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Item 2. Management’s Discussion and Analysis

2022-08-12 compared with 2022-05-13 · 182 added, 143 removed, 390 unchanged (45% of the section changed)

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Period Ended March 31, 2022

Period Ended June 30, 2022

The following discussion analyzes the consolidated financial condition of Community Bancorp.

and its wholly-owned subsidiary, Community National Bank, as of March 31, 2022 and December 31, 2021, and its consolidated results of operations for the three-month interim period and one year period presented.

and its wholly-owned subsidiary, Community National Bank, as of June 30, 2022 and December 31, 2021, and its consolidated results of operations for the three- and six-month interim periods and one year period presented.

The Company is considered a “smaller reporting company” and a “non-accelerated filer” under the disclosure rules of the SEC.

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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.

Certain amounts presented below pertaining to the 2021 comparison periods have been reclassified to conform to current year presentation.

FORWARD-LOOKING STATEMENTS

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

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

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

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;

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However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.

The Company’s consolidated assets on March 31, 2022 were $1,005,190,870 compared to $1,019,105,799 at December 31, 2021, a decrease of 1.4%.

Significant changes in the asset base 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 $7.8 million in commercial & industrial loans and $6.1 million in CRE loans, which was partially offset by a $7.0 million decrease in 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 $2.1 million, or 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 interest-bearing transaction accounts of $7.1 million, or 2.7%, partially offset by an increase in money market funds totaling $1.0 million, or 0.8%, and an increase in savings accounts of $9.6 million, or 5.7%.

Consolidated net income for the first three months of 2022 decreased $620,159, or 20.5% compared to the same period in 2021.

A $927,248 decrease in the amortization of PPP loan processing fees from the SBA was partially offset by an increase of $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.

The Company’s consolidated assets on June 30, 2022 were $999,442,578 compared to $1,019,105,799 at December 31, 2021, a decrease of 1.9%.

Significant changes in the asset base were due to a decrease of $43.3 million, or 39.2%, in cash and cash equivalents, which was partially offset by an increase in net loans of $12.9 million, or 1.9%, and an increase in the available for sale investment portfolio of $6.5 million, or 3.5%.

This demonstrates the Company’s efforts to deploy cash into higher earning assets.

The decrease in cash also reflects deposit runoff, primarily in business and municipal accounts, in the first six months of 2022.

The decrease in municipal accounts reflects the annual financial cycle for municipalities in Vermont.

The increase in the loan portfolio was primarily attributable to an increase of $19.5 million in commercial & industrial loans and $16.8 million in CRE loans, which was partially offset by a $10.6 million decrease in PPP loans and $15.6 million in municipal loan balances, due primarily to the maturing of municipal loans at the end of the annual municipal finance cycle for school districts in Vermont.

Total deposits on June 30, 2022 were $871,908,642 compared to $879,399,953 on December 31, 2021, a decrease of $7.5 million, or 0.9%, reflecting the combined effect of fluctuating demand deposit accounts, mainly large-balance business checking accounts and a decrease in municipal accounts totaling approximately $33 million that is related to the annual municipal finance cycle mentioned above.

These decreases were partially offset by an increase in savings accounts of $14.7 million, or 8.8%.

Consolidated net income for the second quarter of 2022 decreased $25,254, or 0.8%, and decreased $645,413 from $6.1 million for the first six months of 2021 to $5.4 million compared to the same periods in 2022.

A $1.6 million decrease in the amortization of PPP loan processing fees from the SBA and an increase of $665,002 in provision for loan losses was partially offset by an increase of $886,067 in investment income from the Company’s debt securities portfolio and an increase in interest income from loans totaling $604,199, which includes interest adjustments for loans coming out of non-accrual status.

Also contributing to the offset was a decrease of $108,091 in interest expense on savings and money market deposits, and a decrease of $172,491 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.

Total interest income increased $310,359, or 3.7%, for the second quarter of 2022, compared to the same quarter in 2021, but decreased $55,005, or 0.3%, 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 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 same period in 2021.

Those processing fees represented 73.2% and 92.9%, respectively, of the total of fees on loans of $404,326 for the first three months of 2022, and $1.3 million for the first three months of 2021.

Total interest expense decreased $161,106, or 18.9%, for the first three months of 2022 compared to the same period in 2021.

A decrease in time deposits year over year is a contributing factor to the decrease in interest expense, as well as the prolonged low interest rate environment that prevailed throughout 2021 and most of the first quarter of 2022.

The amortization of the SBA PPP fees was $137,978 for the second quarter of 2022, compared to $835,999 for the same quarter in 2021, and $433,747 for the first six months of 2022, compared to $2.1 million for the same period in 2021.

Total interest expense decreased $15,652, or 2.0%, for the second quarter of 2022, compared to the same quarter in 2021, and decreased $176,757, or 10.9%, for the first six months of 2022 compared to the same period in 2021.

The recent increases in the fed funds rate have put more pressure on deposit pricing, resulting in an increase in the Company’s money market and time deposit rates.

Please refer to the interest rate sensitivity discussion in the Interest Rate Risk and Asset and Liability Management section for more information on the impact that the actions of the FRB’s FOMC in regulating interest rates, and changes in the yield curve could have on net interest income.

The provision for loan losses for the first quarter of 2022 was $862,500 compared to $267,497 for the same quarter of 2021, resulting in an increase of $595,003, or 222.4%, between periods.

This increase to the provision was driven primarily by a write-down on a non-performing CRE loan totaling $667,474 during March 2022.

The provision for loan losses for the second quarter of 2022 was $337,500 compared to $267,501 for the same quarter of 2021, resulting in an increase of $69,999, or 26.2%, between periods.

The provision for loan losses for the first six months of 2022 was $1.2 million compared to $534,998 for the same period in 2021, resulting in an increase of $665,002, or 124.3%, between periods.

This increase to the provision was driven primarily by a write-down on a non-performing CRE loan totaling $667,474 during March 2022, as well as increases to the reserve due to the increase in the commercial loan portfolios, both secured and unsecured.

Please refer to the ALL and provisions discussion in the Credit Risk section for more information.

Equity capital decreased to $77.4 million, with a book value per share of $14.08 as of March 31, 2022, compared to equity capital of $84.8 million and a book value of $15.48 as of December 31, 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.

Equity capital decreased to $74.0 million, with a book value per share of $13.41 as of June 30, 2022, compared to equity capital of $84.8 million and a book value of $15.48 as of December 31, 2021.

This decrease in equity capital is directly related to the increase of unrealized losses in the investment portfolio, reflecting rising bond rates, which resulted in an increase of $14.3 million, 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 March 16, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.23 per common share, payable on May 1, 2022 to shareholders of record on April 15, 2022.

As of March 31, 2022, all of the Company’s capital ratios, and those of our subsidiary Bank, were in excess of applicable regulatory requirements.

While we believe that we have sufficient capital to withstand an economic downturn from any headwinds related to inflation or recessionary periods, should one occur, our equity capital and regulatory capital ratios could be adversely impacted, including as a result of credit losses and other adverse impacts of the pandemic or government monetary policy.

On June 15, 2022, the Company's Board of Directors declared a quarterly cash dividend of $0.23 per common share, payable on August 1, 2022 to shareholders of record on July 15, 2022.

As of June 30, 2022, all of the Company’s capital ratios, and those of our subsidiary Bank, were in excess of applicable regulatory requirements.

CRITICAL ACCOUNTING POLICIES

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

There were no material changes during the first six months of 2022 in the Company’s critical accounting policies.

RESULTS OF OPERATIONS

Net income for the first three months of 2022 was $2,405,542 or $0.44 per common share, compared to $3,025,701 or $0.57 per common share for the same period of 2021.

Core earnings (NII) for the first three months of 2022 were $7.6 million compared to $7.8 million for the same period in 2021.

As noted in the Overview, the decrease year over year is attributable to a decrease in the amortization of fees from administering PPP loans.

Net income for the second quarter of 2022 was $3,021,152 or $0.56 per common share compared to $3,046,406 or $0.57 per common share for the same quarter of 2021.

Net income for the first six months of 2022 was $5,426,694 or $1.00 per common share, compared to $6,072,107 or $1.13 per common share for the same period of 2021.

Core earnings (NII) for the second quarter of 2022 were $7.8 million compared to $7.5 million for the same quarter in 2021 and $15.4 million for the first six months of 2022 compared to $15.3 million for the same period in 2021.

As noted in the Overview, the moderate increase in both periods reflects the decrease in the amortization of fees from administering PPP loans, which enhanced NII in 2021.

Over the past year, the portfolio of PPP loans 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 February 2021 to $12.2 million at December 31, 2021 and then to $5.1 million as of March 31, 2022.

The PPP loan portfolio balance decreased from $92.6 million at the end of February 2021 to $12.2 million at December 31, 2021 and then to $1.6 million as of June 30, 2022.

As these loans are paid in full, the unamortized fees are taken to income, resulting in a decrease in income year over year.

Interest paid on deposits, which is the major component of total interest expense, decreased $153,284, or 21.7% in 2022, driven in part by a decrease in time deposits.

Interest paid on deposits, which is the major component of total interest expense, decreased $45,635, or 7.2% between the second quarter comparison periods and $198,919, or 14.9%, year over year, driven in part by a decrease in interest-bearing deposits.

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

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

Three Months Ended March 31,

Three Months Ended June 30,

Return on average assets

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Average equity to average assets

Six Months Ended June 30,

Return on average assets

Return on average equity

Dividend payout ratio (1)

Average equity to average assets

Dividends declared per common share divided by earnings per common share.

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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 $236,043 and $258,761 for the three months ended March 31, 2022 and 2021, respectively, was derived from loans to local municipalities of $48.7 million and $52.2 million, and tax-exempt municipal investments of $2.2 million and $0, at March 31, 2022 and 2021, respectively.

The Company’s tax-exempt interest income of $256,652 and $254,467 for the three months ended June 30, 2022 and 2021, respectively, and $492,695 and $513,228 for the six months ended June 30, 2022 and 2021, respectively, was derived from loans to local municipalities of $32.4 million and $35.8 million, and tax-exempt municipal investments of $3.8 million and $0, at June 30, 2022 and 2021, respectively.

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

Three Months Ended March 31,

Three Months Ended June 30,

Net interest income as presented

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Net interest income, tax equivalent

Six Months Ended June 30,

Net interest income as presented

Effect of tax-exempt income

Net interest income, tax equivalent

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 March 31,

Three Months Ended June 30,

Interest-Earning Assets

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Net interest margin (4)

Included in gross loans are non-accrual loans with average balances of $5,736,827 and $4,087,346 for the three months ended March 31, 2022 and 2021, 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 $49,022,025 and $52,232,117 for the three months ended March 31, 2022 and 2021, respectively.

Included in other investments is the Company’s FHLBB Stock with average balances of $714,250 and $768,400, respectively, with a dividend rate of approximately 2.66% and 1.54%, respectively, for the three months ended March 31, 2022 and 2021, respectively.

Included in gross loans are non-accrual loans with average balances of $5,014,853 and $3,803,807 for the three months ended June 30, 2022 and 2021, 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 $47,565,225 and $51,534,733 for the three months ended June 30, 2022 and 2021, respectively.

Included in other investments is the Company’s FHLBB Stock with average balances of $712,800 and $468,796 for the three months ended June 30, 2022 and 2021, respectively, with a dividend rate of approximately 2.09% and 1.54%, respectively, per quarter.

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.

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

The average volume of interest-earning assets for the three-month period ended March 31, 2022 increased 9.0% compared to the three-month period ended March 31, 2021.

The average yield on interest-earning assets decreased 49 basis points for 2022 versus 2021.

The average volume of loans decreased 3.8% for the first three months of 2022 versus the same period in 2021, and the average yield on loans decreased 26 basis points to 4.42% for 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 volume of loans is attributable to the forgiveness and payoff of PPP loans by the SBA between periods.

Interest earned on the loan portfolio as a percentage of total interest income decreased to 90.8% for the first three months of 2022, compared to 95.8% for the same period in 2021.

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.

Six Months Ended June 30,

Interest-Earning Assets

$ 698,056,683

$ 724,657,107

Taxable investment securities

Tax-exempt investment securities

Sweep and interest-earning accounts

Other investments (2)

$ 956,927,287

$ 877,782,118

Interest-Bearing Liabilities

Interest-bearing transaction accounts

$ 259,195,319

$ 215,375,735

Money market funds

Savings deposits

Time deposits

Borrowed funds

Repurchase agreements

Finance lease obligations

Junior subordinated debentures

$ 719,401,436

$ 649,823,092

Net interest income

Net interest spread (3)

Net interest margin (4)

Included in gross loans are non-accrual loans with average balances of $5,375,840 and $3,945,577 for the six months ended June 30, 2022 and 2021, respectively.

Loans are stated before deduction of unearned discount and ALL, less loans held-for-sale and include tax-exempt loans to local municipalities with average balances of $48,289,600 and $51,881,498 for the six months ended June 30, 2022 and 2021, respectively.

Included in other investments is the Company’s FHLBB Stock with average balances of $713,521 and $768,599, respectively, with a dividend rate of approximately 2.4% and 1.54%, respectively, for the six months ended June 30, 2022 and 2021, respectively.

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.

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

The average volume of interest-earning assets for the three- and six-month periods ended June 30, 2022 increased 10.0% and 9.0%, respectively, compared to the same periods last year, while the average yield on interest-earning assets decreased 22 bps and 33 bps, respectively.

The average volume of loans decreased over the three- and six-month comparison periods of 2022 versus 2021 by 3.5% and 3.7%, respectively, and the average yield on loans increased one bp and decreased 13 bps, respectively.

Loans accounted for 73.2% and 73.0%, respectively, of the average interest-earning asset portfolio for the three- and six- month periods ended June 30, 2022 compared to 83.5% and 82.6%, respectively, for the same periods last year.

Interest earned on the loan portfolio as a percentage of total interest income was 88.9% and 89.8%, respectively for the three- and six-month periods in 2022 compared to 95.3% and 95.6%, respectively for the same periods in 2021.

The average volume of the taxable investment portfolio (classified as AFS) increased 107.4% and 129.3% during the three- and six-month periods ended June 30, 2022, compared to the same periods last year, and the average yield increased 28 bps and 12 bps, respectively, between periods.

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 average volume of the tax-exempt investment portfolio (classified as AFS) for the three- and six-month periods ended June 30, 2022 was $5.4 million and $3.8 million, respectively, with a tax equivalent yield of 3.15% and 2.97%, respectively.

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 account at the FRBB, decreased 12.8% for the three-month ended March 31, 2022 compared to the same period in 2021.

This decrease in volume is attributable to a need to fund investment and loan growth and also to a decrease in customer deposit accounts.

The average yield on these funds increased two basis points during the first three months of 2022 versus the same period in 2021.

The average volume of interest-bearing liabilities for the three-month period ended March 31, 2022 increased 10.9% compared to the same period in 2021.

The average rate paid on interest-bearing liabilities decreased 15 basis points during 2022 compared to 2021.

Although year to date volume shows an overall decrease in deposit accounts, most of the funds deposited through PPP loan proceeds and stimulus funds remained on deposit throughout 2021.

The average volume of interest-bearing transaction accounts increased 20.5% during the three-month period ended March 31, 2022 compared to the same period of 2021, reflecting strong deposit growth throughout 2021.

The average rate paid on these accounts decreased three basis points between comparison periods.

The average volume of money market accounts increased 8.1% during the three-month period ended March 31, 2022 compared to the same period of 2021, while the average rate paid on these deposits decreased 16 basis points.

The average volume of savings accounts increased 19.7% for the three-month period ended March 31, 2022 compared to the same period in 2021, while the average rate paid on these accounts decreased five basis points.

The average volume of time deposits decreased 4.2% during the three-month period ended March 31, 2022 compared to the same period in 2021, and the average rate paid decreased 37 basis points.

Interest paid on time deposits as a percentage of total interest expense was 34.7% and 41.4%, respectively 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 in January and April of 2021 that had not been replaced as of March 31, 2022.

The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing account at the FRBB, increased 24.7% for the three-months ended June 30, 2022 compared to the same period in 2021, while a decrease of 2.4% is noted for the six-months ended June 30, 2022 compared to the same period in 2021.

The decrease in average volume year over year is attributable to the funding of investment and loan growth and also to a decrease in customer deposit accounts.

The average yield on these funds increased 41 bps and 25 bps for the three- and six-month periods ended June 30, 2022 versus the same periods in 2021.

The average volume of interest-bearing liabilities for the three- and six-month periods ended June 30, 2022 increased 10.6% and 10.7%, respectively, compared to the same periods in 2021, while the average rate paid on interest-bearing liabilities decreased five bps and 10 bps, respectively.

The average volume of interest-bearing transaction accounts increased 20.2% and 20.4%, respectively for the three- and six-month periods ended June 30, 2022 compared to the same periods of 2021, reflecting strong deposit growth during the third and fourth quarters of 2021.

The average rate paid on these accounts increased nine and three bps, respectively, between comparison periods.

The average volume of money market accounts increased 2.9% and 5.5%, respectively for the three- and six-month periods ended June 30, 2022 compared to the same periods of 2021, while the average rate paid on these deposits decreased 14 and 15 bps, respectively.

The average volume of savings accounts increased 14.6% and 17.0%, respectively, for the three- and six-month periods ended June 30, 2022 compared to the same periods in 2021, while the average rate paid on these accounts decreased four bps in both comparison periods.

The average volume of time deposits decreased 2.3% and 3.3%, respectively, for the three- and six-month periods ended June 30, 2022 compared to the same periods in 2021, and the average rate paid decreased 26 and 31 bps, respectively.

Interest paid on time deposits as a percentage of total interest expense was 30.3% and 32.4%, respectively, for the three and six-month periods ended June 30, 2022, compared to 39.5% and 40.5%, respectively, for the same comparison periods in 2021.

The decrease in the average volume of time deposits between periods reflects the maturity of brokered deposits in January and April of 2021 that had not been replaced as of June 30, 2022.

Management still considers the brokered deposit market to be a beneficial source of funding to help smooth out the fluctuations in core deposit balances without the need to disrupt deposit pricing in the Company’s local markets.

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Refer to the “Liquidity and Capital Resources” section for more discussion on this topic.

The average volume of borrowed funds decreased $1.2 million, or 48.6% for the three-month period ended March 31, 2022 compared to the same period in 2021 and, for both periods, consisted of only JNE funds at zero percent interest.

The average volume of repurchase agreements decreased 22.7% for the three-month period ended March 31, 2022 compared to the same period in 2021 and the average rate paid decreased nine basis points.

In summary, between the three-month periods ended March 31, 2022 and 2021, the average yield on interest-earning assets decreased 49 basis points and the average rate paid on interest-bearing liabilities decreased 15 basis points.

Net interest spread decreased 34 basis points for the three-month period of 2022 versus 2021 and net interest margin decreased 39 basis points between periods.

The average volume of borrowed funds decreased 43.5% and 46.1% for the three- and six-month periods ended June 30, 2022 compared to the same periods in 2021 and, for all periods, consisted of only JNE funds at zero percent interest.

The average volume of repurchase agreements increased 2.7% and decreased 11.5%, respectively, for the three- and six-month periods ended June 30, 2022 compared to the same periods in 2021 and the average rate paid increased two bps and decreased four bps, respectively, between comparison periods.

In summary, between the three- and six-month periods ended June 30, 2022 and 2021, the average yield on interest-earning assets decreased 22 bps and 33 bps, respectively, and the average rate paid on interest-bearing liabilities decreased five and 10 bps, respectively.

Net interest spread decreased 17 bps and 23 bps for the three- and six-month periods of 2022 versus 2021 and net interest margin decreased 18 and 27 bps, respectively, between periods.

The following table summarizes the variances in interest income and interest expense on a fully tax-equivalent basis for the interim periods presented for 2022 and 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,

Average Interest-Earning Assets

$ (1,041,159 )

Taxable investment securities

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Three Months Ended

Six Months Ended

Income from sold loans

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Total non-interest income

Total non-interest income increased $114,198, or 7.3%, for the first three months of 2022 compared to the same period in 2021, with significant changes noted in the following:

The increase in service fees during the comparison period is mostly due to an increase in interchange income of $21,686, or 5% and overdraft charges of $53,280, or 29.3%, year over year.

The increase in income from sold loans is due to a higher volume of loans sold into the secondary market during the first three months of 2022 versus 2021.

An increase in CRE loan volume in 2022 resulted in a significant increase in documentation fees collected at origination, accounting for the increase in other income from loans when comparing the two periods.

Income from CFS Partners decreased between periods due in part to the impact of mark-to-market adjustments to CFS Partners equity portfolio during the first two months of 2022.

The capital markets rebounded during March, but not enough to offset the decrease during the first two months.

Included in Other miscellaneous income for the first three months of 2022 is income totaling $23,400 associated with a renegotiated contract with the Company’s check printing vendor.

Total non-interest income decreased $134,239, or 7.6% for the second quarter of 2022 and $20,040, or 0.6%, for the first six months of 2022 compared to the same periods in 2021, with significant changes noted in the following:

The increase in service fees during the comparison period is mostly due to an increase in overdraft charges of $77,428, or 42.8%, between the second quarter comparison periods and $130,707, or 36.0%, year over year.

The decrease in income from sold loans is due in part to a lower volume of loans sold into the secondary market during the second quarter of 2022 versus 2021, as well as lower points and premiums on these loans in 2022.

Income from CFS Partners decreased between periods due in part to the impact of mark-to-market adjustments to CFS Partners equity portfolio during 2022.

Included in Other miscellaneous income for 2022 is income totaling $23,400 associated with a renegotiated contract with the Company’s check printing vendor.

Non-interest Expense

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Three Months Ended

Six Months Ended

Salaries and wages

2 unchanged sentences

Other expenses

Outsourcing expense

Service contracts - administrative

Directors fees

Telephone expense

Consultant services

FDIC insurance

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Total non-interest expense

Total non-interest expense increased $88,537, or 1.7%, for the first three months of 2022 compared to the same period in 2021, with significant changes noted in the following:

Total non-interest expense increased $165,068, or 3.1% for the second quarter of 2022 and $253,605, or 2.4%, for the first six months of 2022 compared to the same periods in 2021, with significant changes noted in the following:

The increase in salaries and wages is due to normal salary increases.

The decrease in employee benefits in was attributable to a decrease in health insurance claims year over year.

The increase in directors’ fees is attributable to a change to the Director’s fee schedule as well as an additional Director for 2022 whose quarterly compensation totaled $10,056.

Telephone expense increased due to a one-time fee charged in February 2022.

An increase was budgeted for audit fees in anticipation of increased audit services due to 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.

The decrease in employee benefits was attributable to a decrease in health insurance claims year over year.

The increase in outsourcing expense is attributable to increases in contract pricing, as well as an increase in transactions.

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

The increase in directors’ fees is attributable to a change to the Director’s fee schedule as well as an additional Director for 2022.

The increase in audit fees reflects increased audit services due to the Company surpassing the $1.0 billion asset size.

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

2 unchanged sentences

The use of deposit automation replaces a manual process for required monitoring of cash deposits as well as providing fraud detection measures at ATMs.

The increase in electronic banking expense is attributable to a new mobile banking platform which includes security enhancements and modern upgrades.

State deposit tax increased year over year due primarily to the increase in 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%.

APPLICABLE INCOME TAXES

The provision for income taxes decreased $153,441, or 22.7%, for the first three months of 2022 compared to the same period in 2021 and is proportional to the decrease in income before income taxes totaling $773,600 year over year.

Tax credits related to limited partnership investments amounted to $96,237 and $117,015, respectively, for the first three months of 2022 and 2021.

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $67,092 and $90,762, respectively, for the first three months of 2022 and 2021.

The provision for income taxes decreased $18,041, or 2.6% for the second quarter of 2022 compared to the same quarter in 2021, and decreased $171,482, or 12.5%, for the first six months of 2022 compared to the same period in 2021 and is proportional to the decrease in income before income taxes totaling $43,295 for the second quarter of 2022 versus 2021 and $816,895 year over year.

Tax credits related to limited partnership investments amounted to $96,237 and $117,015, respectively, for the second quarter of 2022 and 2021, and $192,474 and $234,030, respectively, for the first six months of 2022 and 2021.

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $67,092 and $90,762, respectively, for the second quarters of 2022 and 2021, and $134,184 and $181,524, respectively, for the first six months of 2022 and 2021.

These investments provide tax benefits, including tax credits, and are designed to provide a targeted effective annual yield between 7% and 10%.

1 unchanged sentence

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:

March 31, 2022

June 30, 2022

December 31, 2021

17 unchanged sentences

Time deposits

The increase in the loan portfolio during the first three months of 2022 was attributable to increases totaling $13.9 million in commercial & industrial and CRE loans, which was partially offset by payoffs of certain PPP loans through SBA’s forgiveness program totaling $7.0 million.

The increase in the loan portfolio during the first six months of 2022 was attributable to increases totaling $36.3 million in commercial & industrial and CRE loans, which was partially offset by payoffs of certain PPP loans through SBA’s forgiveness program totaling $10.6 million and maturities of certain municipal loans totaling $15.6 million.

The SBA PPP program ended during the second quarter of 2021, so this portfolio will continue to decrease throughout the remainder of 2022 either through pay downs or payoffs initiated on behalf of SBA’s forgiveness program, or by regular amortization as borrowers begin to make scheduled monthly payments.

The increase in the securities AFS portfolio is attributable to the purchase of $19.1 million in securities AFS during the first three months of 2022, consisting of $7.2 million in US Treasuries, $3.8 million in Tax-exempt municipal bonds, and $8.1 million in MBS.

These purchases were reduced in part by maturities and calls exercised amounting to $291,500, as well as principal payments on MBS totaling $4.2 million, and by an increase of $11.1 million in unrealized losses arising during the first quarter of 2022 and reflected in OCI.

The maturities within the municipal loan portfolio are cyclical, with $14.5 million renewed in July, 2022.

The increase in the securities AFS portfolio is attributable to the purchase of $34.8 million in securities AFS during the first six months of 2022, consisting of $9.2 million in US Treasuries, $7.1 million in Tax-exempt municipal bonds, $1.6 million in ABS, $3.0 million in CMO, and $14.0 million in MBS.

These purchases were reduced in part by maturities and calls exercised amounting to $2.0 million, as well as principal payments on various portfolios totaling $7.9 million, and by an increase of $18.1 million in unrealized losses arising during the first six months of 2022, which is reflected in OCI.

In management’s view, the size of the securities AFS portfolio is appropriate and proportional to the overall asset base, as this portfolio serves an important role in the Company’s liquidity position.

Most of the fluctuation in demand deposits is due to a decrease during the first quarter of 2022 in business checking accounts of $7.1 million, or 4.4%, which the Company believes primarily reflects the outflow of funds as customers are starting to spend some of the funds generated through the PPP loans.

The decrease in interest-bearing transaction accounts 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 $8.1 million, or 7.0%, in consumer interest-bearing transaction accounts.

Most of the fluctuation in demand deposits is due to a decrease during the first six months of 2022 in business checking accounts of $9.0 million, or 5.6%, which the Company believes primarily reflects the outflow of funds as customers are starting to spend some of the funds generated through the PPP loans.

The decrease in interest-bearing transaction accounts consists of a decrease of $18.7 million, or 44.4%, in municipal deposit accounts, which was partially offset by an increase of $7.9 million, or 6.8%, in consumer interest-bearing transaction accounts and a combined increase of $3.5 million in ICS funds and the deposit account of the Company’s trust and asset management affiliate, CFSG.

The increase in savings deposits of $14.7 million, or 8.8%, is likely attributable in part to parked funds as customers await more favorable rates for time deposits, as well as deposits of stimulus payments and tax credits from the U.S.

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Management expects that the rising rate environment will have a positive impact to the Company’s 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 March 31, 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, 2022:

Percent Change in NII

The estimated amounts shown in the table are within the ALCO Policy limits.

The estimated amounts shown in the table above are within the ALCO Policy limits.

However, those amounts do not represent a forecast and should not be relied upon as indicative of future results.

1 unchanged sentence

While assumptions used in the ALCO process, including the interest rate simulation analyses, are developed based upon current economic and local market conditions, and expected future conditions, the Company cannot provide any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

As the market rates continue to increase, the impact of a falling rate environment is more pronounced, and the possibility more plausible than during the last several years of near zero short rates.

As of 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 will be phased out, with an expected target date of December 31, 2021 for the 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 Indenture, if 3-month LIBOR is not available, the 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.

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.

As the market rates continue to increase, the impact of a falling rate environment is more pronounced, and the possibility more plausible than during the last several years of near zero short-term rates.

As of June 30, 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%.

As previously announced by the Financial Conduct Authority in the United Kingdom, the entity that administers LIBOR, 3-month LIBOR for U.S.

dollar denominated deposits will be phased out as of June 30, 2023.

The Indenture governing the terms of the Company’s Debentures contains detailed fallback provisions in the event 3-month LIBOR is not available, empowering the Trustee to obtain substitute quotations from other leading banks.

However, those fallback provisions may no longer be effective as a result of the passage in March 2022 of the federal Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”).

Among other provisions, the LIBOR Act voids fallback provisions that are based on a “determining person” (such as an indenture trustee) obtaining quotations of interbank lending or deposit rates and replaces the contract rate as a matter of law, without need to amend contract documents, with a benchmark interest rate that will be identified in regulations to be promulgated by the Federal Reserve no later than September 11, 2022.

Any Federal Reserve-identified benchmark rate will be based on the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York and will include an appropriate “tenor spread adjustment” to reflect historical spreads between LIBOR and SOFR.

The replacement rate established under the LIBOR Act for ineffective fallback provisions will take effect on the first London banking day after June 30, 2023.

The Indenture Trustee has not yet informed the Company regarding its views on the applicability of the LIBOR Act to the interest rate fallback provisions in the Indenture but is expected to do so during the third quarter.

Aside from the Debentures, the Company does not have any other exposures to the phase out of LIBOR.

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Loans are reviewed periodically by an independent loan review firm to help ensure accuracy of the Company's internal risk ratings and compliance with various internal policies, procedures and regulatory guidance.

Residential mortgages represented 30.8% of the Company’s loan balances as of 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.

Residential mortgages represented 31.3% of the Company’s loan balances as of June 30, 2022 and December 31, 2021.

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.

Residential mortgages with loan-to-value ratios exceeding 80% are generally covered by PMI.

A 90% loan-to-value residential mortgage product without PMI is only available to borrowers with excellent credit and low debt-to-income ratios and has not been widely originated.

As of March 31, 2022, junior lien home equity products made up 17.6% of the residential mortgage portfolio with maximum loan-to-value ratios (including prior liens) of 80%.

As of June 30, 2022, junior lien home equity products made up 15.3% 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 68.7% of the Company’s loan portfolio at March 31, 2022, compared to 68.1% at December 31, 2021.

Those percentages included the Company’s portfolio of PPP loans, which have been steadily decreasing, and totaled $5.1 million at March 31, 2022, compared to $12.2 million at December 31, 2021.

Commercial & industrial and CRE loans together comprised 68.3% of the Company’s loan portfolio at June 30, 2022, compared to 68.1% at December 31, 2021.

Those percentages included the Company’s portfolio of PPP loans, which has been steadily decreasing, and totaled $1.6 million at June 30, 2022, compared to $12.2 million at December 31, 2021.

Growth in the CRE portfolio in recent years has been principally driven by new loan volume in Chittenden County and northern Windsor County around the White River Junction, I91-I93 interchange area.

Credits in the Chittenden County market are being managed by two commercial lenders out of the Company’s Burlington loan production office that know the area well , while Windsor County is being served by a commercial lender from the St.

Credits in the Chittenden County market are being managed by two commercial lenders out of the Company’s Burlington loan production office who know the area well, while Windsor County is being served by a commercial lender from the St.

Johnsbury office with previous lending experience serving the greater White River Junction area.

2 unchanged sentences

The types of CRE transactions driving the growth have been a mix of construction, land and development, multifamily, and other non-owner occupied CRE properties including hotels, retail, office, and industrial properties.

The largest components of the $308.3 million CRE portfolio at March 31, 2022 were $105.6 million in owner-occupied CRE and $110.0 million in non-owner occupied CRE.

The largest components of the $318.1 million CRE portfolio at June 30, 2022 were $103.5 million in owner-occupied CRE and $119.1 million in non-owner occupied CRE.

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 March 31, 2022, the Company had $36.8 million in guaranteed loans with guaranteed balances of $28.8 million, compared to $42.9 million in guaranteed loans with guaranteed balances of $35.4 million at December 31, 2021.

At June 30, 2022, the Company had $33.0 million in guaranteed loans with guaranteed balances of $24.8 million, compared to $42.9 million in guaranteed loans with guaranteed balances of $35.4 million at December 31, 2021.

PPP loans are included in these totals, all of which carry a 100% guarantee through the SBA, subject to borrower eligibility requirements.

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Management evaluates each TDR situation on its own merits and does not foreclose the granting of any particular type of concession.

The Company’s TDRs that were past due 90 days or more or in non-accrual status as of the dates presented:

March 31, 2022

The following table shows the Company’s TDRs that were past due 90 days or more or in non-accrual status as of the balance sheet dates:

June 30, 2022

December 31, 2021

3 unchanged sentences

Residential real estate - Jr lien

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

March 31, 2022

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

June 30, 2022

December 31, 2021

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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.

When establishing the ALL each quarter, the Company applies a combination of historical loss factors to most loan segments, including residential first and junior lien mortgages, CRE, commercial & industrial, and consumer loan portfolios, but excluding the municipal loan and purchased loan portfolios as there has never been a loss recorded in either of those loan segments.

The Company applies numerous qualitative factors to each segment of the loan portfolio.

9 unchanged sentences

Loans outstanding

$ 696,293,182

$ 689,988,533

Non-accruing loans to loans outstanding

1 unchanged sentence

Loans outstanding

$ 696,293,182

$ 689,988,533

ALL to non-accruing loans

Non-accruing loans

The provision for loan losses for the first quarter ended March 31, 2022 was $862,500, compared to $267,497 for the same period in 2021.

The $595,003 year over year increase was driven primarily by a write-down on a single non-performing loan, which is in foreclosure, totaling $667,474.

The first quarter ALL analysis indicates that the reserve balance of $7.9 million at March 31, 2022 is sufficient to cover losses that are probable and estimable as of the measurement date, with an unallocated reserve of $90,276.

The provision for loan losses for the six months ended June 30, 2022 was $1.2 million, compared to $534,998 for the same period in 2021.

The $665,002 year over year increase was driven in part by an increase in the commercial loan volume as well as a write-down totaling $667,474, on a single non-performing loan, which is in foreclosure.

The second quarter ALL analysis indicates that the reserve balance of $8.2 million at June 30, 2022 is sufficient to cover losses that are probable and estimable as of the measurement date, with an unallocated reserve of $130,782.

Management believes the reserve balance continues to be directionally consistent with the overall risk profile of the Company’s loan portfolio and credit risk appetite.

1 unchanged sentence

While the ALL is described as consisting of separate allocated portions, the entire ALL is available to support loan losses, regardless of category.

Due to the charge off activity during the first quarter of 2022, the unallocated reserves are lower than historical levels.

Due to the charge off activity during the first six months of 2022, the unallocated reserves are lower than historical levels.

It is expected that the provision would be increased in future periods, if loan growth or additional charge-offs warrants an increase.

1 unchanged sentence

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

For the Three Months Ended March 31,

For the Six Months Ended June 30,

Commercial & industrial

1 unchanged sentence

Average amount outstanding

$ 120,804,935

$ 177,158,060

Purchased loans

Net charge-off during the period

Average amount outstanding

Commercial real estate

1 unchanged sentence

Average amount outstanding

$ 304,057,825

$ 280,029,141

Net charge-off during the period

3 unchanged sentences

Average amount outstanding

$ 182,305,338

$ 170,036,028

Residential real estate - Jr lien

5 unchanged sentences

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.

11 unchanged sentences

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 three months of 2022, the Company did not engage in any activity that created any additional types of off-balance sheet risk.

During the first six months of 2022, the Company did not engage in any activity that created any additional types of off-balance sheet risk.

LIQUIDITY AND CAPITAL RESOURCES

8 unchanged sentences

One-way deposits acquired through the CDARS program provide an alternative funding source when needed.

At March 31, 2022 and December 31, 2021, the Company had no one-way CDARS outstanding.

At June 30, 2022 and December 31, 2021, the Company had no one-way CDARS outstanding.

In addition, two-way (reciprocal) CDARS deposits, as well as reciprocal ICS money market and demand deposits, 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 March 31, 2022 and December 31, 2021, the Company reported $3.6 million in reciprocal CDARS deposits.

The balance in ICS reciprocal money market deposits was $17.2 million at March 31, 2022, compared to $15.3 million at December 31, 2021, and the balance in ICS reciprocal demand deposits as of those dates was $64.6 million and $70.8 million, respectively.

At June 30, 2022 and December 31, 2021, the Company reported $3.6 million in reciprocal CDARS deposits.

The balance in ICS reciprocal money market deposits was $16.6 million at June 30, 2022, compared to $15.3 million at December 31, 2021, and the balance in ICS reciprocal demand deposits as of those dates was $71.5 million and $70.8 million, respectively.

The Company had two blocks of DTC Brokered CDs totaling $2.3 million and $1.4 million with maturities in January, 2021 and April, 2021, respectively.

These blocks were not replaced, leaving no DTC Brokered CDs outstanding at December 31, 2021 or March 31, 2022.

These blocks were not replaced, leaving no DTC Brokered CDs outstanding at December 31, 2021 or June 30, 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 2021 has reduced the Company’s need for supplementary funding sources in the near term.

At March 31, 2022 and December 31, 2021, borrowing capacity of $95.3 million and $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.

At June 30, 2022 and December 31, 2021, borrowing capacity of $89.8 million and $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 $65.1 million and $52.3 million, respectively, at March 31, 2022 and December 31, 2021.

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 $62.8 million and $52.3 million, respectively, at June 30, 2022 and December 31, 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 165 bps.

The Company had no outstanding advances through this facility at March 31, 2022 or December 31, 2021.

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

The Company had no outstanding advances through this facility at June 30, 2022 or December 31, 2021.

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

Long-Term Advances(1)

6 unchanged sentences

The Company had no outstanding advances against these credit lines as of the balance sheet dates presented.

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

The following table illustrates the changes in shareholders' equity from December 31, 2021 to June 30, 2022:

Balance at December 31, 2021 (book value $15.48 per common share)

3 unchanged sentences

Change in AOCI on AFS securities, net of tax

Balance at March 31, 2022 (book value $14.08 per common share)

(14,299,655 )

Balance at June 30, 2022 (book value $13.41 per common share)

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.

2 unchanged sentences

Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

As of March 31, 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.

As of June 30, 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, our regulatory capital ratios could be adversely impacted by future credit losses and other operational impacts of deteriorating economic conditions.

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.

5 unchanged sentences

(Dollars in Thousands)

March 31, 2022

June 30, 2022

Common equity tier 1 capital

11 unchanged sentences

Applicable to banks, but not bank holding companies.

Reflects recalculation of the Company’s previously reported common equity tier I capital ratio.

The previously reported calculation for December 31, 2021 and prior annual and interim periods incorrectly included the Company’s outstanding preferred stock and trust preferred securities in the equity component of the calculation.

The Company's ability to pay dividends to its shareholders is largely dependent on the Bank's ability to pay dividends to the Company.

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis