COMMUNITY BANCORP /VT
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
[ x ] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
Quarterly Period Ended March 31, 2017
OR
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period from
to
Commission
File Number 000-16435
|
Vermont
|
03-0284070
|
|
(State
of Incorporation)
|
(IRS
Employer Identification Number)
|
|
|
|
|
4811 US
Route 5, Derby, Vermont
|
05829
|
|
(Address
of Principal Executive Offices)
|
(zip
code)
|
|
|
|
|
Registrant's
Telephone Number: (802) 334-7915
|
|
Indicate
by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file for such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ( X ) No
( )
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). YES ( X ) NO (
)
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer”, “smaller reporting company” and "emerging
growth company" in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large accelerated filer
|
( )
|
Accelerated filer
|
( )
|
|
Non-accelerated
filer
|
( )
(Do not check if a smaller reporting
company)
|
Smaller reporting company
|
( X )
|
|
|
|
Emerging
growth company
|
( )
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
( )
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
YES
( ) NO(X)
At May
03, 2017, there were 5,072,803 shares outstanding of the
Corporation's common stock.
1
|
FORM
10-Q
|
||
|
Index
|
|
|
|
|
|
Page
|
|
PART
I
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
Item
1
|
Financial
Statements
|
3
|
|
Item
2
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
29
|
|
Item
3
|
Quantitative
and Qualitative Disclosures About Market Risk
|
50
|
|
Item
4
|
Controls
and Procedures
|
50
|
|
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
|
|
Item
1
|
Legal
Proceedings
|
50
|
|
Item
1A
|
Risk
Factors
|
50
|
|
Item
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
51
|
|
Item
6
|
Exhibits
|
51
|
|
|
Signatures
|
52
|
|
|
Exhibit
Index
|
53
|
2
The
following are the unaudited consolidated financial statements for
Community Bancorp. and Subsidiary, "the Company".
3
|
Community
Bancorp. and Subsidiary
|
March
31,
|
December
31,
|
March
31,
|
|
|
2017
|
2016
|
2016
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Assets
|
|
|
|
|
Cash
and due from banks
|
$
17,275,640
|
$
10,943,344
|
$
9,397,008
|
|
Federal
funds sold and overnight deposits
|
15,513,549
|
18,670,942
|
16,055,662
|
|
Total
cash and cash equivalents
|
32,789,189
|
29,614,286
|
25,452,670
|
|
Securities
held-to-maturity (fair value $54,853,000 at 03/31/17,
|
|
|
|
|
$51,035,000
at 12/31/16 and $46,235,000 at 03/31/16)
|
53,879,934
|
49,886,631
|
45,551,714
|
|
Securities
available-for-sale
|
33,852,571
|
33,715,051
|
29,572,121
|
|
Restricted
equity securities, at cost
|
2,426,050
|
2,755,850
|
1,891,250
|
|
Loans
held-for-sale
|
0
|
0
|
525,200
|
|
Loans
|
485,722,245
|
487,249,226
|
455,048,185
|
|
Allowance
for loan losses (ALL)
|
(5,258,440
)
|
(5,278,445
)
|
(5,109,488
)
|
|
Deferred
net loan costs
|
321,285
|
310,130
|
315,050
|
|
Net
loans
|
480,785,090
|
482,280,911
|
450,253,747
|
|
Bank
premises and equipment, net
|
10,629,125
|
10,830,556
|
11,251,819
|
|
Accrued
interest receivable
|
2,062,875
|
1,818,510
|
2,064,364
|
|
Bank
owned life insurance (BOLI)
|
4,649,557
|
4,625,406
|
4,546,589
|
|
Core
deposit intangible
|
204,516
|
272,691
|
477,211
|
|
Goodwill
|
11,574,269
|
11,574,269
|
11,574,269
|
|
Other
real estate owned (OREO)
|
561,979
|
394,000
|
465,000
|
|
Other
assets
|
9,484,895
|
9,885,504
|
9,783,374
|
|
Total
assets
|
$
642,900,050
|
$
637,653,665
|
$
593,409,328
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
Liabilities
|
|
|
|
|
Deposits:
|
|
|
|
|
Demand,
non-interest bearing
|
$
105,880,429
|
$
104,472,268
|
$
91,019,639
|
|
Interest-bearing
transaction accounts
|
121,953,444
|
118,053,360
|
117,208,113
|
|
Money
market funds
|
86,938,154
|
79,042,619
|
86,652,637
|
|
Savings
|
96,883,558
|
86,776,856
|
85,327,489
|
|
Time
deposits, $250,000 and over
|
19,913,160
|
19,274,880
|
13,306,128
|
|
Other
time deposits
|
100,850,953
|
97,115,049
|
95,386,130
|
|
Total
deposits
|
532,419,698
|
504,735,032
|
488,900,136
|
|
Borrowed
funds
|
11,550,000
|
31,550,000
|
10,350,000
|
|
Repurchase
agreements
|
27,747,451
|
30,423,195
|
25,149,039
|
|
Capital
lease obligations
|
459,443
|
483,161
|
537,028
|
|
Junior
subordinated debentures
|
12,887,000
|
12,887,000
|
12,887,000
|
|
Accrued
interest and other liabilities
|
2,649,027
|
3,123,760
|
3,382,769
|
|
Total
liabilities
|
587,712,619
|
583,202,148
|
541,205,972
|
|
Shareholders'
Equity
|
|
|
|
|
Preferred
stock, 1,000,000 shares authorized, 25 shares issued
|
|
|
|
|
and
outstanding ($100,000 liquidation value)
|
2,500,000
|
2,500,000
|
2,500,000
|
|
Common
stock - $2.50 par value; 15,000,000 shares authorized,
|
|
|
|
|
5,283,077
shares issued at 03/31/17, 5,269,053 shares issued
|
|
|
|
|
at
12/31/16 and 5,220,419 shares issued at 03/31/16
|
13,207,693
|
13,172,633
|
13,051,048
|
|
Additional
paid-in capital
|
31,008,521
|
30,825,658
|
30,268,924
|
|
Retained
earnings
|
11,197,709
|
10,666,782
|
8,830,533
|
|
Accumulated
other comprehensive (loss) income
|
(103,715
)
|
(90,779
)
|
175,628
|
|
Less:
treasury stock, at cost; 210,101 shares at 03/31/17,
|
|
|
|
|
12/31/16,
and 03/31/16
|
(2,622,777
)
|
(2,622,777
)
|
(2,622,777
)
|
|
Total
shareholders' equity
|
55,187,431
|
54,451,517
|
52,203,356
|
|
Total
liabilities and shareholders' equity
|
$
642,900,050
|
$
637,653,665
|
$
593,409,328
|
|
|
|
|
|
|
Book value per
common share outstanding
|
$
10.39
|
$
10.27
|
$
9.92
|
The accompanying notes are an integral part of these consolidated
financial statements
4
|
Community
Bancorp. and Subsidiary
|
Three
Months Ended March 31,
|
|
|
|
2017
|
2016
|
|
(Unaudited)
|
|
|
|
Interest
income
|
|
|
|
Interest
and fees on loans
|
$
5,616,867
|
$
5,370,424
|
|
Interest
on debt securities
|
|
|
|
Taxable
|
151,726
|
127,449
|
|
Tax-exempt
|
324,532
|
280,097
|
|
Dividends
|
35,796
|
29,378
|
|
Interest
on federal funds sold and overnight deposits
|
27,472
|
10,906
|
|
Total
interest income
|
6,156,393
|
5,818,254
|
|
|
|
|
|
Interest
expense
|
|
|
|
Interest
on deposits
|
537,789
|
516,594
|
|
Interest
on federal funds purchased and other borrowed funds
|
52,235
|
19,158
|
|
Interest
on repurchase agreements
|
21,527
|
17,991
|
|
Interest
on junior subordinated debentures
|
122,860
|
109,519
|
|
Total
interest expense
|
734,411
|
663,262
|
|
|
|
|
|
Net
interest income
|
5,421,982
|
5,154,992
|
|
Provision for
loan losses
|
150,000
|
100,000
|
|
Net
interest income after provision for loan losses
|
5,271,982
|
5,054,992
|
|
|
|
|
|
Non-interest
income
|
|
|
|
Service
fees
|
748,117
|
617,679
|
|
Income
from sold loans
|
190,295
|
221,194
|
|
Other
income from loans
|
185,617
|
195,888
|
|
Net
realized gain on sale of securities available-for-sale
|
2,130
|
0
|
|
Other
income
|
244,059
|
203,090
|
|
Total
non-interest income
|
1,370,218
|
1,237,851
|
|
|
|
|
|
Non-interest
expense
|
|
|
|
Salaries
and wages
|
1,711,124
|
1,725,000
|
|
Employee
benefits
|
641,561
|
685,082
|
|
Occupancy
expenses, net
|
687,433
|
645,746
|
|
Other
expenses
|
1,691,001
|
1,626,463
|
|
Total
non-interest expense
|
4,731,119
|
4,682,291
|
|
|
|
|
|
Income
before income taxes
|
1,911,081
|
1,610,552
|
|
Income tax
expense
|
496,865
|
441,058
|
|
Net
income
|
$
1,414,216
|
$
1,169,494
|
|
|
|
|
|
Earnings per
common share
|
$
0.27
|
$
0.23
|
|
Weighted
average number of common shares
|
|
|
|
used in
computing earnings per share
|
5,063,128
|
5,000,144
|
|
Dividends
declared per common share
|
$
0.17
|
$
0.16
|
The accompanying notes are an integral part of these consolidated
financial statements.
5
|
Community
Bancorp. and Subsidiary
|
|
|
|
Consolidated
Statements of Comprehensive Income
|
|
|
|
(Unaudited)
|
Three
Months Ended March 31,
|
|
|
|
2017
|
2016
|
|
|
|
|
|
Net
income
|
$
1,414,216
|
$
1,169,494
|
|
|
|
|
|
Other comprehensive
(loss) income, net of tax:
|
|
|
|
Unrealized
holding (loss) gain on available-for-sale securities
|
|
|
|
arising
during the period
|
(17,470
)
|
334,883
|
|
Reclassification
adjustment for gain realized in income
|
(2,130
)
|
0
|
|
Unrealized
(loss) gain during the year
|
(19,600
)
|
334,883
|
|
Tax
effect
|
6,664
|
(113,861
)
|
|
Other
comprehensive (loss) income, net of tax
|
(12,936
)
|
221,022
|
|
Total
comprehensive income
|
$
1,401,280
|
$
1,390,516
|
The accompanying notes are an integral part of these consolidated
financial statements.
6
|
Community
Bancorp. and Subsidiary
|
|
|
|
|
|
|
|
(Unaudited)
|
Three
Months Ended March 31,
|
|
|
|
2017
|
2016
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
Net
income
|
$
1,414,216
|
$
1,169,494
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
operating
activities:
|
|
|
|
Depreciation
and amortization, bank premises and equipment
|
252,131
|
251,627
|
|
Provision
for loan losses
|
150,000
|
100,000
|
|
Deferred
income tax
|
(17,535
)
|
(29,227
)
|
|
Gain
on sale of securities available-for-sale
|
(2,130
)
|
0
|
|
Gain
on sale of loans
|
(79,128
)
|
(101,510
)
|
|
Loss
on sale of bank premises and equipment
|
1,580
|
0
|
|
Loss
on sale of OREO
|
617
|
0
|
|
Income
from Trust LLC
|
(113,179
)
|
(82,579
)
|
|
Amortization
of bond premium, net
|
30,075
|
33,267
|
|
Proceeds
from sales of loans held for sale
|
3,974,739
|
4,753,088
|
|
Originations
of loans held for sale
|
(3,895,611
)
|
(3,977,378
)
|
|
Increase
in taxes payable
|
360,092
|
273,795
|
|
Increase
in interest receivable
|
(244,365
)
|
(431,151
)
|
|
Decrease
in mortgage servicing rights (MSRs)
|
28,462
|
14,097
|
|
(Increase)
decrease in other assets
|
(4,875
)
|
177,535
|
|
Increase
in cash surrender value of BOLI
|
(24,151
)
|
(26,103
)
|
|
Amortization
of core deposit intangible
|
68,175
|
68,175
|
|
Amortization
of limited partnerships
|
154,308
|
146,490
|
|
(Increase)
decrease in unamortized loan costs
|
(11,155
)
|
1,441
|
|
Increase
in interest payable
|
23,329
|
8,675
|
|
Decrease
in accrued expenses
|
(506,924
)
|
(359,833
)
|
|
(Decrease)
increase in other liabilities
|
(21,024
)
|
17,125
|
|
Net
cash provided by operating activities
|
1,537,647
|
2,007,028
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
Investments
- held-to-maturity
|
|
|
|
Maturities
and pay downs
|
2,365,271
|
1,630,861
|
|
Purchases
|
(6,358,574
)
|
(3,828,156
)
|
|
Investments
- available-for-sale
|
|
|
|
Maturities,
calls, pay downs and sales
|
1,300,588
|
1,406,742
|
|
Purchases
|
(1,485,653
)
|
(4,206,847
)
|
|
Proceeds
from redemption of restricted equity securities
|
329,800
|
822,100
|
|
Purchases
of restricted equity securities
|
0
|
(271,700
)
|
|
Decrease
in limited partnership contributions payable
|
(27,000
)
|
0
|
|
Decrease
in loans, net
|
979,595
|
2,648,313
|
|
Capital
expenditures for bank premises and equipment
|
(52,280
)
|
(43,238
)
|
|
Proceeds
from sales of OREO
|
187,383
|
192,108
|
|
Recoveries
of loans charged off
|
21,402
|
25,433
|
|
Net
cash used in investing activities
|
(2,739,468
)
|
(1,624,384
)
|
7
|
|
2017
|
2016
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
Net
increase (decrease) in demand and interest-bearing transaction
accounts
|
5,308,245
|
(16,033,104
)
|
|
Net
increase in money market and savings accounts
|
18,002,237
|
8,317,948
|
|
Net
increase in time deposits
|
4,374,184
|
1,129,730
|
|
Net
(decrease) increase in repurchase agreements
|
(2,675,744
)
|
3,075,801
|
|
Net
decrease in short-term borrowings
|
(20,000,000
)
|
0
|
|
Proceeds
from long-term borrowings
|
0
|
350,000
|
|
Decrease
in capital lease obligations
|
(23,718
)
|
(21,337
)
|
|
Dividends
paid on preferred stock
|
(23,438
)
|
(21,875
)
|
|
Dividends
paid on common stock
|
(585,042
)
|
(579,027
)
|
|
Net
cash provided by (used in) financing activities
|
4,376,724
|
(3,781,864
)
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
3,174,903
|
(3,399,220
)
|
|
Cash
and cash equivalents:
|
|
|
|
Beginning
|
29,614,286
|
28,851,890
|
|
Ending
|
$
32,789,189
|
$
25,452,670
|
|
|
|
|
|
Supplemental
Schedule of Cash Paid During the Period:
|
|
|
|
Interest
|
$
711,082
|
$
654,587
|
|
|
|
|
|
Income
taxes, net of refunds
|
$
0
|
$
50,000
|
|
|
|
|
|
Supplemental
Schedule of Noncash Investing and Financing
Activities:
|
|
|
|
Change
in unrealized (loss) gain on securities
available-for-sale
|
$
(19,600
)
|
$
334,883
|
|
|
|
|
|
Loans
transferred to OREO
|
$
355,979
|
$
395,108
|
|
|
|
|
|
Common
Shares Dividends Paid:
|
|
|
|
Dividends
declared
|
$
859,851
|
$
799,182
|
|
Increase
in dividends payable attributable to dividends
declared
|
(56,886
)
|
(914
)
|
|
Dividends
reinvested
|
(217,923
)
|
(219,241
)
|
|
|
$
585,042
|
$
579,027
|
The accompanying notes are an integral part of these consolidated
financial statements.
8
Notes to Consolidated Financial Statements
The
interim consolidated financial statements of Community Bancorp. and
Subsidiary are unaudited. All significant intercompany balances and
transactions have been eliminated in consolidation. In the opinion
of management, all adjustments necessary for the fair presentation
of the financial condition and results of operations of the Company
contained herein have been made. The unaudited consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year
ended December 31, 2016 contained in the Company's Annual Report on
Form 10-K. The results of operations for the interim period are not
necessarily indicative of the results of operations to be expected
for the full annual period ending December 31, 2017, or for any
other interim period.
Certain
amounts in the 2016 unaudited consolidated income statements have
been reclassified to conform to the 2017 presentation.
Reclassifications had no effect on prior period net income or
shareholders’ equity.
In
January 2016, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) 2016-01,
Financial Instruments—Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities
. This guidance changes how entities
account for equity investments that do not result in consolidation
and are not accounted for under the equity method of accounting.
This guidance also changes certain disclosure requirements and
other aspects of current accounting principles generally accepted
in the United States of America (US GAAP). Public businesses must
use the exit price notion when measuring the fair value of
financial instruments for disclosure purposes. This guidance is
effective for fiscal years beginning after December 15, 2017,
including interim periods within the fiscal year. The Company is
currently evaluating the impact of the adoption of the ASU on its
consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842). The ASU was issued
to increase transparency and comparability among organizations by
recognizing lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing arrangements. The ASU
is effective for annual periods beginning after December 15, 2018,
including interim periods within those fiscal years. Early
application of the amendments in the ASU is permitted for all
entities. The Company is currently evaluating the impact of the
adoption of the ASU on its consolidated financial
statements.
In June 2016, the FASB issued ASU No. 2016-13,
Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments
. Under the new guidance, which will replace the
existing incurred loss model for recognizing credit losses, banks
and other lending institutions will be required to recognize the
full amount of expected
credit losses. The new guidance, which is referred
to as the current expected credit loss model, requires that
expected credit losses for financial assets held at the reporting
date that are accounted for at amortized cost be measured and
recognized based on historical experience and current and
reasonably supportable forecasted conditions to reflect the full
amount of expected credit losses.
A modified version of these requirements also
applies to debt securities classified as available for sale, which
will require that credit losses on those securities be recorded
through an allowance for credit losses rather than a write-down.
T
h
e ASU
i
s
effec
ti
ve for
fisca
l years
be
g
inn
i
n
g
aft
er De
c
ember 15,
2019, in
c
lu
d
ing
in
teri
m p
e
rio
ds
w
i
t
hin
t
ho
se
fiscal
years.
Early
adoption is permitted for fiscal years beginning after December 15,
2018, including interim periods within such years. The Company is
evaluating the impact
of the adoption of the ASU on its consolidated
financial statements.
The ASU may have a material impact on
the Company's consolidated financial statements upon adoption as it
will require a change in the Company's methodology for calculating
its allowance for loan losses (ALL) and allowance on unused
commitments. The Company will transition from an incurred loss
model to an expected loss model, which will likely result in an
increase in the ALL upon adoption and may negatively impact the
Company and Bank's regulatory capital ratios. Additionally, ASU No.
2016-13 may reduce the carrying value of the Company's
held-to-maturity (HTM) investment securities as it will require an
allowance on the expected losses over the life of these securities
to be recorded upon adoption.
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles -
Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment
. The ASU was
issued to reduce the cost and complexity of the goodwill impairment
test. To simplify the subsequent measurement of goodwill, step two
of the goodwill impairment test was eliminated. Instead, a Company
will recognize an impairment of goodwill should the carrying value
of a reporting unit exceed its fair value (i.e. step one). The ASU
will be effective for the Company on January 1, 2020 and will be
applied prospectively.
The
Company has goodwill from its acquisition of LyndonBank in 2007 and
performs an impairment test annually or more frequently if
circumstances warrant (see Note 6). The Company is currently
evaluating the impact of the adoption of the ASU on its
consolidated financial statements, but does not anticipate any
material impact at this time.
9
Earnings
per common share amounts are computed based on the weighted average
number of shares of common stock issued during the period
(retroactively adjusted for stock splits and stock dividends, if
any), including Dividend Reinvestment Plan shares issuable upon
reinvestment of dividends declared, and reduced for shares held in
treasury.
The
following tables illustrate the calculation of earnings per common
share for the periods presented, as adjusted for the cash dividends
declared on the preferred stock:
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
2016
|
|
|
|
|
|
Net income, as
reported
|
$
1,414,216
|
$
1,169,494
|
|
Less: dividends to
preferred shareholders
|
23,438
|
21,875
|
|
Net income
available to common shareholders
|
$
1,390,778
|
$
1,147,619
|
|
Weighted average
number of common shares
|
|
|
|
used
in calculating earnings per share
|
5,063,128
|
5,000,144
|
|
Earnings per common
share
|
$
0.27
|
$
0.23
|
Securities
available-for-sale (AFS) and held-to-maturity (HTM) as of the
balance sheet dates consisted of the following:
|
|
|
Gross
|
Gross
|
|
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|
Securities
AFS
|
Cost
|
Gains
|
Losses
|
Value
|
|
|
|
|
|
|
|
March
31, 2017
|
|
|
|
|
|
U.S. Government
sponsored enterprise (GSE) debt securities
|
$
17,361,110
|
$
18,840
|
$
69,547
|
$
17,310,403
|
|
Agency
mortgage-backed securities (Agency MBS)
|
13,675,605
|
543
|
118,625
|
13,557,523
|
|
Other
investments
|
2,973,000
|
15,327
|
3,682
|
2,984,645
|
|
|
$
34,009,715
|
$
34,710
|
$
191,854
|
$
33,852,571
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
|
|
U.S. GSE debt
securities
|
$
17,365,805
|
$
24,854
|
$
73,331
|
$
17,317,328
|
|
Agency
MBS
|
13,265,790
|
3,896
|
115,458
|
13,154,228
|
|
Other
investments
|
3,221,000
|
24,947
|
2,452
|
3,243,495
|
|
|
$
33,852,595
|
$
53,697
|
$
191,241
|
$
33,715,051
|
|
|
|
|
|
|
|
March
31, 2016
|
|
|
|
|
|
U.S. GSE debt
securities
|
$
12,817,362
|
$
115,533
|
$
0
|
$
12,932,895
|
|
Agency
MBS
|
13,515,656
|
105,722
|
15,674
|
13,605,704
|
|
Other
investments
|
2,973,000
|
60,522
|
0
|
3,033,522
|
|
|
$
29,306,018
|
$
281,777
|
$
15,674
|
$
29,572,121
|
10
|
|
|
Gross
|
Gross
|
|
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|
Securities
HTM
|
Cost
|
Gains
|
Losses
|
Value*
|
|
|
|
|
|
|
|
March
31, 2017
|
|
|
|
|
|
States and
political subdivisions
|
$
53,879,934
|
$
973,066
|
$
0
|
$
54,853,000
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
|
|
States and
political subdivisions
|
$
49,886,631
|
$
1,148,369
|
$
0
|
$
51,035,000
|
|
|
|
|
|
|
|
March
31, 2016
|
|
|
|
|
|
States and
political subdivisions
|
$
45,551,714
|
$
683,286
|
$
0
|
$
46,235,000
|
*Method
used to determine fair value of HTM securities rounds values to
nearest thousand.
U.S.
GSE debt securities, Agency MBS securities and certificates of
deposit (CDs) held for investment with a book value of $33,265,715,
$33,604,595 and $27,172,084 and a fair value of $33,112,253,
$33,469,254 and $27,450,798 were pledged as collateral for
repurchase agreements at March 31, 2017, December 31, 2016 and
March 31, 2016, respectively. These repurchase agreements mature
daily.
The
scheduled maturities of debt securities AFS as of the balance sheet
dates were as follows:
|
|
Amortized
|
Fair
|
|
|
Cost
|
Value
|
|
March
31, 2017
|
|
|
|
Due in one year or
less
|
$
3,002,965
|
$
3,006,801
|
|
Due from one to
five years
|
16,086,145
|
16,070,906
|
|
Due from five to
ten years
|
1,245,000
|
1,217,341
|
|
Agency
MBS
|
13,675,605
|
13,557,523
|
|
|
$
34,009,715
|
$
33,852,571
|
|
|
|
|
|
December
31, 2016
|
|
|
|
Due in one year or
less
|
$
2,006,027
|
$
2,010,287
|
|
Due from one to
five years
|
17,335,778
|
17,329,503
|
|
Due from five to
ten years
|
1,245,000
|
1,221,033
|
|
Agency
MBS
|
13,265,790
|
13,154,228
|
|
|
$
33,852,595
|
$
33,715,051
|
|
|
|
|
|
March
31, 2016
|
|
|
|
Due in one year or
less
|
$
3,063,730
|
$
3,071,337
|
|
Due from one to
five years
|
12,481,632
|
12,650,080
|
|
Due from five to
ten years
|
245,000
|
245,000
|
|
Agency
MBS
|
13,515,656
|
13,605,704
|
|
|
$
29,306,018
|
$
29,572,121
|
Because
the actual maturities of Agency MBS usually differ from their
contractual maturities due to the right of borrowers to prepay the
underlying mortgage loans, usually without penalty, those
securities are not presented in the table by contractual maturity
date.
11
The
scheduled maturities of debt securities HTM as of the balance sheet
dates were as follows:
|
|
Amortized
|
Fair
|
|
|
Cost
|
Value*
|
|
March
31, 2017
|
|
|
|
Due in one year or
less
|
$
29,666,554
|
$
29,667,000
|
|
Due from one to
five years
|
3,905,257
|
4,148,000
|
|
Due from five to
ten years
|
3,950,402
|
4,194,000
|
|
Due after ten
years
|
16,357,721
|
16,844,000
|
|
|
$
53,879,934
|
$
54,853,000
|
|
|
|
|
|
December
31, 2016
|
|
|
|
Due in one year or
less
|
$
25,368,725
|
$
25,369,000
|
|
Due from one to
five years
|
4,030,900
|
4,318,000
|
|
Due from five to
ten years
|
4,013,242
|
4,300,000
|
|
Due after ten
years
|
16,473,764
|
17,048,000
|
|
|
$
49,886,631
|
$
51,035,000
|
|
|
|
|
|
March
31, 2016
|
|
|
|
Due in one year or
less
|
$
30,042,445
|
$
30,042,000
|
|
Due from one to
five years
|
3,864,268
|
4,035,000
|
|
Due from five to
ten years
|
3,235,317
|
3,407,000
|
|
Due after ten
years
|
8,409,684
|
8,751,000
|
|
|
$
45,551,714
|
$
46,235,000
|
*Method
used to determine fair value of HTM securities rounds values to
nearest thousand.
There
were no debt securities HTM in an unrealized loss position as of
the balance sheet dates. Debt securities AFS with unrealized losses
as of the balance sheet dates are presented in the table
below.
|
|
Less
than 12 months
|
12
months or more
|
Total
|
||||
|
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Number
of
|
Fair
|
Unrealized
|
|
|
Value
|
Loss
|
Value
|
Loss
|
Securities
|
Value
|
Loss
|
|
March
31, 2017
|
|
|
|
|
|
|
|
|
U.S. GSE debt
securities
|
$
6,179,311
|
$
69,547
|
$
0
|
$
0
|
5
|
$
6,179,311
|
$
69,547
|
|
Agency
MBS
|
12,018,209
|
104,677
|
1,048,513
|
13,948
|
18
|
13,066,722
|
118,625
|
|
Other
investments
|
740,318
|
3,682
|
0
|
0
|
3
|
740,318
|
3,682
|
|
|
$
18,937,838
|
$
177,906
|
$
1,048,513
|
$
13,948
|
26
|
$
19,986,351
|
$
191,854
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
U.S. GSE debt
securities
|
$
5,176,669
|
$
73,331
|
$
0
|
$
0
|
4
|
$
5,176,669
|
$
73,331
|
|
Agency
MBS
|
10,704,717
|
115,458
|
0
|
0
|
15
|
10,704,717
|
115,458
|
|
Other
investments
|
493,548
|
2,452
|
0
|
0
|
2
|
493,548
|
2,452
|
|
|
$
16,374,934
|
$
191,241
|
$
0
|
$
0
|
21
|
$
16,374,934
|
$
191,241
|
|
|
|
|
|
|
|
|
|
|
March
31, 2016
|
|
|
|
|
|
|
|
|
Agency
MBS
|
$
3,064,237
|
$
15,674
|
$
0
|
$
0
|
5
|
$
3,064,237
|
$
15,674
|
The
unrealized losses for all periods presented were principally
attributable to changes in prevailing interest rates for similar
types of securities and not deterioration in the creditworthiness
of the issuer.
12
Management
evaluates securities for other-than-temporary impairment at least
on a quarterly basis, and more frequently when economic or market
conditions, or adverse developments relating to the issuer, warrant
such evaluation. Consideration is given to (1) the length of time
and the extent to which the fair value has been less than the
carrying value, (2) the financial condition and near-term prospects
of the issuer, and (3) the intent and ability of the Company to
retain its investment for a period of time sufficient to allow for
any anticipated recovery in fair value. In analyzing an issuer's
financial condition, management considers whether the securities
are issued by the federal government or its agencies, whether
downgrades by bond rating agencies or other adverse developments in
the status of the securities have occurred, and the results of
reviews of the issuer's financial condition. As of March 31, 2017,
there were no declines in the fair value of any of the securities
reflected in the table above that were deemed by management to be
other than temporary.
The
composition of net loans as of the balance sheet dates was as
follows:
|
|
March
31,
|
December
31,
|
March
31,
|
|
|
2017
|
2016
|
2016
|
|
|
|
|
|
|
Commercial &
industrial
|
$
69,064,985
|
$
68,730,573
|
$
63,540,340
|
|
Commercial real
estate
|
205,140,487
|
201,728,280
|
178,205,320
|
|
Residential real
estate - 1st lien
|
162,929,247
|
166,691,962
|
162,594,375
|
|
Residential real
estate - Junior (Jr) lien
|
41,820,775
|
42,927,335
|
43,917,725
|
|
Consumer
|
6,766,751
|
7,171,076
|
6,790,425
|
|
Gross
Loans
|
485,722,245
|
487,249,226
|
455,048,185
|
|
Deduct
(add):
|
|
|
|
|
Allowance for loan
losses
|
5,258,440
|
5,278,445
|
5,109,488
|
|
Deferred net loan
costs
|
(321,285
)
|
(310,130
)
|
(315,050
)
|
|
Net
Loans
|
$
480,785,090
|
$
482,280,911
|
$
450,253,747
|
The
following is an age analysis of past due loans (including
non-accrual) as of the balance sheet dates, by portfolio
segment:
|
|
|
|
|
|
|
|
90
Days or
|
|
|
|
90
Days
|
Total
|
|
|
Non-Accrual
|
More
and
|
|
March
31, 2017
|
30-89
Days
|
or
More
|
Past
Due
|
Current
|
Total
Loans
|
Loans
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
Commercial &
industrial
|
$
103,900
|
$
0
|
$
103,900
|
$
68,961,085
|
$
69,064,985
|
$
135,379
|
$
0
|
|
Commercial real
estate
|
681,654
|
215,892
|
897,546
|
204,242,941
|
205,140,487
|
744,989
|
0
|
|
Residential real
estate
|
|
|
|
|
|
|
|
|
- 1st
lien
|
4,289,551
|
1,246,520
|
5,536,071
|
157,393,176
|
162,929,247
|
1,148,848
|
668,569
|
|
- Jr
lien
|
333,625
|
164,726
|
498,351
|
41,322,424
|
41,820,775
|
442,960
|
27,905
|
|
Consumer
|
84,321
|
1,903
|
86,224
|
6,680,527
|
6,766,751
|
0
|
1,903
|
|
|
$
5,493,051
|
$
1,629,041
|
$
7,122,092
|
$
478,600,153
|
$
485,722,245
|
$
2,472,176
|
$
698,377
|
|
|
|
|
|
|
|
|
90
Days or
|
|
|
|
90
Days
|
Total
|
|
|
Non-Accrual
|
More
and
|
|
December
31, 2016
|
30-89
Days
|
or
More
|
Past
Due
|
Current
|
Total
Loans
|
Loans
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
Commercial &
industrial
|
$
328,684
|
$
26,042
|
$
354,726
|
$
68,375,847
|
$
68,730,573
|
$
143,128
|
$
26,042
|
|
Commercial real
estate
|
824,836
|
222,738
|
1,047,574
|
200,680,706
|
201,728,280
|
765,584
|
0
|
|
Residential real
estate
|
|
|
|
|
|
|
|
|
- 1st
lien
|
4,881,496
|
1,723,688
|
6,605,184
|
160,086,778
|
166,691,962
|
1,227,220
|
1,068,083
|
|
- Jr
lien
|
984,849
|
116,849
|
1,101,698
|
41,825,637
|
42,927,335
|
338,602
|
27,905
|
|
Consumer
|
53,972
|
2,176
|
56,148
|
7,114,928
|
7,171,076
|
0
|
2,176
|
|
|
$
7,073,837
|
$
2,091,493
|
$
9,165,330
|
$
478,083,896
|
$
487,249,226
|
$
2,474,534
|
$
1,124,206
|
13
|
|
|
|
|
|
|
|
90
Days or
|
|
|
|
90
Days
|
Total
|
|
|
Non-Accrual
|
More
and
|
|
March
31, 2016
|
30-89
Days
|
or
More
|
Past
Due
|
Current
|
Total
Loans
|
Loans
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
Commercial &
industrial
|
$
37,333
|
$
204,354
|
$
241,687
|
$
63,298,653
|
$
63,540,340
|
$
256,456
|
$
0
|
|
Commercial real
estate
|
3,825,884
|
428,545
|
4,254,429
|
173,950,891
|
178,205,320
|
966,071
|
19,810
|
|
Residential real
estate
|
|
|
|
|
|
|
|
|
- 1st
lien
|
3,950,062
|
991,614
|
4,941,676
|
157,652,699
|
162,594,375
|
1,467,171
|
764,031
|
|
- Jr
lien
|
228,117
|
122,183
|
350,300
|
43,567,425
|
43,917,725
|
377,911
|
122,183
|
|
Consumer
|
152,546
|
0
|
152,546
|
6,637,879
|
6,790,425
|
0
|
0
|
|
Total
|
$
8,193,942
|
$
1,746,696
|
$
9,940,638
|
$
445,107,547
|
$
455,048,185
|
$
3,067,609
|
$
906,024
|
For all
loan segments, loans over 30 days past due are considered
delinquent.
As of
the balance sheet dates presented, residential mortgage loans in
process of foreclosure consisted of the following:
|
|
Number of
loans
|
Balance
|
|
|
|
|
|
March 31,
2017
|
6
|
$
330,548
|
|
December 31,
2016
|
8
|
322,663
|
|
March 31,
2016
|
5
|
230,171
|
Allowance for loan losses
The ALL
is established through a provision for loan losses charged to
earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is
probable. Subsequent recoveries, if any, are credited to the
allowance.
Unsecured
loans, primarily consumer loans, are charged off when they become
uncollectible and no later than 120 days past due. Unsecured loans
to customers who subsequently file bankruptcy are charged off
within 30 days of receipt of the notification of filing or by the
end of the month in which the loans become 120 days past due,
whichever occurs first. For secured loans, both residential and
commercial, the potential loss on impaired loans is carried as a
loan loss reserve specific allocation; the loss portion is charged
off when collection of the full loan appears unlikely. The
unsecured portion of a real estate loan is that portion of the loan
exceeding the "fair value" of the collateral less the estimated
cost to sell. Value of the collateral is determined in accordance
with the Company’s appraisal policy. The unsecured portion of
an impaired real estate secured loan is charged off by the end of
the month in which the loan becomes 180 days past due.
As
described below, the allowance consists of general, specific and
unallocated components. However, the entire allowance is available
to absorb losses in the loan portfolio, regardless of specific,
general and unallocated components considered in determining the
amount of the allowance.
General component
The
general component of the ALL is based on historical loss
experience, adjusted for qualitative factors and stratified by the
following loan segments: commercial and industrial, commercial real
estate, residential real estate first (1
st
) lien, residential
real estate junior (Jr) lien and consumer loans. The Company does
not disaggregate its portfolio segments further into classes. Loss
ratios are calculated by loan segment for one year, two year, three
year, four year and five year look back periods. The highest loss
ratio among these look-back periods is then applied against the
respective segment. Management uses an average of historical losses
based on a time frame appropriate to capture relevant loss data for
each loan segment. This historical loss factor is adjusted for the
following qualitative factors: levels of and trends in
delinquencies and non-performing loans, levels of and trends in
loan risk groups, trends in volumes and terms of loans, effects of
any changes in loan related policies, experience, ability and the
depth of management, documentation and credit data exception
levels, national and local economic trends, external factors such
as competition and regulation and lastly, concentrations of credit
risk in a variety of areas, including portfolio product mix, the
level of loans to individual borrowers and their related interests,
loans to industry segments, and the geographic distribution of
commercial real estate loans. This evaluation is inherently
subjective as it requires estimates that are susceptible to
revision as more information becomes available.
14
The
qualitative factors are determined based on the various risk
characteristics of each loan segment. The Company has policies,
procedures and internal controls that management believes are
commensurate with the risk profile of each of these segments. Major
risk characteristics relevant to each portfolio segment are as
follows:
Commercial & Industrial –
Loans in this segment
include commercial and industrial loans and to a lesser extent
loans to finance agricultural production. Commercial loans are made
to businesses and are generally secured by assets of the business,
including trade assets and equipment. While not the primary
collateral, in many cases these loans may also be secured by the
real estate of the business. Repayment is expected from the cash
flows of the business. A weakened economy, soft consumer spending,
unfavorable foreign trade conditions and the rising cost of labor
or raw materials are examples of issues that can impact the credit
quality in this segment.
Commercial Real Estate –
Loans in this segment are
principally made to businesses and are generally secured by either
owner-occupied, or non-owner occupied commercial real estate. A
relatively small portion of this segment includes farm loans
secured by farm land and buildings. As with commercial and
industrial loans, repayment of owner-occupied commercial real
estate loans is expected from the cash flows of the business and
the segment would be impacted by the same risk factors as
commercial and industrial loans. The non-owner occupied commercial
real estate portion includes both residential and commercial
construction loans, vacant land and real estate development loans,
multi-family dwelling loans and commercial rental property loans.
Repayment of construction loans is expected from permanent
financing takeout; the Company generally requires a commitment or
eligibility for the take-out financing prior to construction loan
origination. Real estate development loans are generally repaid
from the sale of the subject real property as the project
progresses. Construction and development lending entail additional
risks, including the project exceeding budget, not being
constructed according to plans, not receiving permits, or the
pre-leasing or occupancy rate not meeting expectations. Repayment
of multi-family loans and commercial rental property loans is
expected from the cash flow generated by rental payments received
from the individuals or businesses occupying the real estate.
Commercial real estate loans are impacted by factors such as
competitive market forces, vacancy rates, cap rates, net operating
incomes, lease renewals and overall economic demand. In addition,
loans in the recreational and tourism sector can be affected by
weather conditions, such as unseasonably low winter snowfalls.
Commercial real estate lending also carries a higher degree of
environmental risk than other real estate lending.
Residential Real Estate - 1
st
Lien –
All loans in
this segment are collateralized by first mortgages on 1 – 4
family owner-occupied residential real estate and repayment is
dependent on the credit quality of the individual borrower. The
overall health of the economy, including unemployment rates and
housing prices, has an impact on the credit quality of this
segment.
Residential Real Estate – Jr Lien –
All loans in
this segment are collateralized by junior lien mortgages on 1
– 4 family residential real estate and repayment is primarily
dependent on the credit quality of the individual borrower. The
overall health of the economy, including unemployment rates and
housing prices, has an impact on the credit quality of this
segment.
Consumer –
Loans in this segment are made to
individuals for consumer and household purposes. This segment
includes both loans secured by automobiles and other consumer
goods, as well as loans that are unsecured. This segment also
includes overdrafts, which are extensions of credit made to both
individuals and businesses to cover temporary shortages in their
deposit accounts and are generally unsecured. The Company maintains
policies restricting the size and term of these extensions of
credit. The overall health of the economy, including unemployment
rates, has an impact on the credit quality of this
segment.
Specific component
The
specific component of the ALL relates to loans that are impaired.
Impaired loans are loan(s) to a borrower that in the aggregate are
greater than $100,000 and that are in non-accrual status or are
troubled debt restructurings (TDR) regardless of amount. A specific
allowance is established for an impaired loan when its estimated
impaired basis is less than the carrying value of the loan. For all
loan segments, except consumer loans, a loan is considered impaired
when, based on current information and events, in
management’s estimation it is probable that the Company will
be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining
impairment include payment status, collateral value and probability
of collecting scheduled principal and interest payments when due.
Loans that experience insignificant or temporary payment delays and
payment shortfalls generally are not classified as impaired.
Management evaluates the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all
of the circumstances surrounding the loan and the borrower,
including the length and frequency of the delay, the reasons for
the delay, the borrower’s prior payment record and the amount
of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis, by either the
present value of expected future cash flows discounted at the
loan’s effective interest rate, the loan’s obtainable
market price, or the fair value of the collateral if the loan is
collateral dependent.
15
Impaired
loans also include troubled loans that are restructured. A TDR
occurs when the Company, for economic or legal reasons related to
the borrower’s financial difficulties, grants a concession to
the borrower that would otherwise not be granted. TDRs may include
the transfer of assets to the Company in partial satisfaction of a
troubled loan, a modification of a loan’s terms, or a
combination of the two.
Large
groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not
separately identify individual consumer loans for impairment
evaluation, unless such loans are subject to a restructuring
agreement.
Unallocated component
An
unallocated component of the ALL is maintained to cover
uncertainties that could affect management’s estimate of
probable losses. The unallocated component reflects
management’s estimate of the margin of imprecision inherent
in the underlying assumptions used in the methodologies for
estimating specific and general losses in the
portfolio.
The
tables below summarize changes in the ALL and select loan
information, by portfolio segment, for the periods
indicated.
As of or for the three months ended March 31, 2017
|
|
|
|
Residential
|
Residential
|
|
|
|
|
|
Commercial
|
Commercial
|
Real
Estate
|
Real
Estate
|
|
|
|
|
|
&
Industrial
|
Real
Estate
|
1st
Lien
|
Jr
Lien
|
Consumer
|
Unallocated
|
Total
|
|
Allowance for loan
losses
|
|
|
|
|
|
|
|
|
Beginning
balance
|
$
726,848
|
$
2,496,085
|
$
1,369,757
|
$
371,176
|
$
83,973
|
$
230,606
|
$
5,278,445
|
|
Charge-offs
|
(21,024
)
|
(160,207
)
|
(4,735
)
|
0
|
(5,441
)
|
0
|
(191,407
)
|
|
Recoveries
|
7,141
|
0
|
6,236
|
60
|
7,965
|
0
|
21,402
|
|
Provision
(credit)
|
6,808
|
185,243
|
(58,463
)
|
(782
)
|
(25,175
)
|
42,369
|
150,000
|
|
Ending
balance
|
$
719,773
|
$
2,521,121
|
$
1,312,795
|
$
370,454
|
$
61,322
|
$
272,975
|
$
5,258,440
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
losses
|
|
|
|
|
|
|
|
|
Evaluated for
impairment
|
|
|
|
|
|
|
|
|
Individually
|
$
0
|
$
79,200
|
$
3,900
|
$
117,500
|
$
0
|
$
0
|
$
200,600
|
|
Collectively
|
719,773
|
2,441,921
|
1,308,895
|
252,954
|
61,322
|
272,975
|
5,057,840
|
|
Total
|
$
719,773
|
$
2,521,121
|
$
1,312,795
|
$
370,454
|
$
61,322
|
$
272,975
|
$
5,258,440
|
|
|
|||||||
|
Loans evaluated for
impairment
|
|
|
|
|
|
|
|
|
Individually
|
$
48,385
|
$
807,282
|
$
466,328
|
$
222,080
|
$
0
|
|
$
1,544,075
|
|
Collectively
|
69,016,600
|
204,333,205
|
162,462,919
|
41,598,695
|
6,766,751
|
|
484,178,170
|
|
Total
|
$
69,064,985
|
$
205,140,487
|
$
162,929,247
|
$
41,820,775
|
$
6,766,751
|
|
$
485,722,245
|
16
As of or for the year ended December 31, 2016
|
|
|
|
Residential
|
Residential
|
|
|
|
|
|
Commercial
|
Commercial
|
Real
Estate
|
Real
Estate
|
|
|
|
|
|
&
Industrial
|
Real
Estate
|
1st
Lien
|
Jr
Lien
|
Consumer
|
Unallocated
|
Total
|
|
Allowance for loan
losses
|
|
|
|
|
|
|
|
|
Beginning
balance
|
$
712,902
|
$
2,152,678
|
$
1,368,028
|
$
422,822
|
$
75,689
|
$
279,759
|
$
5,011,878
|
|
Charge-offs
|
(49,009
)
|
0
|
(244,149
)
|
0
|
(15,404
)
|
0
|
(308,562
)
|
|
Recoveries
|
36,032
|
0
|
23,712
|
240
|
15,145
|
0
|
75,129
|
|
Provision
(credit)
|
26,923
|
343,407
|
222,166
|
(51,886
)
|
8,543
|
(49,153
)
|
500,000
|
|
Ending
balance
|
$
726,848
|
$
2,496,085
|
$
1,369,757
|
$
371,176
|
$
83,973
|
$
230,606
|
$
5,278,445
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
losses
|
|
|
|
|
|
|
|
|
Evaluated for
impairment
|
|
|
|
|
|
|
|
|
Individually
|
$
0
|
$
86,400
|
$
6,200
|
$
114,800
|
$
0
|
$
0
|
$
207,400
|
|
Collectively
|
726,848
|
2,409,685
|
1,363,557
|
256,376
|
83,973
|
230,606
|
5,071,045
|
|
Total
|
$
726,848
|
$
2,496,085
|
$
1,369,757
|
$
371,176
|
$
83,973
|
$
230,606
|
$
5,278,445
|
|
|
|||||||
|
Loans evaluated for
impairment
|
|
|
|
|
|
|
|
|
Individually
|
$
48,385
|
$
687,495
|
$
946,809
|
$
224,053
|
$
0
|
|
$
1,906,742
|
|
Collectively
|
68,682,188
|
201,040,785
|
165,745,153
|
42,703,282
|
7,171,076
|
|
485,342,484
|
|
Total
|
$
68,730,573
|
$
201,728,280
|
$
166,691,962
|
$
42,927,335
|
$
7,171,076
|
|
$
487,249,226
|
As of or for the three months ended March 31, 2016
|
|
|
|
Residential
|
Residential
|
|
|
|
|
|
Commercial
|
Commercial
|
Real
Estate
|
Real
Estate
|
|
|
|
|
|
&
Industrial
|
Real
Estate
|
1st
Lien
|
Jr
Lien
|
Consumer
|
Unallocated
|
Total
|
|
Allowance for loan
losses
|
|||||||
|
Beginning
balance
|
$
712,902
|
$
2,152,678
|
$
1,368,028
|
$
422,822
|
$
75,689
|
$
279,759
|
$
5,011,878
|
|
Charge-offs
|
(10,836
)
|
0
|
(312
)
|
0
|
(16,675
)
|
0
|
(27,823
)
|
|
Recoveries
|
19,295
|
0
|
312
|
60
|
5,766
|
0
|
25,433
|
|
Provision
(credit)
|
9,014
|
142,625
|
(29,101
)
|
143
|
(6,324
)
|
(16,357
)
|
100,000
|
|
Ending
balance
|
$
730,375
|
$
2,295,303
|
$
1,338,927
|
$
423,025
|
$
58,456
|
$
263,402
|
$
5,109,488
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
losses
|
|||||||
|
Evaluated for
impairment
|
|
|
|
|
|
|
|
|
Individually
|
$
0
|
$
0
|
$
0
|
$
117,700
|
$
0
|
$
0
|
$
117,700
|
|
Collectively
|
730,375
|
2,295,303
|
1,338,927
|
305,325
|
58,456
|
263,402
|
4,991,788
|
|
Total
|
$
730,375
|
$
2,295,303
|
$
1,338,927
|
$
423,025
|
$
58,456
|
$
263,402
|
$
5,109,488
|
|
|
|||||||
|
Loans evaluated for
impairment
|
|
|
|
|
|
|
|
|
Individually
|
$
204,354
|
$
907,309
|
$
717,673
|
$
231,591
|
$
0
|
|
$
2,060,927
|
|
Collectively
|
63,335,986
|
177,298,011
|
161,876,702
|
43,686,134
|
6,790,425
|
|
452,987,258
|
|
Total
|
$
63,540,340
|
$
178,205,320
|
$
162,594,375
|
$
43,917,725
|
$
6,790,425
|
|
$
455,048,185
|
17
Impaired
loans, by portfolio segment, were as follows:
|
|
As
of March 31, 2017
|
|
||
|
|
|
Unpaid
|
|
Average
|
|
|
Recorded
|
Principal
|
Related
|
Recorded
|
|
|
Investment
|
Balance
|
Allowance
|
Investment(1)
|
|
|
|
|
|
|
|
With an allowance
recorded
|
|
|
|
|
|
Commercial
real estate
|
$
346,444
|
$
379,243
|
$
79,200
|
$
283,351
|
|
Residential
real estate - 1st lien
|
53,038
|
57,032
|
3,900
|
162,500
|
|
Residential
real estate - Jr lien
|
222,080
|
284,931
|
117,500
|
223,067
|
|
|
621,562
|
721,206
|
200,600
|
668,918
|
|
|
|
|
|
|
|
With no related
allowance recorded
|
|
|
|
|
|
Commercial
& industrial
|
48,385
|
62,498
|
|
48,385
|
|
Commercial
real estate
|
460,838
|
508,058
|
|
464,038
|
|
Residential
real estate - 1st lien
|
413,290
|
485,577
|
|
544,069
|
|
|
922,513
|
1,056,133
|
|
1,056,492
|
|
|
|
|
|
|
|
Total
|
$
1,544,075
|
$
1,777,339
|
$
200,600
|
$
1,725,410
|
(1) For
the three months ended March 31, 2017
|
|
As
of December 31, 2016
|
2016
|
||
|
|
|
Unpaid
|
|
Average
|
|
|
Recorded
|
Principal
|
Related
|
Recorded
|
|
|
Investment
|
Balance
|
Allowance
|
Investment
|
|
|
|
|
|
|
|
With an allowance
recorded
|
|
|
|
|
|
Commercial
real estate
|
$
220,257
|
$
232,073
|
$
86,400
|
$
89,664
|
|
Residential
real estate - 1st lien
|
271,962
|
275,118
|
6,200
|
350,709
|
|
Residential
real estate - Jr lien
|
224,053
|
284,342
|
114,800
|
241,965
|
|
|
716,272
|
791,533
|
207,400
|
682,338
|
|
|
|
|
|
|
|
With no related
allowance recorded
|
|
|
|
|
|
Commercial
& industrial
|
48,385
|
62,498
|
|
183,925
|
|
Commercial
real estate
|
467,238
|
521,991
|
|
1,059,542
|
|
Residential
real estate - 1st lien
|
674,847
|
893,741
|
|
877,237
|
|
Residential
real estate - Jr lien
|
0
|
0
|
|
15,888
|
|
|
1,190,470
|
1,478,230
|
|
2,136,592
|
|
|
|
|
|
|
|
Total
|
$
1,906,742
|
$
2,269,763
|
$
207,400
|
$
2,818,930
|
18
|
|
As
of March 31, 2016
|
|
||
|
|
|
Unpaid
|
|
Average
|
|
|
Recorded
|
Principal
|
Related
|
Recorded
|
|
|
Investment
|
Balance
|
Allowance
|
Investment(1)
|
|
|
|
|
|
|
|
With an allowance
recorded
|
|
|
|
|
|
Residential
real estate - 1st lien
|
$
0
|
$
0
|
$
0
|
$
86,894
|
|
Residential
real estate - Jr lien
|
231,591
|
284,287
|
117,700
|
232,798
|
|
|
231,591
|
284,287
|
117,700
|
319,692
|
|
|
|
|
|
|
|
With no related
allowance recorded
|
|
|
|
|
|
Commercial
& industrial
|
204,354
|
272,017
|
|
245,395
|
|
Commercial
real estate
|
907,309
|
957,229
|
|
1,729,529
|
|
Residential
real estate - 1st lien
|
717,673
|
803,505
|
|
981,847
|
|
|
1,829,336
|
2,032,751
|
|
2,956,771
|
|
|
|
|
|
|
|
Total
|
$
2,060,927
|
$
2,317,038
|
$
117,700
|
$
3,276,463
|
(1) For
the three months ended March 31, 2016
Interest
income recognized on impaired loans was immaterial for all periods
presented.
For all
loan segments, the accrual of interest is discontinued when a loan
is specifically determined to be impaired or when the loan is
delinquent 90 days and management believes, after considering
collection efforts and other factors, that the borrower's financial
condition is such that collection of interest is considered by
management to be doubtful. Any unpaid interest previously accrued
on those loans is reversed from income. Interest income is
generally not recognized on specific impaired loans unless the
likelihood of further loss is considered by management to be
remote. Interest payments received on impaired loans are generally
applied as a reduction of the loan principal balance. Loans are
returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments
are considered by management to be reasonably assured.
Credit Quality Grouping
In
developing the ALL, management uses credit quality grouping to help
evaluate trends in credit quality. The Company groups credit risk
into Groups A, B and C. The manner the Company utilizes to assign
risk grouping is driven by loan purpose. Commercial purpose loans
are individually risk graded while the retail portion of the
portfolio is generally grouped by delinquency pool.
Group A loans - Acceptable Risk
– are loans that are
expected to perform as agreed under their respective terms. Such
loans carry a normal level of risk that does not require management
attention beyond that warranted by the loan or loan relationship
characteristics, such as loan size or relationship size. Group A
loans include commercial purpose loans that are individually risk
rated and retail loans that are rated by pool. Group A retail loans
include performing consumer and residential real estate loans.
Residential real estate loans are loans to individuals secured by
1-4 family homes, including first mortgages, home equity and home
improvement loans. Loan balances fully secured by deposit accounts
or that are fully guaranteed by the Federal Government are
considered acceptable risk.
Group B loans – Management Involved
- are loans that
require greater attention than the acceptable loans in Group A.
Characteristics of such loans may include, but are not limited to,
borrowers that are experiencing negative operating trends such as
reduced sales or margins, borrowers that have exposure to adverse
market conditions such as increased competition or regulatory
burden, or borrowers that have had unexpected or adverse changes in
management. These loans have a greater likelihood of migrating to
an unacceptable risk level if these characteristics are left
unchecked. Group B is limited to commercial purpose loans that are
individually risk rated.
19
Group C loans – Unacceptable Risk
– are loans
that have distinct shortcomings that require a greater degree of
management attention. Examples of these shortcomings include a
borrower's inadequate capacity to service debt, poor operating
performance, or insolvency. These loans are more likely to result
in repayment through collateral liquidation. Group C loans range
from those that are likely to sustain some loss if the shortcomings
are not corrected, to those for which loss is imminent and
non-accrual treatment is warranted. Group C loans include
individually rated commercial purpose loans and retail loans
adversely rated in accordance with the Federal Financial
Institutions Examination Council’s Uniform Retail Credit
Classification Policy. Group C retail loans include 1-4 family
residential real estate loans and home equity loans past due 90
days or more with loan-to-value ratios greater than 60%, home
equity loans 90 days or more past due where the bank does not hold
first mortgage, irrespective of loan-to-value, loans in bankruptcy
where repayment is likely but not yet established, and consumer
loans that are 90 days or more past due.
Commercial
purpose loan ratings are assigned by the commercial account
officer; for larger and more complex commercial loans, the credit
rating is a collaborative assignment by the lender and the credit
analyst. The credit risk rating is based on the borrower's expected
performance, i.e., the likelihood that the borrower will be able to
service its obligations in accordance with the loan terms. Credit
risk ratings are meant to measure risk versus simply record
history. Assessment of expected future payment performance requires
consideration of numerous factors. While past performance is part
of the overall evaluation, expected performance is based on an
analysis of the borrower's financial strength, and historical and
projected factors such as size and financing alternatives, capacity
and cash flow, balance sheet and income statement trends, the
quality and timeliness of financial reporting, and the quality of
the borrower’s management. Other factors influencing the
credit risk rating to a lesser degree include collateral coverage
and control, guarantor strength and commitment, documentation,
structure and covenants and industry conditions. There are
uncertainties inherent in this process.
Credit
risk ratings are dynamic and require updating whenever relevant
information is received. The risk ratings of larger or more complex
loans, and Group B and C rated loans, are assessed at the time of
their respective annual reviews, during quarterly updates, in
action plans or at any other time that relevant information
warrants update. Lenders are required to make immediate disclosure
to the Chief Credit Officer of any known increase in loan risk,
even if considered temporary in nature.
The
risk ratings within the loan portfolio, by segment, as of the
balance sheet dates were as follows:
As of March 31, 2017
|
|
|
|
Residential
|
Residential
|
|
|
|
|
Commercial
|
Commercial
|
Real
Estate
|
Real
Estate
|
|
|
|
|
&
Industrial
|
Real
Estate
|
1st
Lien
|
Jr
Lien
|
Consumer
|
Total
|
|
|
|
|
|
|
|
|
|
Group
A
|
$
66,610,036
|
$
194,682,293
|
$
160,911,670
|
$
41,115,085
|
$
6,764,848
|
$
470,083,932
|
|
Group
B
|
1,709,910
|
2,423,387
|
0
|
167,692
|
0
|
4,300,989
|
|
Group
C
|
745,039
|
8,034,807
|
2,017,577
|
537,998
|
1,903
|
11,337,324
|
|
Total
|
$
69,064,985
|
$
205,140,487
|
$
162,929,247
|
$
41,820,775
|
$
6,766,751
|
$
485,722,245
|
As of December 31, 2016
|
|
|
|
Residential
|
Residential
|
|
|
|
|
Commercial
|
Commercial
|
Real
Estate
|
Real
Estate
|
|
|
|
|
&
Industrial
|
Real
Estate
|
1st
Lien
|
Jr
Lien
|
Consumer
|
Total
|
|
|
|
|
|
|
|
|
|
Group
A
|
$
67,297,983
|
$
191,755,393
|
$
164,708,778
|
$
42,289,062
|
$
7,168,901
|
$
473,220,117
|
|
Group
B
|
512,329
|
2,971,364
|
0
|
169,054
|
0
|
3,652,747
|
|
Group
C
|
920,261
|
7,001,523
|
1,983,184
|
469,219
|
2,175
|
10,376,362
|
|
Total
|
$
68,730,573
|
$
201,728,280
|
$
166,691,962
|
$
42,927,335
|
$
7,171,076
|
$
487,249,226
|
20
As of March 31, 2016
|
|
|
|
Residential
|
Residential
|
|
|
|
|
Commercial
|
Commercial
|
Real
Estate
|
Real
Estate
|
|
|
|
|
&
Industrial
|
Real
Estate
|
1st
Lien
|
Jr
Lien
|
Consumer
|
Total
|
|
|
|
|
|
|
|
|
|
Group
A
|
$
58,289,285
|
$
165,816,389
|
$
159,255,456
|
$
43,197,130
|
$
6,790,425
|
$
433,348,685
|
|
Group
B
|
4,448,662
|
4,638,741
|
593,394
|
184,734
|
0
|
9,865,531
|
|
Group
C
|
802,393
|
7,750,190
|
2,745,525
|
535,861
|
0
|
11,833,969
|
|
Total
|
$
63,540,340
|
$
178,205,320
|
$
162,594,375
|
$
43,917,725
|
$
6,790,425
|
$
455,048,185
|
Modifications of Loans and TDRs
A loan is classified as a TDR if, for economic or legal reasons
related to a borrower’s financial difficulties, the Company
grants a concession to the borrower that it would not otherwise
consider.
The Company is deemed to have granted such a concession if it has
modified a troubled loan in any of the following ways:
●
Reduced
accrued interest;
●
Reduced
the original contractual interest rate to a rate that is below the
current market rate for the borrower;
●
Converted
a variable-rate loan to a fixed-rate loan;
●
Extended
the term of the loan beyond an insignificant delay;
●
Deferred
or forgiven principal in an amount greater than three months of
payments; or
●
Performed
a refinancing and deferred or forgiven principal on the original
loan.
An insignificant delay or insignificant shortfall in the amount of
payments typically would not require the loan to be accounted for
as a TDR. However, pursuant to regulatory guidance, any payment
delay longer than three months is generally not considered
insignificant. Management’s assessment of whether a
concession has been granted also takes into account payments
expected to be received from third parties, including third-party
guarantors, provided that the third party has the ability to
perform on the guarantee.
The Company’s TDRs are principally a result of extending loan
repayment terms to relieve cash flow difficulties. The Company has
only, on a limited basis, reduced interest rates for borrowers
below the current market rate for the borrower. The Company has not
forgiven principal or reduced accrued interest within the terms of
original restructurings, nor has it converted variable rate terms
to fixed rate terms. However, the Company evaluates each TDR
situation on its own merits and does not foreclose the granting of
any particular type of concession.
New
TDRs, by portfolio segment, during the periods presented were as
follows:
|
Three
months ended March 31, 2017
|
|
Pre-
|
Post-
|
|
|
|
Modification
|
Modification
|
|
|
|
Outstanding
|
Outstanding
|
|
|
Number
of
|
Recorded
|
Recorded
|
|
|
Contracts
|
Investment
|
Investment
|
|
|
|
|
|
|
Commercial &
industrial
|
1
|
$
41,857
|
$
57,418
|
21
|
Year
ended December 31, 2016
|
|
Pre-
|
Post-
|
|
|
|
Modification
|
Modification
|
|
|
|
Outstanding
|
Outstanding
|
|
|
Number
of
|
Recorded
|
Recorded
|
|
|
Contracts
|
Investment
|
Investment
|
|
|
|
|
|
|
Residential real
estate - 1st lien
|
8
|
$
572,418
|
$
598,030
|
|
Residential real
estate - Jr lien
|
2
|
62,819
|
64,977
|
|
Total
|
10
|
$
635,237
|
$
663,007
|
|
Three
months ended March 31, 2016
|
|
Pre-
|
Post-
|
|
|
|
Modification
|
Modification
|
|
|
|
Outstanding
|
Outstanding
|
|
|
Number
of
|
Recorded
|
Recorded
|
|
|
Contracts
|
Investment
|
Investment
|
|
|
|
|
|
|
Residential real
estate - 1st lien
|
5
|
$
395,236
|
$
412,923
|
|
Residential real
estate - Jr lien
|
1
|
10,261
|
10,340
|
|
Total
|
6
|
$
405,497
|
$
423,263
|
The
TDR’s for which there was a payment default during the twelve
month periods presented were as follows:
|
Twelve
months ended March 31, 2017
|
Number
of
|
Recorded
|
|
|
Contracts
|
Investment
|
|
Residential real
estate - 1st lien
|
1
|
$
64,218
|
|
Residential real
estate - Jr lien
|
1
|
54,557
|
|
Total
|
2
|
$
118,775
|
|
Twelve
months ended December 31, 2016
|
Number
of
|
Recorded
|
|
|
Contracts
|
Investment
|
|
Residential real
estate - 1st lien
|
2
|
$
93,230
|
|
Residential real
estate - Jr lien
|
1
|
54,557
|
|
Total
|
3
|
$
147,787
|
|
Twelve
months ended March 31, 2016
|
Number
of
|
Recorded
|
|
|
Contracts
|
Investment
|
|
Commercial
|
1
|
$
79,158
|
|
Commercial real
estate
|
1
|
146,519
|
|
Residential real
estate - 1st lien
|
1
|
59,838
|
|
Total
|
3
|
$
285,515
|
TDRs
are treated as other impaired loans and carry individual specific
reserves with respect to the calculation of the ALL. These loans
are categorized as non-performing, may be past due, and are
generally adversely risk rated. The TDRs that have defaulted under
their restructured terms are generally in collection status and
their reserve is typically calculated using the fair value of
collateral method.
The
specific allowances related to TDRs as of the balance sheet dates
are presented in the table below. There were no TDRs with specific
allocations as of March 31, 2016.
|
|
March 31,
|
December 31,
|
|
|
2017
|
2016
|
|
Specific
Allocation
|
$
83,100
|
$
92,600
|
22
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 Small Business
Administration guaranteed line of credit to a borrower whose
lending relationship was previously restructured.
As a
result of a merger with LyndonBank on December 31, 2007, the
Company recorded goodwill amounting to $11,574,269. The goodwill is
not amortizable and is not deductible for tax
purposes.
The
Company also initially recorded $4,161,000 of acquired identified
intangible assets in the LyndonBank merger, representing the core
deposit intangible which is subject to amortization as a
non-interest expense over a ten year period. The accumulated
amortization expense was $3,956,484 and $3,683,789 as of March 31,
2017 and 2016, respectively.
Amortization
expense for the core deposit intangible for the first three months
of 2017 and 2016 was $68,175. The future amortization expense
related to the remaining core deposit intangible is $204,516 and
will be fully expensed in 2017.
Management
evaluates goodwill for impairment annually and the core deposit
intangible for impairment if conditions warrant. As of the date of
the most recent evaluation (December 31, 2016), management
concluded that no impairment existed in either
category.
Certain
assets and liabilities are recorded at fair value to provide
additional insight into the Company’s quality of earnings.
The fair values of some of these assets and liabilities are
measured on a recurring basis while others are measured on a
non-recurring basis, with the determination based upon applicable
existing accounting pronouncements. For example, securities
available-for-sale are recorded at fair value on a recurring basis.
Other assets, such as MSRs, loans held-for-sale, impaired loans,
and OREO are recorded at fair value on a non-recurring basis using
the lower of cost or market methodology to determine impairment of
individual assets. The Company groups assets and liabilities which
are recorded at fair value in three levels, based on the markets in
which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value. The level within the
fair value hierarchy is based on the lowest level of input that is
significant to the fair value measurement (with Level 1 considered
highest and Level 3 considered lowest). A brief description of each
level follows.
Level
1
Quoted prices in
active markets for identical assets or liabilities. Level 1 assets
and liabilities include debt and equity securities and derivative
contracts that are traded in an active exchange market, as well as
U.S. Treasury, other U.S. Government debt securities that are
highly liquid and are actively traded in over-the-counter
markets.
Level
2
Observable inputs
other than Level 1 prices such as quoted prices for similar assets
and liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the
assets or liabilities. Level 2 assets and liabilities include debt
securities with quoted prices that are traded less frequently than
exchange-traded instruments and derivative contracts whose value is
determined using a pricing model with inputs that are observable in
the market or can be derived principally from or corroborated by
observable market data. This category generally includes MSRs,
impaired loans and OREO.
Level
3
Unobservable inputs
that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. Level 3
assets and liabilities include financial instruments whose value is
determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for
which the determination of fair value requires significant
management judgment or estimation.
The
following methods and assumptions were used by the Company in
estimating its fair value measurements and
disclosures:
Cash and cash equivalents:
The carrying amounts
reported in the balance sheet for cash and cash equivalents
approximate their fair values. As such, the Company classifies
these financial instruments as Level 1.
Securities available-for-sale and
held-to-maturity:
Fair
value measurement is based upon quoted prices for similar assets,
if available. If quoted prices are not available, fair values are
measured using matrix pricing models, or other model-based
valuation techniques requiring observable inputs other than quoted
prices such as yield curves, prepayment speeds and default rates.
Level 1 securities would include U.S. Treasury securities that are
traded by dealers or brokers in active over-the-counter markets.
Level 2 securities include federal agency securities and securities
of local municipalities.
23
Restricted equity
securities:
Restricted equity securities
are comprised of Federal Reserve Bank of Boston (FRBB) stock and
Federal Home Loan Bank of Boston (FHLBB) stock. These securities
are carried at cost, which is believed to approximate fair value,
based on the redemption provisions of the FRBB and the FHLBB. The
stock is nonmarketable, and redeemable at par value, subject to
certain conditions. The Company classifies these securities as
Level 2.
Loans and loans
held-for-sale:
For variable-rate loans that
reprice frequently and with no significant change in credit risk,
fair values are based on carrying amounts. The fair values for
other loans (for example, fixed rate residential, commercial real
estate, and rental property mortgage loans, and commercial and
industrial loans) are estimated using discounted cash flow
analyses, based on interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. Loan
fair value estimates include judgments regarding future expected
loss experience and risk characteristics. Loan impairment is deemed
to exist when full repayment of principal and interest according to
the contractual terms of the loan is no longer probable. Impaired
loans are reported based on one of three measures: the present
value of expected future cash flows discounted at the loan’s
effective interest rate; the loan’s observable market price;
or the fair value of the collateral if the loan is collateral
dependent. If the fair value is less than an impaired loan’s
recorded investment, an impairment loss is recognized as part of
the ALL. Accordingly, certain impaired loans may be subject to
measurement at fair value on a non-recurring basis. Management has
estimated the fair values of these assets using Level 2 inputs,
such as the fair value of collateral based on independent
third-party appraisals for collateral-dependent loans. All other
loans are valued using Level 3 inputs.
The
fair value of loans held-for-sale is based upon an actual purchase
and sale agreement between the Company and an independent market
participant. The sale is executed within a reasonable period
following quarter end at the stated fair value.
MSRs:
MSRs represent the
value associated with servicing residential mortgage loans.
Servicing assets and servicing liabilities are reported using the
amortization method and compared to fair value for impairment. In
evaluating the carrying values of MSRs, the Company obtains third
party valuations based on loan level data including note rate, and
the type and term of the underlying loans. The Company classifies
MSRs as non-recurring Level 2.
OREO:
Real estate acquired
through or in lieu of foreclosure and bank properties no longer
used as bank premises are initially recorded at fair value. The
fair value of OREO is based on property appraisals and an analysis
of similar properties currently available. The Company records OREO
as non-recurring Level 2.
Deposits, repurchase agreements and borrowed
funds:
The
fair values disclosed for demand deposits (for example, checking
accounts and savings accounts) are, by definition, equal to the
amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying value of repurchase agreements
approximates fair value due to their short term. The fair values
for certificates of deposit and borrowed funds are estimated using
a discounted cash flow calculation that applies interest rates
currently being offered on certificates and indebtedness to a
schedule of aggregated contractual maturities on such time deposits
and indebtedness. The Company classifies deposits, repurchase
agreements and borrowed funds as Level 2.
Capital lease
obligations:
Fair value is determined using a
discounted cash flow calculation using current rates. Based on
current rates, carrying value approximates fair value. The Company
classifies these obligations as Level 2.
Junior subordinated
debentures:
Fair value is estimated using current
rates for debentures of similar maturity. The Company classifies
these instruments as Level 2.
Accrued interest:
The carrying amounts of
accrued interest approximate their fair values. The Company
classifies accrued interest as Level 2.
Off-balance-sheet credit related
instruments:
Commitments to extend credit
are evaluated and fair value is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit-worthiness
of the counterparties. For fixed-rate loan commitments, fair value
also considers the difference between current levels of interest
rates and the committed rates.
24
FASB
ASC Topic 825 “Financial Instruments”, requires
disclosures of fair value information about financial instruments,
whether or not recognized in the balance sheet, if the fair values
can be reasonably determined. Fair value is best determined based
upon quoted market prices. However, in many instances, there are no
quoted market prices for the Company’s various financial
instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other
valuation techniques using observable inputs when available. Those
techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows.
Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument. Topic 825 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value
amounts presented may not necessarily represent the underlying fair
value of the Company.
Assets and Liabilities Recorded at Fair Value on a Recurring
Basis
Assets
measured at fair value on a recurring basis and reflected in the
consolidated balance sheets at the dates presented, segregated by
fair value hierarchy, are summarized below:
|
March
31, 2017
|
Level
2
|
|
Assets: (market
approach)
|
|
|
U.S. GSE debt
securities
|
$
17,310,403
|
|
Agency
MBS
|
13,557,523
|
|
Other
investments
|
2,984,645
|
|
Total
|
$
33,852,571
|
|
December
31, 2016
|
Level
2
|
|
Assets: (market
approach)
|
|
|
U.S. GSE debt
securities
|
$
17,317,328
|
|
Agency
MBS
|
13,154,228
|
|
Other
investments
|
3,243,495
|
|
Total
|
$
33,715,051
|
|
March
31, 2016
|
Level
2
|
|
Assets: (market
approach)
|
|
|
U.S. GSE debt
securities
|
$
12,932,895
|
|
Agency
MBS
|
13,605,704
|
|
Other
investments
|
3,033,522
|
|
Total
|
$
29,572,121
|
There
were no Level 1 or Level 3 assets or liabilities measured on a
recurring basis as of the balance sheet dates
presented.
Assets and Liabilities Recorded at Fair Value on a Non-Recurring
Basis
The
following table includes assets measured at fair value on a
nonrecurring basis that have had a fair value adjustment since
their initial recognition. Impaired loans measured at fair value
only include impaired loans with a related specific ALL and are
presented net of specific allowances as disclosed in Note
5.
Assets
measured at fair value on a nonrecurring basis and reflected in the
consolidated balance sheets at the dates presented, segregated by
fair value hierarchy, are summarized below:
|
March
31, 2017
|
Level
2
|
|
Assets: (market
approach)
|
|
|
MSRs
(1)
|
$
1,182,233
|
|
Impaired loans, net
of related allowance
|
420,962
|
|
OREO
|
561,979
|
|
|
|
(1)
Represents MSRs at lower of cost or fair value, including MSRs
deemed to be impaired and for which a valuation allowance was
established to carry at fair value as of the balance sheet dates
presented.
25
|
December
31, 2016
|
Level
2
|
|
Assets: (market
approach)
|
|
|
MSRs
(1)
|
$
1,210,695
|
|
Impaired loans, net
of related allowance
|
508,872
|
|
OREO
|
394,000
|
|
March
31, 2016
|
Level
2
|
|
Assets: (market
approach)
|
|
|
MSRs
(1)
|
$
1,278,982
|
|
Impaired loans, net
of related allowance
|
113,891
|
|
OREO
|
465,000
|
(1)
Represents MSRs at lower of cost or fair value, including MSRs
deemed to be impaired and for which a valuation allowance was
established to carry at fair value as of the balance sheet dates
presented.
There
were no Level 1 or Level 3 assets or liabilities measured on a
non-recurring basis as of the balance sheet dates
presented.
The
estimated fair values of commitments to extend credit and letters
of credit were immaterial as of the dates presented in the tables
below. The estimated fair values of the Company's financial
instruments were as follows:
|
March
31, 2017
|
|
Fair
|
Fair
|
Fair
|
Fair
|
|
|
Carrying
|
Value
|
Value
|
Value
|
Value
|
|
|
Amount
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
|
(Dollars
in Thousands)
|
||||
|
Financial
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
32,789
|
$
32,789
|
$
0
|
$
0
|
$
32,789
|
|
Securities
held-to-maturity
|
53,880
|
0
|
54,853
|
0
|
54,853
|
|
Securities
available-for-sale
|
33,853
|
0
|
33,853
|
0
|
33,853
|
|
Restricted equity
securities
|
2,426
|
0
|
2,426
|
0
|
2,426
|
|
Loans and loans
held-for-sale
|
|
|
|
|
|
|
Commercial
& industrial
|
68,306
|
0
|
48
|
68,936
|
68,984
|
|
Commercial
real estate
|
202,504
|
0
|
728
|
203,903
|
204,631
|
|
Residential
real estate - 1st lien
|
161,525
|
0
|
462
|
163,536
|
163,998
|
|
Residential
real estate - Jr lien
|
41,427
|
0
|
105
|
41,822
|
41,927
|
|
Consumer
|
6,702
|
0
|
0
|
6,953
|
6,953
|
|
MSRs
(1)
|
1,182
|
0
|
1,302
|
0
|
1,302
|
|
Accrued interest
receivable
|
2,063
|
0
|
2,063
|
0
|
2,063
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
Other
deposits
|
491,435
|
0
|
490,746
|
0
|
490,746
|
|
Brokered
deposits
|
40,985
|
0
|
40,986
|
0
|
40,986
|
|
Short-term
borrowings
|
10,000
|
0
|
9,998
|
0
|
9,998
|
|
Long-term
borrowings
|
1,550
|
0
|
1,389
|
0
|
1,389
|
|
Repurchase
agreements
|
27,747
|
0
|
27,747
|
0
|
27,747
|
|
Capital lease
obligations
|
459
|
0
|
459
|
0
|
459
|
|
Subordinated
debentures
|
12,887
|
0
|
12,846
|
0
|
12,846
|
|
Accrued interest
payable
|
96
|
0
|
96
|
0
|
96
|
(1)
Reported fair value represents all MSRs for loans serviced by the
Company at March 31, 2017, regardless of carrying
amount.
26
|
December
31, 2016
|
|
Fair
|
Fair
|
Fair
|
Fair
|
|
|
Carrying
|
Value
|
Value
|
Value
|
Value
|
|
|
Amount
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
|
(Dollars
in Thousands)
|
||||
|
Financial
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
29,614
|
$
29,614
|
$
0
|
$
0
|
$
29,614
|
|
Securities
held-to-maturity
|
49,887
|
0
|
51,035
|
0
|
51,035
|
|
Securities
available-for-sale
|
33,715
|
0
|
33,715
|
0
|
33,715
|
|
Restricted equity
securities
|
2,756
|
0
|
2,756
|
0
|
2,756
|
|
Loans and loans
held-for-sale
|
|
|
|
|
|
|
Commercial
& industrial
|
67,972
|
0
|
48
|
68,727
|
68,775
|
|
Commercial
real estate
|
199,136
|
0
|
601
|
201,560
|
202,161
|
|
Residential
real estate - 1st lien
|
165,243
|
0
|
941
|
166,858
|
167,799
|
|
Residential
real estate - Jr lien
|
42,536
|
0
|
109
|
42,948
|
43,057
|
|
Consumer
|
7,084
|
0
|
0
|
7,371
|
7,371
|
|
MSRs(1)
|
1,211
|
0
|
1,302
|
0
|
1,302
|
|
Accrued interest
receivable
|
1,819
|
0
|
1,819
|
0
|
1,819
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
Other
deposits
|
470,002
|
0
|
469,323
|
0
|
469,323
|
|
Brokered
deposits
|
34,733
|
0
|
34,745
|
0
|
34,745
|
|
Short-term
borrowings
|
30,000
|
0
|
30,000
|
0
|
30,000
|
|
Long-term
borrowings
|
1,550
|
0
|
1,376
|
0
|
1,376
|
|
Repurchase
agreements
|
30,423
|
0
|
30,423
|
0
|
30,423
|
|
Capital lease
obligations
|
483
|
0
|
483
|
0
|
483
|
|
Subordinated
debentures
|
12,887
|
0
|
12,849
|
0
|
12,849
|
|
Accrued interest
payable
|
73
|
0
|
73
|
0
|
73
|
(1)
Reported fair value represents all MSRs for loans serviced by the
Company at December 31, 2016, regardless of carrying
amount.
27
|
March
31, 2016
|
|
Fair
|
Fair
|
Fair
|
Fair
|
|
|
Carrying
|
Value
|
Value
|
Value
|
Value
|
|
|
Amount
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
|
(Dollars
in Thousands)
|
||||
|
Financial
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
25,453
|
$
25,453
|
$
0
|
$
0
|
$
25,453
|
|
Securities
held-to-maturity
|
45,552
|
0
|
46,235
|
0
|
46,235
|
|
Securities
available-for-sale
|
29,572
|
0
|
29,572
|
0
|
29,572
|
|
Restricted equity
securities
|
1,891
|
0
|
1,891
|
0
|
1,891
|
|
Loans and loans
held-for-sale
|
|
|
|
|
|
|
Commercial
& industrial
|
62,773
|
0
|
204
|
63,772
|
63,976
|
|
Commercial
real estate
|
175,807
|
0
|
907
|
180,164
|
181,071
|
|
Residential
real estate - 1st lien
|
161,686
|
0
|
718
|
165,571
|
166,289
|
|
Residential
real estate - Jr lien
|
43,470
|
0
|
114
|
44,085
|
44,199
|
|
Consumer
|
6,728
|
0
|
0
|
7,021
|
7,021
|
|
MSRs(1)
|
1,279
|
0
|
1,497
|
0
|
1,497
|
|
Accrued interest
receivable
|
2,064
|
0
|
2,064
|
0
|
2,064
|
|
Financial
liabilities:
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
Other
deposits
|
468,288
|
0
|
468,451
|
0
|
468,451
|
|
Brokered
deposits
|
20,612
|
0
|
20,618
|
0
|
20,618
|
|
Short-term
borrowings
|
10,000
|
0
|
10,000
|
0
|
10,000
|
|
Long-term
borrowings
|
350
|
0
|
324
|
0
|
324
|
|
Repurchase
agreements
|
25,149
|
0
|
25,149
|
0
|
25,149
|
|
Capital lease
obligations
|
537
|
0
|
537
|
0
|
537
|
|
Subordinated
debentures
|
12,887
|
0
|
12,516
|
0
|
12,516
|
|
Accrued interest
payable
|
61
|
0
|
61
|
0
|
61
|
(1)
Reported fair value represents all MSRs for loans serviced by the
Company at March 31, 2016, regardless of carrying
amount.
The
following table shows the changes in the carrying amount of the
mortgage servicing rights, included in other assets in the
consolidated balance sheets, for the periods
indicated:
|
|
Three
Months Ended
|
Year
Ended
|
Three
Months Ended
|
|
|
March
31, 2017
|
December
31, 2016
|
March
31, 2016
|
|
|
|
|
|
|
Balance at
beginning of year
|
$
1,210,695
|
$
1,293,079
|
$
1,293,079
|
|
Mortgage
servicing rights capitalized
|
28,466
|
176,705
|
41,424
|
|
Mortgage
servicing rights amortized
|
(56,928
)
|
(266,603
)
|
(63,035
)
|
|
Change
in valuation allowance
|
0
|
7,514
|
7,514
|
|
Balance at end of
period
|
$
1,182,233
|
$
1,210,695
|
$
1,278,982
|
In the
normal course of business, the Company and its subsidiary are
involved in litigation that is considered incidental to their
business. Management does not expect that any such litigation will
be material to the Company's consolidated financial condition or
results of operations.
The
Company has evaluated events and transactions through the date that
the financial statements were issued for potential recognition or
disclosure in these financial statements, as required by U.S. GAAP.
On March 8, 2017, the Company declared a cash dividend of $0.17 per
common share payable May 1, 2017 to shareholders of record as of
April 15, 2017. This dividend, amounting to $859,851, was accrued
at March 31, 2017.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Period Ended March 31, 2017
The
following discussion analyzes the consolidated financial condition
of Community Bancorp. (the Company) and its wholly-owned
subsidiary, Community National Bank (the Bank), as of March 31,
2017, December 31, 2016 and March 31, 2016, and its consolidated
results of operations for the three-month interim period presented.
The Company is considered a “smaller reporting company”
under applicable regulations of the Securities and Exchange
Commission (SEC) and is therefore eligible for relief from certain
disclosure requirements.
The
following discussion should be read in conjunction with the
Company’s audited consolidated financial statements and
related notes contained in its 2016 Annual Report on Form 10-K
filed with the SEC.
FORWARD-LOOKING STATEMENTS
This
Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements
about 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," "plans," "predicts," or 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. Future
results of the Company may differ materially from those expressed
in these forward-looking statements. Examples of forward looking
statements included in this discussion include, but are not limited
to, estimated contingent liability related to assumptions made
within the asset/liability management process, management's
expectations as to the future interest rate environment and the
Company's related liquidity level, credit risk expectations
relating to the Company's loan portfolio and its participation in
the Federal Home Loan Bank of Boston (FHLBB) Mortgage Partnership
Finance (MPF) program, and management's general outlook for the
future performance of the Company or the local or national economy.
Although forward-looking statements are based on management's
current expectations and estimates, many of the factors that could
influence or determine actual results are unpredictable and not
within the Company's control. 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.
Factors
that may cause actual results to differ materially from those
contemplated by these forward-looking statements include, among
others, the following possibilities: (1) general economic
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; (2) 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; (3) interest rates change in such
a way as to negatively affect the Company's net income, asset
valuations or margins; (4) 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; (5)
changes in federal or state tax policy; (6) changes in the level of
nonperforming assets and charge-offs; (7) changes in estimates of
future reserve requirements based upon relevant regulatory and
accounting requirements; (8) changes in consumer and business
spending, borrowing and savings habits; (9) reductions in deposit
levels, which necessitate increased borrowings to fund loans and
investments; (10) the geographic concentration of the
Company’s loan portfolio and deposit base; (11) losses due to
the fraudulent or negligent conduct of third parties, including the
Company’s service providers, customers and employees; (12)
the effect of changes to the calculation of the Company’s
regulatory capital ratios which began in 2015 under the Basel III
capital framework and which, among other things, requires
additional regulatory capital, and changes the framework for
risk-weighting of certain assets; (13) the effect of and changes in
the United States monetary and fiscal policies, including the
interest rate policies of the Federal Reserve Board (FRB) and its
regulation of the money supply; and (14) adverse changes in the
credit rating of U.S. government debt.
29
NON-GAAP FINANCIAL MEASURES
Under
SEC Regulation G, public companies making disclosures containing
financial measures that are not in accordance with generally
accepted accounting principles in the United States (US GAAP or
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 (Net
Interest Income)) 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 March 31, 2017 were
$642,900,050, an increase of $5,246,385, or 0.8%, from December 31,
2016 and an increase of $49,490,722, or 8.3%, from March 31, 2016.
Net loans decreased $1,495,821, or 0.3%, since December 31, 2016
and increased $30,531,343, or 6.8%, since March 31, 2016. The year
over year increase is attributable to growth in commercial loans
and was funded primarily through an increase in deposit
accounts.
Total
deposits increased $27,684,666, or 5.5%, since December 31, 2016
due to an $18.0 million, or 10.9%, increase in savings and money
market accounts, and a $3.9 million, or 3.3%, increase in interest
bearing demand deposits. Brokered certificates of deposit (CDs)
increased $4.6 million, or 27.2%. In the year over year comparison,
deposits increased $43,519,562, or 8.9%. Core deposits saw
increases in all areas except retail time deposits, which have
remained flat after several years of declining balances. The
decrease in retail time deposits was a trend that had been
prevalent for several years while rates remained at historic lows.
Management believes that the low interest rates being paid on CDs
and other investment products has caused some depositors to place
their money in non-maturity products such as demand and savings
accounts while awaiting an improvement in interest rates and market
conditions. This trend has slowed in recent months as rates appear
to have bottomed and the majority of remaining CDs have already
repriced to lower rates.
Despite
three increases in the fed funds rate of 25 basis points each since
December 2015, interest rates remain at historically low levels,
and the resulting pressure on margins is being further exacerbated
by a flattening yield curve as long rates have stayed in a tight
range. Growth of the commercial loan portfolio in recent years,
which typically carries higher yields than residential and consumer
loans, has helped to maintain a stable level of interest income.
This shift in asset mix is in line with the Company’s
strategic plan to increase its concentration in commercial loans
while maintaining a stable residential loan portfolio. While
commercial loans inherently carry more risk, the Company has
dedicated significant resources in the credit administration
department to mitigate the additional risk. The opportunities for
growth continue to be primarily in the Central Vermont market,
where economic activity is more robust than in the Company’s
Orleans and Caledonia county markets, and where the Company is
increasing its presence and market share. The Company opened a loan
production office in Chittenden County, the economic hub of
Vermont, during the first quarter of 2017, which should further
drive commercial loan activity. Yields in the taxable and tax
exempt securities portfolios have remained stable compared with the
prior year, with increased interest income resulting from growth of
$4.0 million, or 8.0%, in the tax exempt portfolio.
Interest
income increased $338,139, or 5.8%, for the first three months of
2017 compared to the same period in 2016 and interest expense
increased $71,149, or 10.7%. The increase in interest income year
over year reflects the higher balances in net loans, which exceeded
the prior year by $30.7 million, or 6.7%, as well as the growth in
the tax-exempt securities portfolio. The increase in interest paid
on deposits is attributable to a higher utilization of brokered
time deposits, which carry higher rates than core non-maturity
deposits. Higher levels of borrowing and the increase in fed funds
rate caused increased interest expense on FHLB advances of $34,767,
or 439.2%, compared with the first quarter of 2016. The increase in
the fed funds rate also caused an increase of $13,341, or 12.2%, in
interest expense associated with the Company’s s junior
subordinated debentures.
30
Net
interest income after the provision for loan losses improved by
$216,990, or 4.3%, for the three months ended March 31, 2017
compared to the same period in 2016. The charge to income for the
provision for loan losses increased $50,000, or 50.0%, for the
comparison period due to a combination of a low level of losses in
the first quarter of 2016 and the increase in the loan portfolio,
year over year. Please refer to the Allowance for loan losses and
provisions discussion in the Credit Risk section for more
information.
Net
income for the first three months of 2017 was $1,414,216, an
increase of $244,722, or 20.9%, compared to the same period in
2016. Non-interest income increased $132,367, or 10.7%, but
non-interest expense increased $48,828, or 1.0%; and income tax
expense increased $55,807, or 12.7%, offsetting a portion of the
increase in non-interest income. Service fee income increased
$130,438, or 21.1%, contributing to the increase in net income.
Also contributing to the increase in net income was an increase of
$30,601, or 37.1%, in trust income from Community Financial
Services Group (CFSG Partners), and an increase of $23,643, or
365.4%, in market value of the Company’s investments related
to the Supplemental Employee Retirement Account (SERP). Residential
mortgage lending activity was lower for 2016 compared to 2015, with
residential mortgage originations totaling $8,111,071 for the first
three months of 2017 compared to $8,475,629 for the same period of
2016, accounting for the decrease in the Company’s loan fee
income.
Of those
originations during the first three months of 2017, secondary
market sales totaled $3,167,501, compared to $4,651,578 for the
first three months of 2016, providing points and premiums from the
sales of these mortgages of $190,295 and $221,194, respectively, a
decrease of 14.0%. Furthermore, operating expenses remain
manageable at this time with an increase of 1.0%. Please refer to
the Non-interest Income and Expense sections for more
information.
On
March 8, 2017, the Company's Board of Directors declared a
quarterly cash dividend of $0.17 per common share, payable on May
1, 2017 to shareholders of record on April 15, 2017. This
represents an increase in the quarterly dividend of $0.01 per share
and is attributable to the Bank’s strong performance in 2016,
demonstrating the confidence of the Board of Directors and
management team in the Company’s ability to generate
shareholder value. The Company is focused on increasing the
profitability of the balance sheet, and prudently managing
operating expenses and risk, particularly credit risk, in order to
remain a well-capitalized bank in this challenging interest rate
environment.
CRITICAL ACCOUNTING POLICIES
The
Company’s significant accounting policies, are fundamental to
understanding the Company’s results of operations and
financial condition because they require management to use
estimates and assumptions that may affect the value of the
Company’s assets or liabilities and financial results. These
policies are considered by management to be critical because they
require subjective and complex judgments about matters that are
inherently uncertain and because it is likely that materially
different amounts would be reported under different conditions or
using different assumptions. The Company’s critical
accounting policies govern:
●
the allowance for
loan losses;
●
other real estate
owned (OREO);
●
valuation of
residential mortgage servicing rights (MSRs);
●
other than
temporary impairment of investment securities; and
●
the carrying value
of goodwill.
These
policies are described further in the Company’s 2016 Annual
Report on Form 10-K in the section titled “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Policies” and in Note
1 (Significant Accounting Policies) to the audited consolidated
financial statements. There were no material changes during the
first three months of 2017 in the Company’s critical
accounting policies.
31
RESULTS OF OPERATIONS
Net
income for the first three months of 2017 was $1,414,216 or $0.27
per common share, compared to $1,169,494 or $0.23 per common share
for the same period in 2016. Core earnings (net interest income
before the provision for loan losses) for the three months ended
March 31, 2017 increased $266,990, or 5.2%, compared to the prior
year. In light of the continued pressure on net interest margin and
spread in this flattening yield curve environment, the Company is
pleased with these increases. To help offset this pressure, the
Company has continued to shift assets from lower yielding taxable
investments to loans, and to shift a portion of the investment
portfolio to higher yielding small business administration
securities (SBA) and agency mortgage-backed securities (Agency MBS)
within its available-for-sale portfolio. Compared to the same
period last year, during the first three months of 2017, the loan
mix continued to shift in favor of higher yielding commercial
loans, while the deposit mix experienced an increase in lower cost
non-maturity deposits, both of which have benefitted the
Company’s net interest income. Interest paid on deposits,
which is the major component of total interest expense, increased
$21,195, or 4.1%, in the first three months of 2017 compared to the
same period of 2016, reflecting the increased deposit balances. The
Company recorded a provision for loan losses
of $150,000 for the
first three months of 2017, compared to $100,000 for the same
period of 2016. Non-interest income increased $132,367, or 10.7%,
for the first three months of 2017 compared to 2016, due in part to
an increase in service fees on deposit accounts, an increase in
trust income from CFSG Partners, and an increase in the market
value of the Company’s SERP investment account. Non-interest
expense increased $48,828, or 1.0%,
for the first three months of
2017 compared to the prior year with increases in occupancy expense
and other expenses. The section below labeled Non-Interest Income
and Non-Interest Expense provides a more detailed discussion on the
significant components of these items.
Return
on average assets, which is net income divided by average total
assets, measures how effectively a corporation uses its assets to
produce earnings. Return on average equity, which is net income
divided by average shareholders' equity, measures how effectively a
corporation uses its equity capital to produce
earnings.
The
following table shows these ratios annualized for the comparison
periods.
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
2016
|
|
Return on Average
Assets
|
0.90
%
|
0.80
%
|
|
Return on Average
Equity
|
10.47
%
|
9.04
%
|
|
|
|
|
32
The
following table summarizes the earnings performance and certain
balance sheet data of the Company for the periods
presented.
|
SELECTED
FINANCIAL DATA (Unaudited)
|
|||
|
|
|
||
|
|
March
31,
|
December
31,
|
March
31,
|
|
|
2017
|
2016
|
2016
|
|
Balance
Sheet Data
|
|
|
|
|
Net
loans
|
$
480,785,090
|
$
482,280,911
|
$
450,253,747
|
|
Total
assets
|
642,900,050
|
637,653,665
|
593,409,328
|
|
Total
deposits
|
532,419,698
|
504,735,032
|
488,900,136
|
|
Borrowed
funds
|
11,550,000
|
31,550,000
|
10,350,000
|
|
Total
liabilities
|
587,712,619
|
583,202,148
|
541,205,972
|
|
Total shareholders'
equity
|
55,187,431
|
54,451,517
|
52,203,356
|
|
|
|
|
|
|
Book value per
common share outstanding
|
$
10.39
|
$
10.27
|
$
9.92
|
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
2016
|
|
Operating
Data
|
|
|
|
Total interest
income
|
$
6,156,393
|
$
5,818,254
|
|
Total interest
expense
|
734,411
|
663,262
|
|
Net
interest income
|
5,421,982
|
5,154,992
|
|
|
|
|
|
Provision for loan
losses
|
150,000
|
100,000
|
|
Net
interest income after provision for loan losses
|
5,271,982
|
5,054,992
|
|
|
|
|
|
Non-interest
income
|
1,370,218
|
1,237,851
|
|
Non-interest
expense
|
4,731,119
|
4,682,291
|
|
Income
before income taxes
|
1,911,081
|
1,610,552
|
|
Applicable income
tax expense(1)
|
496,865
|
441,058
|
|
|
|
|
|
Net
Income
|
$
1,414,216
|
$
1,169,494
|
|
|
|
|
|
Per
Common Share Data
|
|
|
|
Earnings per common
share (2)
|
$
0.27
|
$
0.23
|
|
Dividends declared
per common share
|
$
0.17
|
$
0.16
|
|
Weighted average
number of common shares outstanding
|
5,063,128
|
5,000,144
|
|
Number of common
shares outstanding, period end
|
5,072,976
|
5,010,318
|
(1)
Applicable income tax expense assumes a 34% tax rate.
(2)
Computed based on the weighted average number of common shares
outstanding during the periods presented.
33
INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST
INCOME)
The
largest component of the Company’s operating income is net
interest income, which is the difference between interest earned on
loans and investments and the interest paid on deposits and other
sources of funds (i.e. other 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 from changes in the yield earned and costs of funds (rate). A
portion of the Company’s income from municipal investments is
not subject to income taxes. Because the proportion of tax-exempt
items in the Company's portfolio 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.
Because the Company’s corporate tax rate is 34%, to equalize
tax-free and taxable income in the comparison, we divide the
tax-free income by 66%, with the result that every tax-free dollar
is equivalent to $1.52 in taxable income.
The
Company’s tax-exempt interest income of $324,532 for the
first three months of 2017 and $280,097 for the same period last
year was derived from municipal investments, which comprised the
entire held-to-maturity portfolio of $53,879,934 at March 31, 2017,
and $45,551,714 at March 31, 2016.
The
following table shows the reconciliation between reported net
interest income and tax equivalent, net interest income for the
quarterly comparison periods presented.
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
2016
|
|
|
|
|
|
Net interest income
as presented
|
$
5,421,982
|
$
5,154,992
|
|
Effect of
tax-exempt income
|
167,183
|
144,292
|
|
Net
interest income, tax equivalent
|
$
5,589,165
|
$
5,299,284
|
34
The
following table presents average earning assets and average
interest-bearing liabilities supporting earning assets. Interest
income (excluding interest on non-accrual loans) and interest
expense are both expressed on a tax equivalent basis, both in
dollars and as a rate/yield for the comparison periods
presented.
|
|
Three
Months Ended March 31,
|
|||||
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
Income/
|
Rate/
|
Average
|
Income/
|
Rate/
|
|
|
Balance
|
Expense
|
Yield
|
Balance
|
Expense
|
Yield
|
|
Interest-Earning
Assets
|
|
|
|
|
|
|
|
Loans
(1)
|
$
485,288,232
|
$
5,616,867
|
4.69
%
|
$
454,820,382
|
$
5,370,424
|
4.75
%
|
|
Taxable
investment securities
|
34,053,569
|
151,726
|
1.81
%
|
29,114,466
|
127,449
|
1.76
%
|
|
Tax-exempt
investment securities
|
51,957,649
|
491,715
|
3.84
%
|
44,788,615
|
424,389
|
3.81
%
|
|
Sweep and
interest-earning accounts
|
14,043,904
|
27,472
|
0.79
%
|
9,088,192
|
10,906
|
0.48
%
|
|
Other
investments (2)
|
3,021,923
|
35,796
|
4.80
%
|
2,575,619
|
29,378
|
4.59
%
|
|
Total
|
$
588,365,277
|
$
6,323,576
|
4.36
%
|
$
540,387,274
|
$
5,962,546
|
4.44
%
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities
|
|
|
|
|
|
|
|
Interest-bearing
transaction accounts
|
$
115,735,842
|
$
57,213
|
0.20
%
|
$
115,448,881
|
$
53,699
|
0.19
%
|
|
Money market
accounts
|
84,633,510
|
203,898
|
0.98
%
|
87,656,153
|
217,469
|
1.00
%
|
|
Savings
deposits
|
92,565,385
|
28,425
|
0.12
%
|
83,000,432
|
25,599
|
0.12
%
|
|
Time
deposits
|
118,947,370
|
248,253
|
0.85
%
|
109,066,015
|
219,827
|
0.81
%
|
|
Borrowed
funds
|
21,773,444
|
42,688
|
0.80
%
|
6,729,780
|
8,056
|
0.48
%
|
|
Repurchase
agreements
|
29,419,726
|
21,527
|
0.30
%
|
24,437,248
|
17,991
|
0.30
%
|
|
Capital lease
obligations
|
467,557
|
9,547
|
8.17
%
|
544,405
|
11,102
|
8.16
%
|
|
Junior
subordinated debentures
|
12,887,000
|
122,860
|
3.87
%
|
12,887,000
|
109,519
|
3.42
%
|
|
Total
|
$
476,429,834
|
$
734,411
|
0.63
%
|
$
439,769,914
|
$
663,262
|
0.61
%
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
$
5,589,165
|
|
|
$
5,299,284
|
|
|
Net interest spread
(3)
|
|
|
3.73
%
|
|
|
3.83
%
|
|
Net interest margin
(4)
|
|
|
3.85
%
|
|
|
3.94
%
|
|
(1)
Included in gross loans are non-accrual loans with an average
balance of $2,535,919 and $4,015,185 for the three
|
|
months
ended March 31, 2017 and 2016, respectively. Loans are stated
before deduction of unearned discount
|
|
and
allowance for loan losses.
|
|
(2)
Included in other investments is the Company’s FHLBB Stock
with average balances of $2,046,773 and $1,600,469
|
|
respectively,
and a dividend rate of approximately 4.02% for the first three
months of 2017 and 2016.
|
|
(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.
|
35
The
average volume of interest-earning assets for the first three
months of 2017 increased $47,978,003, or 6.7%, compared to the same
period of 2016, while the average yield decreased eight basis
points to 4.36% for the first three months of 2017 compared to
4.44% for the same period of 2016. The average volume of loans
increased $30,467,850, or 6.7%, while the average yield declined by
six basis points. Interest earned on the loan portfolio equaled
approximately 88.8% of total interest income for the first three
months of 2017 and 90.1% for the same period of 2016. The average
volume of the taxable investment portfolio (classified as
available-for-sale) increased $4,939,103, or 17.0%, for the same
period, and the average yield increased five basis points due in
part to the shift to higher yielding mortgage backed securities and
investment CDs. The average volume of the tax-exempt investment
portfolio (classified as held-to-maturity) increased $7,169,034, or
16.0%, between periods, and the average tax equivalent yield
increased three basis points year over year. The average volume of
sweep and interest-earning accounts, which is primarily made up of
an interest-earning deposit account at the Federal Reserve Bank of
Boston (FRBB), increased $4,955,712, or 54.5%.
In
comparison, the average volume of interest-bearing liabilities for
the first three months of 2017 increased $36,659,920, or 8.3%, over
the 2016 comparison period, and the average rate paid on these
liabilities increased two basis points. The average volume of
savings accounts increased $9,564,953, or 11.5%, for the first
three months of 2017 compared to the same period in 2016 due
primarily to several construction escrow accounts totaling
approximately $8 million. The majority of the funds are expected to
remain in place through 2017, and several million dollars of
additional funds are expected; however this is expected to all run
off within the next 18 months. The average volume of retail time
deposits decreased $865,545, or 0.8%, while the average volume of
wholesale time deposits increased $10,746,900, or 116.9%, and the
average rate paid increased four basis points in total. The average
volume of borrowed funds increased $15,043,664, or 223.5%, and the
average rate paid increased 32 basis points for the first three
months of 2017 compared to the same period of 2016. More short term
advances were utilized during the first three months of 2017
compared to the same period in 2016 and borrowing costs increased
slightly due to the increase in the federal funds rate in December,
2016. The average volume of repurchase agreements increased
$4,982,478, or 20.4%, while the average rate paid remained flat.
The average volume of money market funds decreased $3,022,643, or
3.5%, and the average rate paid decreased two basis
points.
For the
three month comparison periods of 2017 and 2016, the average yield
on interest-earning assets decreased eight basis points, while the
average rate paid on interest-bearing liabilities increased two
basis points, resulting in a decrease of ten basis points in net
interest spread. Net interest margin for the first three months of
2017 was 3.85% compared to 3.94% for the same period in 2016. This
was driven by the need for higher cost funding in the form of
brokered deposits and short term borrowings, while fixed rate loan
yields remain very competitive and have not seen any benefit from
the movement at the short end of the curve. In addition, the
larger, higher credit quality loans the Bank has been fortunate to
originate in the past year have commanded slightly lower
pricing.
36
The
following table summarizes the variances in interest income and
interest expense on a fully tax-equivalent basis for the periods
presented for 2017 and 2016 resulting from volume changes in
average assets and average liabilities and fluctuations in average
rates earned and paid.
|
Changes
in Interest Income and Interest Expense
|
|||
|
|
|
|
|
|
|
Variance
|
Variance
|
|
|
|
Due
to
|
Due
to
|
Total
|
|
|
Rate
(1)
|
Volume
(1)
|
Variance
|
|
Average
Interest-Earning Assets
|
|
|
|
|
Loans
|
$
(113,386
)
|
$
359,829
|
$
246,443
|
|
Taxable
investment securities
|
2,664
|
21,613
|
24,277
|
|
Tax-exempt
investment securities
|
(586
)
|
67,912
|
67,326
|
|
Sweep and
interest-earning accounts
|
10,652
|
5,914
|
16,566
|
|
Other
investments
|
1,325
|
5,093
|
6,418
|
|
Total
|
$
(99,331
)
|
$
460,361
|
$
361,030
|
|
|
|
|
|
|
Average
Interest-Bearing Liabilities
|
|
|
|
|
Interest-bearing
transaction accounts
|
$
3,378
|
$
136
|
$
3,514
|
|
Money market
accounts
|
(6,267
)
|
(7,304
)
|
(13,571
)
|
|
Savings
deposits
|
(28
)
|
2,854
|
2,826
|
|
Time
deposits
|
8,526
|
19,900
|
28,426
|
|
Borrowed
funds
|
16,678
|
17,954
|
34,632
|
|
Repurchase
agreements
|
(180
)
|
3,716
|
3,536
|
|
Capital lease
obligations
|
(7
)
|
(1,548
)
|
(1,555
)
|
|
Junior
subordinated debentures
|
13,341
|
0
|
13,341
|
|
Total
|
$
35,441
|
$
35,708
|
$
71,149
|
|
|
|
|
|
|
Changes
in net interest income
|
$
(134,772
)
|
$
424,653
|
$
289,881
|
|
(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
|
37
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Non-interest Income
The
components of non-interest income for the periods presented are as
follows:
|
|
Three
Months Ended
|
|
|
|
|
|
March
31,
|
Change
|
||
|
|
2017
|
2016
|
Income
|
Percent
|
|
|
|
|
|
|
|
Service
fees
|
$
748,117
|
$
617,679
|
$
130,438
|
21.12
%
|
|
Income from sold
loans
|
190,295
|
221,194
|
(30,899
)
|
-13.97
%
|
|
Other income from
loans
|
185,617
|
195,888
|
(10,271
)
|
-5.24
%
|
|
Net realized gain
on sale of securities
|
|
|
|
|
|
available-for-sale
|
2,130
|
0
|
2,130
|
100.00
%
|
|
Income from CFSG
Partners
|
113,180
|
82,579
|
30,601
|
37.06
%
|
|
Exchange
income
|
21,000
|
27,500
|
(6,500
)
|
-23.64
%
|
|
SERP fair value
adjustment
|
30,114
|
6,471
|
23,643
|
365.37
%
|
|
Other
income
|
79,765
|
86,540
|
(6,775
)
|
-7.83
%
|
|
Total
non-interest income
|
$
1,370,218
|
$
1,237,851
|
$
132,367
|
10.69
%
|
Total
non-interest income increased $132,367 for the first three months
of 2017 versus the same period in 2016, with significant changes
noted in the following:
●
Service fees on
deposit accounts increased $130,438, or 21.1%, year over year due
to the implementation of the Bank’s new courtesy overdraft
protection program, which provided an increase of $124,252, or
82.8%, compared to the first quarter of 2016.
●
Income from sold
loans decreased $30,899, or 14.0%, year over year, due to a
decrease in the volume of secondary market sales year over
year.
●
Other income from
loans decreased $10,271, or 5.2%, year over year, due primarily to
slightly lower loan fee income than the same period a year
ago.
●
Income from CFSG
Partners increased $30,601, or 37.1%, year over year which is
attributable to an increase in asset management fees due to an
increase in the equity markets.
●
Exchange income
decreased $6,500, or 23.6%, year over year due to fluctuations in
the currency rates during the first quarter of 2017 as the U.S.
dollar strengthened in relation to the Canadian
dollar.
●
SERP fair value
adjustment increased $23,643, or 365.4%, year over year due to
changes in the equity markets
.
38
Non-interest Expense
The
components of non-interest expense for the periods presented are as
follows:
|
|
Three
Months Ended
|
|
|
|
|
|
March
31,
|
Change
|
||
|
|
2017
|
2016
|
Expense
|
Percent
|
|
|
|
|
|
|
|
Salaries and
wages
|
$
1,711,124
|
$
1,725,000
|
$
(13,876
)
|
-0.80
%
|
|
Employee
benefits
|
641,561
|
685,082
|
(43,521
)
|
-6.35
%
|
|
Occupancy expenses,
net
|
687,433
|
645,746
|
41,687
|
6.46
%
|
|
Other
expenses
|
|
|
|
|
|
Computer
outsourcing
|
138,118
|
122,695
|
15,423
|
12.57
%
|
|
Service
contracts – administrative
|
95,008
|
89,699
|
5,309
|
5.92
%
|
|
Marketing
expense
|
120,506
|
92,400
|
28,106
|
30.42
%
|
|
Consultant
services
|
48,480
|
35,050
|
13,430
|
38.32
%
|
|
Collection
& non-accruing loan
|
|
|
|
|
|
expense
|
3,655
|
28,000
|
(24,345
)
|
-86.95
%
|
|
OREO
expense
|
6,804
|
(4,494
)
|
11,298
|
-251.40
%
|
|
Other
miscellaneous expenses
|
1,278,430
|
1,263,113
|
15,317
|
1.21
%
|
|
Total
non-interest expense
|
$
4,731,119
|
$
4,682,291
|
$
48,828
|
1.04
%
|
Total
non-interest expense increased $48,828, or 1.0%, for the first
three months of 2017 compared to the same period in 2016 with
significant changes noted in the following:
●
Employee benefits
decreased $43,521, or 6.4%, year over year, mostly due to a
decrease in the amount set aside to fund the Supplemental Executive
Retirement Plan (SERP) due to retirement of the sole remaining
participant at the end of 2016.
●
Occupancy expenses
increased $41,687, or 6.5%, year over year, due in part to lower
heating costs and maintenance costs associated with the 2015-2016
winter months as the region experienced a fairly mild winter last
year compared to this past winter. Also contributing to the
increase is the cost of the lease on the South Burlington loan
production office that opened in the first quarter of 2017 in the
amount of $8,475 for the first three months of 2017.
●
Computer
outsourcing increased $15,423, or 12.6%, year over year due in part
to an increase in purchased electronic technology services from the
Company’s core vendor, particularly in the area of electronic
and mobile banking.
●
Marketing expense
increased $28,106, or 30.4%, year over year due to the
Company’s strategic decision to enhance marketing efforts,
including a shift to television ads from paper and radio, in the
2017 calendar year.
●
Consultant services
increased $13,430, or 38.3%, year over year partly due to a
contract with a consultant for technology related
projects.
●
Collection &
non-accruing loan expense decreased $24,345, or 87.0%, year over
year, due to non-recurring recovery of expenses in 2017 in the
amount of approximately $30,000.
●
OREO expense
increased $11,298, or 251.4%, year over year. During the first
quarter of 2016, the Company received approximately $15,000 in
reimbursed condominium association fees relating to an OREO
property that was sold in December of 2015.
APPLICABLE INCOME TAXES
The
provision for income taxes increased $55,807, or 12.7%, to $496,865
for the first three months of 2017 compared to $441,058 for the
first three months of 2016, due primarily to an increase in income
before taxes of $300,529, or 18.7%. An increase of $8,124 in tax
credits helped to soften the increase in tax expense. Tax credits
related to limited partnerships amounted to $106,599 and $98,475,
respectively, for the first three months of 2017 and
2016.
39
Amortization
expense related to limited partnership investments is included as a
component of tax expense and amounted to $105,414 and $102,006,
respectively, for the first three months of 2017 and 2016. These
investments provide tax benefits, including tax credits, and are
designed to provide an effective yield between 8% and
10%.
CHANGES IN FINANCIAL CONDITION
The
following table reflects the composition of the Company's major
categories of assets and liabilities as a percentage of total
assets or liabilities and shareholders’ equity, as the case
may be, as of the dates indicated:
|
|
March
31, 2017
|
December
31, 2016
|
March
31, 2016
|
|||
|
Assets
|
|
|
|
|
|
|
|
Loans
|
$
485,722,245
|
75.55
%
|
$
487,249,226
|
76.41
%
|
$
455,048,185
|
76.68
%
|
|
Securities
available-for-sale
|
33,852,571
|
5.27
%
|
33,715,051
|
5.29
%
|
29,572,121
|
4.98
%
|
|
Securities
held-to-maturity
|
53,879,934
|
8.38
%
|
49,886,631
|
7.82
%
|
45,551,714
|
7.68
%
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Demand
deposits
|
105,880,429
|
16.47
%
|
104,472,268
|
16.38
%
|
91,019,639
|
15.34
%
|
|
Interest-bearing
transaction accounts
|
121,953,444
|
18.97
%
|
118,053,360
|
18.51
%
|
117,208,113
|
19.75
%
|
|
Money market
accounts
|
86,938,154
|
13.52
%
|
79,042,619
|
12.40
%
|
86,652,637
|
14.60
%
|
|
Savings
deposits
|
96,883,558
|
15.07
%
|
86,776,856
|
13.61
%
|
85,327,489
|
14.38
%
|
|
Time
deposits
|
120,764,113
|
18.78
%
|
116,389,929
|
18.25
%
|
108,692,258
|
18.32
%
|
|
Short-term
advances
|
10,000,000
|
1.56
%
|
30,000,000
|
4.70
%
|
10,000,000
|
1.69
%
|
|
Long-term
advances
|
1,550,000
|
0.24
%
|
1,550,000
|
0.24
%
|
350,000
|
0.06
%
|
The
Company's total loan portfolio at March 31, 2017 decreased
$1,526,981, or 0.3%, from December 31, 2016 and increased
$30,674,060, or 6.7%, year over year. The Company has several large
construction loans that have closed but have yet to begin drawing
funds; these should begin to draw in the second quarter, increasing
loan balances. Most of the growth in the commercial loan portfolio
in the past 12 months has occurred in the Company’s
Washington County (Central Vermont) market. Securities
available-for-sale increased $137,520, or 0.4%, year to date, and
$4,280,450, or 14.5%, year over year. Securities held-to-maturity
increased $3,993,303, or 8.0%, year to date and $8,328,220, or
18.3%, year over year. Held-to-maturity securities are made up of
investments from the Company’s municipal customers in its
service areas. While the Company has used maturing securities to
fund loan growth in recent periods, the liquidity provided by these
investments is very important, and the portfolio has increased to
support the growth in the loan portfolio, as this asset growth
requires additional liquidity.
Total
deposits increased $27,684,666, or 5.5%, from December 31, 2016 to
March 31, 2017, and an increase of $43,519,562, or 8.9%, is noted
year over year. Demand deposits increased $1,408,161, or 1.4%, year
to date and $14,860,790, or 16.3%, year over year, split between
growth in business checking ($10.9 million, or 19.4%) and regular
checking ($4.0 million, or 11.4%). Money market accounts increased
$7,895,535, or 10.0%, year to date, with only a modest increase
year over year of $285,517, or 0.3%. Savings deposits increased
significantly in both periods, with increases of $10,106,702, or
11.7%, year to date and $11,556,069, or 13.5%, year over year. As
mentioned earlier, this is due to multiple construction escrow
accounts. Time deposits increased $4,374,184, or 3.8%, year to date
and $12,071,855 year over year, which is entirely attributable to
an increase in wholesale purchased time deposits. Short-term
advances from the FHLBB totaling $10,000,000 were reported at March
31, 2017, $30,000,000 at December 31, 2016 and $10,000,000 at March
31, 2016. In addition, there were outstanding long-term advances
from the FHLBB of $1,550,000 at March 31, 2017 and December 31,
2016, and $350,000 at March 31, 2016.
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 Asset/Liability
Management Committee (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.
40
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 net interest
income (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 basis
point (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, 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. The recent increase in
the federal funds rate, the third in the past two years, is
expected to generate a positive impact to the Company’s NII
in 2017 as variable rate loans reprice in the second quarter of the
year; however the behavior of the long end of the curve will also
be very important to the Company’s margins going forward, as
funding costs continue to rise.
The
following table summarizes the estimated impact on the Company's
NII over a twelve month period, assuming a gradual parallel shift
of the yield curve beginning March 31, 2017:
|
Rate
Change
|
Percent
Change in NII
|
|
|
|
|
Down 100 basis
points
|
-3.1
%
|
|
Up 200 basis
points
|
4.4
%
|
The
amounts shown in the table are well within the ALCO Policy limits.
However, those amounts do not represent a forecast and should not
be relied upon as indicative of future results. While assumptions
used in the ALCO process, including the interest rate simulation
analyses, are developed based upon current economic and local
market conditions, and expected future conditions, the Company
cannot provide any assurances as to the predictive nature of these
assumptions, including how customer preferences or competitor
influences might change.
Credit Risk
- As a financial institution, one of the primary
risks the Company manages is credit risk, the risk of loss stemming
from borrowers’ failure to repay loans or inability to meet
other contractual obligations. The Company’s Board of
Directors prescribes policies for managing credit risk, including
Loan, Appraisal and Environmental policies. These policies are
supplemented by comprehensive underwriting standards and
procedures. The Company maintains a Credit Administration
department whose function includes credit analysis and monitoring
of and reporting on the status of the loan portfolio, including
delinquent and non-performing loan trends. The Company also
monitors concentration of credit risk in a variety of areas,
including portfolio mix, the level of loans to individual borrowers
and their related interest, loans to industry segments, and the
geographic distribution of commercial real estate loans. Loans are
reviewed periodically by an independent loan review firm to help
ensure accuracy of the Company's internal risk ratings and
compliance with various internal policies, procedures and
regulatory guidance.
Residential
mortgages represent approximately half of the Company’s loan
balances; that level has been on a gradual decline in recent years,
with a strategic shift to commercial lending. The Company maintains
a mortgage loan portfolio of traditional mortgage products and does
not engage in higher risk loans such as option adjustable rate
mortgage products, high loan-to-value products, interest only
mortgages, subprime loans and products with deeply discounted
teaser rates. Residential mortgages with loan-to-values exceeding
80% are generally covered by private mortgage insurance
(“PMI”). A 90% loan-to-value residential mortgage
product without PMI is only available to borrowers with excellent
credit and low debt-to-income ratios and has not been widely
originated. Junior lien home equity products make up just under 21%
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.
41
The
Company’s strategy is to continue growing the commercial
& industrial and commercial real estate portfolios. Consistent
with the strategic focus on commercial lending, both segments saw
solid growth during 2016 despite some significant loan payoffs
during the period. The 2016 growth included balances being drawn on
commercial construction loans and higher balances on commercial
lines of credit. Commercial and commercial real estate loan demand
has continued into 2017 and is expected to increase with the
funding of construction projects and draws on lines of credit that
are at a seasonal low point. Commercial and commercial real estate
loans together comprised 53.1% of the Company’s loan
portfolio at March 31, 2016, growing to 55.5% at December 31, 2016
and to 56.5% at March 31, 2017. The increase in the absolute and
relative size of the commercial loan portfolio has also increased
geographic diversification, with much of the growth in commercial
loans occurring in central Vermont and Chittenden
County.
The
following table reflects the composition of the Company's loan
portfolio, by portfolio segment, as a percentage of total loans as
of the dates indicated:
|
|
March
31, 2017
|
December
31, 2016
|
March
31, 2016
|
|||
|
|
|
|
|
|
|
|
|
Commercial &
industrial
|
$
69,064,985
|
14.22
%
|
$
68,730,573
|
14.11
%
|
$
63,540,340
|
13.97
%
|
|
Commercial real
estate
|
205,140,487
|
42.24
%
|
201,728,280
|
41.40
%
|
178,205,320
|
39.16
%
|
|
1 - 4 family
residential - 1st lien
|
162,929,247
|
33.54
%
|
166,691,962
|
34.21
%
|
162,594,375
|
35.73
%
|
|
1 - 4 family
residential - Jr lien
|
41,820,775
|
8.61
%
|
42,927,335
|
8.81
%
|
43,917,725
|
9.65
%
|
|
Consumer
|
6,766,751
|
1.39
%
|
7,171,076
|
1.47
%
|
6,790,425
|
1.49
%
|
|
Total
loans
|
485,722,245
|
100.00
%
|
487,249,226
|
100.00
%
|
455,048,185
|
100.00
%
|
|
Deduct
(add):
|
|
|
|
|
|
|
|
Allowance for loan
losses
|
5,258,440
|
|
5,278,445
|
|
5,109,488
|
|
|
Deferred net loan
costs
|
(321,285
)
|
|
(310,130
)
|
|
(315,050
)
|
|
|
Net
loans
|
$
480,785,090
|
|
$
482,280,911
|
|
$
450,253,747
|
|
Risk in
the Company’s commercial & industrial and commercial real
estate loan portfolios is mitigated in part by government
guarantees issued by federal agencies such as the U.S. Small
Business Administration (SBA) and U.S. Department of Agriculture
(USDA) Rural Development. At March 31, 2017, the Company had
$23,376,997 in guaranteed loans with guaranteed balances of
$17,250,407, compared to $23,929,426 in guaranteed loans with
guaranteed balances of $18,128,676 at December 31, 2016 and
$22,780,646 in guaranteed loans with guaranteed balances of
$17,379,981 at March 31, 2016.
The
Company works actively with customers early in the delinquency
process to help them to avoid default and foreclosure. Commercial
& industrial and commercial real estate 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's policy is to reverse the accrued interest against current
period income and to discontinue 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 principal balance.
The
Company’s non-performing assets decreased $260,208 or 6.5%
during the first three months of 2017.
The change in
non-performing assets resulted from the sale of one residential
property, and several residential loans moving under ninety days
past due, more than offsetting one commercial real estate property
moving into OREO. Claims receivable on related government
guarantees were $27,542 at March 31, 2017 compared to $56,319 at
December 31, 2016 and $64,618 at March 31, 2016, with numerous USDA
and SBA claims settled and paid throughout 2016. Non-performing
loans as of March 31, 2017 carried USDA and SBA guarantees totaling
$201,395.
42
The
following table reflects the composition of the Company's
non-performing assets, by portfolio segment, as a percentage of
total non-performing assets as of the dates indicated:
|
|
March
31, 2017
|
December
31, 2016
|
March
31, 2016
|
|||
|
|
|
|
|
|
|
|
|
Loans
past due 90 days or more
|
|
|
|
|
|
|
|
and
still accruing
|
|
|
|
|
|
|
|
Commercial
& industrial
|
$
0
|
0.00
%
|
$
26,042
|
0.65
%
|
$
0
|
0.00
%
|
|
Commercial
real estate
|
0
|
0.00
%
|
0
|
0.00
%
|
19,810
|
0.45
%
|
|
Residential
real estate - 1st lien
|
668,569
|
17.91
%
|
1,068,083
|
26.75
%
|
764,031
|
17.21
%
|
|
Residential
real estate - Jr lien
|
27,905
|
0.75
%
|
27,905
|
0.70
%
|
122,183
|
2.75
%
|
|
Consumer
|
1,903
|
0.05
%
|
2,176
|
0.05
%
|
0
|
0.00
%
|
|
|
698,377
|
18.71
%
|
1,124,206
|
28.15
%
|
906,024
|
20.41
%
|
|
|
|
|
|
|
|
|
|
Non-accrual
loans (1)
|
|
|
|
|
|
|
|
Commercial
& industrial
|
135,379
|
3.62
%
|
143,128
|
3.59
%
|
256,456
|
5.78
%
|
|
Commercial
real estate
|
744,989
|
19.96
%
|
765,584
|
19.17
%
|
966,071
|
21.77
%
|
|
Residential
real estate - 1st lien
|
1,148,848
|
30.78
%
|
1,227,220
|
30.74
%
|
1,467,171
|
33.05
%
|
|
Residential
real estate - Jr lien
|
442,960
|
11.87
%
|
338,602
|
8.48
%
|
377,911
|
8.51
%
|
|
|
2,472,176
|
66.24
%
|
2,474,534
|
61.98
%
|
3,067,609
|
69.11
%
|
|
|
|
|
|
|
|
|
|
Other
real estate owned
|
561,979
|
15.06
%
|
394,000
|
9.87
%
|
465,000
|
10.48
%
|
|
|
|
|
|
|
|
|
|
|
$
3,732,532
|
100.00
%
|
$
3,992,740
|
100.00
%
|
$
4,438,633
|
100.00
%
|
(1) No
consumer loans were in non-accrual status as of the consolidated
balance sheet dates. In accordance with Company policy, delinquent
consumer loans are charged off at 120 days past due.
The
Company’s OREO portfolio at March 31, 2017 consisted of two
residential properties and two commercial properties compared to
two residential properties at December 31, 2016 and one residential
property and two commercial properties at March 31, 2016. One of
the residential properties held at year-end was sold in February,
2017, and the Company then acquired another residential property in
March 2017, both acquired through the normal foreclosure process.
The Company took control of the two commercial properties, one in
January, 2017 and the other in March, 2017. One of the commercial
properties sold in April, 2017 and the other is scheduled for an
auction in May, 2017.
The
Company’s Troubled Debt Restructurings (TDRs) are principally
a result of extending loan repayment terms to relieve cash flow
difficulties. The Company has only infrequently reduced interest
rates for borrowers below the current market rate. The Company has
not forgiven principal or reduced accrued interest within the terms
of original restructurings. Management evaluates each TDR situation
on its own merits and does not foreclose the granting of any
particular type of concession.
The
non-performing assets in the table above include the following TDRs
that were past due 90 days or more or in non-accrual status as of
the dates presented:
|
|
March
31, 2017
|
December
31, 2016
|
March
31, 2016
|
|||
|
|
Number
of
|
Principal
|
Number
of
|
Principal
|
Number
of
|
Principal
|
|
|
Loans
|
Balance
|
Loans
|
Balance
|
Loans
|
Balance
|
|
Commercial &
industrial
|
2
|
$
135,379
|
2
|
$
143,127
|
2
|
$
204,354
|
|
Commercial real
estate
|
2
|
346,444
|
2
|
354,811
|
2
|
380,436
|
|
Residential real
estate - 1st lien
|
8
|
457,430
|
9
|
516,886
|
11
|
780,330
|
|
Residential real
estate - Jr lien
|
2
|
113,064
|
2
|
117,158
|
1
|
54,081
|
|
Total
|
14
|
$
1,052,316
|
15
|
$
1,131,982
|
16
|
$
1,419,201
|
43
The
remaining TDRs were performing in accordance with their modified
terms as of the dates presented and consisted of the
following:
|
|
March
31, 2017
|
December
31, 2016
|
March
31, 2016
|
|||
|
|
Number
of
|
Principal
|
Number
of
|
Principal
|
Number
of
|
Principal
|
|
|
Loans
|
Balance
|
Loans
|
Balance
|
Loans
|
Balance
|
|
Commercial &
industrial
|
0
|
$
0
|
0
|
$
0
|
2
|
$
53,758
|
|
Commercial real
estate
|
5
|
1,329,461
|
5
|
1,350,480
|
5
|
1,414,403
|
|
Residential real
estate - 1st lien
|
29
|
2,695,521
|
28
|
2,722,973
|
26
|
2,521,708
|
|
Residential real
estate - Jr lien
|
2
|
63,713
|
2
|
63,971
|
2
|
80,048
|
|
Total
|
36
|
$
4,088,695
|
35
|
$
4,137,424
|
35
|
$
4,069,917
|
As of
the balance sheet dates, the Company was not 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.
Allowance for loan losses and provisions
- The Company
maintains an allowance for loan losses (allowance) at a level that
management believes is appropriate to absorb losses inherent in the
loan portfolio as of the measurement date (See Critical Accounting
Policies). Although the Company, in establishing the allowance,
considers the inherent losses in individual loans and pools of
loans, the allowance is a general reserve available to absorb all
credit losses in the loan portfolio. No part of the allowance is
segregated to absorb losses from any particular loan or segment of
loans.
When
establishing the allowance each quarter the Company applies a
combination of historical loss factors and qualitative factors to
loan segments, including residential first and junior lien
mortgages, commercial real estate, commercial & industrial, and
consumer loan portfolios. No changes were made to the allowance
methodology during the first three months of 2017. The Company
shortens or lengthens its look back period for determining average
portfolio historical loss rates as the economy either contracts or
expands; during a period of economic contraction, a shortening of
the look back period may more conservatively reflect the current
economic climate. The highest loss rates experienced for the look
back period are applied to the various segments in establishing the
allowance.
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. While unallocated reserves have
stayed relatively similar over the periods from March 31, 2016 to
March 31, 2017, they are considered by management to be appropriate
in light of the Company’s continued growth strategy and shift
in the portfolio from residential loans to commercial and
commercial real estate loans and the risk associated with the
relatively new, unseasoned loans in those portfolios.
The
adequacy of the allowance is reviewed quarterly by the risk
management committee of the Board of Directors and then presented
to the full Board of Directors for approval.
44
The
following table summarizes the Company's loan loss experience for
the periods presented:
|
|
As
of or Three Months Ended March 31,
|
|
|
|
2017
|
2016
|
|
|
|
|
|
Loans outstanding,
end of period
|
$
485,722,245
|
$
455,048,185
|
|
Average loans
outstanding during period
|
$
485,288,232
|
$
454,820,382
|
|
Non-accruing loans,
end of period
|
$
2,472,176
|
$
3,067,609
|
|
Non-accruing loans,
net of government guarantees
|
$
2,334,256
|
$
2,889,135
|
|
|
|
|
|
Allowance,
beginning of period
|
$
5,278,445
|
$
5,011,878
|
|
Loans charged
off:
|
|
|
|
Commercial
& industrial
|
(21,024
)
|
(10,836
)
|
|
Commercial
real estate
|
(160,207
)
|
0
|
|
Residential
real estate - 1st lien
|
(4,735
)
|
(312
)
|
|
Consumer
loans
|
(5,441
)
|
(16,675
)
|
|
Total
loans charged off
|
(191,407
)
|
(27,823
)
|
|
Recoveries:
|
|
|
|
Commercial
& industrial
|
7,141
|
19,295
|
|
Residential
real estate - 1st lien
|
6,236
|
312
|
|
Residential
real estate - Jr lien
|
60
|
60
|
|
Consumer
loans
|
7,965
|
5,766
|
|
Total
recoveries
|
21,402
|
25,433
|
|
Net loans charged
off
|
(170,005
)
|
(2,390
)
|
|
Provision charged
to income
|
150,000
|
100,000
|
|
Allowance, end of
period
|
$
5,258,440
|
$
5,109,488
|
|
|
|
|
|
Net charge offs to
average loans outstanding
|
0.035
%
|
0.001
%
|
|
Provision charged
to income as a percent of average loans
|
0.031
%
|
0.022
%
|
|
Allowance to
average loans outstanding
|
1.084
%
|
1.123
%
|
|
Allowance to
non-accruing loans
|
212.705
%
|
166.563
%
|
|
Allowance to
non-accruing loans net of government guarantees
|
225.273
%
|
176.852
%
|
(1) No
residential real estate – Jr lien charge-offs or commercial
real estate recoveries were recorded during the periods presented
in the table above.
The
Company increased its provision during the first three months of
2017, resulting in a provision of $150,000 for the three months
ended March 31, 2017 compared to $100,000 for the same period in
2016, an increase of $50,000 or 50.0%. The increase in the
provision was principally related to the comparatively low level of
net loan losses experienced during the first quarter of 2016. The
first quarter 2017 provision supported higher losses driven by one
particular commercial real estate charge off. The decrease in the
size of the overall portfolio compared to year-end precluded the
need for any additional provision. The Company has an experienced
collections department that continues to work actively with
borrowers to resolve problem loans and manage the OREO portfolio,
and management continues to monitor the loan portfolio
closely.
Specific
allocations to the allowance are made for certain impaired loans.
Impaired loans include loans to a borrower that in aggregate are
greater than $100,000 and that are in non-accrual status or are
current year troubled debt restructurings. 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 will review 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
portion of the allowance 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 allowance is described as
consisting of separate allocated portions, the entire allowance is
available to support loan losses, regardless of
category.
45
Market Risk
-
In
addition to credit risk in the Company’s loan portfolio and
liquidity risk in its loan and deposit-taking operations, the
Company’s business activities also generate market risk.
Market risk is the risk of loss in a financial instrument arising
from adverse changes in market prices and rates, foreign currency
exchange rates, commodity prices and equity prices. Declining
capital markets can result in fair value adjustments necessary to
record decreases in the value of the investment portfolio for
other-than-temporary-impairment. The Company does not have any
market risk sensitive instruments acquired for trading purposes.
The Company’s market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities. During
recessionary periods, a declining housing market can result in an
increase in loan loss reserves or ultimately an increase in
foreclosures. Interest rate risk is directly related to the
different maturities and repricing characteristics of
interest-bearing assets and liabilities, as well as to loan
prepayment risks, early withdrawal of time deposits, and the fact
that the speed and magnitude of responses to interest rate changes
vary by product. The prolonged weak economy and disruption in the
financial markets in recent years may heighten the Company’s
market risk. 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 three months of 2017, the Company did
not engage in any activity that created any additional types of
off-balance sheet risk.
The
Company generally requires collateral or other security to support
financial instruments with credit risk. The Company's financial
instruments whose contract amount represents credit risk were as
follows:
|
|
Contract
or Notional Amount
|
|
|
|
March
31,
|
December
31,
|
|
|
2017
|
2016
|
|
|
|
|
|
Unused portions of
home equity lines of credit
|
$
26,689,060
|
$
25,535,104
|
|
Residential
construction lines of credit
|
3,862,356
|
3,676,176
|
|
Commercial real
estate and other construction lines of credit
|
34,305,179
|
25,951,345
|
|
Commercial and
industrial commitments
|
54,099,390
|
36,227,213
|
|
Other commitments
to extend credit
|
33,940,694
|
42,459,454
|
|
Standby letters of
credit and commercial letters of credit
|
2,001,288
|
2,009,788
|
|
Recourse on sale of
credit card portfolio
|
247,005
|
258,555
|
|
MPF credit
enhancement obligation, net of liability recorded
|
748,099
|
748,239
|
Since
many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent
future cash requirements.
In
connection with its 2007 trust preferred securities financing, the
Company guaranteed the payment obligations under the $12,500,000 of
capital securities of its subsidiary, CMTV Statutory Trust I. The
source of funds for payments by the Trust on its capital securities
is payments made by the Company on its debentures issued to the
Trust. The Company's obligation under those debentures is fully
reflected in the Company's balance sheet, in the gross amount of
$12,887,000 for each of the comparison periods, of which
$12,500,000 represents external financing through the issuance to
investors of capital securities by CMTV Statutory Trust
I.
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 roll over 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.
46
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 Certificate of Deposit Account Registry Service (CDARS)
program provide an alternative funding source when needed. Such
deposits are generally considered a form of brokered
deposits.
At March
31, 2017 and March 31, 2016, the Company had one-way CDARS
outstanding totaling $5,000,000 and $457,115, respectively,
compared to no one way CDARS at December 31, 2016. In addition,
two-way CDARS deposits allow the Company to provide Federal Deposit
Insurance Corporation (FDIC) deposit insurance to its customers in
excess of account coverage limits by exchanging deposits with other
CDARS members. At March 31, 2017, the Company reported $3,053,119
in two-way CDARS deposits representing exchanged deposits with
other CDARS participating banks, compared to $3,141,773 at December
31, 2016 and $2,779,540 at March 31, 2016. The balance in insured
cash sweep (ICS) reciprocal money market deposits was $13,978,066
at March 31, 2017, compared to $11,909,300 at December 31, 2016 and
$12,157,457 at March 31, 2016, and the balance in ICS demand
deposits was $5,239,185, $5,706,882 and $5,217,665,
respectively.
At
March 31, 2017, December 31, 2016 and March 31, 2016, borrowing
capacity of approximately $65,193,219, $68,163,543 and $70,329,222,
respectively, was available through the FHLBB, secured by the
Company's qualifying loan portfolio (generally, residential
mortgage 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 basis points higher than the rate paid on federal
funds sold.
The
following table reflects the Company’s outstanding FHLBB
advances against the respective lines as of the dates
indicated:
|
|
March
31,
|
December
31,
|
March
31,
|
|
|
2017
|
2016
|
2016
|
|
Long-Term
Advances(1)
|
|
|
|
|
FHLBB term advance,
0.00%, due February 26, 2021
|
$
350,000
|
$
350,000
|
$
350,000
|
|
FHLBB term advance,
0.00%, due September 22, 2023
|
200,000
|
200,000
|
|
|
FHLBB term advance,
0.00%, due November 22, 2021
|
1,000,000
|
1,000,000
|
0
|
|
|
1,550,000
|
1,550,000
|
350,000
|
|
|
|
|
|
|
Short-Term
Advances
|
|
|
|
|
FHLBB term
advances, 0.77% and 0.51% fixed rate, due
|
|
|
|
|
February
8, 2017 and May 24, 2016, respectively
|
0
|
10,000,000
|
5,000,000
|
|
FHLBB term advance
0.77% and 0.57% fixed rate, due
|
|
|
|
|
February
24, 2017 and June 29, 2016
|
0
|
10,000,000
|
5,000,000
|
|
FHLBB term advance
0.92% fixed rate, due June 14, 2017
|
10,000,000
|
10,000,000
|
0
|
|
|
10,000,000
|
30,000,000
|
10,000,000
|
|
|
|
|
|
|
Total
Advances and Overnight Borrowings
|
$
11,550,000
|
$
31,550,000
|
$
10,350,000
|
(1)
The Company has
borrowed a total of $1,550,000 under the FHLBB’s Jobs for New
England (JNE) program, a program dedicated to supporting job growth
and economic development throughout New England. The FHLBB is
providing a subsidy, funded by the FHLBB’s earnings, to write
down interest rates to zero percent on advances that finance
qualifying loans to small businesses. JNE advances must support
small business in New England that create and/or retain jobs, or
otherwise contribute to overall economic development
activities.
The
Company has a Borrower-in-Custody (BIC) arrangement with the FRBB
secured by eligible commercial loans, commercial real estate loans
and home equity loans, resulting in an available credit line of
$79,056,231, $77,862,708, and $70,424,270, respectively, at March
31, 2017, December 31, 2016 and March 31, 2016. 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 125 basis points. The Company
had no outstanding advances against this credit line during any of
the periods presented.
47
The
Company has unsecured lines of credit with three correspondent
banks with aggregate available borrowing capacity totaling
$12,500,000 as of March 31, 2017 and December 31, 2016 and
unsecured lines of credit with two correspondent banks with
aggregate available borrowing capacity of $7,500,000 as of March
31, 2016. There were no outstanding advances against any of these
lines during any of the respective comparison periods.
Securities
sold under agreements to repurchase provide another funding source
for the Company. At March 31, 2017, December 31, 2016 and March 31,
2016, the Company had outstanding repurchase agreement balances of
$27,747,451, $30,423,195 and $25,149,039, respectively, as of such
dates. These repurchase agreements mature and are repriced
daily.
The
following table illustrates the changes in shareholders' equity
from December 31, 2016 to March 31, 2017:
|
Balance at December
31, 2016 (book value $10.27 per common share)
|
$
54,451,517
|
|
Net
income
|
1,414,216
|
|
Issuance
of stock through the Dividend Reinvestment Plan
|
217,923
|
|
Dividends
declared on common stock
|
(859,851
)
|
|
Dividends
declared on preferred stock
|
(23,438
)
|
|
Unrealized
loss on available-for-sale securities during the period, net of
tax
|
(12,936
)
|
|
Balance at March
31, 2017 (book value $10.39 per common share)
|
$
55,187,431
|
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 the Company’s 2016 Annual Report
on Form 10-K in Note 20 to the audited consolidated financial
statements contained therein and under the caption “LIQUIDITY
AND CAPITAL RESOURCES” in the Management’s Discussion
and Analysis section of such report, the Company (on a consolidated
basis) and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies pursuant
to which they must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain
off-balance-sheet items. Capital amounts and classifications are
also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Beginning
in 2016, an additional capital conservation buffer has been added
to the minimum requirements for capital adequacy purposes, subject
to a three year phase-in period. The capital conservation buffer
will be fully phased-in on January 1, 2019 at 2.5 percent. A
banking organization with a conservation buffer of less than 2.5
percent (or the required phase-in amount in years prior to 2019)
will be subject to limitations on capital distributions, including
dividend payments and certain discretionary bonus payments to
executive officers. The Company’s and the Bank’s
capital conservation buffer was 5.62% and 5.51%, respectively, at
March 31, 2017. As of March 31, 2017, both the Company and the Bank
exceeded the required capital conservation buffer of 1.25% and, on
a pro forma basis, would be compliant with the fully phased-in
capital conservation buffer requirement.
As of
March 31, 2017, the Bank was considered well capitalized under the
regulatory capital framework for Prompt Corrective Action and the
Company exceeded applicable consolidated regulatory guidelines for
capital adequacy.
48
The
following table shows the Company’s actual capital ratios and
those of its subsidiary, as well as applicable regulatory capital
requirements, as of the dates indicated.
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
Minimum
|
To
Be Well
|
||
|
|
|
|
For
Capital
|
Capitalized
Under
|
||
|
|
|
|
Adequacy
|
Prompt
Corrective
|
||
|
|
Actual
|
Purposes:
|
Action
Provisions(1):
|
|||
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
|
(Dollars
in Thousands)
|
|||||
|
March
31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier
1 capital
|
|
|
|
|
|
|
|
(to
risk-weighted assets)
|
|
|
|
|
|
|
|
Company
|
$
56,522
|
12.45
%
|
$
20,424
|
4.50
%
|
N/A
|
N/A
|
|
Bank
|
$
55,966
|
12.34
%
|
$
20,403
|
4.50
%
|
$
29,471
|
6.50
%
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to
risk-weighted assets)
|
|
|
|
|
|
|
|
Company
|
$
56,522
|
12.45
%
|
$
27,232
|
6.00
%
|
N/A
|
N/A
|
|
Bank
|
$
55,966
|
12.34
%
|
$
27,204
|
6.00
%
|
$
36,272
|
8.00
%
|
|
|
|
|
|
|
|
|
|
Total capital (to
risk-weighted assets)
|
|
|
|
|
|
|
|
Company
|
$
61,824
|
13.62
%
|
$
36,309
|
8.00
%
|
N/A
|
N/A
|
|
Bank
|
$
61,269
|
13.51
%
|
$
36,272
|
8.00
%
|
$
45,340
|
10.00
%
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to
average assets)
|
|
|
|
|
|
|
|
Company
|
$
56,522
|
9.05
%
|
$
24,989
|
4.00
%
|
N/A
|
N/A
|
|
Bank
|
$
55,966
|
8.97
%
|
$
24,971
|
4.00
%
|
$
31,214
|
5.00
%
|
|
|
|
|
|
|
|
|
|
December
31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier
1 capital
|
|
|
|
|
|
|
|
(to
risk-weighted assets)
|
|
|
|
|
|
|
|
Company
|
$
55,690
|
12.34
%
|
$
20,304
|
4.50
%
|
N/A
|
N/A
|
|
Bank
|
$
55,120
|
12.23
%
|
$
20,274
|
4.50
%
|
$
29,285
|
6.50
%
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to
risk-weighted assets)
|
|
|
|
|
|
|
|
Company
|
$
55,690
|
12.34
%
|
$
27,072
|
6.00
%
|
N/A
|
N/A
|
|
Bank
|
$
55,120
|
12.23
%
|
$
27,032
|
6.00
%
|
$
36,043
|
8.00
%
|
|
|
|
|
|
|
|
|
|
Total capital (to
risk-weighted assets)
|
|
|
|
|
|
|
|
Company
|
$
61,012
|
13.52
%
|
$
36,096
|
8.00
%
|
N/A
|
N/A
|
|
Bank
|
$
60,443
|
13.42
%
|
$
36,043
|
8.00
%
|
$
45,054
|
10.00
%
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to
average assets)
|
|
|
|
|
|
|
|
Company
|
$
55,690
|
9.17
%
|
$
24,305
|
4.00
%
|
N/A
|
N/A
|
|
Bank
|
$
55,120
|
9.08
%
|
$
24,281
|
4.00
%
|
$
30,351
|
5.00
%
|
(1)
Applicable to banks, but not bank holding companies.
49
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.
The
Company's management of the credit, liquidity and market risk
inherent in its business operations is discussed in Part 1, Item 2
of this report under the captions "CHANGES IN FINANCIAL CONDITION",
“COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET
ARRANGEMENTS” and “LIQUIDITY & CAPITAL
RESOURCES”
,
which are
incorporated herein by reference. Management does not believe that
there have been any material changes in the nature or categories of
the Company's risk exposures from those disclosed in the
Company’s 2016 Annual Report on Form 10-K.
Disclosure Controls and Procedures
Management
is responsible for establishing and maintaining effective
disclosure controls and procedures, as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the “Exchange
Act”). As of March 31, 2017, an evaluation was performed
under the supervision and with the participation of management,
including the principal executive officer and principal financial
officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures. Based on that
evaluation, management concluded that its disclosure controls and
procedures as of March 31, 2017 were effective in ensuring that
material information required to be disclosed in the reports it
files with the Commission under the Exchange Act was recorded,
processed, summarized, and reported on a timely basis.
For
this purpose, the term “disclosure controls and
procedures” means controls and other procedures of the
Company that are designed to ensure that information required to be
disclosed by it in the reports that it files or submits under the
Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed,
summarized and reported, within the time periods specified in the
SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Company’s management,
including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal control over
financial reporting that occurred during the quarter ended March
31, 2017 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over
financial reporting.
In the
normal course of business, the Company and its subsidiary are
involved in litigation that is considered incidental to their
business. Management does not expect that any such litigation will
be material to the Company's consolidated financial condition or
results of operations.
The
Risk Factors identified in our Annual Report on Form 10-K for the
year ended December 31, 2016, continue to represent the most
significant risks to the Company's future results of operations and
financial condition.
50
The
following table provides information as to the purchases of the
Company’s common stock during the three months ended March
31, 2017, by the Company or by any affiliated purchaser (as defined
in SEC Rule 10b-18).
|
|
|
|
|
Maximum Number
of
|
|
|
|
|
Total Number
of
|
Shares That May
Yet
|
|
|
Total
Number
|
Average
|
Shares
Purchased
|
Be
Purchased Under
|
|
|
of
Shares
|
Price
Paid
|
as
Part of Publicly
|
the
Plan at the End
|
|
For the
period:
|
Purchased(1)(2)
|
Per
Share
|
Announced
Plan
|
of
the Period
|
|
|
|
|
|
|
|
January 1 - January
31
|
0
|
$
0.00
|
N/A
|
N/A
|
|
February 1 -
February 28
|
6,085
|
15.25
|
N/A
|
N/A
|
|
March 1 -March
31
|
0
|
0.00
|
N/A
|
N/A
|
|
Total
|
6,085
|
$
15.25
|
N/A
|
N/A
|
(1) All
6,085 shares were purchased for the account of participants
invested in the Company Stock Fund under the Company’s
Retirement Savings Plan by or on behalf of the Plan Trustee, the
Human Resources Committee of Community National Bank. Such share
purchases were facilitated through CFSG, which provides certain
investment advisory services to the Plan. Both the Plan Trustee and
CFSG may be considered affiliates of the Company under Rule
10b-18.
(2) Shares
purchased during the period do not include fractional shares
repurchased from time to time in connection with the participant's
election to discontinue participation in the Company's Dividend
Reinvestment Plan.
The
following exhibits are filed with this report:
Exhibit
31.1 - Certification from the Chief Executive Officer (Principal
Executive Officer) of the Company pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit
31.2 - Certification from the Treasurer (Principal Financial
Officer) of the Company pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit
32.1 - Certification from the Chief Executive Officer (Principal
Executive Officer) of the Company pursuant to 18 U.S.C., Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002*
Exhibit
32.2 - Certification from the Treasurer (Principal Financial
Officer) of the Company pursuant to 18 U.S.C., Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002*
Exhibit
101--The following materials from the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2017 formatted
in eXtensible Business Reporting Language (XBRL): (i) the unaudited
consolidated balance sheets, (ii) the unaudited consolidated
statements of income for the three month interim periods ended
March 31, 2017 and 2016, (iii) the unaudited consolidated
statements of comprehensive income, (iv) the unaudited consolidated
statements of cash flows and (v) related notes.
* This
exhibit shall not be deemed “filed” for purposes of
Section 18 of the Securities Exchange Act of 1934, or otherwise
subject to the liability of that section, and shall not be deemed
to be incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of
1934.
51
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
COMMUNITY
BANCORP.
|
DATED:
May 11, 2017
|
/s/Kathryn
M. Austin
|
|
|
|
Kathryn
M. Austin, President
|
|
|
|
&
Chief Executive Officer
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
DATED:
May 11, 2017
|
/s/Louise
M. Bonvechio
|
|
|
|
Louise
M. Bonvechio, Corporate
|
|
|
|
Secretary
& Treasurer
|
|
|
|
(Principal
Financial Officer)
|
|
52
SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM 10-Q
[ x ] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMUNITY BANCORP.
EXHIBITS
EXHIBIT
INDEX
|
Exhibit
31.1
|
Certification
from the Chief Executive Officer (Principal Executive Officer) of
the Company pursuant to section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
Exhibit
31.2
|
Certification
from the Treasurer (Principal Financial Officer) of the Company
pursuant to section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
Exhibit
32.1
|
Certification
from the Chief Executive Officer (Principal Executive Officer) of
the Company pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
Exhibit
32.2
|
Certification
from the Treasurer (Principal Financial Officer) of the Company
pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section
906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
Exhibit
101
|
The
following materials from the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2017 formatted in
eXtensible Business Reporting Language (XBRL): (i) the unaudited
consolidated balance sheets, (ii) the unaudited consolidated
statements of income for the three month interim periods ended
March 31, 2017 and 2016, (iii) the unaudited consolidated
statements of comprehensive income, (iv) the unaudited consolidated
statements of cash flows and (v) related notes.
|
53
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial Statements (unaudited)Note 1. Basis Of Presentation and ConsolidationNote 2. Recent Accounting DevelopmentsNote 3. Earnings Per Common ShareNote 4. Investment SecuritiesNote 5. Loans, Allowance For Loan Losses and Credit QualityNote 6. Goodwill and Other Intangible AssetsNote 7. Fair ValueNote 8. Loan ServicingNote 9. Legal ProceedingsNote 10. Subsequent EventItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits