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Item 2. Management’s Discussion and Analysis

2022-11-14 compared with 2022-08-12 · 184 added, 158 removed, 414 unchanged (45% of the section changed)

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Period Ended June 30, 2022

Period Ended September 30, 2022

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

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.

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

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

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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 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;

changes in federal or state tax laws or policy;

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

the impact of inflation on the Company’s customers and on its financial results and performance;

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

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 U.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;

the planned phase out of three month LIBOR by 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%;

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

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

changes in federal or state tax laws or policy;

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;

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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;

continuing the 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;

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

the continuing 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;

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increased cybercrime and payment system risk due to increase usage by customers of online and other remote banking channels;

the impact of inflation on the Company’s customers and on its financial results and performance;

the ongoing challenges to find qualified workers to maintain a stable workforce;

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

adverse changes in the credit rating of U.S.

government debt.

Readers are cautioned not to place undue reliance on such statements as they speak only as of the date they are made.

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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 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%.

The Company’s consolidated assets on September 30, 2022 were $1,026,884,950 compared to $1,019,105,799 at December 31, 2021, an increase of 0.8%.

Significant changes in the asset base were due to an increase in net loans of $34.0 million, or 5.0%, and an increase in the available-for-sale investment portfolio of $4.9 million, or 2.7%, which was partially offset by a decrease of $36.5 million, or 33.0%, in cash and cash equivalents.

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.

The increase in the loan portfolio was primarily attributable to an increase of $20.0 million in commercial & industrial loans and $23.3 million in CRE loans, which was partially offset by an $11.1 million decrease in PPP loans and $7.8 million in municipal loan balances.

Total deposits on September 30, 2022 were $903,041,149 compared to $879,399,953 on December 31, 2021, an increase of $23.6 million, or 2.7%.

Savings accounts increased $11.5 million, or 6.8%, followed by money market funds with an increase of $7.9 million, or 6.1%.

Consolidated net income for the third quarter of 2022 decreased $88,696, or 2.4% to $3.6 million compared to $3.7 million in the third quarter of 2021.

Income for the first nine months of 2022 decreased $734,109 to $9.0 million compared to $9.7 million in the same period of 2021.

Year over year, a $3.2 million decrease in PPP loan processing fees from the SBA and an increase of $700,835 in provision for loan losses was partially offset by an increase of $1.4 million in interest income from the Company’s debt securities portfolio and an increase in interest income from loans totaling $1.58 million, which includes interest adjustments of approximately $286 thousand for loans coming out of non-accrual status.

Also contributing to the offset was a decrease of $74,979 in interest expense on savings and money market deposits, and a decrease of $226,062 in interest expense on time deposits.

These changes and other significant changes are discussed in the appropriate income sections of this MD&A.

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.

Total interest income increased $221,392 or 2.4%, for the third quarter of 2022, compared to the same quarter in 2021, and increased $166,388, or 0.6%, 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 $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.

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 six months of 2022.

Negatively impacting interest income for the three- and nine-month comparison periods was the amortization of the SBA PPP fees in the amount of $36,182 for the third quarter of 2022, compared to $1.6 million for the same quarter in 2021, and $469,929 for the first nine months of 2022, compared to $3.7 million for the same period in 2021.

Total interest expense increased $329,895, or 45.3%, for the third quarter of 2022, compared to the same quarter in 2021, and increased $153,139, or 6.5%, for the first nine 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 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.

The provision for loan losses for the third quarter of 2022 was $125,000 compared to $89,167 for the same quarter of 2021, resulting in an increase of $35,833, or 40.2%, between periods.

The provision for loan losses for the first nine months of 2022 was $1.3 million compared to $624,165 for the same period in 2021, resulting in an increase of $700,835, or 112.3%, 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 $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.

Equity capital decreased to $69.5 million, with a book value per share of $12.56 as of September 30, 2022, compared to $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 $21.4 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 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.

On September 7, 2022, the Company's Board of Directors declared a quarterly cash dividend of $0.23 per common share, payable on November 1, 2022 to shareholders of record on October 15, 2022.

As of September 30, 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, deteriorating economic conditions, or government monetary policy.

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Because of the significance of these estimates and assumptions, there is a high likelihood that materially different amounts would be reported for the Company under different conditions or using different assumptions or estimates.

Management evaluates on an ongoing basis its judgment as to which policies are considered to be critical.

Management evaluates on an ongoing basis its judgment as to which policies are considered to be critical, and communicates all evaluations with the Company’s Audit Committee.

The Company’s critical accounting policies govern:

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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 six months of 2022 in the Company’s critical accounting policies.

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

RESULTS OF OPERATIONS

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.

Net income for the third quarter of 2022 was $3,610,506 or $0.66 per common share compared to $3,699,202 or $0.69 per common share for the same quarter of 2021.

Net income for the first nine months of 2022 was $9,037,200 or $1.67 per common share, compared to $9,771,309 or $1.82 per common share for the same period of 2021.

Core earnings (NII) for the third quarter of 2022 were $8.37 million compared to $8.48 million for the same quarter in 2021 and $23.77 million for the first nine months of 2022 compared to $23.76 million for the same period in 2021.

As noted in the Overview, the moderate changes in NII in both periods primarily reflect 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 $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 $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.

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 $1.1 million as of September 30, 2022.

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

Interest paid on deposits, which is the major component of total interest expense, increased $243,656, or 41.0% between the third quarter comparison periods and $44,737, or 2.3%, year over year, driven primarily by the increases in the fed funds rate during 2022.

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 June 30,

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

Three Months Ended September 30,

Return on average assets

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Average equity to average assets

Six Months Ended June 30,

Nine Months Ended September 30,

Return on average assets

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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 $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 Company’s tax-exempt interest income of $284,618 and $246,627 for the three months ended September 30, 2022 and 2021, respectively, and $777,314 and $759,855 for the nine months ended September 30, 2022 and 2021, respectively, was derived from loans to local municipalities of $40.2 million and $53.8 million, and tax-exempt municipal investments of $10.3 million and $0, at September 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 June 30,

Three Months Ended September 30,

Net interest income as presented

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Net interest income, tax equivalent

Six Months Ended June 30,

Nine Months Ended September 30,

Net interest income as presented

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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,

Interest income (excluding interest on non-accrual loans) is expressed on a tax equivalent basis, both in dollars and as a yield/rate for the comparison periods presented.

Three Months Ended September 30,

Interest-Earning Assets

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Net interest margin (4)

Included in gross loans are non-accrual loans with average balances of $5,014,853 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.

Included in gross loans are non-accrual loans with average balances of $7,337,588 and $3,803,807 for the three months ended September 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 $39,007,717 and $52,546,634 for the three months ended September 30, 2022 and 2021, respectively.

Included in other investments is the Company’s FHLBB Stock with average balances of $712,800 and $769,000 for the three months ended September 30, 2022 and 2021, respectively, with a dividend rate of approximately 3.72% and 1.52%, 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.

Six Months Ended June 30,

Nine Months Ended September 30,

Interest-Earning Assets

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Net interest margin (4)

Included in gross loans are non-accrual loans with average balances of $5,375,840 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.

Included in gross loans are non-accrual loans with average balances of $5,375,840 and $3,945,577 for the nine months ended September 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 $45,161,639 and $52,105,647 for the nine months ended September 30, 2022 and 2021, respectively.

Included in other investments is the Company’s FHLBB Stock with average balances of $713,278 and $768,734, respectively, with a dividend rate of approximately 3.38% and 1.52%, respectively, for the nine months ended September 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 average volume of interest-earning assets for the three- and nine-month periods ended September 30, 2022 increased 10.2% and 9.5%, respectively, compared to the same periods last year, while the average yield on interest-earning assets decreased 29 bps and 32 bps, respectively.

The average volume of loans increased 1.7% over the three-month comparison period and decreased 1.9% over the nine-month comparison period of 2022 versus 2021, while the average yield on loans decreased 42 bp and 23 bps, respectively.

The $286 thousand in income for loans coming out of non-accrual status, discussed in the Overview, translates to an increase of five bps in the nine-month comparison period for 2022.

Loans accounted for 74.0% and 73.1%, respectively, of the average interest-earning asset portfolio for the three- and nine-month periods ended September 30, 2022 compared to 80.3% and 81.6%, respectively, for the same periods last year.

Interest earned on the loan portfolio as a percentage of total interest income was 86.7% and 88.7%, respectively for the three- and nine-month periods in 2022 compared to 95.3% and 95.5%, respectively for the same periods in 2021.

The average volume of the taxable investment portfolio (classified as AFS) increased 100.0% and 112.6% during the three- and nine-month periods ended September 30, 2022, compared to the same periods last year, and the average yield increased 33 bps and 23 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- 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 average volume of the tax-exempt investment portfolio (classified as AFS) for the three- and nine-month periods ended September 30, 2022 was $9.1 million and $5.6 million, respectively, with a tax equivalent yield of 3.75% and 3.39%, 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, 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.

The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing account at the FRBB, decreased 27.5% and 7.7%, respectively, for the three- and nine-month comparison periods ended September 30, 2022 compared to the same period in 2021.

The decrease in average volume is attributable to the funding of investment and loan growth.

The average yield on these funds increased 198 bps and 72 bps for the three- and nine-month periods ended September 30, 2022 versus the same periods in 2021.

The average volume of interest-bearing liabilities for the three- and nine-month periods ended September 30, 2022 increased 10.7% in both periods, compared to the same periods in 2021, while the average rate paid on interest-bearing liabilities increased 14 bps and decreased two bps, respectively.

The average volume of interest-bearing transaction accounts increased 16.0% and 18.9%, respectively for the three- and nine-month periods ended September 30, 2022 compared to the same periods of 2021.

The average rate paid on these accounts increased 36 bps and 14 bps, respectively, between comparison periods.

The average volume of money market accounts increased 9.3% and 6.8%, respectively for the three- and nine-month periods ended September 30, 2022 compared to the same periods of 2021, while the average rate paid on these deposits increased 10 bps and decreased six bps, respectively.

The average volume of savings accounts increased 8.5% and 14.0%, respectively, for the three- and nine-month periods ended September 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 1.2% and 2.6%, respectively, for the three- and nine-month periods ended September 30, 2022 compared to the same periods in 2021, and the average rate paid decreased 13 bps and 25 bps, respectively.

Interest paid on time deposits as a percentage of total interest expense was 21.7% and 27.9%, respectively, for the three and nine-month periods ended September 30, 2022, compared to 36.7% and 39.3%, 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 September 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 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 average volume of borrowed funds decreased 43.5% and 45.3% for the three- and nine-month periods ended September 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 41.3% and 2.5%, respectively, for the three- and nine-month periods ended September 30, 2022 compared to the same periods in 2021 and the average rate paid increased 26 bps and six bps, respectively, between comparison periods.

In summary, between the three- and nine-month periods ended September 30, 2022 and 2021, the average yield on interest-earning assets decreased 29 bps and 32 bps, respectively, and the average rate paid on interest-bearing liabilities increased 14 bps and decreased two bps, respectively.

Net interest spread decreased 43 bps and 30 bps for the three- and nine-month periods of 2022 versus 2021 and net interest margin decreased 40 and 31 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 June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Average Interest-Earning Assets

$ (1,189,407 )

$ (1,645,141 )

Taxable investment securities

22 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Income from sold loans

3 unchanged sentences

Total non-interest income

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.

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 both comparison 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 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.

Total non-interest income decreased $168,983, or 9.9% for the third quarter of 2022 and $189,023, or 3.8%, for the first nine 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 $31,752, or 39.9%, between the third quarter comparison periods and $162,459, or 27.8%, 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 first nine months of 2022 versus 2021, as well as lower points and premiums on these loans in 2022.

An increase in CRE loan volume in 2022 resulted in a significant increase in documentation fees collected at origination as well as commercial rate lock fees collected accounting for the increase in other income from loans when comparing both comparison 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 2022, reflecting general stock market conditions.

Included in Other miscellaneous income for 2022 is income totaling $23,400 associated with a renegotiated contract with the Company’s check printing vendor, helping to offset decreases in other components of this category.

Non-interest Expense

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Salaries and wages

2 unchanged sentences

Other expenses

Outsourcing expense

Service contracts - administrative

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Total non-interest expense

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 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.

Total non-interest expense decreased $190,948, or 3.5% for the third quarter of 2022 and increased $62,657, or 0.4%, for the first nine months of 2022 compared to the same periods in 2021, with significant changes noted in the following:

The increase in salaries and wages in the nine month comparison period is due to normal salary increases.

The decrease in employee benefits was attributable to a decrease in health insurance claims year over year under the Company’s self-funded health insurance plan.

The decrease in occupancy expenses is primarily attributable to a write down of $63,125 at maturity of a capital lease during the third quarter of 2021.

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.

1 unchanged sentence

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.

Collection & non-accruing loan expense is higher year over year due to expenses associated with a commercial property in the Company’s non-accruing loan portfolio.

FDIC insurance decreased for the third quarter due to a decrease in the assessment multiplier, while the modest increase year over year is due primarily to an increase in assets.

Collection & non-accruing loan expense is lower in both periods due to the recoupment of expenses associated with properties in the Company’s non-accruing loan portfolio.

ATM fees increased due to the ongoing cost to support the upgraded and enhanced technology utilized for deposit automation.

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.

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

State deposit tax increased year over year due primarily to the increase in deposits throughout 2021.

1 unchanged sentence

APPLICABLE INCOME TAXES

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.

The provision for income taxes decreased $33,675, or 3.9%, for the third quarter of 2022 compared to the same quarter in 2021, and decreased $205,157, or 9.2%, for the first nine months of 2022 compared to the same period in 2021 and is proportional to the decrease in income before income taxes totaling $122,371 for the third quarter of 2022 versus 2021 and $939,266 year over year.

Tax credits related to limited partnership investments amounted to $99,958 and $117,015, respectively, for the third quarter of 2022 and 2021, and $292,437 and $351,045, respectively, for the first nine months of 2022 and 2021.

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $67,353 and $90,762, respectively, for the third quarters of 2022 and 2021, and $201,537 and $272,286, respectively, for the first nine 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:

June 30, 2022

September 30, 2022

December 31, 2021

17 unchanged sentences

Time deposits

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 increase in the loan portfolio during the first nine months of 2022 was attributable to increases totaling $43.3 million in commercial & industrial and CRE loans, which was partially offset by payoffs of certain PPP loans through SBA’s forgiveness program totaling $11.1 million and maturities of certain municipal loans totaling $7.8 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 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.

The maturities within the municipal loan portfolio are cyclical, generally occurring on June 30.

As a result of competition from area financial institutions, the Company lost the bids on renewal of a portion of the matured municipal loans.

The increase in the securities AFS portfolio is attributable to the purchase of $47.5 million in securities AFS during the first nine months of 2022, consisting of $9.1 million in US treasury securities, $10.9 million in tax-exempt municipal bonds, $1.6 million in ABS, $7.4 million in CMO, and $18.5 million in MBS.

These purchases were reduced in part by maturities and calls exercised amounting to $3.0 million, as well as principal payments on various portfolios totaling $12.0 million, and by an increase of $27.1 million in unrealized losses arising during the first nine 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 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 interest-bearing transaction accounts consists of an increase of $11.7 million, or 9.9%, in consumer interest-bearing transaction accounts, which includes Health Savings Accounts and the deposit account of the Company’s trust and asset management affiliate, CFSG.

This was partially offset by a decrease of $3.2 million, or 7.6%, in municipal deposit accounts and a decrease of $4.1 million, or 5.8% in the ICS deposit accounts.

The increase in savings deposits of $11.5 million, or 6.8%, 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.

22 unchanged sentences

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.

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 June 30, 2022:

Management expects that the current rising rate environment will have a positive impact to the Company’s NII for the remainder of 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 September 30, 2022:

Percent Change in NII

4 unchanged sentences

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 of September 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.

1 unchanged sentence

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.

However, under the federal Adjustable Interest Rate (LIBOR) Act enacted in March 2022 (the “LIBOR Act”), fallback provisions like those in the Company’s Indenture that are based on a “determining person” (such as an indenture trustee) obtaining quotations of interbank lending or deposit rates are deemed “ineffective” and will be replaced as a matter of law, without need to amend contract documents, with a benchmark interest rate that will be identified in final regulations to be promulgated by the Federal Reserve.

The Federal Reserve has issued proposed regulations and has indicated that it will issue final regulations prior to the June 30, 2023 LIBOR phase out date.

As required under the LIBOR Act, any Federal Reserve-identified benchmark rate specified in the final regulations 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 for ineffective fallback provisions will take effect on the first London banking day after June 30, 2023.

The Indenture Trustee has indicated informally that it views the fallback provisions in the Indenture as ineffective under the LIBOR Act, and that it intends to provide written guidance on the transition from LIBOR prior to June 30, 2023, following the Federal Reserve’s adoption of final regulations.

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.

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 with certainty 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.

4 unchanged sentences

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

Residential mortgages represented 31.3% of the Company’s loan balances as of September 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.

1 unchanged sentence

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 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%.

As of September 30, 2022, junior lien home equity products made up 14.9% 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 68.3% 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.

Commercial & industrial and CRE loans together comprised 67.1% of the Company’s loan portfolio at September 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 $1.1 million at September 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.

4 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 $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.

The largest components of the $324.3 million CRE portfolio at September 30, 2022 were $102.4 million in owner-occupied CRE and $124.9 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 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.

At September 30, 2022, the Company had $31.9 million in guaranteed loans with guaranteed balances of $23.8 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.

12 unchanged sentences

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

September 30, 2022

December 31, 2021

4 unchanged sentences

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

September 30, 2022

December 31, 2021

17 unchanged sentences

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

September 30,

ALL to total loans outstanding

Loans outstanding

$ 724,194,001

$ 689,988,533

Non-accruing loans to loans outstanding

1 unchanged sentence

Loans outstanding

$ 724,194,001

$ 689,988,533

ALL to non-accruing loans

Non-accruing loans

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.

The provision for loan losses for the nine months ended September 30, 2022 was $1.3 million, compared to $624,165 for the same period in 2021.

The $700,835 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, currently in foreclosure.

The increase of $2.7 million in non-accruing loans is attributable to one business relationship, which the Company is monitoring closely.

The third quarter ALL analysis indicates that the reserve balance of $8.4 million at September 30, 2022 is sufficient to cover losses that are probable and estimable as of the measurement date, with an unallocated reserve of $258,555.

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 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.

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.

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

For the Six Months Ended June 30,

As stated in Note 2 of the accompanying notes to the Company’s unaudited interim consolidated financial statements, effective January 1, 2023, the Company will be required to recognize credit losses under the guidance of ASU No.

2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , 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.

Any adjustments from the adoption of CECL will be recorded as an adjustment to retained earnings and will affect calculation of regulatory capital ratios.

Based on a parallel calculation as of September 30, 2022 the required adjustment would have an immaterial impact to retained earnings and regulatory capital.

Changes in forecasts used in the model could produce different results, quarter to quarter, including as of the January 1, 2023 effective date for the transition to CECL.

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

For the Nine Months Ended September 30,

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

Commercial & industrial

Net charge-off during the period

Net charge-offs during the period

Average amount outstanding

$ 115,489,717

$ 160,565,446

Purchased loans

Net charge-off during the period

Net charge-offs during the period

Average amount outstanding

Commercial real estate

Net (charge-off) recovery during the period

Net (charge-offs) recoveries during the period

Average amount outstanding

Net charge-off during the period

$ 313,919,164

$ 283,812,722

Net charge-offs during the period

Average amount outstanding

Residential real estate - 1st lien

Net recovery during the period

Net recoveries during the period

Average amount outstanding

$ 184,548,015

$ 170,620,859

Residential real estate - Jr lien

Net recovery during the period

Net recoveries during the period

Average amount outstanding

Net charge-off during the period

Net charge-offs during the period

Average amount outstanding

Net charge-off during the period

Net charge-offs during the period

Average amount outstanding

$ 704,673,950

$ 718,366,424

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.

5 unchanged sentences

Interest rate risk is directly related to the different maturities and repricing characteristics of interest-bearing assets and liabilities, as well as to loan prepayment risks, early withdrawal of time deposits, and the fact that the speed and magnitude of responses to interest rate changes vary by product.

Rapid changes in prevailing interest rates, particularly after a long period of relative stability, create a challenging interest rate environment.

As discussed above under "Interest Rate Risk and Asset and Liability Management", the Company actively monitors and manages its interest rate risk through the ALCO process.

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

During the first nine 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

5 unchanged sentences

Short-term funding needs arise from declines in deposits or other funding sources and from funding requirements for loan commitments.

The Company’s strategy is to fund assets to the maximum extent possible with core deposits that provide a sizable source of relatively stable and low-cost funds.

The Company’s strategy is to fund assets to the maximum extent possible with core deposits that provide a sizable source of relatively stable and lower-cost funds.

The Company recognizes that, at times, when loan demand exceeds deposit growth or the Company has other liquidity demands, it may be desirable to utilize alternative sources of deposit funding to augment retail deposits and borrowings.

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

At 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 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.

At September 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, enhance the Company’s ability to retain larger deposit balances by allowing the Company to provide FDIC deposit insurance to its customers in excess of account coverage limits through the exchange of deposits with other participating FDIC-insured financial institutions.

At September 30, 2022 and December 31, 2021, the Company reported $3.1 million and $3.6 million, respectively, in reciprocal CDARS deposits.

The balance in ICS reciprocal money market deposits was $15.6 million at September 30, 2022, compared to $15.3 million at December 31, 2021, and the balance in ICS reciprocal demand deposits as of those dates was $66.7 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 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 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.

These blocks were not replaced, leaving no DTC Brokered CDs outstanding at the balance sheet dates presented in this quarterly report.

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 and 2022 has reduced the Company’s need for supplementary funding sources in the near term.

At September 30, 2022 and December 31, 2021, borrowing capacity of $112.8 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 $62.8 million and $52.3 million, respectively, at June 30, 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 $62.6 million and $52.3 million, respectively, at September 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 400 bps.

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:

The Company had no outstanding advances through this facility at September 30, 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:

September 30,

Long-Term Advances(1)

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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 June 30, 2022:

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

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

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(21,392,376 )

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

Balance at September 30, 2022 (book value $12.56 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.

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

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.

As of September 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.

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)

June 30, 2022

September 30, 2022

Common equity tier 1 capital

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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.

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.

Quantitative and Qualitative Disclosures about Market Risk

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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