COMMUNITY BANCORP /VT Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                           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 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. Accordingly, the
Company has elected to provide its audited statements of income, comprehensive
income, cash flows and changes in shareholders' equity for a two year, rather
than a three year, period and intends to provide smaller reporting company
scaled disclosures where management deems it appropriate.



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

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

FORWARD-LOOKING STATEMENTS



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



Forward-looking statements are not guarantees of future performance.  They
necessarily involve risks, uncertainties and assumptions.  Examples of forward
looking statements included in this discussion include, but are not limited to,
statements regarding the potential effects of the COVID-19 pandemic on our
business, financial condition, results of operations and prospects; the
estimated contingent liability related to assumptions made within the
asset/liability management process; management's expectations as to the future
interest rate environment and the Company's related liquidity level; credit risk
expectations relating to the Company's loan portfolio; and management's general
outlook for the future performance of the Company or the local or national
economy. Although forward-looking statements are based on management's
expectations and estimates as of the date they are made, many of the factors
that could influence or determine actual results are unpredictable and not
within the Company's control.

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

· general economic or business conditions, either nationally, regionally or

        locally, deteriorate, resulting in a decline in credit quality or a
        diminished demand for the Company's products and services;
    ·   competitive pressures increase among financial service providers in the

Company's northern New England market area or in the financial services

industry generally, including competitive pressures from non-bank

financial service providers, from increasing consolidation and integration

of financial service providers, and from changes in technology and

delivery systems;

· interest rates change in such a way as to negatively affect 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;

· 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;





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· losses due to the fraudulent or negligent conduct of third parties,

including the Company's service providers, customers and employees;

· cybersecurity risks could adversely affect the Company's business,

financial performance or reputation and could result in financial

liability for losses incurred by customers or others due to data breaches

or other compromise of the Company's information security systems;

· higher-than-expected costs are incurred relating to information technology

or difficulties arise in implementing technological enhancements;

· management's risk management measures may not be completely effective;

· changes in the United States monetary and fiscal policies, including the

interest rate policies of the FRB and its regulation of the money supply;

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

· 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%;

· 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;
    ·   the continuing effects of government and regulatory responses to the
        COVID-19 pandemic;

· operational and internal system failures due to changes in normal business

        practices, including remote working for Company staff;
    ·   increased cybercrime and payment system risk due to increase usage by
        customers of online and other remote banking channels;

· the impact of inflation on the Company's customers and on its financial

results and performance; and

· the ongoing challenges to find qualified workers to maintain a stable

        workforce.




Readers are cautioned not to place undue reliance on such statements as they
speak only as of the date they are made.  The Company does not undertake, and
disclaims any obligation, to revise or update any forward-looking statements to
reflect the occurrence or anticipated occurrence of events or circumstances
after the date of this Report, except as required by applicable law.  The
Company claims the protection of the safe harbor for forward-looking statements
provided in the Private Securities Litigation Reform Act of 1995.



NON-GAAP FINANCIAL MEASURES



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



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



OVERVIEW



The Company's consolidated assets on June 30, 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.

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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 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 $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.  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.  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.  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 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.  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.

CRITICAL ACCOUNTING POLICIES



The Company's consolidated financial statements are prepared according to U.S.
GAAP. The preparation of such financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities in the consolidated financial statements and related notes. The
SEC has defined a company's critical accounting policies as those that are most
important to the portrayal of the Company's financial condition and results of
operations, and which require the Company to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. 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.






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The Company's critical accounting policies govern:

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




These policies are described in the Company's 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.



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.  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.



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,
                                       2022                2021
Return on average assets                    1.20 %              1.30 %
Return on average equity                   16.12 %             15.46 %
Dividend payout ratio (1)                  41.07 %             38.60 %
Average equity to average assets            7.45 %              8.43 %




                                      Six Months Ended June 30,
                                       2022               2021
Return on average assets                   1.09 %             1.32 %
Return on average equity                  13.84 %            15.60 %
Dividend payout ratio (1)                 46.00 %            38.94 %
Average equity to average assets           7.84 %             8.45 %

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

INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST INCOME)

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

periods presented.




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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 June 30,
                                           2022               2021

Net interest income as presented $ 7,837,185 $ 7,511,174 Effect of tax-exempt income

                    68,224           67,643

Net interest income, tax equivalent $ 7,905,409 $ 7,578,817

                                        Six Months Ended June 30,
                                          2022              2021

Net interest income as presented $ 15,395,414 $ 15,273,662 Effect of tax-exempt income

                 130,970          136,428

Net interest income, tax equivalent $ 15,526,384 $ 15,410,090

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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,
                                      2022                                             2021
                                                      Average                                         Average
                      Average          Income/         Rate/          Average          Income/         Rate/
                      Balance          Expense         Yield          Balance          Expense         Yield
Interest-Earning
Assets
Loans (1)          $ 703,056,776     $ 7,689,953          4.39 %   $ 728,685,149     $ 7,956,066          4.38 %
Taxable
investment
securities           181,906,304         736,407          1.62 %      87,692,593         293,731          1.34 %
Tax-exempt
investment
securities             5,442,227          42,767          3.15 %               0               0          0.00 %
Sweep and
interest-earning
accounts              68,587,282         169,965          0.99 %      55,000,258          80,006          0.58 %
Other
investments (2)        1,777,950          16,632          3.75 %       1,833,946          14,981          3.28 %
Total              $ 960,770,539     $ 8,655,724          3.61 %   $ 873,211,946     $ 8,344,784          3.83 %

Interest-Bearing
Liabilities
Interest-bearing
transaction
accounts           $ 259,645,648     $   211,278          0.33 %   $ 216,063,449     $   127,646          0.24 %
Money market
funds                127,849,142         121,221          0.38 %     124,192,217         160,288          0.52 %
Savings deposits     181,057,302          26,003          0.06 %     158,005,819          40,771          0.10 %
Time deposits        106,162,111         226,956          0.86 %     108,625,246         302,388          1.12 %
Borrowed funds         1,301,132               5          0.00 %       2,301,330              12          0.00 %
Repurchase
agreements            29,958,442          22,129          0.30 %      29,185,028          20,509          0.28 %
Finance lease
obligations            3,769,886          21,660          2.30 %       2,395,094          14,437          2.41 %
Junior
subordinated
debentures            12,887,000         121,063          3.77 %      12,887,000          99,916          3.11 %
Total              $ 722,630,663     $   750,315          0.42 %   $ 653,655,183     $   765,967          0.47 %

Net interest
income                               $ 7,905,409                                     $ 7,578,817
Net interest
spread (3)                                                3.19 %                                          3.36 %
Net interest
margin (4)                                                3.30 %                                          3.48 %

(1) 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.

(2) 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.

(3) Net interest spread is the difference between the average yield on average

interest-earning assets and the average rate paid on average

interest-bearing liabilities.

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





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                                                     Six Months Ended June 30,
                                       2022                                             2021
                                                       Average                                          Average
                      Average          Income/          Rate/          Average          Income/          Rate/
                      Balance          Expense          Yield          Balance          Expense          Yield
Interest-Earning
Assets
Loans (1)          $ 698,056,683     $ 15,236,988          4.40 %   $ 724,657,107     $ 16,278,147          4.53 %
Taxable
investment
securities           183,839,728        1,392,684          1.53 %      80,190,706          558,844          1.41 %
Tax-exempt
investment
securities             3,846,121           56,627          2.97 %               0                0          0.00 %
Sweep and
interest-earning
accounts              69,406,084          250,625          0.73 %      71,100,556          167,888          0.48 %
Other
investments (2)        1,778,671           33,092          3.75 %       1,833,749           25,600          2.82 %
Total              $ 956,927,287     $ 16,970,016          3.58 %   $ 877,782,118     $ 17,030,479          3.91 %

Interest-Bearing
Liabilities
Interest-bearing
transaction
accounts           $ 259,195,319     $    371,356          0.29 %   $ 215,375,735     $    274,164          0.26 %
Money market
funds                129,288,338          248,902          0.39 %     122,564,234          328,393          0.54 %
Savings deposits     177,129,696           49,443          0.06 %     151,346,385           78,043          0.10 %
Time deposits        106,397,607          467,717          0.89 %     109,968,712          655,737          1.20 %
Borrowed funds         1,301,138                6          0.00 %       2,415,425               24          0.00 %
Repurchase
agreements            29,405,997           43,169          0.30 %      33,226,234           55,951          0.34 %
Finance lease
obligations            3,796,341           43,624          2.30 %       2,039,367           29,366          2.88 %
Junior
subordinated
debentures            12,887,000          219,415          3.43 %      12,887,000          198,711          3.11 %
Total              $ 719,401,436     $  1,443,632          0.40 %   $ 649,823,092     $  1,620,389          0.50 %

Net interest
income                               $ 15,526,384                                     $ 15,410,090
Net interest
spread (3)                                                 3.18 %                                           3.41 %
Net interest
margin (4)                                                 3.27 %                                           3.54 %

(1) 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.

(2) 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.

(3) Net interest spread is the difference between the average yield on average

interest-earning assets and the average rate paid on average

interest-bearing liabilities.

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

        assets.





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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- 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, 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. These funds can be
obtained relatively quickly on an as-needed basis, making them a valuable
alternative to traditional term borrowings from the FHLBB.  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.




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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 June 30,                     Six Months Ended June 30,
                   Variance       Variance                       Variance       Variance
                    Due to         Due to          Total          Due to         Due to           Total
                   Rate (1)      Volume (1)       Variance       Rate (1)      Volume (1)        Variance

Average
Interest-Earning
Assets

Loans              $  14,388     $  (280,501 )   $ (266,113 )   $ (460,760 )   $  (580,399 )   $ (1,041,159 )
Taxable
investment
securities           127,925         314,751        442,676        109,120         724,720          833,840
Tax-exempt
investment
securities            42,767               0         42,767         56,627               0           56,627
Sweep and
interest-earning
accounts              70,312          19,647         89,959         88,871          (6,134 )         82,737
Other
investments            2,175            (524 )        1,651          8,516          (1,024 )          7,492
Total              $ 257,567     $    53,373     $  310,940     $ (197,626 )   $   137,163     $    (60,463 )

Average
Interest-Bearing
Liabilities

Interest-bearing
transaction
accounts           $  57,554     $    26,078     $   83,632     $   40,695     $    56,497     $     97,192
Money market
funds                (43,808 )         4,741        (39,067 )      (97,497 )        18,006          (79,491 )
Savings deposits     (20,515 )         5,747        (14,768 )      (41,386 )        12,786          (28,600 )
Time deposits        (70,151 )        (5,281 )      (75,432 )     (172,259 )       (15,761 )       (188,020 )
Borrowed funds            (8 )             0             (8 )          (18 )             0              (18 )
Repurchase
agreements             1,081             540          1,621         (7,099 )        (5,683 )        (12,782 )
Finance lease
obligations           (1,037 )         8,260          7,223        (10,834 )        25,092           14,258
Junior
subordinated
debentures            21,147               0         21,147         20,704               0           20,704
Total              $ (55,737 )   $    40,085     $  (15,652 )   $ (267,694 )   $    90,937     $   (176,757 )

Changes in net
interest income    $ 313,304     $    13,288     $  326,592     $   70,068     $    46,226     $    116,294

(1) Items which have shown a year-to-year increase in volume have variances

allocated as follows:

Variance due to rate = Change in rate x new volume

Variance due to volume = Change in volume x old rate

Items which have shown a year-to-year decrease in volume have variances

        allocated as follows:
        Variance due to rate = Change in rate x old volume
        Variances due to volume = Change in volume x new rate





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NON-INTEREST INCOME AND NON-INTEREST EXPENSE

Non-interest Income



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



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

Service fees $ 936,382 $ 856,631 $ 79,751 9.31 %

$ 1,799,269 $ 1,645,255 $ 154,014 9.36 % Income from sold loans 195,542 277,061 (81,519 ) -29.42 %

399,384 462,067 (62,683 ) -13.57 % Other income from loans 322,913 246,716 76,197 30.88 %

       594,174         429,989        164,185        38.18 %
Other income
Income from
CFS Partners         72,961         287,072        (214,111 )     -74.58 %       298,831         594,058       (295,227 )     -49.70 %
Other
miscellaneous
income              106,498         101,055           5,443         5.39 % 

229,068 209,397 19,671 9.39 % Total non-interest

                                     ($134,239)                                                   ($20,040)
income          $ 1,634,296     $ 1,768,535                        -7.59 %   $ 3,320,726     $ 3,340,766                       -0.60 %




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.





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Non-interest Expense



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



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

Salaries and
wages            $ 2,034,000     $ 1,944,999     $   89,001         4.58 %   $  4,074,000     $  3,920,002     $  153,998         3.93 %
Employee
benefits             704,623         824,210       (119,587 )     -14.51 %      1,476,675        1,655,420       (178,745 )     -10.80 %
Occupancy
expenses, net        673,177         652,202         20,975         3.22 %      1,426,541        1,396,922         29,619         2.12 %
Other expenses
Outsourcing
expense              132,747         122,389         10,358         8.46 %        264,962          251,900         13,062         5.19 %
Service
contracts -
administrative       147,668         123,650         24,018        19.42 %        286,173          261,540         24,633         9.42 %
Directors fees       144,357         128,604         15,753        12.25 %        288,214          257,708         30,506        11.84 %
Audit fees           115,028         100,182         14,846        14.82 %        215,756          189,414         26,342        13.91 %
FDIC insurance        96,426          78,708         17,718        22.51 %        186,410          161,565         24,845        15.38 %
Collection &
non-accruing
loan expense          11,000          11,600           (600 )      -5.17 %         47,000           23,200         23,800       102.59 %
ATM fees             153,301         141,349         11,952         8.46 %        294,191          270,295         23,896         8.84 %
Electronic
banking
expense               65,481          52,983         12,498        23.59 %        133,059          105,365         27,694        26.28 %
State deposit
tax                  246,098         218,328         27,770        12.72 %        486,576          425,261         61,315        14.42 %
Other
miscellaneous
expenses             910,558         870,192         40,366         4.64 %      1,708,495        1,715,855         (7,360 )      -0.43 %
Total
non-interest

expense          $ 5,434,464     $ 5,269,396     $  165,068         3.13 % 

$ 10,888,052 $ 10,634,447 $ 253,605 2.38 %

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.

· 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.

· 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.

· 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.

· 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.





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

CHANGES IN FINANCIAL CONDITION

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



                                          June 30, 2022                 December 31, 2021
Assets
Loans                              $ 702,928,547         70.33 %   $ 689,988,533         67.71 %
AFS securities                       188,793,844         18.89 %     182,342,459         17.89 %

Liabilities
Demand deposits                      202,409,216         20.25 %     209,465,151         20.55 %
Interest-bearing transaction
accounts                             258,462,274         25.86 %     265,513,937         26.05 %
Money market funds                   122,432,630         12.25 %     129,728,954         12.73 %
Savings deposits                     183,135,690         18.32 %     168,390,905         16.52 %
Time deposits                        105,468,832         10.55 %     106,301,006         10.43 %
Long-term advances                     1,300,000          0.13 %       1,300,000          0.13 %




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



                                          Change in Volume       Percentage Change
Assets
Loans                                   $       12,940,014                    1.88 %
AFS securities                                   6,451,385                    3.54 %

Liabilities
Demand deposits                                 (7,055,935 )                 -3.37 %

Interest-bearing transaction accounts           (7,051,663 )               

 -2.66 %
Money market funds                              (7,296,324 )                 -5.62 %
Savings deposits                                14,744,785                    8.76 %
Time deposits                                     (832,174 )                 -0.78 %

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 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.




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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. Government.

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



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



Under the Company's interest rate sensitivity modeling, with the continued asset
sensitive balance sheet, in a rising rate environment NII is expected to trend
upward as the short-term asset base (cash and adjustable rate loans) quickly
cycle upward while the retail funding base (deposits) lags the market.  If rates
paid on deposits have to be increased more and/or more quickly than projected
due to competitive pressures, the expected benefit to rising rates would be
reduced.  In a falling rate environment, NII is expected to trend slightly
downward compared with the current rate environment scenario for the first year
of the simulation as asset yield erosion is not fully offset by decreasing
funding costs.  Thereafter, net interest income is projected to experience
sustained downward pressure as funding costs reach their assumed floors and
asset yields continue to reprice into the lower rate environment.  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:

Rate Change Percent Change in NII

Down 100 bps              -1.7%
Up 200 bps                -0.1%




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.  The ALCO model also provides
alternate scenarios including a sustained flat, or inverted yield curve. While
assumptions used in the ALCO process, including the interest rate simulation
analyses, are developed based upon current economic and local market conditions,
and expected future conditions, the Company cannot provide any assurances as to
the predictive nature of these assumptions, including how customer preferences
or competitor influences might change.  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.




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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.  The Company has not generally utilized
LIBOR as an interest rate benchmark for its variable rate commercial,
residential or other loans and does not utilize derivatives or other financial
instruments tied to LIBOR for hedging or investment purposes.  Accordingly,
management expects that the Company's exposure to the phase out of LIBOR will be
limited to the effect on the interest rate paid on its Debentures, but cannot
predict the magnitude of the impact on the Company's interest expense at this
time.



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



Residential mortgages represented 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-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 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 68.3% 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 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. The
Company has a loan production office in Lebanon, New Hampshire to provide a
presence in the greater White River Junction area including Grafton County, New
Hampshire. Larger transactions continue to be centrally underwritten and
monitored through the Company's commercial credit department. The types of CRE
transactions driving the growth 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.




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



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



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

The 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
                                    Number of       Principal        Number of       Principal
                                        Loans         Balance            Loans         Balance

Commercial & industrial                     5     $    53,363                6     $    71,128
Commercial real estate                      5       2,939,928                5       3,642,073
Residential real estate - 1st
lien                                       12       1,082,022               12         977,961
Residential real estate - Jr
lien                                        1          38,624                1          41,901
Total                                      23     $ 4,113,937               24     $ 4,733,063

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
                                    Number of       Principal        Number of       Principal
                                        Loans         Balance            Loans         Balance

Commercial real estate                      1     $     5,659                2     $    41,228
Residential real estate - 1st
lien                                       31       2,431,228               31       2,473,767
Residential real estate - Jr
lien                                        1           2,886                1           3,537
Total                                      33     $ 2,439,773               34     $ 2,518,532

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

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




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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.  Those factors include the levels of and trends in delinquencies and
non-accrual loans, criticized and classified assets, volumes and terms of loans,
and the impact of any loan policy changes.  Experience, ability and depth of
lending personnel, levels of policy and documentation exceptions, national and
local economic trends, the competitive environment, and concentrations of credit
are also factors considered.



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



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



                                            June 30,        December 31,
                                              2022              2021

ALL to total loans outstanding                     1.17 %            1.12 %
ALL                                           8,232,773         7,710,256
Loans outstanding                           702,928,547       689,988,533

Non-accruing loans to loans outstanding            0.69 %            0.86 %

Non-accruing loans                            4,858,365         5,940,629
Loans outstanding                           702,928,547       689,988,533

ALL to non-accruing loans                        169.46 %          129.79 %
ALL                                           8,232,773         7,710,256
Non-accruing loans                            4,858,365         5,940,629




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.  The portion of the ALL termed "unallocated" is established to absorb
inherent losses that exist as of the measurement date although not specifically
identified through management's process for estimating credit losses.  While the
ALL is described as consisting of separate allocated portions, the entire ALL is
available to support loan losses, regardless of category.  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.

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

For the Six Months Ended June 30,                      2022

2021

Commercial & industrial                               -0.02 %           -0.01 %
Net charge-off during the period                    (18,124 )         (14,086 )
Average amount outstanding                      113,095,165       170,279,574

Purchased loans                                        0.00 %            0.00 %

Net charge-off during the period                          0                

0
Average amount outstanding                        9,052,590        10,978,589

Commercial real estate                                -0.22 %            0.00 %
Net (charge-off) recovery during the period        (667,474 )           7,000
Average amount outstanding                      308,380,329       281,231,771

Municipal                                              0.00 %            0.00 %

Net charge-off during the period                          0                 0
Average amount outstanding                       48,289,600        

51,881,498

Residential real estate - 1st lien                     0.01 %            0.00 %
Net recovery during the period                       12,563             

2,326

Average amount outstanding                      182,598,259       

169,626,934

Residential real estate - Jr lien                      0.01 %            0.00 %
Net recovery during the period                        2,430               960
Average amount outstanding                       33,169,602        36,934,347

Consumer                                              -0.20 %           -0.55 %
Net charge-off during the period                     (6,878 )         (20,426 )
Average amount outstanding                        3,471,138         3,724,394

Total loans                                           -0.10 %            0.00 %
Net charge-off during the period                   (677,483 )         (24,226 )
Average amount outstanding                      698,056,683       724,657,107




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

COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET ARRANGEMENTS

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




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LIQUIDITY AND CAPITAL RESOURCES

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



The Company recognizes that, at times, when loan demand exceeds deposit growth
or the Company has other liquidity demands, it may be desirable to utilize
alternative sources of deposit funding to augment retail deposits and
borrowings.  One-way deposits acquired through the CDARS program provide an
alternative funding source when needed.  At June 30, 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.



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.  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.  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 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:

June 30,       December 31,
                                                           2022               2021
Long-Term Advances(1)

FHLBB term advance, 0.00%, due September 22, 2023   $   200,000     $      200,000
FHLBB term advance, 0.00%, due November 12, 2025        300,000           

300,000

FHLBB term advance, 0.00%, due November 13, 2028        800,000           

800,000
                                                    $ 1,300,000     $    1,300,000

(1) All long-term advances are pursuant to the JNE program, through which the

FHLBB provides a subsidy, funded by the FHLBB's earnings, to write down

interest rates to zero percent on advances that finance qualifying loans to

small businesses. JNE advances must support small business in New England

that create and/or retain jobs, or otherwise contribute to overall economic

    development activities.

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




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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) $ 84,760,268 Net income

5,426,694

Issuance of common stock through the DRIP                                 

593,613

Dividends declared on common stock                                     (2,476,929 )
Dividends declared on preferred stock                                     (25,312 )
Change in AOCI on AFS securities, net of tax                          

(14,299,655 ) Balance at June 30, 2022 (book value $13.41 per common share) $ 73,978,679

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



As described in more detail in Note 23 to the audited consolidated financial
statements contained in the Company's 2021 Annual Report on Form 10-K and under
the caption "LIQUIDITY AND CAPITAL RESOURCES" in the MD&A section of that
report, the Company (on a consolidated basis) and the Bank are subject to
various regulatory capital requirements administered by the federal banking
agencies pursuant to which they must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance-sheet items.  Capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weightings and
other factors.



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.




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



                                                                        Minimum                      Minimum
                                               Minimum                For Capital                   To Be Well
                                             For Capital           Adequacy Purposes            Capitalized Under
                                              Adequacy             with Conservation            Prompt Corrective
                       Actual                 Purposes:                Buffer(1):             Action Provisions(2):
                  Amount      Ratio        Amount      Ratio         Amount       Ratio            Amount        Ratio
                                                        (Dollars in Thousands)
June 30, 2022
Common equity
tier 1
capital
(to
risk-weighted
assets)
Company         $ 76,371       11.73 %   $ 29,306       4.50 %   $   45,588        7.00 %             N/A          N/A
Bank            $ 90,026       13.83 %   $ 29,285       4.50 %   $   45,554        7.00 %   $      42,300         6.50 %
Tier 1
capital (to
risk-weighted
assets)
Company         $ 90,758       13.94 %   $ 39,075       6.00 %   $   55,357        8.50 %             N/A          N/A
Bank            $ 90,026       13.83 %   $ 39,046       6.00 %   $   55,315        8.50 %   $      52,061         8.00 %
Total capital
(to
risk-weighted
assets)
Company         $ 98,901       15.19 %   $ 52,100       8.00 %   $   68,382       10.50 %             N/A          N/A
Bank            $ 98,163       15.08 %   $ 52,061       8.00 %   $   68,331       10.50 %   $      65,077        10.00 %
Tier 1
capital (to
average
assets)
Company         $ 90,758        8.98 %   $ 40,434       4.00 %          N/A         N/A               N/A          N/A
Bank            $ 90,026        8.91 %   $ 40,416       4.00 %          N/A         N/A     $      50,520         5.00 %

December 31,
2021:
Common equity
tier 1
capital
(to
risk-weighted
assets)
Company (3)     $ 72,853       11.90 %   $ 27,548       4.50 %   $   42,853        7.00 %             N/A          N/A
Bank            $ 86,654       14.17 %   $ 27,522       4.50 %   $   42,812        7.00 %   $      39,754         6.50 %
Tier 1
capital (to
risk-weighted
assets)
Company         $ 87,240       14.25 %   $ 36,731       6.00 %   $   52,036        8.50 %             N/A          N/A
Bank            $ 86,654       14.17 %   $ 36,696       6.00 %   $   51,986        8.50 %   $      48,928         8.00 %
Total capital
(to
risk-weighted
assets)
Company         $ 94,894       15.50 %   $ 48,975       8.00 %   $   64,279       10.50 %             N/A          N/A
Bank            $ 94,301       15.42 %   $ 48,928       8.00 %   $   64,218       10.50 %   $      61,160        10.00 %
Tier 1
capital (to
average
assets)
Company         $ 87,240        8.79 %   $ 39,719       4.00 %          N/A         N/A               N/A          N/A
Bank            $ 86,654        8.73 %   $ 39,698       4.00 %          N/A         N/A     $      49,622         5.00 %

(1) Conservation Buffer is calculated based on risk-weighted assets and does not

apply to calculations of average assets. (2) Applicable to banks, but not bank holding companies. (3) 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.  In general, a national
bank may not pay dividends that exceed net income for the current and preceding
two years regardless of statutory restrictions, as a matter of regulatory
policy, banks and bank holding companies should pay dividends only out of
current earnings and only if, after paying such dividends, they remain
adequately capitalized.




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