarterly cash dividend of ~~$0.22~~$0.23 per common share, payable on ~~August~~May 1, ~~2021~~2022 to shareholders of record on ~~July~~April 15, ~~2021, representing an increase of $0.03 per share over the quarterly dividend paid in recent quarters.~~2022.

As of ~~June 30, 2021,~~March 31, 2022, all of the Company’s capital ratios, and those of our subsidiary Bank, were in excess of ~~all~~applicable regulatory requirements. While we believe that we have sufficient capital to withstand an economic downturn from ~~a resurgence of COVID-19,~~any headwinds related to inflation or recessionary periods, should one occur, our equity capital and regulatory capital ratios could be adversely impacted, byincluding as a result of credit losses and other adverse ~~economic and operational~~ impacts of the ~~pandemic.~~pandemic or government monetary policy.

CRITICAL ACCOUNTING POLICIES

The Company’s ~~significant~~consolidated financial statements are prepared according to U.S. GAAP. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities in the consolidated financial statements and related notes. The SEC has defined a company’s critical accounting policies as those that are ~~fundamental~~most important to ~~understanding~~the portrayal of the Company’s financial condition and results of operations, and ~~financial condition because they~~which require ~~management~~the Company to ~~use estimates~~make its most difficult and ~~assumptions that may affect the value~~subjective judgments, often as a result of the ~~Company’s assets or liabilities and financial results, sometimes in material respects. These policies are considered by management~~need to ~~be critical because they require subjective and complex judgments about~~make estimates of matters that are inherently ~~uncertain~~uncertain. Because of the significance of these estimates and ~~because it~~assumptions, there is ~~likely~~a high likelihood that materially different amounts would be reported for the Company under different conditions or using different ~~assumptions. These~~assumptions or estimates. Management evaluates on an ongoing basis its judgment as to which policies ~~and others deemed less critical,~~ are ~~described in the Company’s Accounting Policy, which is updated yearly for review and approval by the Company’s Audit Committee, and then presented~~considered to ~~the Company’s Board for final review and approval.~~be critical.

The Company’s critical accounting policies govern:

	·	the ALL;
	·	OREO;
	·	OTTI of debt securities;
	·	valuation of residential MSRs; and
	·	the carrying value of goodwill.

These policies are described in the Company’s ~~2020~~2021 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~~three months of ~~2021~~2022 in the Company’s critical accounting policies.

Table of Contents

RESULTS OF OPERATIONS

Net income for the ~~second quarter~~first three months of ~~2021~~2022 was ~~$3,046,406~~$2,405,542 or ~~$0.57~~$0.44 per common share, compared to ~~$2,842,311 for the same quarter of 2020. Net income for the first six months of 2021 was $6,072,107~~$3,025,701 or ~~$1.13 per common share, compared to $4,703,550 or $0.89~~$0.57 per common share for the same period ~~in 2020.~~of 2021. Core earnings (NII) for the ~~second quarter~~first three months of ~~2021 was $7.5~~2022 were $7.6 million compared to ~~$7.0 million for the same quarter in 2020 and $15.3 million for the first six months of 2021 compared to $13.3~~$7.8 million for the same period in ~~2020. Interest income during~~2021. As noted in the ~~second quarter and~~Overview, the decrease year over year is attributable to ~~date period was supported by~~a decrease in the amortization of fees ~~generated~~ from administering PPP loans. OfOver the ~~$7.0 million in fee income that~~past year, the ~~Company expects to receive from the SBA over the life~~portfolio of ~~the related~~ PPP loans ~~a total~~has decreased, as these loans are forgiven and paid in full by the SBA. The PPP loan portfolio balance decreased from $92.6 million at the end of ~~$2.1~~February 2021 to $12.2 million ~~was recognized during~~at December 31, 2021 and then to $5.1 million as of March 31, 2022. As these loans are paid in full, the ~~first six months of 2021, including $835,999 recognized during the second quarter of 2021. These~~unamortized fees ~~have offset~~are taken to income, resulting in a decrease in ~~interest~~ income due to the repricing of loans, new loans (other than PPP loans) booked at lower market rates and PPP loans booked at a mandated 1% annual interest rate. Despite a significant increase in deposits between periods, interestyear over year. Interest paid on deposits, which is the major component of total interest expense, decreased ~~$440,942,~~$153,284, or ~~36.5% for the second quarter of 2021 compared to the same quarter of 2020, and $1.1 million, or 39.6%, for the first six months of 2021 compared to the same period last year, reflecting the decreases~~21.7% in ~~short-term rates initiated~~2022, driven in part by ~~the FRB beginning~~a decrease in ~~March 2020 in response to the pandemic.~~time deposits.

~~Table of Contents~~

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

June 30,

December 31,

2021

2020

Balance Sheet Data

Net loans

$ 693,682,887

$ 700,951,104

Total assets

925,498,638

918,233,284

Total deposits

799,893,395

782,290,840

Borrowed funds

2,300,000

2,800,000

Junior subordinated debentures

12,887,000

12,887,000

Total liabilities

844,771,549

840,944,571

Total shareholders’ equity

80,727,089

77,288,713

Book value per common share outstanding

$ 14.81

$ 14.25

Six Months Ended June 30,

2021

2020

Operating Data

Total interest income

$ 16,894,051

$ 15,963,594

Total interest expense

1,620,389

2,683,302

Net interest income

15,273,662

13,280,292

Provision for loan losses

534,998

684,002

Net interest income after provision for loan losses

14,738,664

12,596,290

Non-interest income

3,340,766

3,115,809

Non-interest expense

10,634,447

10,080,673

Income before income taxes

7,444,983

5,631,426

Applicable income tax expense(1)

1,372,876

927,876

Net Income

$ 6,072,107

$ 4,703,550

Per Common Share Data

Earnings per common share (2)

$ 1.13

$ 0.89

Dividends declared per common share

$ 0.44

$ 0.38

Weighted average number of common shares outstanding

5,330,497

5,254,202

Number of common shares outstanding, period end

5,349,766

5,275,043

~~______________~~

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

~~Table of Contents~~

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

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

	Three Months Ended March 31,
	2022			2021
Return on average assets		0.97	%		1.33	%
Return on average equity		11.76	%		15.75	%
Dividend payout ratio (1)		52.27	%		38.60	%
Average equity to average assets		8.24	%		8.48	%

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

INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST INCOME)

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

The Company’s tax-exempt interest income of ~~$254,467~~$236,043 and ~~$396,590~~$258,761 for the three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020, respectively, and $513,228 and $792,078 for the six months ended June 31, 2021 and 2020,~~ respectively, was derived from loans to local municipalities of ~~$35.8~~$48.7 million and ~~$48.2~~$52.2 million, and tax-exempt municipal investments of $2.2 million and $0, at ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively.

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

Three Months Ended June 30,

2021

2020

Net interest income as presented

$ 7,511,174

$ 6,984,533

Effect of tax-exempt income

67,643

105,423

Net interest income, tax equivalent

$ 7,578,817

$ 7,089,956

	Six Months Ended June 30,				Three Months Ended March 31,
	2021		2020		2022		2021

Net interest income as presented	$	15,273,662	$	13,280,292	$	7,558,230	$	7,762,488
Effect of tax-exempt income		136,428		210,552		62,745		68,785
Net interest income, tax equivalent	$	15,410,090	$	13,490,844	$	7,620,975	$	7,831,273

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

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

	Three Months Ended June 30,														Three Months Ended March 31,
	2021							2020									2022							2021
					Average							Average							Average							Average
	Average		Income/		Rate/			Average		Income/		Rate/			Average		Income/		Rate/			Average		Income/		Rate/
	Balance		Expense		Yield			Balance		Expense		Yield			Balance		Expense		Yield			Balance		Expense		Yield
Interest-Earning Assets
Loans (1)	$	728,685,149	$	7,956,066		4.38	%	$	707,342,015	$	7,947,820		4.52	%	$	693,001,033	$	7,547,035		4.42	%	$	720,584,311	$	8,322,081		4.68	%
Taxable investment securities		87,692,593		293,731		1.34	%		43,254,956		253,178		2.35	%		185,794,633		656,277		1.43	%		71,633,125		265,112		1.50	%
Tax-exempt investment securities																2,232,280		13,859		2.52	%		0		0		0.00	%
Sweep and interest-earning accounts		55,000,258		80,006		0.58	%		19,928,646		74,467		1.50	%		69,778,429		80,660		0.47	%		79,995,338		87,883		0.45	%
Other investments (2)		1,833,946		14,981		3.28	%		1,851,684		21,400		4.65	%		1,779,400		16,460		3.75	%		1,833,550		10,619		2.35	%
Total	$	873,211,946	$	8,344,784		3.83	%	$	772,377,301	$	8,296,865		4.32	%	$	952,585,775	$	8,314,291		3.54	%	$	874,046,324	$	8,685,695		4.03	%

Interest-Bearing Liabilities
Interest-bearing transaction accounts	$	234,028,669	$	132,107		0.23	%	$	200,646,650	$	251,549		0.50	%	$	258,739,985	$	160,078		0.25	%	$	214,680,380	$	146,518		0.28	%
Money market accounts		124,192,217		160,288		0.52	%		105,396,324		296,856		1.13	%
Money market funds																130,743,524		127,680		0.40	%		120,918,163		168,105		0.56	%
Savings deposits		140,040,599		36,310		0.10	%		109,987,298		37,575		0.14	%		173,158,450		23,440		0.05	%		144,612,956		37,273		0.10	%
Time deposits		108,625,246		302,388		1.12	%		110,069,513		441,228		1.61	%		106,635,720		240,761		0.92	%		111,327,106		353,348		1.29	%
Borrowed funds		2,301,330		12		0.00	%		5,475,396		2,238		0.16	%		1,301,144		2		0.00	%		2,530,789		12		0.00	%
Repurchase agreements		29,185,028		20,509		0.28	%		29,066,422		59,006		0.82	%		28,847,413		21,040		0.30	%		37,312,342		35,442		0.39	%
Finance lease obligations		2,395,094		14,437		2.41	%		74,678		1,495		8.01	%		3,823,091		21,963		2.30	%		1,679,688		14,929		3.56	%
Junior subordinated debentures		12,887,000		99,916		3.11	%		12,887,000		116,962		3.65	%		12,887,000		98,352		3.10	%		12,887,000		98,795		3.11	%
Total	$	653,655,183	$	765,967		0.47	%	$	573,603,281	$	1,206,909		0.85	%	$	716,136,327	$	693,316		0.39	%	$	645,948,424	$	854,422		0.54	%

Net interest income			$	7,578,817						$	7,089,956						$	7,620,975						$	7,831,273
Net interest spread (3)						3.36	%						3.47	%						3.15	%						3.49	%
Net interest margin (4)						3.48	%						3.69	%						3.24	%						3.63	%

~~_____________~~

	(1)	Included in gross loans are non-accrual loans with average balances of ~~$3,803,807~~$5,736,827 and ~~$4,677,752~~$4,087,346 for the three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. Loans are stated before deduction of unearned discount and ALL, less loans held-for-sale and include tax-exempt loans to local municipalities with average balances of ~~$51,534,733~~$49,022,025 and ~~$59,360,944~~$52,232,117 for the three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively.

	(2)	Included in other investments is the Company’s FHLBB Stock with average balances of ~~$768,796~~$714,250 and ~~$786,534~~$768,400, respectively, with a dividend rate of approximately 2.66% and 1.54%, respectively, for the three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020, respectively, and a dividend rate of approximately 1.54% and 5.06%, respectively, per quarter.~~respectively.

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

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

~~Table of Contents~~

Six Months Ended June 30,

2021

2020

Average

Average

Average

Income/

Rate/

Average

Income/

Rate/

Balance

Expense

Yield

Balance

Expense

Yield

Interest-Earning Assets

Loans (1)

$ 724,657,107

$ 16,278,147

4.53 %

$ 661,041,857

$ 15,418,910

4.69 %
Taxable investment securities

80,190,706

558,844

1.41 %

43,299,623

537,934

2.50 %
Sweep and interest-earning accounts

71,100,556

167,888

0.48 %

19,383,640

171,477

1.78 %
Other investments (2)

1,833,749

25,600

2.82 %

1,871,601

45,825

4.92 %
Total

$ 877,782,118

$ 17,030,479

3.91 %

$ 725,596,721

$ 16,174,146

4.48 %

Interest-Bearing Liabilities

Interest-bearing transaction accounts

$ 231,959,383

$ 282,368

0.25 %

$ 190,359,362

$ 637,781

0.67 %
Money market accounts

122,564,234

328,393

0.54 %

101,776,006

658,139

1.30 %
Savings deposits

134,762,737

69,839

0.10 %

104,392,291

76,846

0.15 %
Time deposits

109,968,712

655,737

1.20 %

110,725,171

903,979

1.64 %
Borrowed funds

2,415,425

24

0.00 %

6,646,874

13,254

0.40 %
Repurchase agreements

33,226,234

55,951

0.34 %

27,602,725

118,541

0.86 %
Finance lease obligations

2,039,367

29,366

2.88 %

82,375

3,274

7.95 %
Junior subordinated debentures

12,887,000

198,711

3.11 %

12,887,000

271,488

4.24 %
Total

$ 649,823,092

$ 1,620,389

0.50 %

$ 554,471,804

$ 2,683,302

0.97 %

Net interest income

$ 15,410,090

$ 13,490,844

Net interest spread (3)

3.41 %

3.51 %
Net interest margin (4)

3.54 %

3.74 %

~~_______________~~

~~(1)~~	Included in gross loans are non-accrual loans with average balances of $3,945,577 and $4,706,338 for the six months ended June 30, 2021 and 2020, respectively. Loans are stated before deduction of unearned discount and ALL, less loans held-for-sale and include tax-exempt loans to local municipalities with average balances of $51,881,498 and $58,970,429 for the six months ended June 30, 2021 and 2020, respectively.

~~(2)~~	Included in other investments is the Company’s FHLBB Stock with average balances of $768,599 and $806,451, respectively, and a dividend rate of approximately 1.54% and 4.94%, respectively, for the six months ended June 30, 2021 and 2020, respectively.

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

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

The average volume of interest-earning assets for the ~~three- and six-month periods~~three-month period ended ~~June 30, 2021~~March 31, 2022 increased ~~13.1% and 21.0%, respectively,~~9.0% compared to the ~~same periods last year, while the~~three-month period ended March 31, 2021. The average yield on interest-earning assets decreased 49 bps and 57 bps, respectively. The decrease in the average yield in most categories reflects the decrease in the federal funds rate, with taxable investment securities reporting a decrease of 101 bps and 109 bps, respectively, and other investments reporting a decrease of 137 bps and 210 bps, respectively,basis points for ~~the three- and six-month periods ended June 30, 2021, compared to the same periods in 2020.~~2022 versus 2021.

The average volume of loans ~~increased over~~decreased 3.8% for the ~~three-~~first three months of 2022 versus the same period in 2021, and ~~six-month comparison periods of 2021 versus 2020 by 3.0% and 9.6%, respectively, while~~ the average yield on loans decreased ~~14 bps and 16 bps, respectively. Loans accounted~~26 basis points to 4.42% for ~~83.5% and 82.6%, respectively, of~~2022 compared to 4.68% for 2021. The decrease in the yield in 2022 was due primarily to the decrease in PPP fees year over year as discussed in the Overview. The decrease in the average ~~interest-earning asset portfolio for~~volume of loans is attributable to the ~~three-~~forgiveness and ~~six- month periods ended June 30, 2021 compared to 91.6% and 91.1%, respectively, for~~payoff of PPP loans by the ~~same periods last year.~~SBA between periods. Interest earned on the loan portfolio as a percentage of total interest income ~~was 95.3% and 95.6%, respectively~~decreased to 90.8% for the ~~three- and six-month periods in 2021~~first three months of 2022, compared to ~~95.6% and 95.3%, respectively~~95.8% for the same ~~periods~~period in ~~2020.~~

The average volume of the taxable investment portfolio (classified as AFS) increased 102.7% and 85.2% during the three- and six-month periods ended June 30, 2021, compared to the same periods last year, while the average yield decreased 101 bps and 109 bps, respectively, between periods. 2021.

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The average volume of the taxable investment portfolio (classified as AFS) increased 159.4% for the three-month period ended March 31, 2022 compared the same period last year, while the average yield decreased seven basis points. The increase in average volume is due primarily to management’s effort to continue to grow the investment portfolio incrementally as the balance sheet grows in order to provide additional liquidity and pledge quality assets.

The average volume of the tax-exempt investment portfolio (classified as AFS) for the three-month period ended March 31, 2022 was $2.2 million, with a tax equivalent yield of 2.52%. The Company began investing in these tax-exempt bonds during December 2021.

The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing ~~accounts~~account at the FRBB, ~~and two correspondent banks, increased $35.1 million, or 176.0% during~~decreased 12.8% for the three-month ~~period~~ ended ~~June 30, 2021,~~March 31, 2022 compared to the same period ~~last year,~~in 2021. This decrease in volume is attributable to a need to fund investment and ~~$51.7 million, or 266.8%, for the six-month period ended June 30, 2021, while the~~loan growth and also to a decrease in customer deposit accounts. The average yield on these funds ~~decreased 92 bps and 130 bps, respectively. This increase~~increased two basis points during the first three months of 2022 versus the same period in cash volume is attributable to significant increases in core deposits which were driven in part by PPP loan funds that were deposited in business checking accounts as well as increases in customer checking accounts likely from stimulus payments, unemployment benefits and deferral or forbearance agreements on residential mortgage and student loans.2021.

The average volume of interest-bearing liabilities for the ~~three- and six-month periods~~three-month period ended ~~June 30, 2021~~March 31, 2022 increased ~~14.4% and 17.2%, respectively,~~10.9% compared to the same ~~periods last year, while the~~period in 2021. The average rate paid on interest-bearing liabilities decreased ~~38 bps and 47 bps, respectively, reflecting the~~15 basis points during 2022 compared to 2021. Although year to date volume shows an overall decrease in deposit accounts, most of the ~~federal~~ funds ~~rate beginning in March 2020. Customer deposits of~~deposited through PPP loan proceeds and stimulus ~~payments were contributing factors to the increase in average volume.~~funds remained on deposit throughout 2021.

The average volume of interest-bearing transaction accounts increased ~~16.6% and 21.9%, respectively,~~20.5% during the ~~three- and six-month periods~~three-month period ended ~~June 30, 2021~~March 31, 2022 compared to the same ~~periods last year, while the~~period of 2021, reflecting strong deposit growth throughout 2021. The average rate paid on these accounts decreased 27 bps and 42 bps, respectively. Contributing factors to the increase in average volume were increases of $10.6 million, or 24.5%, and $10.7 million, or 25.6%, respectively, in the average volume of ICS DDAs, and $24.7 million or 30.1%, and $26.7 million, or 35.5%, respectively, in the average volume of other interest-bearing DDAs. Interest-bearing transaction accounts comprised 35.8% and 35.7%, respectively, of the interest-bearing liabilities for the three- and six-month periods ended June 30, 2021 compared to 35.0% and 34.3%, respectively, for the same periods last year.three basis points between comparison periods.

The average volume of money market accounts increased ~~17.8% and 20.4%, respectively,~~8.1% during the ~~three- and six-month periods~~three-month period ended ~~June 30, 2021~~March 31, 2022 compared to the same ~~periods in 2020,~~period of 2021, while the average rate paid on these deposits decreased ~~61 bps and 76 bps, respectively.~~16 basis points.

The average volume of savings accounts increased ~~27.3% and 29.1%, respectively,~~19.7% for the ~~three- and six-month periods~~three-month period ended ~~June 30, 2021 versus~~March 31, 2022 compared to the same ~~periods~~period in ~~2020,~~2021, while the average rate paid on these accounts decreased ~~four bps and~~ five ~~bps, respectively.~~basis points.

The average volume of time deposits decreased ~~1.3% and 0.7%, respectively,~~4.2% during the ~~three- and six-month periods~~three-month period ended ~~June 30, 2021,~~March 31, 2022 compared to the same ~~periods last year,~~period in 2021, and the average rate paid decreased 37 basis points. Interest paid on ~~these accounts decreased 49 bps~~time deposits as a percentage of total interest expense was 34.7% and ~~44 bps,~~41.4%, respectively ~~between periods.~~for the three-month periods ended March 31, 2022 and 2021. The decrease in the average volume of time deposits between periods reflects the maturity of brokered deposits ~~throughout the first three months~~in January and April of 2021 that had not been replaced as of ~~June 30, 2021. Time deposits represented 16.6% and 16.9%, respectively,~~March 31, 2022. Management still considers the brokered deposit market to be a beneficial source of ~~average interest-bearing liabilities for~~funding to help smooth out the ~~three- and six-month periods ended June 30, 2021, compared~~fluctuations in core deposit balances without the need to ~~19.2% and 20.0%, respectively, for~~disrupt deposit pricing in the ~~same periods last year. Interest paid~~Company’s local markets. These funds can be obtained relatively quickly on ~~time deposits represented 39.5% and 40.5%, respectively, of total interest expense for~~an as-needed basis, making them a valuable alternative to traditional term borrowings from the three- and six-month period in 2021, compared to 36.6% and 33.7%, respectively, for the same periods in 2020. The average volume of retail time deposits increased 0.5% for the three-month period from $102.1 million at June 30, 2020 to $102.6 million at June 30, 2021, and 1.8% for the six-month period from $101.3 million at June 30, 2020 to $103.2 million at June 30, 2021. The average volume of wholesale time deposits decreased 24.7% from an average volume of $8.0 million to $6.0 million for the three-month periods ended June 30, 2021 and 2020, respectively, and 27.9% for the six-month periods from an average volume of $9.4 million at June 30, 2020 to $6.8 million at June 30, 2021.FHLBB. Refer to the “Liquidity and Capital Resources” section for more discussion on ~~these changes.~~this topic.

The average volume of borrowed funds decreased ~~$3.2~~$1.2 million, ~~and $4.2 million, respectively, between~~or 48.6% for the ~~three- and six-month comparison periods of~~three-month period ended March 31, 2022 compared to the same period in 2021 and, 2020, and the average rate paid on these borrowings decreased 16 bps and 40 bps, respectively, between periods. The average balances are reflective of the influx of cash throughout 2020 and into 2021 resulting from PPP lending activity, COVID stimulus payments and other government mitigation measures. The balance of borrowed funds at June 30, 2021 consistsfor both periods, consisted of only JNE funds at zero percent interest.

The average volume of repurchase agreements ~~increased .04% and 20.4%, respectively,~~decreased 22.7% for the ~~three-~~three-month period ended March 31, 2022 compared to the same period in 2021 and ~~six-month comparison periods of 2021 versus 2020, while~~ the average rate paid decreased ~~54 bps and 52 bps, respectively.~~nine basis points.

In summary, between the ~~three- and six month~~three-month periods ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the average yield on interest-earning assets decreased 49 ~~bps and 57 bps, respectively,~~basis points and the average rate paid on interest-bearing liabilities decreased ~~38 bps and 47 bps, respectively.~~15 basis points. Net interest spread decreased ~~11 bps~~34 basis points for the ~~second quarter of 2021 versus 2020, and 10 bps for the six-month~~three-month period of 2022 versus 2021 ~~versus 2020. Net~~and net interest margin decreased ~~21 bps and 20 bps, respectively,~~39 basis points between ~~the same comparison~~ periods.

The reductions in the target federal funds rate, in response to the pandemic have placed pressure on the Company’s net interest margin and net interest spread and may continue to adversely affect them in future periods, although the extent and duration of such impacts cannot be predicted at this time.

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The following table summarizes the variances in interest income and interest expense on a fully tax-equivalent basis for the interim periods presented for ~~2021~~2022 and ~~2020~~2021 resulting from volume changes in daily average assets and daily average liabilities and fluctuations in average rates earned and paid.

																			Three Months Ended March 31,
	Three Months Ended June 30,									Six Months Ended June 30,									Variance			Variance
	Variance			Variance						Variance			Variance						Due to			Due to			Total
	Due to			Due to			Total			Due to			Due to			Total			Rate (1)			Volume (1)			Variance
	Rate (1)			Volume (1)			Variance			Rate (1)			Volume (1)			Variance
Average Interest-Earning Assets

Loans	$	(231,614	)	$	239,860		$	8,246		$	(624,389	)	$	1,483,626		$	859,237		$	(474,426	)	$	(300,620	)	$	(775,046	)
Taxable investment securities		(219,091	)		259,644			40,553			(437,709	)		458,619			20,910			(31,076	)		422,241			391,165
Tax-exempt investment securities																				13,859			0			13,859
Sweep and interest-earning accounts		(125,261	)		130,800			5,539			(461,354	)		457,765			(3,589	)		4,617			(11,840	)		(7,223	)
Other investments		(6,274	)		(145	)		(6,419	)		(19,696	)		(529	)		(20,225	)		6,342			(501	)		5,841
Total	$	(582,240	)	$	630,159		$	47,919		$	(1,543,148	)	$	2,399,481		$	856,333		$	(480,684	)	$	109,280		$	(371,404	)

Average Interest-Bearing Liabilities

Interest-bearing transaction accounts	$	(160,942	)	$	41,500		$	(119,442	)	$	(494,012	)	$	138,599		$	(355,413	)	$	(16,859	)	$	30,419		$	13,560
Money market accounts		(189,376	)		52,808			(136,568	)		(464,131	)		134,385			(329,746	)
Money market funds																				(53,992	)		13,567			(40,425	)
Savings deposits		(11,726	)		10,461			(1,265	)		(29,660	)		22,653			(7,007	)		(20,872	)		7,039			(13,833	)
Time deposits		(134,807	)		(4,033	)		(138,840	)		(243,741	)		(4,501	)		(248,242	)		(101,945	)		(10,642	)		(112,587	)
Borrowed funds		(2,226	)		0			(2,226	)		(13,230	)		0			(13,230	)		(10	)		0			(10	)
Repurchase agreements		(38,739	)		242			(38,497	)		(86,639	)		24,049			(62,590	)		(8,140	)		(6,262	)		(14,402	)
Finance lease obligations		(33,270	)		46,212			12,942			(51,273	)		77,365			26,092			(11,781	)		18,815			7,034
Junior subordinated debentures		(17,046	)		0			(17,046	)		(72,777	)		0			(72,777	)		(443	)		0			(443	)
Total	$	(588,132	)	$	147,190		$	(440,942	)	$	(1,455,463	)	$	392,550		$	(1,062,913	)	$	(214,042	)	$	52,936		$	(161,106	)

Changes in net interest income	$	5,892		$	482,969		$	488,861		$	(87,685	)	$	2,006,931		$	1,919,246		$	(266,642	)	$	56,344		$	(210,298	)

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

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NON-INTEREST INCOME AND NON-INTEREST EXPENSE

Non-interest Income

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

	Three Months Ended										Six Months Ended										Three Months Ended
	June 30,				Change						June 30,				Change						March 31,				Change
	2021		2020		Income			Percent			2021		2020		Income			Percent			2022		2021		Income			Percent

Service fees	$	856,631	$	721,521	$	135,110			18.73	%	$	1,645,255	$	1,527,732	$	117,523			7.69	%	$	862,887	$	788,623	$	74,264			9.42	%
Income from sold loans		277,061		396,291		(119,230	)		-30.09	%		462,067		536,754		(74,687	)		-13.91	%		203,842		185,006		18,836			10.18	%
Other income from loans		246,716		301,129		(54,413	)		-18.07	%		429,989		521,596		(91,607	)		-17.56	%		271,260		183,274		87,986			48.01	%
Net realized gain on sale of securities AFS		0		39,086		(39,086	)		-100.00	%		0		39,086		(39,086	)		-100.00	%
Other income
Income from CFS Partners		287,072		219,259		67,813			30.93	%		594,058		311,167		282,891			90.91	%		225,870		306,986		(81,116	)		-26.42	%
Exchange income		15,300		0		15,300			100.00	%		32,100		0		32,100			100.00	%
VISA card commission		25,404		18,662		6,742			36.13	%		50,808		37,324		13,484			36.13	%
Other miscellaneous income		60,351		66,154		(5,803	)		-8.77	%		126,489		142,150		(15,661	)		-11.02	%		122,570		108,342		14,228			13.13	%
Total non-interest income	$	1,768,535	$	1,762,102	$	6,433			0.37	%	$	3,340,766	$	3,115,809	$	224,957			7.22	%	$	1,686,429	$	1,572,231	$	114,198			7.26	%

Total non-interest income increased ~~$6,433,~~$114,198, or ~~0.4%~~7.3%, for the ~~second quarter of 2021 and $224,957, or 7.2% for the~~ first ~~six~~three months of ~~2021~~2022 compared to the same ~~periods~~period in ~~2020,~~2021, with significant changes noted in the following:

	·	The increase in service fees during ~~both~~the comparison ~~periods~~period is mostly due to an increase in ~~VISA check~~ interchange income of ~~$76,576,~~$21,686, or ~~22.9% for the second quarter~~5% and overdraft charges of ~~2021 compared to the same quarter of 2020, and $148,502,~~$53,280, or ~~23.9%~~29.3%, year over year.

	·	The ~~decrease~~increase in income from sold loans is due to a ~~lower~~higher volume of loans sold into the secondary market during the ~~second quarter~~first three months of ~~2021~~2022 versus ~~2020.~~ 2021.

	·	~~A decrease~~An increase in CRE ~~and residential mortgage~~ loan volume in 2022 resulted in ~~decreases~~a significant increase in documentation fees collected at origination, accounting for the ~~decrease~~increase in other income from loans. when comparing the two periods.

	·	~~There were no sales~~Income from CFS Partners decreased between periods due in part to the ~~Company’s securities AFS~~impact of mark-to-market adjustments to CFS Partners equity portfolio during the first ~~six~~two months of ~~2021, resulting in no~~ ~~net realized gains on sale of securities AFS~~2022. The capital markets rebounded during ~~2021 compared~~March, but not enough to offset the ~~same period in 2020.~~ decrease during the first two months.

	·	Included in ~~Income from CFS Partners~~Other miscellaneous income increased significantly between periods due in part to the impact of more favorable stock market valuations on the fee income of its trust and asset management subsidiary, as well as an increase in managed assets. Also, CFS Partners has a small portion of its equity capital invested in the stock market. It was necessary to mark-to-market the portfolio to reflect the stock market decline duringfor the first ~~quarter~~three months of ~~2020 at~~2022 is income totaling $23,400 associated with a renegotiated contract with the ~~outset of the COVID-19 pandemic, resulting in a $106,000 mark down.~~

	·	~~The shutdown of the US/Canadian border to all non-essential travel created less demand for an exchange of Canadian cash in the first half of 2020, accounting for the lack of~~ ~~exchange income~~. After the shutdown, as the border opened to commerce related travel, the exchange of Canadian cash resumed but had not yet returned to normal levels by June 30, 2021. In July 2021, the US/Canadian border was again shut down to all non-essential travel.

	·	~~The increase in~~ ~~VISA card commission~~ ~~is attributable to an increase in transaction volume in the VISA card program.~~ Company’s check printing vendor.

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Non-interest Expense

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

	Three Months Ended										Six Months Ended										Three Months Ended
	June 30,				Change						June 30,				Change						March 31,				Change
	2021		2020		Expense			Percent			2021		2020		Expense			Percent			2022		2021		Expense			Percent

Salaries and wages	$	1,944,999	$	1,928,421	$	16,578			0.86	%	$	3,920,002	$	3,814,737	$	105,265			2.76	%	$	2,040,000	$	1,975,003	$	64,997			3.29	%
Employee benefits		824,210		734,441		89,769			12.22	%		1,655,420		1,532,882		122,538			7.99	%		772,052		831,210		(59,158	)		-7.12	%
Occupancy expenses, net		652,202		637,269		14,933			2.34	%		1,396,922		1,320,504		76,418			5.79	%		753,364		744,720		8,644			1.16	%
Other expenses
Outsourcing expense		122,389		116,685		5,704			4.89	%		251,900		235,362		16,538			7.03	%
Directors Fees																						143,857		129,104		14,753			11.43	%
Telephone expense		33,804		65,687		(31,883	)		-48.54	%		65,929		131,465		(65,536	)		-49.85	%		34,571		32,125		2,446			7.61	%
Audit fees																						100,728		89,232		11,496			12.88	%
Consultant services		64,519		57,361		7,158			12.48	%		143,308		114,340		28,968			25.33	%		64,887		78,789		(13,902	)		-17.64	%
FDIC insurance		78,708		54,690		24,018			43.92	%		161,565		120,132		41,433			34.49	%		89,984		82,857		7,127			8.60	%
Collection & non-accruing loan expense		11,600		8,824		2,776			31.46	%		23,200		37,648		(14,448	)		-38.38	%		36,000		11,600		24,400			210.34	%
ATM fees		141,349		117,737		23,612			20.05	%		270,295		233,500		36,795			15.76	%		140,890		128,946		11,944			9.26	%
Electronic banking expense																						67,578		52,382		15,196			29.01	%
State deposit tax		218,328		170,912		47,416			27.74	%		425,261		332,137		93,124			28.04	%		240,478		206,933		33,545			16.21	%
Other miscellaneous expenses		1,177,288		1,095,426		81,862			7.47	%		2,320,645		2,207,966		112,679			5.10	%		969,199		1,002,150		(32,951	)		-3.29	%
Total non-interest expense	$	5,269,396	$	4,987,453	$	281,943			5.65	%	$	10,634,447	$	10,080,673	$	553,774			5.49	%	$	5,453,588	$	5,365,051	$	88,537			1.65	%

Total non-interest expense increased ~~$281,943,~~$88,537, or ~~5.7% for the second quarter of 2021 and $553,774, or 5.5%~~1.7%, for the ~~six~~first three months ~~ended June 30, 2021~~of 2022 compared to the same ~~periods~~period in ~~2020,~~2021, with significant changes noted in the following:

	·	The increase in ~~employee benefits~~salaries and wages ~~in both periods was attributable~~is due to ~~the increased cost of health insurance premiums.~~ normal salary increases.

	·	The ~~moderate increase~~decrease in ~~occupancy expense~~employee benefits ~~is primarily~~in was attributable to ~~an increase~~a decrease in ~~capital lease expense.~~ health insurance claims year over year.

	·	~~A moderate~~The increase ~~is also noted~~ in ~~outsourcing expense~~ directors’ fees~~due~~ is attributable to a ~~combination of annual increases in contract pricing and~~change to the Director’s fee schedule as well as an ~~increase in transactions.~~ additional Director for 2022 whose quarterly compensation totaled $10,056.

	·	Telephone expense ~~decreased as~~increased due to a ~~result of a renegotiated contract with the Company’s main connectivity vendor that was effective mid-year 2020.~~ one-time fee charged in February 2022.

	·	~~The~~An increase was budgeted for audit feesin ~~Consultant~~anticipation of increased audit services ~~year over year is attributable in part~~ due to ~~recruitment of a senior management position.~~ the Company surpassing the $1.0 billion asset size.

	·	The decrease in consultant services year over year is attributable in part to recruitment of a senior management position in 2021.

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

	·	Collection & non-accruing loan expense ~~are lower~~is higher year over year due to expenses associated with a commercial property in ~~all periods compared to historical activity, due primarily to~~ the ~~impact of a legislative moratorium on ejectment and foreclosure actions during the COVID-19 emergency.~~ Company’s non-accruing loan portfolio.

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

	·	State deposit tax increased year over year due primarily to ~~a significant~~the increase in ~~deposits.~~deposits throughout 2021. The calculation is based on an average of month-end deposit totals over a 12 month period.

	·	The components of other miscellaneous expense are made up of several categories including outsourcing expense and service contracts – administration, but none with changes year over year greater than 5%.

Table of Contents

APPLICABLE INCOME TAXES

The provision for income taxes ~~increased in both comparison periods, with an increase of $87,034,~~decreased $153,441, or ~~14.3% for the second quarter of 2021, and $445,000, or 48.0%~~22.7%, for the first ~~six~~three months of ~~2021~~2022 compared to the ~~respective periods~~same period in ~~2020. These increases are~~2021 and is proportional to the ~~increases~~decrease in income before income taxes totaling ~~$291,129 for the second quarter of 2021 versus 2020, and $1.8 million for the first six months of 2021 versus 2020.~~$773,600 year over year. Tax credits related to limited partnership investments amounted to ~~$117,015~~$96,237 and ~~$108,492, respectively, for the second quarters of 2021 and 2020, and $234,030 and $216,984,~~$117,015, respectively, for the first ~~six~~three months of ~~2021~~2022 and ~~2020.~~2021.

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to ~~$90,762~~$67,092 and ~~$84,171, respectively, for the second quarters of 2021 and 2020, and $181,524 and $168,342,~~$90,762, respectively, for the first ~~six~~three months of ~~2021~~2022 and ~~2020.~~2021. These investments provide tax benefits, including tax credits, and are designed to provide a targeted effective annual yield between 7% and 10%.

~~Table of Contents~~

CHANGES IN FINANCIAL CONDITION

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

	June 30, 2021				December 31, 2020				March 31, 2022				December 31, 2021
Assets
Loans	$	704,201,276	76.09	%	$	709,355,330	77.25	%	$	696,293,182	69.27	%	$	689,988,533	67.71	%
Securities AFS		91,556,135	9.89	%		60,705,178	6.61	%
AFS securities										185,755,566	18.48	%		182,342,459	17.89	%

Liabilities
Demand deposits		204,616,899	22.11	%		185,954,976	20.25	%		203,661,459	20.26	%		209,465,151	20.55	%
Interest-bearing transaction accounts		232,134,055	25.08	%		242,902,715	26.45	%		258,401,561	25.71	%		265,513,937	26.05	%
Money market accounts		111,345,535	12.03	%		115,546,064	12.58	%
Money market funds										130,731,075	13.01	%		129,728,954	12.73	%
Savings deposits		143,739,953	15.53	%		124,555,124	13.56	%		177,994,875	17.71	%		168,390,905	16.52	%
Time deposits		108,056,953	11.68	%		113,331,961	12.34	%		106,511,475	10.60	%		106,301,006	10.43	%
Long-term advances		2,300,000	0.25	%		2,800,000	0.30	%		1,300,000	0.13	%		1,300,000	0.13	%

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

	Change in Volume			Percentage Change			Change in Volume			Percentage Change
Assets
Loans	$	(5,154,054	)		-0.73	%	$	6,304,649			0.91	%
Securities AFS		30,850,957			50.82	%
AFS securities								3,413,107			1.87	%

Liabilities
Demand deposits		18,661,923			10.04	%		(5,803,692	)		-2.77	%
Interest-bearing transaction accounts		(10,768,660	)		-4.43	%		(7,112,376	)		-2.68	%
Money market accounts		(4,200,529	)		-3.64	%
Money market funds								1,002,121			0.77	%
Savings deposits		19,184,829			15.40	%		9,603,970			5.70	%
Time deposits		(5,275,008	)		-4.65	%		210,469			0.20	%
Long-term advances		(500,000	)		-17.86	%

The ~~decrease~~increase in the loan ~~growth~~portfolio during the first ~~six~~three months of ~~2021~~2022 was attributable to ~~the seasonal maturities of municipal~~increases totaling $13.9 million in commercial & industrial and CRE loans, which was partially offset ~~in part~~ by ~~an increase in PPP loans and CRE loans. The Company booked a total of $58.6 million of PPP loans during the first six months of 2021, which was offset in part by paydowns or~~ payoffs of certain PPP loans through ~~the~~ SBA’s forgiveness program totaling ~~$47.4~~$7.0 million. ~~Also included in~~The SBA PPP program ended during the ~~commercial loan growth were originations~~second quarter of ~~$2.4 million in commercial loans purchased~~2021, so this portfolio will continue to decrease throughout the remainder of 2022 either through ~~BHG. This portfolio has served well~~pay downs or payoffs initiated on behalf of SBA’s forgiveness program, or by regular amortization as borrowers begin to support asset growth and provide geographic diversification, and with average duration expected to be slightly longer than the Company’s loan portfolio average, it is expected to reduce exposure to falling rates in the near term. The Company has established conservative credit parameters and expects a low risk of default in this portfolio.make scheduled monthly payments.

The increase in the securities AFS portfolio is attributable to the purchase of ~~$41.6~~$19.1 million in securities AFS during the first ~~six~~three months of ~~2021,~~2022, consisting of ~~$5.6~~$7.2 million in US Treasuries, ~~$3.0~~$3.8 million in ~~US Government Bonds, $32.1~~Tax-exempt municipal bonds, and $8.1 million in ~~MBS and $1.0 million in CMOs.~~MBS. These purchases were reduced in part by maturities and calls exercised amounting to ~~$2.7 million,~~$291,500, as well as principal payments on MBS totaling ~~$6.8~~$4.2 million, ~~accounting for~~and by an increase of $11.1 million in unrealized losses arising during the ~~year to date increase~~first quarter of 2022 and reflected in ~~the AFS portfolio noted in the tables above.~~OCI. In management’s view, the size of the securities AFS portfolio is appropriate and proportional to the overall asset base, as this portfolio serves an important role in the Company’s liquidity position.

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Most of the fluctuation in demand deposits is due to a ~~year to date increase~~decrease during the first quarter of 2022 in business checking accounts of ~~$17.2~~$7.1 million, or ~~12.38%~~4.4%, which the Company believes ~~is a result~~primarily reflects the outflow of funds as customers are starting to spend some of the ~~distribution of~~ funds generated through the PPP loans. The ~~overall~~ decrease in interest-bearing transaction accounts ~~reflects the combined effect~~consists of a decrease of $10.8 million, or 25.7%, in municipal deposit accounts, as well as a decrease of $6.1 million, or 8.6%, in ICS deposit accounts, which was partially offset by an increase of ~~$10.2~~$8.1 million, or ~~10.0%~~7.0%, in consumer interest-bearing transaction accounts, and $4.4 million, or 30.7% in ATS accounts, offset by a decrease of $19.1 million, or 46.4%, in municipal deposit accounts and $5.5 million, or 16.8% in the deposit account of the Company’s affiliate, CFSG. The increase of $16.9 million, or 22.0%, in consumer and business money market accounts year to date was offset, in part by decreases in the ICS money market accounts of $8.3 million, or 35.9% and non-arbitrage borrowing accounts of $12.9 million, or 84.6%.accounts. The increase in savings deposits of ~~$19.2~~$9.6 million, or ~~15.4%~~5.7%, is likely attributable in part to parked funds as customers await more favorable rates for time deposits, as well as deposits ~~through the~~of stimulus payments and tax credits from the U.S. Government. The decrease in time deposits was split between a decrease in wholesale time deposits of $3.5 million, or 38.5%, and a decrease in retail time deposits of $1.8 million, or 1.7%. The decrease in long-term advances was due to maturities in the JNE advances. See “Liquidity and Capital Resources” section for additional information on these advances.

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

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

Under the Company’s interest rate sensitivity modeling, with the continued asset sensitive balance sheet, in a rising rate environment ~~interest income~~NII 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~~upward while the retail funding base ~~likewise increases, putting pressure~~(deposits) lags the market. If rates paid on ~~NII and reducing~~deposits have to be increased more and/or more quickly than projected due to competitive pressures, the expected benefit to rising ~~rates.~~rates would be reduced. In a falling rate environment, NII is expected to trend slightly downward compared with the current rate environment scenario for the first year of the simulation as asset yield erosion is not fully offset by decreasing funding costs. Thereafter, net interest income is projected to experience sustained downward pressure as funding costs reach their assumed floors and asset yields continue to reprice into the lower rate environment. ~~The slope of~~Management expects that the ~~yield curve~~rising rate environment will ~~be very important~~have a positive impact to the Company’s ~~margins going forward.~~NII in 2022.

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, 2021:~~March 31, 2022:

Rate Change	Percent Change in NII

Down 100 bps		~~-0.7~~-1.2	%
Up 200 bps		~~4.4~~0.9	%

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The estimated amounts shown in the table ~~above~~ are ~~well~~ within the ALCO Policy limits. However, those amounts do not represent a forecast and should not be relied upon as indicative of future results. The ALCO model also provides alternate scenarios including a sustained flat, or inverted yield curve. While assumptions used in the ALCO process, including the interest rate simulation analyses, are developed based upon current economic and local market conditions, and expected future conditions, the Company cannot provide any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might ~~change, or~~change. As the ~~measures that~~market rates continue to increase, the ~~FRB may take in managing monetary policy in response to external events such as~~impact of a falling rate environment is more pronounced, and the ~~COVID-19 pandemic or emerging threats from variants~~possibility more plausible than during the last several years of ~~the virus.~~near zero short rates.

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As of ~~June 30, 2021,~~March 31, 2022, the Company had outstanding $12,887,000 in principal amount of Junior Subordinated Debentures due December 15, 2037, which bear a quarterly floating rate of interest equal to the 3-month London Interbank Offered Rate (LIBOR), plus 2.85%. During 2017, the Financial Conduct Authority (FCA) in the United Kingdom that administers LIBOR announced that LIBOR ~~reference rates~~ will be phased out, ~~beginning at~~with an expected target date of December 31, 2021 for the ~~end of 2021.~~phase out. On March 5, 2021, the FCA announced firm target dates for the phase out of various LIBOR settings, including a phase out date of June 30, 2023 for 3-month LIBOR for U.S. dollar deposits. Under the terms of the ~~Company’s~~ Indenture, if 3-month LIBOR is not available, the ~~Debenture~~ Trustee may obtain substitute quotations from four leading banks in the London interbank market for their offered rate to prime banks in the London market for U.S. dollar deposits having a three month maturity; if at least two such quotations are provided, the quarterly rate on the Debentures will be the arithmetic mean of such quotations. If fewer than two such quotations are received, the Trustee will request substitute quotations from four major New York City banks for their offered rate to leading European banks for loans in U.S. dollars; if at least two such quotations are provided, the quarterly rate on the Debentures will be the arithmetic mean of such quotations. The Debenture Trustee has not yet informed the Company as to how it intends to proceed. Aside from the Debentures, the Company does not have any other exposures to the phase out of LIBOR. The Company has not generally utilized LIBOR as an interest rate benchmark for its variable rate commercial, residential or other loans and does not utilize derivatives or other financial instruments tied to LIBOR for hedging or investment purposes. Accordingly, management expects that the Company’s exposure to the phase out of LIBOR will be limited to the effect on the interest rate paid on its Debentures, but cannot predict the magnitude of the impact on the Company’s interest expense at this time.

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

Residential mortgages represented ~~29.3%~~30.8% of the Company’s loan balances as of ~~June 30,~~March 31, 2022, compared to 31.3% at December 31, 2021, a level that has historically been on a gradual annual decline in recent years, consistent with the Company’s strategic shift to commercial lending. The Company maintains a residential mortgage loan portfolio of traditional mortgage products and does not engage in higher risk loans such as option adjustable rate mortgage products, high loan-to-value products, interest only mortgages, subprime loans and products with deeply discounted teaser rates. Residential mortgages with loan-to-values exceeding 80% are generally covered by PMI. A 90% loan-to-value residential mortgage product without PMI is only available to borrowers with excellent credit and low debt-to-income ratios and has not been widely originated. ~~Junior~~As of March 31, 2022, junior lien home equity products ~~make~~made up 17.6% of the residential mortgage portfolio with maximum loan-to-value ratios (including prior liens) of 80%. The Company also originates some home equity loans greater than 80% under an insured loan program with stringent underwriting criteria.

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 ~~70.1%~~68.7% of the Company’s loan portfolio at ~~June 30, 2021,~~March 31, 2022, compared to ~~70.0%~~68.1% at December 31, ~~2020.~~2021. Those percentages included the Company’s portfolio of PPP loans, which ~~was $71.6~~have been steadily decreasing, and totaled $5.1 million at ~~June 30, 2021,~~March 31, 2022, compared to ~~$64.4~~$12.2 million at December 31, ~~2020.~~2021.

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 ~~outside the Company’s primary market area, principally~~ in Chittenden County and in northern Windsor County around the White River Junction, ~~Vermont~~ I91-I93 interchange area. Credits in the Chittenden County market are being managed by two commercial lenders out of the Company’s Burlington loan production office ~~who~~that know the area well, while Windsor County is being served ~~through a loan production office in Lebanon, New Hampshire~~ by a commercial lender from the St. Johnsbury office with previous lending experience serving the greater White River ~~Junction-Lebanon~~Junction area. The Company has a loan production office in Lebanon, New Hampshire to provide a presence in the greater White River Junction area including Grafton County, New Hampshire. Larger transactions continue to be centrally underwritten and monitored through the Company’s commercial credit department. The types of CRE transactions driving the growth ~~in the CRE portfolio~~ have been a mix of construction, land and development, multifamily, and other non-owner occupied CRE properties including hotels, retail, office, and industrial properties. The largest components of the ~~$284.9~~$308.3 million CRE portfolio at ~~June 30, 2021~~March 31, 2022 were ~~approximately $98.0~~$105.6 million in owner-occupied CRE and ~~$97.3~~$110.0 million in non-owner occupied CRE.

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~~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, 2021

December 31, 2020

Commercial & industrial

$ 172,804,158

24.54 %

$ 161,067,501

22.70 %
Commercial real estate

284,946,461

40.46 %

280,544,550

39.55 %
Municipal

35,807,161

5.09 %

54,807,367

7.73 %
Residential real estate - 1st lien

170,113,951

24.16 %

170,507,263

24.04 %
Residential real estate - Jr lien

36,355,567

5.16 %

38,147,659

5.38 %
Consumer

4,173,978

0.59 %

4,280,990

0.60 %
Total loans

704,201,276

100.00 %

709,355,330

100.00 %

ALL

(7,719,257 )

(7,208,485 )

Deferred net loan fees

(2,799,132 )

(1,195,741 )

Net loans

$ 693,682,887

$ 700,951,104

Risk in the Company’s commercial & industrial and CRE loan portfolios is mitigated in part by government guarantees issued by federal agencies such as the SBA and RD. At ~~June 30, 2021,~~March 31, 2022, the Company had ~~$101.1~~$36.8 million in guaranteed loans with guaranteed balances of ~~$99.7~~$28.8 million, compared to ~~$93.4~~$42.9 million in guaranteed loans with guaranteed balances of ~~$86.1~~$35.4 million at December 31, ~~2020. Included in the totals are the~~2021. PPP loans ~~disclosed earlier~~are included in ~~this discussion,~~these totals, all of which carry a 100% guarantee through the SBA, subject to borrower eligibility requirements.

At June 30, 2021, loan balances in the retail, restaurant and bars, hotels and lodging, and breweries totaled $31.7 million, $5.9 million, $28.0 million, and $16.6 million, respectively. These segments of the economy have been particularly impacted by the COVID-19 business shutdowns and re-opening restrictions. While the Company has performed additional stress testing and oversight of these loan portfolios, the credit quality may deteriorate in future periods should COVID-19 business restrictions persist or be reimposed in response to the emergence of variants of the virus.

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

The Company’s non-performing assets decreased $281,467 or 5.5%, during the first six months of 2021. Increases in CRE and residential mortgage loan delinquencies in the 90 days or more past due, were offset in part by decreases in the same loan segments within the non-accrual loan portfolio. There were no claims receivable on related government guaranteed loans at June 30, 2021 compared to claims of $1,939 at December 31, 2020. Non-performing loans as of June 30, 2021 carried RD and SBA guarantees totaling $274,162, compared to $316,752 at December 31, 2020.

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~~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, 2021

December 31, 2020

Loans past due 90 days or more and still accruing (1)

Commercial real estate

$ 623,734

12.77 %

$ 0

0.00 %
Residential real estate - 1st lien

533,391

10.92 %

390,288

7.56 %
Residential real estate - Jr lien

35,098

0.72 %

98,889

1.91 %
Total

1,192,223

24.41 %

489,177

9.47 %

Non-accrual loans (1)

Commercial & industrial

394,901

8.09 %

434,196

8.41 %
Commercial real estate

1,836,177

37.61 %

1,875,942

36.33 %
Residential real estate - 1st lien

1,274,249

26.10 %

2,173,315

42.09 %
Residential real estate - Jr lien

184,924

3.79 %

191,311

3.70 %
Total

3,690,251

75.59 %

4,674,764

90.53 %

Total Non-Performing Assets

$ 4,882,474

100.00 %

$ 5,163,941

100.00 %

~~____________~~

~~(1)~~

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

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

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

	June 30, 2021				December 31, 2020				March 31, 2022				December 31, 2021
	Number of		Principal		Number of		Principal		Number of		Principal		Number of		Principal
	Loans		Balance		Loans		Balance		Loans		Balance		Loans		Balance

Commercial & industrial		7	$	272,039		6	$	270,695		5	$	58,448		6	$	71,128
Commercial real estate		4		660,298		4		711,816		5		2,968,472		5		3,642,073
Residential real estate - 1st lien		15		1,314,242		18		1,892,695		13		1,239,113		12		977,961
Residential real estate - Jr lien		1		45,179		1		48,456		1		40,263		1		41,901
Total		27	$	2,291,758		29	$	2,923,663		24	$	4,306,296		24	$	4,733,063

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

June 30, 2021

December 31, 2020

Number of

Principal

Number of

Principal

Loans

Balance

Loans

Balance

Commercial real estate

2

$ 50,227

2

$ 74,757

Residential real estate - 1st lien

32

2,507,226

31

2,417,563

Residential real estate - Jr lien

1

4,174

1

4,775

Total

35

$ 2,561,627

34

$ 2,497,095

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	March 31, 2022					December 31, 2021
	Number of		Principal			Number of		Principal
	Loans		Balance			Loans		Balance

Commercial real estate		1	$	9,496	��		2	$	41,228
Residential real estate - 1st lien		31		2,460,459			31		2,473,767
Residential real estate - Jr lien		1		3,213			1		3,537
Total		33	$	2,473,168			34	$	2,518,532

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 65 to the accompanying unaudited interim consolidated financial statements). Although the Company, in establishing the ALL, considers the inherent losses in individual loans and pools of loans, the ALL is a general reserve available to absorb all credit losses in the loan portfolio. No part of the ALL is segregated to absorb losses from any particular loan or segment of loans.

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

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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 65 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~~credit risk ratios for the ~~periods~~balance sheet dates presented:

As of or for the Six Months Ended June 30,

2021

2020

Loans outstanding, end of period

$ 704,201,276

$ 720,914,799

Average loans outstanding during period

$ 724,657,107

$ 661,041,857

Non-accruing loans, end of period

$ 3,690,251

$ 4,808,846

Non-accruing loans, net of government guarantees

$ 3,416,089

$ 4,484,089

ALL, beginning of period

$ 7,208,485

$ 5,926,491

Loans charged off:

Commercial & industrial

(18,847 )

0

Residential real estate - 1st lien

0

(77,695 )
Residential real estate - Jr lien

0

(28,673 )
Consumer

(37,373 )

(42,898 )
Total loans charged off

(56,220 )

(149,266 )
Recoveries:

Commercial & industrial

4,761

1,087

Commercial real estate

7,000

20,000

Residential real estate - 1st lien

2,326

5,810

Residential real estate - Jr lien

960

4,747

Consumer

16,947

22,813

Total recoveries

31,994

54,457

Net loans charged off

(24,226 )

(94,809 )
Provision charged to income

534,998

684,002

ALL, end of period

$ 7,719,257

$ 6,515,684

Net charge offs to average loans outstanding

0.003 %

0.014 %
Provision charged to income as a percent of average loans

0.074 %

0.103 %
ALL to average loans outstanding

1.065 %

0.986 %
ALL to non-accruing loans

209.180 %

135.494 %
ALL to non-accruing loans net of government guarantees

225.968 %

145.307 %

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	March 31,			December 31,
	2022			2021

ALL to total loans outstanding		1.13	%		1.12	%
ALL	$	7,890,648		$	7,710,256
Loans outstanding	$	696,293,182		$	689,988,533

Non-accruing loans to loans outstanding		0.78	%		0.86	%
Non-accruing loans	$	5,414,963		$	5,940,629
Loans outstanding	$	696,293,182		$	689,988,533

ALL to non-accruing loans		145.72	%		129.79	%
ALL	$	7,890,648		$	7,710,256
Non-accruing loans	$	5,414,963		$	5,940,629

The ~~ALL increased $1.2 million, or 18.5%, as of June 30, 2021 compared to June 30, 2020, while the~~ provision for loan losses ~~decreased $149,004, or 21.8%,~~ for the ~~six months~~first quarter ended ~~June 30, 2021,~~March 31, 2022 was $862,500, compared to $267,497 for the same period ~~last year.~~in 2021. The ~~decrease~~$595,003 year over year increase was driven primarily by a write-down on a single non-performing loan, which is in the provision between periods reflects the growth during the first six months of 2020 in the loan portfolio and higher than anticipated charge off activity, compared to a decrease of $12.4 million in the loan portfolio other than SBA guaranteed PPP loans and negligible charge off activity during the first six months of 2021. Increases in the provision in future periods may be necessary if economic conditions and credit quality continue to deteriorate due to the continuing impacts of the COVID-19 pandemic.foreclosure, totaling $667,474.

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

~~Based on the six month~~first quarter ALL analysis ~~in management’s view~~indicates that the reserve balance of ~~$7.7~~$7.9 million at ~~June 30, 2021~~March 31, 2022 is ~~appropriate~~sufficient to cover losses that are probable and estimable as of the measurement date, with an unallocated reserve of ~~$912,420 compared to $398,913 at December 31, 2020. The~~$90,276. Management believes the reserve balance ~~and unallocated amount continue~~continues to be directionally consistent with the overall risk profile of the Company’s loan portfolio and credit risk appetite. The portion of the ALL termed “unallocated” is established to absorb inherent ~~credit~~ losses that exist as of the measurement date although not specifically identified through management’s process for estimating credit losses. While the ALL is described as consisting of separate allocated portions, the entire ALL is available to support loan losses, regardless of category. ~~Unallocated~~Due to the charge off activity during the first quarter of 2022, the unallocated reserves are ~~considered by management to~~lower than historical levels. It is expected that the provision would be ~~appropriate~~increased in ~~light of the uncertainties as to the full impact to borrowers due to COVID-19, the Company’s continued~~future periods, if loan 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.~~or additional charge-offs warrants an increase. The adequacy of the ALL is reviewed quarterly by the risk management committee of the Board and then presented to the full Board for approval.

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Net charge-offs during the period to average loan outstanding were as follows:

For the Three Months Ended March 31,	2022			2021

Commercial & industrial		-0.01	%		-0.01	%
Net charge-off during the period	$	(17,650	)	$	(14,086	)
Average amount outstanding	$	120,804,935		$	177,158,060

Commercial real estate		-0.22	%		0.00	%
Net (charge-off) recovery during the period	$	(667,474	)	$	7,000
Average amount outstanding	$	304,057,825		$	280,029,141

Municipal		0.00	%		0.00	%
Net charge-off during the period	$	0		$	0
Average amount outstanding	$	49,022,024		$	52,232,117

Residential real estate - 1st lien		0.00	%		0.00	%
Net recovery during the period	$	1,210		$	1,567
Average amount outstanding	$	182,305,338		$	170,036,028

Residential real estate - Jr lien		0.01	%		0.00	%
Net recovery during the period	$	2,276		$	528
Average amount outstanding	$	33,230,645		$	37,317,509

Consumer		-0.01	%		-0.07	%
Net charge-off during the period	$	(470	)	$	(2,703	)
Average amount outstanding	$	3,580,266		$	3,811,456

Total loans		-0.10	%		0.00	%
Net charge-off during the period	$	(682,108	)	$	(7,694	)
Average amount outstanding	$	693,001,033		$	720,584,311

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

COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET ARRANGEMENTS

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and risk-sharing commitments on certain sold loans. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. During the first ~~six~~three months of ~~2021,~~2022, the Company did not engage in any activity that created any additional types of off-balance sheet risk.

Table of Contents

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.

~~Table of Contents~~

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, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the Company had no one-way CDARS outstanding. In addition, two-way ~~(that is, reciprocal)~~(reciprocal) CDARS deposits, as well as reciprocal ICS money market and demand deposits, allow the Company to provide FDIC deposit insurance to its customers in excess of account coverage limits by exchanging deposits with other participating FDIC-insured financial institutions. At ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the Company reported ~~$5.1~~$3.6 million ~~and $4.9 million, respectively,~~ in reciprocal CDARS deposits. The balance in ICS reciprocal money market deposits was ~~$14.8~~$17.2 million at ~~June 30, 2021,~~March 31, 2022, compared to ~~$23.1~~$15.3 million at December 31, ~~2020,~~2021, and the balance in ICS reciprocal demand deposits as of those dates was ~~$52.3~~$64.6 million and ~~$53.1~~$70.8 million, respectively.

~~During July, 2020, the~~The Company ~~issued $5.0 million~~had two blocks of DTC Brokered CDs ~~in three blocks of $1.3 million,~~totaling $2.3 million and $1.4 million with maturities in ~~October, 2020,~~ January, 2021 and April, 2021, respectively. ~~The block that matured in October, 2020 was not replaced, leaving a total outstanding at December 31, 2020 of $3.7 million. The~~These blocks ~~that matured in January and April of 2021~~ were ~~also~~ not replaced, leaving no DTC Brokered CDs outstanding at ~~June 30, 2021.~~December 31, 2021 or March 31, 2022. Although wholesale deposit funding through DTC is an important supplemental source of liquidity that has proven efficient, flexible and cost-effective when compared with other borrowing methods, the growth in deposits during ~~2020 and the first six months of~~ 2021 has reduced the Company’s need for supplementary funding sources in the near term.

At ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, borrowing capacity of ~~$96.4~~$95.3 million and ~~$93.1~~$100.2 million, respectively, was available through the FHLBB, secured by the Company’s qualifying loan portfolio (generally, residential mortgage and commercial loans), reduced by outstanding advances and by collateral pledges securing FHLBB letters of credit collateralizing public unit deposits. The Company also has an unsecured Federal Funds credit line with the FHLBB with an available balance of $500,000 and no outstanding advances during any of the respective comparison periods. Interest is chargeable at a rate determined daily, approximately 25 bps higher than the rate paid on federal funds sold.

The Company has a BIC arrangement with the FRBB secured by eligible commercial & industrial loans, CRE loans and home equity loans, resulting in an available credit line of ~~$52.2~~$65.1 million and ~~$50.4~~$52.3 million, respectively, at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. 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 2540 bps. The Company had no outstanding advances through this facility at ~~June 30, 2021~~March 31, 2022 or December 31, ~~2020.~~

On April 20, 2020, the Company became eligible to borrow through the FRB’s PPPLF under a lending arrangement with the FRBB to support its PPP lending activities. Under the PPPLF, advances from the FRBB carry a fixed interest rate of 35 bps and must be secured by pledges of loans to small businesses guaranteed by the SBA. The Company had no PPPLF advances as of June 30, 2021 or December 31, 2020. On June 25, 2021, the FRBB announced that it would extend for a final time its PPPLF by an additional month to July 30, 2021. ~~The Company did not exercise its right to borrow during the additional time period.~~

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

	June 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021
Long-Term Advances(1)
FHLBB term advance, 0.00%, due January 07, 2021	$	0	$	150,000
FHLBB term advance, 0.00%, due February 26, 2021		0		350,000
FHLBB term advance, 0.00%, due November 22, 2021		1,000,000		1,000,000
FHLBB term advance, 0.00%, due September 22, 2023		200,000		200,000	$	200,000	$	200,000
FHLBB term advance, 0.00%, due November 12, 2025		300,000		300,000		300,000		300,000
FHLBB term advance, 0.00%, due November 13, 2028		800,000		800,000		800,000		800,000
	$	2,300,000	$	2,800,000	$	1,300,000	$	1,300,000

~~_________~~

(1)

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

The Company has unsecured lines of credit with ~~three~~two correspondent banks with aggregate available borrowing capacity totaling ~~$25.5~~$20.5 million as of the balance sheet dates presented in this quarterly report. The Company had no outstanding ~~advance~~advances against these credit lines as of the balance sheet dates presented.

Securities sold under agreements to repurchase provide another funding source for the Company. At June 30, 2021 and December 31, 2020, the Company had outstanding repurchase agreement balances of $23.5 million and $38.7 million, respectively. These repurchase agreements mature and are repriced daily.

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The following table illustrates the changes in shareholders’ equity from December 31, ~~2020~~2021 to ~~June 30, 2021:~~March 31, 2022:

Balance at December 31, 2020 (book value $14.25 per common share)	$	77,288,713
Balance at December 31, 2021 (book value $15.48 per common share)				$	84,760,268
Net income		6,072,107			2,405,542
Issuance of common stock through the DRIP		554,915			272,683
Dividends declared on common stock		(2,342,808	)		(1,236,880	)
Dividends declared on preferred stock		(24,375	)		(12,188	)
Change in AOCI on AFS securities, net of tax		(821,463	)		(8,744,637	)
Balance at June 30, 2021 (book value $14.81 per common share)	$	80,727,089
Balance at March 31, 2022 (book value $14.08 per common share)				$	77,444,788

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

As described in more detail in Note 23 to the audited consolidated financial statements contained in the Company’s ~~2020~~2021 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.

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

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

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

~~As of June 30, 2021,~~2022, the Bank was considered well capitalized under the standard regulatory capital framework for Prompt Corrective Action and the Company exceeded currently applicable consolidated regulatory guidelines for capital adequacy. While we believe that the Company has sufficient capital to withstand an extended economic downturn in the wake of the COVID-19 pandemic, our regulatory capital ratios could be adversely impacted by future credit losses and other operational impacts related to COVID-19 or emerging variants of the virus.

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

											Minimum					Minimum															Minimum					Minimum
						Minimum					For Capital					To Be Well										Minimum					For Capital					To Be Well
						For Capital					Adequacy Purposes					Capitalized Under										For Capital					Adequacy Purposes					Capitalized Under
						Adequacy					with Conservation					Prompt Corrective										Adequacy					with Conservation					Prompt Corrective
	Actual					Purposes:					Buffer(1):					Action Provisions(2):					Actual					Purposes:					Buffer(1):					Action Provisions(2):
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)																				(Dollars in Thousands)
June 30, 2021
March 31, 2022
Common equity tier 1 capital
(to risk-weighted assets)
Company	$	81,882		14.78	%	$	24,935		4.50	%	$	38,787		7.00	%		N/A		N/A		$	88,669		14.06	%	$	28,388		4.50	%	$	44,159		7.00	%		N/A		N/A
Bank	$	81,274		14.68	%	$	24,913		4.50	%	$	38,753		7.00	%	$	35,985		6.50	%	$	88,070		13.97	%	$	28,369		4.50	%	$	44,129		7.00	%	$	40,977		6.50	%
Tier 1 capital (to risk-weighted assets)
Company	$	81,882		14.78	%	$	33,246		6.00	%	$	47,099		8.50	%		N/A		N/A		$	88,669		14.06	%	$	37,851		6.00	%	$	53,622		8.50	%		N/A		N/A
Bank	$	81,274		14.68	%	$	33,217		6.00	%	$	47,058		8.50	%	$	44,290		8.00	%	$	88,070		13.97	%	$	37,825		6.00	%	$	53,585		8.50	%	$	50,433		8.00	%
Total capital (to risk-weighted assets)
Company	$	88,820		16.03	%	$	44,328		8.00	%	$	58,181		10.50	%		N/A		N/A		$	96,556		15.31	%	$	50,468		8.00	%	$	66,239		10.50	%		N/A		N/A
Bank	$	88,201		15.93	%	$	44,290		8.00	%	$	58,130		10.50	%	$	55,362		10.00	%	$	95,952		15.22	%	$	50,433		8.00	%	$	66,194		10.50	%	$	63,042		10.00	%
Tier 1 capital (to average assets)
Company	$	81,882		8.84	%	$	37,062		4.00	%		N/A		N/A			N/A		N/A		$	88,669		8.88	%	$	39,952		4.00	%		N/A		N/A			N/A		N/A
Bank	$	81,274		8.78	%	$	37,044		4.00	%		N/A		N/A		$	46,305		5.00	%	$	88,070		8.82	%	$	39,935		4.00	%		N/A		N/A		$	49,919		5.00	%

December 31, 2020:
December 31, 2021:
Common equity tier 1 capital
(to risk-weighted assets)
Company	$	77,594		14.15	%	$	24,680		4.50	%	$	38,391		7.00	%		N/A		N/A		$	87,240		14.25	%	$	27,548		4.50	%	$	42,853		7.00	%		N/A		N/A
Bank	$	77,017		14.06	%	$	24,654		4.50	%	$	38,351		7.00	%	$	35,611		6.50	%	$	86,654		14.17	%	$	27,522		4.50	%	$	42,812		7.00	%	$	39,754		6.50	%
Tier 1 capital (to risk-weighted assets)
Company	$	77,594		14.15	%	$	32,907		6.00	%	$	46,618		8.50	%		N/A		N/A		$	87,240		14.25	%	$	36,731		6.00	%	$	52,036		8.50	%		N/A		N/A
Bank	$	77,017		14.06	%	$	32,872		6.00	%	$	46,569		8.50	%	$	43,829		8.00	%	$	86,654		14.17	%	$	36,696		6.00	%	$	51,986		8.50	%	$	48,928		8.00	%
Total capital (to risk-weighted assets)
Company	$	84,455		15.40	%	$	43,876		8.00	%	$	57,587		10.50	%		N/A		N/A		$	94,894		15.50	%	$	48,975		8.00	%	$	64,279		10.50	%		N/A		N/A
Bank	$	83,871		15.31	%	$	43,829		8.00	%	$	57,526		10.50	%	$	54,787		10.00	%	$	94,301		15.42	%	$	48,928		8.00	%	$	64,218		10.50	%	$	61,160		10.00	%
Tier 1 capital (to average assets)
Company	$	77,594		8.80	%	$	35,273		4.00	%		N/A		N/A			N/A		N/A		$	87,240		8.79	%	$	39,719		4.00	%		N/A		N/A			N/A		N/A
Bank	$	77,017		8.74	%	$	35,252		4.00	%		N/A		N/A		$	44,065		5.00	%	$	86,654		8.73	%	$	39,698		4.00	%		N/A		N/A		$	49,622		5.00	%

~~_________________~~

(1)	Conservation Buffer is calculated based on risk-weighted assets and does not apply to calculations of average assets.
(2)	Applicable to banks, but not bank holding companies.

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

~~Table of Contents~~

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Omitted, in accordance with the regulatory relief available to smaller reporting companies in SEC Release Nos. 33-10513 and 34-83550.

Table of Contents

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act). As of ~~June 30, 2021,~~March 31, 2022, 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, 2021~~March 31, 2022 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, 2021~~March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

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

ITEM 1A. Risk Factors

In management’s view, the Risk Factors identified in our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, represent the most significant risks to the Company’s future results of operations and financial condition as of ~~June 30, 2021.~~March 31, 2022.

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

The following table provides information as to the purchases of the Company’s common stock during the three months ended ~~June 30, 2021,~~March 31, 2022, by the Company or by any affiliated purchaser (as defined in SEC Rule 10b-18). During the monthly periods presented, the Company did not have any publicly announced repurchase plans or programs.

Total Number

Average

of Shares

Price Paid

For the period:

Purchased(1)

Per Share

April 1 - April 30

755

$ 18.75

May 1 - May 31

4,630

18.89

June 1 - June 30

0

0.00

Total

5,385

$ 18.87

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

January 1 - January 31		0	$	0.00
February 1 - February 28		0		0.00
March 1 - March 31		4,244	$	21.75
Total		4,244	$	21.75

~~_______________~~

(1)

All ~~5,385~~4,244 shares were purchased for the account of participants invested in the Company Stock Fund under the Company’s Retirement Savings Plan by or on behalf of the Plan Trustee, the Human Resources Committee of the Bank. Such share purchases were facilitated through CFSG, which provides certain investment advisory services to the Plan. Both the Plan Trustee and CFSG may be considered affiliates of the Company under Rule 10b-18.

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ITEM 6. Exhibits

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

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

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

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

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

Exhibit 101 -	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2021~~March 31, 2022 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three-month ~~and six-month interim~~ periods ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ (iii) the unaudited consolidated statements of comprehensive income, (iv) the unaudited consolidated statements of cash flows and (v) related notes.

Exhibit 104 -	Cover page Interactive Data File (formatted in iXBRL and contained in Exhibit 101)

~~_______________~~

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

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SIGNATURES

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

		COMMUNITY BANCORP.

DATED: ~~August 16, 2021~~May 13, 2022		/s/Kathryn M. Austin
		Kathryn M. Austin, President
		& Chief Executive Officer
		(Principal Executive Officer)

DATED: ~~August 16, 2021~~May 13, 2022		/s/Louise M. Bonvechio
		Louise M. Bonvechio, Corporate
		Secretary & Treasurer
		(Principal Financial Officer)

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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~June 30, 2021~~March 31, 2022

COMMUNITY BANCORP.

EXHIBITS

EXHIBIT INDEX

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

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

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

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

Exhibit 101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2021~~March 31, 2022 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the ~~three- and six-month~~three-month interim periods ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ (iii) the unaudited consolidated statements of comprehensive income, (iv) the unaudited consolidated statements of cash flows and (v) related notes.

Exhibit 104	Cover page Interactive Data File (formatted in iXBRL and contained in Exhibit 101)

~~___________~~

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

5550

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

ALL beginning balance	$	867,667	$	3,323,054	$	0	$	1,477,276	$	285,781	$	53,717		$	179,269	$	6,186,764
Charge-offs		0		0		0		0		0		(15,507	)		0		(15,507	)
Recoveries		1,087		20,000		0		2,476		1,380		11,985			0		36,928
Provision (credit)		17,792		63,448		0		32,145		32,588		(1,542	)		163,068		307,499
ALL ending balance	$	886,546	$	3,406,502	$	0	$	1,511,897	$	319,749	$	48,653		$	342,337	$	6,515,684

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

Related allowance recorded
Residential real estate
1st lien	$	819,752	$	826,472	$	98,503	$	967,850	$	945,427	$	32,518
Jr lien		4,181		4,174		233		4,323		4,475		228
Total with related allowance		823,933		830,646		98,736		972,173		949,902		32,746

No related allowance recorded
Commercial & industrial		382,207		452,976				401,591		405,816		204
Commercial real estate		1,880,489		2,369,692				1,763,205		1,823,474		4,299
Residential real estate
1st lien		3,371,491		4,290,817				3,342,168		3,491,101		111,079
Jr lien		135,745		179,768				137,307		134,964		0
Total with no related allowance		5,769,932		7,293,253				5,644,271		5,855,355		115,582

Total impaired loans	$	6,593,865	$	8,123,899	$	98,736	$	6,616,444	$	6,805,257	$	148,328

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

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

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

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

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

Related allowance recorded
Residential real estate
1st lien	$	864,493	$	903,869	$	119,841	$	916,476	$	903,797	$	39,735
Jr lien		5,414		5,411		445		5,550		5,740		282
Total with related allowance		869,907		909,280		120,286		922,026		909,537		40,017

No related allowance recorded
Commercial & industrial		383,737		417,734				387,962		398,952		213
Commercial real estate		1,614,105		1,983,282				1,632,676		1,655,041		7,339
Residential real estate
1st lien		4,231,160		5,011,883				4,032,707		3,893,458		117,120
Jr lien		86,831		120,377				197,834		181,880		0
Total with no related allowance		6,315,833		7,533,276				6,251,179		6,129,331		124,672

Total impaired loans	$	7,185,740	$	8,442,556	$	120,286	$	7,173,205	$	7,038,868	$	164,689