COMMUNITY BANCORP /VT
10-Ks and 10-Qs
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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, 2018
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
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Vermont
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03-0284070
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(State
of Incorporation)
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(IRS
Employer Identification Number)
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4811 US
Route 5, Derby, Vermont
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05829
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(Address
of Principal Executive Offices)
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(zip
code)
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Registrant's
Telephone Number: (802) 334-7915
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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, or a smaller
reporting company. See the definitions of “large accelerated
filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer ( )
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Accelerated
filer ( X )
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Non-accelerated
filer ( ) (Do not check if a smaller reporting
company)
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Smaller
reporting company ( )
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Emerging
growth company ( )
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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, 2018, there were 5,126,274 shares outstanding of the
Corporation's common stock.
1
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FORM
10-Q
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Index
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Page
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PART
I
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FINANCIAL
INFORMATION
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Item
1
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3
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Item
2
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29
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Item
3
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49
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Item
4
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49
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PART
II
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OTHER
INFORMATION
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Item
1
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49
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Item
1A
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49
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Item
2
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50
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Item
6
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50
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51
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52
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2
I
TEM 1. Financial Statements (Unaudited)
The
following are the unaudited consolidated financial statements for
Community Bancorp. and Subsidiary, "the Company".
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Community
Bancorp. and Subsidiary
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March
31,
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December
31,
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March
31,
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2018
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2017
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2017
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(Unaudited)
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(Unaudited)
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Assets
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Cash
and due from banks
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$
12,172,705
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$
10,690,396
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$
17,275,640
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Federal
funds sold and overnight deposits
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29,297,476
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31,963,105
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15,513,549
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Total
cash and cash equivalents
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41,470,181
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42,653,501
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32,789,189
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Securities
held-to-maturity (fair value $47,644,000 at 03/31/18,
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$48,796,000
at 12/31/17 and $54,853,000 at 03/31/17)
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47,899,857
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48,824,965
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53,879,934
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Securities
available-for-sale
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38,694,065
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38,450,653
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33,852,571
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Restricted
equity securities, at cost
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1,793,650
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1,703,650
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2,426,050
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Loans
held-for-sale
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358,500
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1,037,287
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0
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Loans
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504,033,558
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502,864,651
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485,722,245
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Allowance
for loan losses
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(5,341,220
)
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(5,438,099
)
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(5,258,440
)
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Deferred
net loan costs
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329,244
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318,651
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321,285
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Net
loans
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499,021,582
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497,745,203
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480,785,090
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Bank
premises and equipment, net
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10,196,450
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10,344,177
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10,629,125
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Accrued
interest receivable
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2,212,131
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2,051,918
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2,062,875
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Bank
owned life insurance
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4,744,512
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4,721,782
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4,649,557
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Core
deposit intangible
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0
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0
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204,516
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Goodwill
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11,574,269
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11,574,269
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11,574,269
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Other
real estate owned
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284,235
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284,235
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561,979
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Other
assets
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7,722,318
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7,653,955
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9,484,895
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Total
assets
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$
665,971,750
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$
667,045,595
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$
642,900,050
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Liabilities
and Shareholders' Equity
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Liabilities
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Deposits:
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Demand,
non-interest bearing
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$
109,656,422
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$
117,245,565
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$
105,880,429
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Interest-bearing
transaction accounts
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131,469,439
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132,633,533
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121,953,444
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Money
market funds
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106,878,746
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93,392,005
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86,938,154
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Savings
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99,528,104
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97,516,284
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96,883,558
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Time
deposits, $250,000 and over
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16,577,061
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18,909,898
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19,913,160
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Other
time deposits
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94,119,774
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100,937,695
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100,850,953
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Total
deposits
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558,229,546
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560,634,980
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532,419,698
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Borrowed
funds
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3,550,000
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3,550,000
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11,550,000
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Repurchase
agreements
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30,246,926
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28,647,848
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27,747,451
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Capital
lease obligations
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353,909
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381,807
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459,443
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Junior
subordinated debentures
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12,887,000
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12,887,000
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12,887,000
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Accrued
interest and other liabilities
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2,395,548
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3,008,106
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2,649,027
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Total
liabilities
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607,662,929
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609,109,741
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587,712,619
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Shareholders'
Equity
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Preferred
stock, 1,000,000 shares authorized, 20 and 25 shares
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issued
and outstanding in 2018 and 2017, respectively
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($100,000
liquidation value)
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2,000,000
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2,500,000
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2,500,000
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Common
stock - $2.50 par value; 15,000,000 shares authorized,
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5,335,658
shares issued at 03/31/18, 5,322,320 shares issued
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at
12/31/17 and 5,283,077 shares issued at 03/31/17
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13,339,145
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13,305,800
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13,207,693
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Additional
paid-in capital
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31,846,397
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31,639,189
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31,008,521
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Retained
earnings
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14,473,029
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13,387,739
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11,197,709
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Accumulated
other comprehensive loss
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(726,973
)
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(274,097
)
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(103,715
)
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Less:
treasury stock, at cost; 210,101 shares at 03/31/18,
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12/31/17
and 03/31/17
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(2,622,777
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(2,622,777
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(2,622,777
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Total
shareholders' equity
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58,308,821
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57,935,854
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55,187,431
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Total
liabilities and shareholders' equity
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$
665,971,750
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$
667,045,595
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$
642,900,050
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Book value per
common share outstanding
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$
10.99
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$
10.84
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$
10.39
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The accompanying notes are an integral part of these consolidated
financial statements
3
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Community
Bancorp. and Subsidiary
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Three
Months Ended March 31,
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2018
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2017
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(Unaudited)
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Interest
income
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Interest
and fees on loans
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$
6,140,544
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$
5,616,867
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Interest
on debt securities
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Taxable
|
202,885
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151,726
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Tax-exempt
|
310,156
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324,532
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Dividends
|
67,855
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35,796
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Interest
on federal funds sold and overnight deposits
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55,398
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27,472
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Total
interest income
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6,776,838
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6,156,393
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Interest
expense
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Interest
on deposits
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687,063
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537,789
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Interest
on borrowed funds
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7,483
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52,235
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Interest
on repurchase agreements
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31,206
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21,527
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Interest
on junior subordinated debentures
|
142,997
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122,860
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Total
interest expense
|
868,749
|
734,411
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Net
interest income
|
5,908,089
|
5,421,982
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Provision for
loan losses
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180,000
|
150,000
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Net
interest income after provision for loan losses
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5,728,089
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5,271,982
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Non-interest
income
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Service
fees
|
770,082
|
748,117
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Income
from sold loans
|
183,619
|
190,295
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Other
income from loans
|
212,270
|
185,617
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Net
realized (loss) gain on sale of securities AFS
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(3,860
)
|
2,130
|
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Other
income
|
233,559
|
244,059
|
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Total
non-interest income
|
1,395,670
|
1,370,218
|
|
|
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Non-interest
expense
|
|
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Salaries
and wages
|
1,615,386
|
1,711,124
|
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Employee
benefits
|
674,002
|
641,561
|
|
Occupancy
expenses, net
|
674,873
|
687,433
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Other
expenses
|
1,766,855
|
1,691,001
|
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Total
non-interest expense
|
4,731,116
|
4,731,119
|
|
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Income
before income taxes
|
2,392,643
|
1,911,081
|
|
Income tax
expense
|
410,100
|
496,865
|
|
Net
income
|
$
1,982,543
|
$
1,414,216
|
|
|
|
|
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Earnings per
common share
|
$
0.38
|
$
0.27
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Weighted
average number of common shares
|
|
|
|
used in
computing earnings per share
|
5,117,009
|
5,063,128
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Dividends
declared per common share
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$
0.17
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$
0.17
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The accompanying notes are an integral part of these consolidated
financial statements.
4
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Community
Bancorp. and Subsidiary
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|
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Consolidated
Statements of Comprehensive Income
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(Unaudited)
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Three
Months Ended March 31,
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2018
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2017
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Net
income
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$
1,982,543
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$
1,414,216
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Other comprehensive
loss, net of tax:
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Unrealized
holding loss on securities AFS arising during the
period
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(577,124
)
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(17,470
)
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Reclassification
adjustment for loss (gain) realized in income
|
3,860
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(2,130
)
|
|
Unrealized
loss during the period
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(573,264
)
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(19,600
)
|
|
Tax
effect
|
120,388
|
6,664
|
|
Other
comprehensive loss, net of tax
|
(452,876
)
|
(12,936
)
|
|
Total
comprehensive income
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$
1,529,667
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$
1,401,280
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The accompanying notes are an integral part of these consolidated
financial statements.
5
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Community
Bancorp. and Subsidiary
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(Unaudited)
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Three
Months Ended March 31,
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2018
|
2017
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Cash
Flows from Operating Activities:
|
|
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Net
income
|
$
1,982,543
|
$
1,414,216
|
|
Adjustments
to reconcile net income to net cash provided by
|
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operating
activities:
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Depreciation
and amortization, bank premises and equipment
|
246,582
|
252,131
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Provision
for loan losses
|
180,000
|
150,000
|
|
Deferred
income tax
|
6,667
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(17,535
)
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Loss
(gain) on sale of securities AFS
|
3,860
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(2,130
)
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Gain
on sale of loans
|
(77,698
)
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(79,128
)
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Loss
on sale of bank premises and equipment
|
631
|
1,580
|
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Loss
on sale of OREO
|
0
|
617
|
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Income
from CFSG Partners
|
(128,183
)
|
(113,179
)
|
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Amortization
of bond premium, net
|
33,969
|
30,075
|
|
Proceeds
from sales of loans held for sale
|
2,153,059
|
3,974,739
|
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Originations
of loans held for sale
|
(1,396,574
)
|
(3,895,611
)
|
|
Increase
in taxes payable
|
309,062
|
360,092
|
|
Increase
in interest receivable
|
(160,213
)
|
(244,365
)
|
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Decrease
in mortgage servicing rights
|
27,446
|
28,462
|
|
Increase
in other assets
|
(257,338
)
|
(4,875
)
|
|
Increase
in cash surrender value of BOLI
|
(22,730
)
|
(24,151
)
|
|
Amortization
of core deposit intangible
|
0
|
68,175
|
|
Amortization
of limited partnerships
|
94,371
|
154,308
|
|
Increase
in unamortized loan costs
|
(10,593
)
|
(11,155
)
|
|
Increase
in interest payable
|
9,073
|
23,329
|
|
Decrease
in accrued expenses
|
(616,259
)
|
(506,924
)
|
|
Decrease
in other liabilities
|
(5,532
)
|
(21,024
)
|
|
Net
cash provided by operating activities
|
2,372,143
|
1,537,647
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
Investments
- HTM
|
|
|
|
Maturities
and pay downs
|
4,047,473
|
2,365,271
|
|
Purchases
|
(3,122,365
)
|
(6,358,574
)
|
|
Investments
- AFS
|
|
|
|
Maturities,
calls, pay downs and sales
|
2,190,856
|
1,300,588
|
|
Purchases
|
(3,045,361
)
|
(1,485,653
)
|
|
Proceeds
from redemption of restricted equity securities
|
0
|
329,800
|
|
Purchases
of restricted equity securities
|
(90,000
)
|
0
|
|
Decrease
in limited partnership contributions payable
|
0
|
(27,000
)
|
|
(Increase)
decrease in loans, net
|
(1,469,503
)
|
979,595
|
|
Capital
expenditures for bank premises and equipment
|
(99,486
)
|
(52,280
)
|
|
Proceeds
from sales of OREO
|
0
|
187,383
|
|
Recoveries
of loans charged off
|
23,717
|
21,402
|
|
Net
cash used in investing activities
|
(1,564,669
)
|
(2,739,468
)
|
6
|
|
2018
|
2017
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
Net
(decrease) increase in demand and interest-bearing transaction
accounts
|
(8,753,237
)
|
5,308,245
|
|
Net
increase in money market and savings accounts
|
15,498,561
|
18,002,237
|
|
Net
(decrease) increase in time deposits
|
(9,150,758
)
|
4,374,184
|
|
Net
increase (decrease) in repurchase agreements
|
1,599,078
|
(2,675,744
)
|
|
Net
decrease in short-term borrowings
|
0
|
(20,000,000
)
|
|
Decrease
in capital lease obligations
|
(27,898
)
|
(23,718
)
|
|
Redemption
of preferred stock
|
(500,000
)
|
0
|
|
Dividends
paid on preferred stock
|
(28,125
)
|
(23,438
)
|
|
Dividends
paid on common stock
|
(628,415
)
|
(585,042
)
|
|
Net
cash (used in) provided by financing activities
|
(1,990,794
)
|
4,376,724
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
(1,183,320
)
|
3,174,903
|
|
Cash
and cash equivalents:
|
|
|
|
Beginning
|
42,653,501
|
29,614,286
|
|
Ending
|
$
41,470,181
|
$
32,789,189
|
|
|
|
|
|
Supplemental
Schedule of Cash Paid During the Period:
|
|
|
|
Interest
|
$
859,676
|
$
711,082
|
|
|
|
|
|
Supplemental
Schedule of Noncash Investing and Financing
Activities:
|
|
|
|
Change
in unrealized loss on securities AFS
|
$
(573,264
)
|
$
(19,600
)
|
|
|
|
|
|
Loans
transferred to OREO
|
$
0
|
$
355,979
|
|
|
|
|
|
Common
Shares Dividends Paid:
|
|
|
|
Dividends
declared
|
$
869,128
|
$
859,851
|
|
Increase
in dividends payable attributable to dividends
declared
|
(160
)
|
(56,886
)
|
|
Dividends
reinvested
|
(240,553
)
|
(217,923
)
|
|
|
$
628,415
|
$
585,042
|
The accompanying notes are an integral part of these consolidated
financial statements.
7
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 consolidated financial condition and results of operations
of the Company and its subsidiary, Community National Bank (the
Bank), contained herein have been made. The unaudited interim
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes
thereto for the year ended December 31, 2017 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, 2018, or for any other interim period.
Certain
amounts in the 2017 unaudited consolidated income statements have
been reclassified to conform to the 2018 presentation.
Reclassifications had no effect on prior period net income or
shareholders’ equity.
In
addition to the definitions provided elsewhere in this quarterly
report, the definitions, acronyms and abbreviations identified
below are used throughout this Form 10-Q, including Part I.
“Financial Information” and Part II. “Other
Information”, and is intended to aid the reader and provide a
reference page when reviewing this Form 10Q.
|
AFS:
|
Available-for-sale
|
FRBB:
|
Federal Reserve Bank of Boston
|
|
Agency MBS:
|
MBS issued by a US government agency or GSE
|
GAAP:
|
Generally Accepted Accounting Principles in the United
States
|
|
ALCO:
|
Asset Liability Committee
|
GSE
|
Government sponsored enterprise
|
|
ALL:
|
Allowance for loan losses
|
HTM:
|
Held-to-maturity
|
|
ASC:
|
Accounting Standards Codification
|
ICS:
|
Insured Cash Sweeps of the Promontory Interfinancial
Network
|
|
ASU:
|
Accounting Standards Update
|
IRS:
|
Internal Revenue Service
|
|
BIC:
|
Borrower-in-Custody
|
JNE:
|
Jobs for New England
|
|
Board:
|
Board of Directors
|
Jr:
|
Junior
|
|
BOLI
|
Bank owned life insurance
|
MBS:
|
Mortgage-backed security
|
|
bp or bps:
|
Basis point(s)
|
MPF:
|
Mortgage Partnership Finance
|
|
CDARS:
|
Certificate of Deposit Accounts Registry Service of the Promontory
Interfinancial Network
|
MSRs:
|
Mortgage servicing rights
|
|
CDs:
|
Certificates of deposit
|
NII:
|
Net interest income
|
|
CDI:
|
Core deposit intangible
|
OCI:
|
Other comprehensive income (loss)
|
|
CECL:
|
Current Expected Credit Loss
|
OREO:
|
Other real estate owned
|
|
CFSG:
|
Community Financial Services Group
|
OTTI:
|
Other-than-temporary impairment
|
|
CFSG Partners:
|
Community Financial Services Partners, LLC
|
PMI
|
Private mortgage insurance
|
|
Company:
|
Community Bancorp. and Subsidiary
|
RD:
|
USDA Rural Development
|
|
CRE:
|
Commercial Real Estate
|
SBA
|
U.S. Small Business Administration
|
|
DRIP:
|
Dividend Reinvestment Plan
|
SERP
|
Supplemental Employee Retirement Plan
|
|
Exchange Act:
|
Securities Exchange Act of 1934
|
SBA:
|
U.S. Small Business Administration
|
|
FASB:
|
Financial Accounting Standards Board
|
SEC:
|
U.S. Securities and Exchange Commission
|
|
FDIC:
|
Federal Deposit Insurance Corporation
|
TDR:
|
Troubled-debt restructuring
|
|
FHLBB:
|
Federal Home Loan Bank of Boston
|
USDA:
|
U.S. Department of Agriculture
|
|
FHLMC
|
Federal Home Loan Mortgage Corporation
|
VA:
|
U.S. Veterans Administration
|
|
FRB:
|
Federal Reserve Board
|
2017 Tax Act:
|
Tax Cut and Jobs Act of 2017
|
8
The FASB issued ASU No. 2014-09,
Revenue from Contracts with
Customers
, in 2014 to replace
the current plethora of industry-specific rules with a broad,
principles-based framework for recognizing and measuring revenue.
Due to the complexity of the new pronouncement and the anticipated
effort required by entities in many industries to implement ASU No.
2014-09, FASB delayed the effective date. ASU 2014-09 became
effective for the Company on January 1, 2018 and has been applied
prospectively.
FASB formed a Transition Resource Group to assist it in identifying
implementation issues that may require further clarification or
amendment to ASU No. 2014-09. As a result of that group’s
deliberations, FASB has issued several amendments, which became
effective concurrently with ASU No. 2014-09, including ASU No.
2016-08,
Principal versus Agent
Considerations
, which clarifies
whether an entity should record the gross amount of revenue or only
its ultimate share when a third party is also involved in providing
goods or services to a customer. Since the guidance does not apply
to revenue associated with financial instruments, including loans
and securities that are accounted for under other GAAP, the new
guidance did not have a material impact on revenue most closely
associated with financial instruments, including interest income
and expense. This ASU did not have a material impact on the
Company’s consolidated financial
statements.
In
January 2016, the FASB issued 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. 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 those fiscal years. The impact of
adopting this ASU was not material on the Company’s
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, but
does not anticipate any material impact at this time.
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 CECL model, requires that expected credit losses for
financial assets held at the reporting date that are accounted for
at amortized cost be measured and recognized based on historical
experience and current and reasonably supportable forecasted
conditions to reflect the full amount of expected credit
losses.
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 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 the Bank's regulatory
capital ratios. Additionally, ASU No. 2016-13 may reduce the
carrying value of the Company's HTM investment securities as it
will require an allowance for the expected losses over the life of
these securities to be recorded upon adoption. The Company has
formed a committee to assess the implications of this new
pronouncement and transitioned to a software solution for preparing
the ALL calculation and related reports that provides the Company
with stronger data integrity, ease and efficiency in ALL
preparation. The new software solution also provides numerous
training opportunities for the appropriate personnel within the
Company. The Company has gathered and will analyze the historical
data to serve as a basis for estimating the ALL under
CECL.
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
In
February 2018, FASB issued ASU No. 2018-02,
Income Statement – Reporting
Comprehensive Income (Topic 220): Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income.
This
ASU was issued to allow a reclassification from accumulated other
comprehensive income (loss) to retained earnings for stranded tax
effects resulting from the Tax Cuts and Jobs Act to improve the
usefulness of information reported to financial statement users.
The ASU is effective for fiscal years beginning after December 15,
2018, with early adoption permitted for financial statements which
have not yet been issued. The Company adopted the ASU for the
December 31, 2017 consolidated financial statements. See Note 12 of
the audited consolidated financial statements contained in the
Company’s December 31, 2017 Annual Report on Form 10-K for
more information.
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,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Net income, as
reported
|
$
1,982,543
|
$
1,414,216
|
|
Less: dividends to
preferred shareholders
|
28,125
|
23,438
|
|
Net income
available to common shareholders
|
$
1,954,418
|
$
1,390,778
|
|
Weighted average
number of common shares
|
|
|
|
used
in calculating earnings per share
|
5,117,009
|
5,063,128
|
|
Earnings per common
share
|
$
0.38
|
$
0.27
|
Securities
AFS and 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, 2018
|
|
|
|
|
|
U.S. GSE debt
securities
|
$
17,272,170
|
$
0
|
$
386,980
|
$
16,885,190
|
|
Agency
MBS
|
17,139,115
|
3,327
|
460,499
|
16,681,943
|
|
Other
investments
|
5,203,000
|
0
|
76,068
|
5,126,932
|
|
|
$
39,614,285
|
$
3,327
|
$
923,547
|
$
38,694,065
|
|
|
|
|
|
|
|
December
31, 2017
|
|
|
|
|
|
U.S. GSE debt
securities
|
$
17,308,229
|
$
0
|
$
149,487
|
$
17,158,742
|
|
Agency
MBS
|
16,782,380
|
11,144
|
180,187
|
16,613,337
|
|
Other
investments
|
4,707,000
|
165
|
28,591
|
4,678,574
|
|
|
$
38,797,609
|
$
11,309
|
$
358,265
|
$
38,450,653
|
|
|
|
|
|
|
|
March
31, 2017
|
|
|
|
|
|
U.S. GSE debt
securities
|
$
17,361,110
|
$
18,840
|
$
69,547
|
$
17,310,403
|
|
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
|
10
|
|
|
Gross
|
Gross
|
|
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|
Securities
HTM
|
Cost
|
Gains
|
Losses
|
Value*
|
|
|
|
|
|
|
|
March
31, 2018
|
|
|
|
|
|
States and
political subdivisions
|
$
47,899,857
|
$
275,801
|
$
531,658
|
$
47,644,000
|
|
|
|
|
|
|
|
December
31, 2017
|
|
|
|
|
|
States and
political subdivisions
|
$
48,824,965
|
$
0
|
$
28,965
|
$
48,796,000
|
|
|
|
|
|
|
|
March
31, 2017
|
|
|
|
|
|
States and
political subdivisions
|
$
53,879,934
|
$
973,066
|
$
0
|
$
54,853,000
|
*Method
used to determine fair value of HTM securities rounds values to
nearest thousand.
Investments
pledged as collateral for repurchase agreements consisted of U.S.
GSE debt securities, Agency MBS securities and CDs. These
repurchase agreements mature daily. These investments as of the
balance sheet dates were as follows:
|
|
Amortized
|
Fair
|
|
|
Cost
|
Value
|
|
|
|
|
|
March 31,
2018
|
$
39,614,284
|
$
38,694,065
|
|
December 31,
2017
|
38,797,609
|
38,450,653
|
|
March 31,
2017
|
33,265,715
|
33,112,253
|
The
scheduled maturities of debt securities AFS as of the balance sheet
dates were as follows:
|
|
Amortized
|
Fair
|
|
|
Cost
|
Value
|
|
March
31, 2018
|
|
|
|
Due in one year or
less
|
$
2,250,000
|
$
2,242,195
|
|
Due from one to
five years
|
11,766,268
|
11,548,006
|
|
Due from five to
ten years
|
8,458,902
|
8,221,921
|
|
Agency
MBS
|
17,139,115
|
16,681,943
|
|
|
$
39,614,285
|
$
38,694,065
|
|
|
|
|
|
December
31, 2017
|
|
|
|
Due in one year or
less
|
$
3,749,956
|
$
3,739,512
|
|
Due from one to
five years
|
11,275,824
|
11,168,065
|
|
Due from five to
ten years
|
6,989,449
|
6,929,739
|
|
Agency
MBS
|
16,782,380
|
16,613,337
|
|
|
$
38,797,609
|
$
38,450,653
|
|
|
|
|
|
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
|
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, 2018
|
|
|
|
Due in one year or
less
|
$
23,788,327
|
$
23,788,000
|
|
Due from one to
five years
|
4,638,586
|
4,575,000
|
|
Due from five to
ten years
|
4,450,931
|
4,331,000
|
|
Due after ten
years
|
15,022,013
|
14,894,000
|
|
|
$
47,899,857
|
$
47,644,000
|
|
|
|
|
|
December
31, 2017
|
|
|
|
Due in one year or
less
|
$
24,817,334
|
$
24,817,000
|
|
Due from one to
five years
|
4,494,343
|
4,487,000
|
|
Due from five to
ten years
|
4,338,246
|
4,331,000
|
|
Due after ten
years
|
15,175,042
|
15,161,000
|
|
|
$
48,824,965
|
$
48,796,000
|
|
|
|
|
|
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
|
*Method
used to determine fair value of HTM securities rounds values to
nearest thousand.
Debt
securities AFS and HTM 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, 2018
|
|
|
|
|
|
|
|
|
U.S. GSE debt
securities
|
$
12,997,086
|
$
275,084
|
$
3,888,103
|
$
111,896
|
15
|
$
16,885,189
|
$
386,980
|
|
Agency
MBS
|
10,987,068
|
298,918
|
4,237,057
|
161,581
|
21
|
15,224,125
|
460,499
|
|
Other
investments
|
4,146,288
|
67,711
|
487,644
|
8,357
|
16
|
4,633,932
|
76,068
|
|
State and political
subdivisions
|
44,235,977
|
531,658
|
0
|
0
|
121
|
44,235,977
|
531,658
|
|
|
$
72,366,419
|
$
1,173,371
|
$
8,612,804
|
$
281,834
|
173
|
$
80,979,223
|
$
1,455,205
|
|
|
|
|
|
|
|
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
U.S. GSE debt
securities
|
$
13,223,739
|
$
84,490
|
$
3,935,003
|
$
64,997
|
15
|
$
17,158,742
|
$
149,487
|
|
Agency
MBS
|
9,251,323
|
105,063
|
4,542,446
|
75,124
|
21
|
13,793,769
|
180,187
|
|
Other
investments
|
3,692,571
|
25,429
|
244,838
|
3,162
|
16
|
3,937,409
|
28,591
|
|
State and political
subdivisions
|
22,530,141
|
28,965
|
0
|
0
|
79
|
22,530,141
|
28,965
|
|
|
$
48,697,774
|
$
243,947
|
$
8,722,287
|
$
143,283
|
131
|
$
57,420,061
|
$
387,230
|
|
|
|
|
|
|
|
|
|
|
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
|
3
|
13,066,722
|
118,625
|
|
Other
investments
|
740,318
|
3,682
|
0
|
0
|
18
|
740,318
|
3,682
|
|
|
$
18,937,838
|
$
177,906
|
$
1,048,513
|
$
13,948
|
26
|
$
19,986,351
|
$
191,854
|
The
unrealized losses for all periods presented were principally
attributable to changes in prevailing interest rates for similar
types of securities and not deterioration in the creditworthiness
of the issuer.
Management
evaluates securities for OTTI at least on a quarterly basis, and
more frequently when economic or market conditions, or adverse
developments relating to the issuer, warrant such evaluation.
Consideration is given to (1) the length of time and the extent to
which the fair value has been less than the carrying value, (2) the
financial condition and near-term prospects of the issuer, and (3)
the intent and ability of the Company to retain its investment for
a period of time sufficient to allow for any anticipated recovery
in fair value. In analyzing an issuer's financial condition,
management considers whether the securities are issued by the
federal government or its agencies, whether downgrades by bond
rating agencies or other adverse developments in the status of the
securities have occurred, and the results of reviews of the
issuer's financial condition. As of March 31, 2018, there were no
declines in the fair value of any of the securities reflected in
the table above that were deemed by management to be
OTTI.
12
The
composition of net loans as of the balance sheet dates was as
follows:
|
|
March
31,
|
December
31,
|
March
31,
|
|
|
2018
|
2017
|
2017
|
|
|
|
|
|
|
Commercial &
industrial
|
$
76,968,888
|
$
77,110,747
|
$
69,064,985
|
|
Commercial real
estate
|
210,135,736
|
207,044,227
|
205,140,487
|
|
Residential real
estate - 1st lien
|
166,435,383
|
168,184,135
|
162,929,247
|
|
Residential real
estate - Jr lien
|
45,459,718
|
45,256,862
|
41,820,775
|
|
Consumer
|
5,033,833
|
5,268,680
|
6,766,751
|
|
Gross
Loans
|
504,033,558
|
502,864,651
|
485,722,245
|
|
Deduct
(add):
|
|
|
|
|
Allowance for loan
losses
|
5,341,220
|
5,438,099
|
5,258,440
|
|
Deferred net loan
costs
|
(329,244
)
|
(318,651
)
|
(321,285
)
|
|
Net
Loans
|
$
499,021,582
|
$
497,745,203
|
$
480,785,090
|
The
following is an age analysis of 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, 2018
|
30-89
Days
|
or
More
|
Past
Due
|
Current
|
Total
Loans
|
Loans
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
Commercial &
industrial
|
$
873,514
|
$
44,813
|
$
918,327
|
$
76,050,561
|
$
76,968,888
|
$
185,012
|
$
8,207
|
|
Commercial real
estate
|
1,205,289
|
451,104
|
1,656,393
|
208,479,343
|
210,135,736
|
1,588,084
|
0
|
|
Residential real
estate
|
|
|
|
|
|
|
|
|
- 1st
lien
|
3,837,705
|
961,601
|
4,799,306
|
161,636,077
|
166,435,383
|
1,518,759
|
466,704
|
|
- Jr
lien
|
181,062
|
250,399
|
431,461
|
45,028,257
|
45,459,718
|
345,214
|
113,578
|
|
Consumer
|
35,090
|
0
|
35,090
|
4,998,743
|
5,033,833
|
0
|
0
|
|
|
$
6,132,660
|
$
1,707,917
|
$
7,840,577
|
$
496,192,981
|
$
504,033,558
|
$
3,637,069
|
$
588,489
|
|
|
|
|
|
|
|
|
90
Days or
|
|
|
|
90
Days
|
Total
|
|
|
Non-Accrual
|
More
and
|
|
December
31, 2017
|
30-89
Days
|
or
More
|
Past
Due
|
Current
|
Total
Loans
|
Loans
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
Commercial &
industrial
|
$
308,712
|
$
0
|
$
308,712
|
$
76,802,035
|
$
77,110,747
|
$
98,806
|
$
0
|
|
Commercial real
estate
|
1,482,982
|
418,255
|
1,901,237
|
205,142,990
|
207,044,227
|
1,065,385
|
0
|
|
Residential real
estate
|
|
|
|
|
|
|
|
|
- 1st
lien
|
4,238,933
|
2,011,419
|
6,250,352
|
161,933,783
|
168,184,135
|
1,585,473
|
1,249,241
|
|
- Jr
lien
|
156,101
|
168,517
|
324,618
|
44,932,244
|
45,256,862
|
346,912
|
0
|
|
Consumer
|
80,384
|
1,484
|
81,868
|
5,186,812
|
5,268,680
|
0
|
1,484
|
|
|
$
6,267,112
|
$
2,599,675
|
$
8,866,787
|
$
493,997,864
|
$
502,864,651
|
$
3,096,576
|
$
1,250,725
|
13
|
|
|
|
|
|
|
|
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
|
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,
2018
|
10
|
$
694,509
|
|
December 31,
2017
|
10
|
791,944
|
|
March 31,
2017
|
6
|
330,548
|
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
and various qualitative factors and is stratified by the following
loan segments: commercial and industrial, CRE, residential real
estate 1st lien, residential real estate Jr lien and consumer
loans. The Company does not disaggregate its portfolio segments
further into classes.
Loss
ratios are calculated by loan segment for one year, two year, three
year, four year and five year look back periods. Management uses an
average of historical losses based on a time frame appropriate to
capture relevant loss data for each loan segment in the current
economic climate. During periods of economic stability, a
relatively longer period (e.g., five years) may be appropriate.
During periods of significant expansion or contraction, the Company
may appropriately shorten the historical time period. The Company
is currently using an extended look back period of five
years.
Qualitative
factors include the levels of and trends in delinquencies and
non-performing loans, levels of and trends in loan risk groups,
trends in volumes and terms of loans, effects of any changes in
loan related policies, experience, ability and the depth of
management, documentation and credit data exception levels,
national and local economic trends, external factors such as
competition and regulation and lastly, concentrations of credit
risk in a variety of areas, including portfolio product mix, the
level of loans to individual borrowers and their related interests,
loans to industry segments, and the geographic distribution of CRE
loans. This evaluation is inherently subjective as it requires
estimates that are susceptible to revision as more information
becomes available.
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 CRE. A relatively small
portion of this segment includes farm loans secured by farm land
and buildings. As with commercial and industrial loans, repayment
of owner-occupied CRE loans is expected from the cash flows of the
business and the segment would be impacted by the same risk factors
as commercial and industrial loans. The non-owner occupied CRE
portion includes both residential and commercial construction
loans, vacant land and real estate development loans, multi-family
dwelling loans and commercial rental property loans. Repayment of
construction loans is expected from permanent financing takeout;
the Company generally requires a commitment or eligibility for the
take-out financing prior to construction loan origination. Real
estate development loans are generally repaid from the sale of the
subject real property as the project progresses. Construction and
development lending entail additional risks, including the project
exceeding budget, not being constructed according to plans, not
receiving permits, or the pre-leasing or occupancy rate not meeting
expectations. Repayment of multi-family loans and commercial rental
property loans is expected from the cash flow generated by rental
payments received from the individuals or businesses occupying the
real estate. CRE loans are impacted by factors such as competitive
market forces, vacancy rates, cap rates, net operating incomes,
lease renewals and overall economic demand. In addition, loans in
the recreational and tourism sector can be affected by weather
conditions, such as unseasonably low winter snowfalls. CRE lending
also carries a higher degree of environmental risk than other real
estate lending.
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, 2018
|
|
|
|
Residential
|
Residential
|
|
|
|
|
|
Commercial
|
Commercial
|
Real
Estate
|
Real
Estate
|
|
|
|
|
|
&
Industrial
|
Real
Estate
|
1st
Lien
|
Jr
Lien
|
Consumer
|
Unallocated
|
Total
|
|
Allowance for loan
losses
|
|
|
|
|
|
|
|
|
Beginning
balance
|
$
675,687
|
$
2,674,029
|
$
1,460,547
|
$
316,982
|
$
43,303
|
$
267,551
|
$
5,438,099
|
|
Charge-offs
|
(88,894
)
|
(121,000
)
|
(33,072
)
|
(24,000
)
|
(33,630
)
|
0
|
(300,596
)
|
|
Recoveries
|
5,014
|
0
|
8,858
|
435
|
9,410
|
0
|
23,717
|
|
Provision
(credit)
|
74,853
|
113,675
|
(28,532
)
|
(4,125
)
|
25,079
|
(950
)
|
180,000
|
|
Ending
balance
|
$
666,660
|
$
2,666,704
|
$
1,407,801
|
$
289,292
|
$
44,162
|
$
266,601
|
$
5,341,220
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
losses
|
|
|
|
|
|
|
|
|
Evaluated for
impairment
|
|
|
|
|
|
|
|
|
Individually
|
$
0
|
$
3,528
|
$
120,264
|
$
1,194
|
$
0
|
$
0
|
$
124,986
|
|
Collectively
|
666,660
|
2,663,176
|
1,287,537
|
288,098
|
44,162
|
266,601
|
5,216,234
|
|
|
$
666,660
|
$
2,666,704
|
$
1,407,801
|
$
289,292
|
$
44,162
|
$
266,601
|
$
5,341,220
|
|
|
|||||||
|
Loans evaluated for
impairment
|
|
|
|
|
|
|
|
|
Individually
|
$
185,012
|
$
1,605,948
|
$
4,277,541
|
$
272,506
|
$
0
|
|
$
6,341,007
|
|
Collectively
|
76,783,876
|
208,529,788
|
162,157,842
|
45,187,212
|
5,033,833
|
|
497,692,551
|
|
|
$
76,968,888
|
$
210,135,736
|
$
166,435,383
|
$
45,459,718
|
$
5,033,833
|
|
$
504,033,558
|
16
As of or for the year ended December 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
|
(20,000
)
|
(160,207
)
|
(159,533
)
|
(118,359
)
|
(124,042
)
|
0
|
(582,141
)
|
|
Recoveries
|
27,051
|
230
|
26,826
|
465
|
37,223
|
0
|
91,795
|
|
Provision
(credit)
|
(58,212
)
|
337,921
|
223,497
|
63,700
|
46,149
|
36,945
|
650,000
|
|
Ending
balance
|
$
675,687
|
$
2,674,029
|
$
1,460,547
|
$
316,982
|
$
43,303
|
$
267,551
|
$
5,438,099
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
losses
|
|
|
|
|
|
|
|
|
Evaluated for
impairment
|
|
|
|
|
|
|
|
|
Individually
|
$
0
|
$
69,015
|
$
125,305
|
$
26,353
|
$
0
|
$
0
|
$
220,673
|
|
Collectively
|
675,687
|
2,605,014
|
1,335,242
|
290,629
|
43,303
|
267,551
|
5,217,426
|
|
|
$
675,687
|
$
2,674,029
|
$
1,460,547
|
$
316,982
|
$
43,303
|
$
267,551
|
$
5,438,099
|
|
|
|||||||
|
Loans evaluated for
impairment
|
|
|
|
|
|
|
|
|
Individually
|
$
98,806
|
$
1,306,057
|
$
4,075,666
|
$
300,759
|
$
0
|
|
$
5,781,288
|
|
Collectively
|
77,011,941
|
205,738,170
|
164,108,469
|
44,956,103
|
5,268,680
|
|
497,083,363
|
|
|
$
77,110,747
|
$
207,044,227
|
$
168,184,135
|
$
45,256,862
|
$
5,268,680
|
|
$
502,864,651
|
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
|
|
|
$
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
|
|
|
$
69,064,985
|
$
205,140,487
|
$
162,929,247
|
$
41,820,775
|
$
6,766,751
|
|
$
485,722,245
|
17
Impaired
loans, by portfolio segment, were as follows:
|
|
As
of March 31, 2018
|
|
|
||
|
|
|
Unpaid
|
|
Average
|
Interest
|
|
|
Recorded
|
Principal
|
Related
|
Recorded
|
Income
|
|
|
Investment
|
Balance
|
Allowance
|
Investment (1)
|
Recognized(1)
|
|
|
|
|
|||
|
Related allowance
recorded
|
|
|
|
|
|
|
Commercial
real estate
|
$
83,645
|
$
225,681
|
$
3,528
|
$
183,567
|
$
0
|
|
Residential
real estate
|
|
|
|
|
|
|
-
1st lien
|
793,881
|
834,267
|
120,264
|
751,122
|
7,682
|
|
-
Jr lien
|
8,182
|
8,151
|
1,194
|
177,100
|
92
|
|
|
885,708
|
1,068,099
|
124,986
|
1,111,789
|
7,774
|
|
|
|
|
|
|
|
|
No related
allowance recorded
|
|
|
|
|
|
|
Commercial
& industrial
|
185,012
|
450,039
|
|
103,193
|
0
|
|
Commercial
real estate
|
1,523,166
|
1,658,923
|
|
1,316,216
|
4,064
|
|
Residential
real estate
|
|
|
|
|
|
|
-
1st lien
|
3,507,912
|
3,923,460
|
|
2,496,646
|
31,124
|
|
-
Jr lien
|
264,355
|
438,777
|
|
169,390
|
0
|
|
|
5,480,445
|
6,471,199
|
|
4,085,445
|
35,188
|
|
|
|
|
|
|
|
|
|
$
6,366,153
|
$
7,539,298
|
$
124,986
|
$
5,197,234
|
$
42,962
|
(1) For
the three months ended March 31, 2018
In the
table above, recorded investment of impaired loans as of March 31,
2018 includes accrued interest receivable and deferred net loan
costs of $25,146.
|
|
As
of December 31, 2017
|
2017
|
|||
|
|
|
Unpaid
|
|
Average
|
Interest
|
|
|
Recorded
|
Principal
|
Related
|
Recorded
|
Income
|
|
|
Investment
|
Balance
|
Allowance
|
Investment
|
Recognized
|
|
|
|
|
|
|
|
|
Related allowance
recorded
|
|
|
|
|
|
|
Commercial
real estate
|
$
204,645
|
$
225,681
|
$
69,015
|
$
210,890
|
$
0
|
|
Residential
real estate
|
|
|
|
|
|
|
-
1st lien
|
798,226
|
837,766
|
125,305
|
646,799
|
29,262
|
|
-
Jr lien
|
146,654
|
293,351
|
26,353
|
220,274
|
400
|
|
|
1,149,525
|
1,356,798
|
220,673
|
1,077,963
|
29,662
|
|
|
|
|
|
|
|
|
No related
allowance recorded
|
|
|
|
|
|
|
Commercial
& industrial
|
98,806
|
136,590
|
|
75,868
|
72,426
|
|
Commercial
real estate
|
1,102,859
|
1,226,040
|
|
1,105,030
|
237,792
|
|
Residential
real estate
|
|
|
|
|
|
|
-
1st lien
|
3,300,175
|
3,641,627
|
|
1,930,108
|
133,732
|
|
-
Jr lien
|
154,116
|
154,423
|
|
116,519
|
16,574
|
|
|
4,655,956
|
5,158,680
|
|
3,227,525
|
460,524
|
|
|
|
|
|
|
|
|
|
$
5,805,481
|
$
6,515,478
|
$
220,673
|
$
4,305,488
|
$
490,186
|
In the
table above, recorded investment of impaired loans as of December
31, 2017 includes accrued interest receivable and deferred net loan
costs of $24,193.
18
|
|
As
of March 31, 2017
|
|
||
|
|
|
Unpaid
|
|
Average
|
|
|
Recorded
|
Principal
|
Related
|
Recorded
|
|
|
Investment
|
Balance
|
Allowance
|
Investment(1)
|
|
|
|
|
|
|
|
Related 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
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
$
1,544,075
|
$
1,777,339
|
$
200,600
|
$
1,725,410
|
(1) For
the three months ended March 31, 2017
Interest
income recognized on impaired loans was immaterial for the March
31, 2017 period 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 risk loans in Group
A. Characteristics of such loans may include, but are not limited
to, borrowers that are experiencing negative operating trends such
as reduced sales or margins, borrowers that have exposure to
adverse market conditions such as increased competition or
regulatory burden, or borrowers that have had unexpected or adverse
changes in management. These loans have a greater likelihood of
migrating to an unacceptable risk level if these characteristics
are left unchecked. Group B is limited to commercial purpose loans
that are individually risk rated.
Group C loans – Unacceptable Risk
– are loans
that have distinct shortcomings that require a greater degree of
management attention. Examples of these shortcomings include a
borrower's inadequate capacity to service debt, poor operating
performance, or insolvency. These loans are more likely to result
in repayment through collateral liquidation. Group C loans range
from those that are likely to sustain some loss if the shortcomings
are not corrected, to those for which loss is imminent and
non-accrual treatment is warranted. Group C loans include
individually rated commercial purpose loans and retail loans
adversely rated in accordance with the Federal Financial
Institutions Examination Council’s Uniform Retail Credit
Classification Policy. Group C retail loans include 1-4 family
residential real estate loans and home equity loans past due 90
days or more with loan-to-value ratios greater than 60%, home
equity loans 90 days or more past due where the bank does not hold
first mortgage, irrespective of loan-to-value, loans in bankruptcy
where repayment is likely but not yet established, and lastly
consumer loans that are 90 days or more past due.
19
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, 2018
|
|
|
|
Residential
|
Residential
|
|
|
|
|
Commercial
|
Commercial
|
Real
Estate
|
Real
Estate
|
|
|
|
|
&
Industrial
|
Real
Estate
|
1st
Lien
|
Jr
Lien
|
Consumer
|
Total
|
|
|
|
|
|
|
|
|
|
Group
A
|
$
74,829,100
|
$
196,906,148
|
$
163,625,382
|
$
44,896,784
|
$
5,033,833
|
$
485,291,247
|
|
Group
B
|
1,139,008
|
4,334,637
|
210,428
|
36,429
|
0
|
5,720,502
|
|
Group
C
|
1,000,780
|
8,894,951
|
2,599,573
|
526,505
|
0
|
13,021,809
|
|
|
$
76,968,888
|
$
210,135,736
|
$
166,435,383
|
$
45,459,718
|
$
5,033,833
|
$
504,033,558
|
As of December 31, 2017
|
|
|
|
Residential
|
Residential
|
|
|
|
|
Commercial
|
Commercial
|
Real
Estate
|
Real
Estate
|
|
|
|
|
&
Industrial
|
Real
Estate
|
1st
Lien
|
Jr
Lien
|
Consumer
|
Total
|
|
|
|
|
|
|
|
|
|
Group
A
|
$
73,352,768
|
$
194,066,034
|
$
165,089,999
|
$
44,687,951
|
$
5,267,196
|
$
482,463,948
|
|
Group
B
|
617,526
|
4,609,847
|
282,671
|
37,598
|
0
|
5,547,642
|
|
Group
C
|
3,140,453
|
8,368,346
|
2,811,465
|
531,313
|
1,484
|
14,853,061
|
|
|
$
77,110,747
|
$
207,044,227
|
$
168,184,135
|
$
45,256,862
|
$
5,268,680
|
$
502,864,651
|
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
|
|
|
$
69,064,985
|
$
205,140,487
|
$
162,929,247
|
$
41,820,775
|
$
6,766,751
|
$
485,722,245
|
20
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, 2018
|
|
|
Pre-
|
|
Post-
|
||
|
|
|
|
Modification
|
|
Modification
|
||
|
|
|
|
Outstanding
|
|
Outstanding
|
||
|
|
Number of
|
|
Recorded
|
|
Recorded
|
||
|
|
Contracts
|
|
Investment
|
|
Investment
|
||
|
Residential
real estate
|
|
|
|
|
|
|
|
|
-
1st lien
|
5
|
|
$
|
682,791
|
|
$
|
785,309
|
|
Year ended December 31, 2017
|
|
|
Pre-
|
|
Post-
|
||
|
|
|
|
Modification
|
|
Modification
|
||
|
|
|
|
Outstanding
|
|
Outstanding
|
||
|
|
Number of
|
|
Recorded
|
|
Recorded
|
||
|
|
Contracts
|
|
Investment
|
|
Investment
|
||
|
Residential
real estate
|
|
|
|
|
|
|
|
|
-
1st lien
|
4
|
|
$
|
256,353
|
|
$
|
287,385
|
|
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
The
TDRs for which there was a payment default during the twelve month
periods presented were as follows:
|
Twelve
months ended March 31, 2018
|
Number
of
|
Recorded
|
|
|
Contracts
|
Investment
|
|
|
|
|
|
Residential real
estate – 1st lien
|
1
|
$
87,696
|
|
Twelve
months ended December 31, 2017
|
Number
of
|
Recorded
|
|
|
Contracts
|
Investment
|
|
|
|
|
|
Residential real
estate - 1st lien
|
1
|
$
87,696
|
|
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
|
|
|
2
|
$
118,775
|
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.
|
|
March
31,
|
December
31,
|
March
31,
|
|
|
2018
|
2017
|
2017
|
|
|
|
|
|
|
Specific
Allocation
|
$
124,986
|
$
197,605
|
$
83,100
|
As of
the balance sheet dates, the Company evaluates whether it is
contractually committed to lend additional funds to debtors with
impaired, non-accrual or modified loans. The Company is
contractually committed to lend on one SBA guaranteed line of
credit to a borrower whose lending relationship was previously
restructured.
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 CDI
which was subject to amortization as a non-interest expense over a
ten year period and was fully amortized in 2017.
Management
evaluates goodwill for impairment annually. As of the date of the
most recent evaluation (December 31, 2017), management concluded
that no impairment existed.
22
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 AFS and HTM:
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.
Restricted equity
securities:
Restricted equity securities
are comprised primarily of FRBB stock and 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, CRE, 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 collateral-dependent loans using Level 2 inputs,
such as the fair value of collateral based on independent
third-party appraisals. All other loans are valued using Level 3
inputs.
23
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.
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, 2018
|
Level
2
|
|
Assets: (market
approach)
|
|
|
U.S. GSE debt
securities
|
$
16,885,190
|
|
Agency
MBS
|
16,681,943
|
|
Other
investments
|
5,126,932
|
|
|
$
38,694,065
|
24
|
December
31, 2017
|
Level
2
|
|
Assets: (market
approach)
|
|
|
U.S. GSE debt
securities
|
$
17,158,742
|
|
Agency
MBS
|
16,613,337
|
|
Other
investments
|
4,678,574
|
|
|
$
38,450,653
|
|
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
|
|
|
$
33,852,571
|
There
were no Level 1 or Level 3 assets or liabilities measured on a
recurring basis as of the balance sheet dates presented, nor were
there any transfers of assets between Levels during 2018 or
2017.
Assets and Liabilities Recorded at Fair Value on a Non-Recurring
Basis
The
following table includes assets measured at fair value on a
non-recurring basis that have had a fair value adjustment since
their initial recognition. Impaired loans measured at fair value
only include impaired loans with a related specific ALL and are
presented net of specific allowances as disclosed in Note
5.
Assets
measured at fair value on a non-recurring basis and reflected in
the consolidated balance sheets at the dates presented, segregated
by fair value hierarchy, are summarized below:
|
March
31, 2018
|
Level
2
|
|
Assets: (market
approach)
|
|
|
MSRs
(1)
|
$
1,055,840
|
|
Impaired loans, net
of related allowance
|
80,118
|
|
OREO
|
284,235
|
|
|
|
|
December
31, 2017
|
Level
2
|
|
Assets: (market
approach)
|
|
|
MSRs
(1)
|
$
1,083,286
|
|
Impaired loans, net
of related allowance
|
135,630
|
|
OREO
|
284,235
|
|
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.
There
were no Level 1 or Level 3 assets or liabilities measured on a
non-recurring basis as of the balance sheet dates presented, nor
were there any transfers of assets between Levels during 2018 or
2017.
25
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, 2018
|
|
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
|
$
41,470
|
$
41,470
|
$
0
|
$
0
|
$
41,470
|
|
Securities
HTM
|
47,900
|
0
|
47,644
|
0
|
47,644
|
|
Securities
AFS
|
38,694
|
0
|
38,694
|
0
|
38,694
|
|
Restricted equity
securities
|
1,794
|
0
|
1,794
|
0
|
1,794
|
|
Loans and loans
held-for-sale, net of ALL
|
|
|
|
|
|
|
Commercial
& industrial
|
76,261
|
0
|
0
|
76,248
|
76,248
|
|
Commercial
real estate
|
207,358
|
0
|
80
|
206,326
|
206,406
|
|
Residential
real estate - 1st lien
|
165,298
|
0
|
0
|
162,774
|
162,774
|
|
Residential
real estate - Jr lien
|
45,147
|
0
|
0
|
44,630
|
44,630
|
|
Consumer
|
4,987
|
0
|
0
|
5,080
|
5,080
|
|
MSRs
(1)
|
1,056
|
0
|
1,453
|
0
|
1,453
|
|
Accrued interest
receivable
|
2,212
|
0
|
2,212
|
0
|
2,212
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
Other
deposits
|
513,029
|
0
|
511,229
|
0
|
511,229
|
|
Brokered
deposits
|
45,201
|
0
|
45,154
|
0
|
45,154
|
|
Long-term
borrowings
|
3,550
|
0
|
3,157
|
0
|
3,157
|
|
Repurchase
agreements
|
30,247
|
0
|
30,247
|
0
|
30,247
|
|
Capital lease
obligations
|
354
|
0
|
354
|
0
|
354
|
|
Subordinated
debentures
|
12,887
|
0
|
12,814
|
0
|
12,814
|
|
Accrued interest
payable
|
110
|
0
|
110
|
0
|
110
|
(1)
Reported fair value represents all MSRs for loans serviced by the
Company at March 31, 2018, regardless of carrying
amount.
26
|
December
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
|
$
42,654
|
$
42,654
|
$
0
|
$
0
|
$
42,654
|
|
Securities
HTM
|
48,825
|
0
|
48,796
|
0
|
48,796
|
|
Securities
AFS
|
38,451
|
0
|
38,451
|
0
|
38,451
|
|
Restricted equity
securities
|
1,704
|
0
|
1,704
|
0
|
1,704
|
|
Loans and loans
held-for-sale, net of ALL
|
|
|
|
|
|
|
Commercial
& industrial
|
76,394
|
0
|
0
|
76,799
|
76,799
|
|
Commercial
real estate
|
204,260
|
0
|
136
|
204,697
|
204,833
|
|
Residential
real estate - 1st lien
|
167,671
|
0
|
0
|
169,205
|
169,205
|
|
Residential
real estate - Jr lien
|
44,916
|
0
|
0
|
45,207
|
45,207
|
|
Consumer
|
5,223
|
0
|
0
|
5,425
|
5,425
|
|
MSRs(1)
|
1,083
|
0
|
1,337
|
0
|
1,337
|
|
Accrued interest
receivable
|
2,052
|
0
|
2,052
|
0
|
2,052
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
Other
deposits
|
509,686
|
0
|
508,407
|
0
|
508,407
|
|
Brokered
deposits
|
50,949
|
0
|
50,926
|
0
|
50,926
|
|
Long-term
borrowings
|
3,550
|
0
|
3,191
|
0
|
3,191
|
|
Repurchase
agreements
|
28,648
|
0
|
28,648
|
0
|
28,648
|
|
Capital lease
obligations
|
382
|
0
|
382
|
0
|
382
|
|
Subordinated
debentures
|
12,887
|
0
|
12,832
|
0
|
12,832
|
|
Accrued interest
payable
|
101
|
0
|
101
|
0
|
101
|
(1)
Reported fair value represents all MSRs for loans serviced by the
Company at December 31, 2017, regardless of carrying
amount.
27
|
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
HTM
|
53,880
|
0
|
54,853
|
0
|
54,853
|
|
Securities
AFS
|
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, net of ALL
|
|
|
|
|
|
|
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.
The
following table shows the changes in the carrying amount of the
MSRs, included in other assets in the consolidated balance sheets,
for the periods indicated:
|
|
Three
Months Ended
|
Year
Ended
|
Three
Months Ended
|
|
|
March
31, 2018
|
December
31, 2017
|
March
30, 2017
|
|
|
|
|
|
|
Balance at
beginning of year
|
$
1,083,286
|
$
1,210,695
|
$
1,210,695
|
|
MSRs
capitalized
|
20,494
|
109,297
|
28,466
|
|
MSRs
amortized
|
(47,940
)
|
(236,706
)
|
(56,928
)
|
|
Balance at end of
period
|
$
1,055,840
|
$
1,083,286
|
$
1,182,233
|
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 GAAP. On
March 14, 2018, the Company declared a cash dividend of $0.17 per
common share payable May 1, 2018 to shareholders of record as of
April 15, 2018. This dividend has been recorded as of the
declaration date, including shares issuable under the
DRIP.
28
I
TEM 2. Management's Discussion
and Analysis of Financial Condition and Results of
Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Period Ended March 31, 2018
The
following discussion analyzes the consolidated financial condition
of the Company and its wholly-owned subsidiary, Community National
Bank (the Bank), as of March 31, 2018, December 31, 2017, and March
31, 2017, and its consolidated results of operations for the
three-month interim periods presented.
The
following discussion should be read in conjunction with the
Company’s audited consolidated financial statements and
related notes contained in its 2017 Annual Report on Form 10-K
filed with the SEC.
Capitalized
terms, abbreviations and acronyms used throughout the following
discussion are defined in Note 1 to the Company’s unaudited
consolidated financial statements contained in Part I, Item 1 of
this report.
FORWARD-LOOKING STATEMENTS
This
Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) contains certain forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995, regarding the results of operations, financial
condition and business of the Company and its subsidiary. Words
used in the discussion below such as "believes," "expects,"
"anticipates," "intends," "estimates," “projects”,
"plans," “assumes”, "predicts," “may”,
“might”, “will”, “could”,
“should” and similar expressions, indicate that
management of the Company is making forward-looking
statements.
Forward-looking
statements are not guarantees of future performance. They
necessarily involve risks, uncertainties and assumptions. Examples
of forward looking statements included in this discussion include,
but are not limited to, estimated contingent liability related to
assumptions made within the asset/liability management process,
management's expectations as to the future interest rate
environment and the Company's related liquidity level, credit risk
expectations relating to the Company's loan portfolio and its
participation in the FHLBB MPF program, and management's general
outlook for the future performance of the Company or the local or
national economy. Although forward-looking statements are based on
management's expectations and estimates as of the date they are
made, many of the factors that could influence or determine actual
results are unpredictable and not within the Company's
control.
Factors
that may cause actual results to differ materially from those
contemplated by these forward-looking statements include, among
others, the following possibilities:
●
general economic or
business conditions, either nationally, regionally or locally,
deteriorate, resulting in a decline in credit quality or a
diminished demand for the Company's products and
services;
●
competitive
pressures increase among financial service providers in the
Company's northern New England market area or in the financial
services industry generally, including competitive pressures from
non-bank financial service providers, from increasing consolidation
and integration of financial service providers, and from changes in
technology and delivery systems;
●
interest rates
change in such a way as to negatively affect the Company's net
income, asset valuations or margins;
●
changes in laws or
government rules, including the rules of the federal Consumer
Financial Protection Bureau, or the way in which courts or
government agencies interpret or implement those laws or rules,
increase our costs of doing business, causing us to limit or change
our product offerings or pricing, or otherwise adversely affect the
Company's business;
●
changes in federal
or state tax laws or policy;
●
changes in the
level of nonperforming assets and charge-offs;
●
changes in
applicable accounting policies, practices and
standards;
●
changes in consumer
and business spending, borrowing and savings habits;
●
reductions in
deposit levels, which necessitate increased borrowings to fund
loans and investments;
●
the geographic
concentration of the Company’s loan portfolio and deposit
base;
●
losses due to the
fraudulent or negligent conduct of third parties, including the
Company’s service providers, customers and
employees;
●
cybersecurity risks
could adversely affect the Company’s business, financial
performance or reputation and could result in financial liability
for losses incurred by customers or others due to data breaches or
other compromise of the Company’s information security
systems;
●
higher-than-expected
costs are incurred relating to information technology or
difficulties arise in implementing technological
enhancements;
●
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;
29
●
management’s
risk management measures may not be completely
effective;
●
changes in the
United States monetary and fiscal policies, including the interest
rate policies of the FRB and its regulation of the money supply;
and
●
adverse changes in
the credit rating of U.S. government debt.
Readers
are cautioned not to place undue reliance on such statements as
they speak only as of the date they are made. The Company does not
undertake, and disclaims any obligation, to revise or update any
forward-looking statements to reflect the occurrence or anticipated
occurrence of events or circumstances after the date of this
Report, except as required by applicable law. The Company claims
the protection of the safe harbor for forward-looking statements
provided in the Private Securities Litigation Reform Act of
1995.
NON-GAAP FINANCIAL MEASURES
Under
SEC Regulation G, public companies making disclosures containing
financial measures that are not in accordance with GAAP must also
disclose, along with each non-GAAP financial measure, certain
additional information, including a reconciliation of the non-GAAP
financial measure to the closest comparable GAAP financial measure,
as well as a statement of the company’s reasons for utilizing
the non-GAAP financial measure. The SEC has exempted from the
definition of non-GAAP financial measures certain commonly used
financial measures that are not based on GAAP. However, three
non-GAAP financial measures commonly used by financial
institutions, namely tax-equivalent net interest income and
tax-equivalent net interest margin (as presented in the tables in
the section labeled Interest Income Versus Interest Expense (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, 2018 were
$665,971,750, a decrease of $1,073,845, or 0.2%, from December 31,
2017 and an increase of $23,071,700, or 3.6%, from March 31, 2017.
Net loans increased $1,276,379, or 0.2%, since December 31, 2017
and $18,236,492, or 3.8%, since March 31, 2017. The year over year
increase in the loan portfolio is primarily attributable to growth
in commercial loans and was funded primarily through an increase in
deposit accounts.
Total
deposits decreased $2,405,434, or 0.4%, since December 31, 2017
with decreases in checking accounts of $8,753,237 and $9,150,758 in
time deposits, partially offset by increases in money markets
accounts of $13,486,741, or 14.4% and savings accounts of
$2,011,820, or 2.1%. In the year over year comparison, deposits
increased $25,809,848, or 4.9%. Core deposits saw increases in all
areas in the year over year comparison, with the most significant
increase noted in money market accounts. These increases resulted
in less reliance on borrowed funds, with a decrease of $8,000,000
year over year.
Interest
income increased $620,445, or 10.1%, for the first quarter of 2018
compared to the same quarter in 2017. Interest expense increased
$134,338, or 18.3%, for the first quarter of 2018 compared to the
same quarter in 2017. The increase in interest income year over
year is partly due to the higher average loan balances, which
exceeded the prior year by $21.3 million, or 4.4%, as well as the
recent increases in short-term rates. The increase in short term
rates is also starting to put upward pressure on interest rates
paid on deposit accounts. The rate increase, coupled with the
increase in interest-bearing deposit account balances, resulted in
an increase in interest paid on deposit accounts of $149,274 year
over year. This was partially offset by a decrease in interest paid
on borrowed funds of $44,752 as the growth in deposits permitted
the Company to rely less on wholesale funds during the first
quarter of 2018 versus the 2017 comparison period.
Net
interest income after the provision for loan losses improved by
$456,107, or 8.7%, for the first quarter of 2018 compared to the
same quarter in 2017. The charge to income for the provision for
loan losses increased $30,000, or 20.0%, compared to the same
period last year, in part to accommodate a projected increase in
the loan portfolio, year over year
.
Please refer to the ALL and
provisions discussion in the Credit Risk section for more
information.
Net
income for the first quarter of 2018 was $1,982,543, an increase of
$568,327, or 40.2%, over net income of $1,414,216 for the first
quarter of 2017. As stated above, net interest income contributed
significantly to the Company’s increase in earnings. An
increase in non-interest income of $25,452, or 1.9%, for the
quarter is noted, while total non-interest expense remained
virtually unchanged between the quarters. Please refer to the
Non-interest Income and Expense sections for more
information.
30
On
March 31, 2018, the Company completed a partial redemption of its
outstanding Series A non-cumulative perpetual preferred stock. Five
shares were redeemed at par, at an aggregate redemption price of
$500,000, plus accrued dividends.
The financial statements and
capital sections of this report reflect the
redemption.
On
March 14, 2018, the Company's Board declared a quarterly cash
dividend of $0.17 per common share, payable on May 1, 2018 to
shareholders of record on April 15, 2018. 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
ALL;
●
OREO;
●
valuation of
residential MSRs;
●
OTTI of investment
securities; and
●
the carrying value
of goodwill.
These
policies are described further in the Company’s 2017 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 2018 in the Company’s critical
accounting policies.
RESULTS OF OPERATIONS
Net
income for the first quarter of 2018 was $1,982,543 or $0.38 per
common share, compared to $1,414,216 or $0.27 per common share for
the same quarter of 2017. Core earnings (net interest income) for
the first quarter of 2018 increased $486,107, or 9.0% compared to
the same quarter in 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 $149,274, or 27.8%, for the first
quarter of 2018 compared to the same quarter of 2017, reflecting
the increases in short term rates and higher interest-bearing
deposit balances. The recent increases in prime rate also had an
impact on the interest paid on the junior subordinated debentures,
contributing to the increase in interest expense, year over year.
The Company recorded a provision for loan losses of $180,000 for
the first quarter of 2018 and $150,000 for the same period in 2017.
Non-interest income increased $25,452, or 1.9%, for the first
quarter of 2018 compared to the same quarter of 2017. Non-interest
expense remained virtually unchanged between periods, decreasing
$3. The section 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,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Return on Average
Assets
|
1.22
%
|
0.90
%
|
|
Return on Average
Equity
|
13.80
%
|
10.47
%
|
31
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,
|
|
|
2018
|
2017
|
2017
|
|
Balance
Sheet Data
|
|
|
|
|
Net
loans
|
$
499,021,582
|
$
497,745,203
|
$
480,785,090
|
|
Total
assets
|
665,971,750
|
667,045,595
|
642,900,050
|
|
Total
deposits
|
558,229,546
|
560,634,980
|
532,419,698
|
|
Borrowed
funds
|
3,550,000
|
3,550,000
|
11,550,000
|
|
Junior subordinated
debentures
|
12,887,000
|
12,887,000
|
12,887,000
|
|
Total
liabilities
|
607,662,929
|
609,109,741
|
587,712,619
|
|
Total shareholders'
equity
|
58,308,821
|
57,935,854
|
55,187,431
|
|
|
|
|
|
|
Book value per
common share outstanding
|
$
10.99
|
$
10.84
|
$
10.39
|
|
|
Three
Months Ended March 31,
|
|
|
|
2018
|
2017
|
|
Operating
Data
|
|
|
|
Total interest
income
|
$
6,776,838
|
$
6,156,393
|
|
Total interest
expense
|
868,749
|
734,411
|
|
Net
interest income
|
5,908,089
|
5,421,982
|
|
|
|
|
|
Provision for loan
losses
|
180,000
|
150,000
|
|
Net
interest income after provision for loan losses
|
5,728,089
|
5,271,982
|
|
|
|
|
|
Non-interest
income
|
1,395,670
|
1,370,218
|
|
Non-interest
expense
|
4,731,116
|
4,731,119
|
|
Income
before income taxes
|
2,392,643
|
1,911,081
|
|
Applicable income
tax expense(1)
|
410,100
|
496,865
|
|
|
|
|
|
Net
Income
|
$
1,982,543
|
$
1,414,216
|
|
|
|
|
|
Per
Common Share Data
|
|
|
|
Earnings per common
share (2)
|
$
0.38
|
$
0.27
|
|
Dividends declared
per common share
|
$
0.17
|
$
0.17
|
|
Weighted average
number of common shares outstanding
|
5,117,009
|
5,063,128
|
|
Number of common
shares outstanding, period end
|
5,125,557
|
5,072,976
|
(1)
Applicable income tax expense assumes a 21% and 34% tax rate for
2018 and 2017, respectively.
(2)
Computed based on the weighted average number of common shares
outstanding during the periods presented.
32
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 21% for 2018 and
34% for previous years, to equalize tax-free and taxable income in
the comparison, we divide the tax-free income by 79% for 2018 and
66% for 2017, with the result that every tax-free dollar is
equivalent to $1.27 and $1.52, for the two periods respectively, in
taxable income.
The
Company’s tax-exempt interest income of $310,156 for the
three months ended March 31, 2018 and $324,532 for the same period
last year, was derived from municipal investments, which comprised
the entire HTM portfolio of $47,899,857 at March 31, 2018, and
$53,879,934 at March 31, 2017.
The
following table shows the reconciliation between reported net
interest income and tax equivalent, net interest income for the
comparison periods presented.
|
|
Three
Months Ended March 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Net interest income
as presented
|
$
5,908,089
|
$
5,421,982
|
|
Effect of
tax-exempt income
|
82,447
|
167,183
|
|
Net
interest income, tax equivalent
|
$
5,990,536
|
$
5,589,165
|
33
The
following tables present average interest-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, utilizing an effective tax rate of 21% for the first
quarter of 2018 and 34% for the 2017 comparison
period.
|
|
Three
Months Ended March 31,
|
|||||
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
Income/
|
Rate/
|
Average
|
Income/
|
Rate/
|
|
|
Balance
|
Expense
|
Yield
|
Balance
|
Expense
|
Yield
|
|
Interest-Earning
Assets
|
|
|
|
|
|
|
|
Loans
(1)
|
$
506,584,535
|
$
6,140,544
|
4.92
%
|
$
485,288,232
|
$
5,616,867
|
4.69
%
|
|
Taxable
investment securities
|
38,262,697
|
202,885
|
2.15
%
|
34,053,569
|
151,726
|
1.81
%
|
|
Tax-exempt
investment securities
|
47,781,155
|
392,603
|
3.33
%
|
51,957,649
|
491,715
|
3.84
%
|
|
Sweep and
interest-earning accounts
|
21,358,685
|
94,401
|
1.79
%
|
14,043,904
|
30,433
|
0.88
%
|
|
Other
investments (2)
|
2,108,650
|
28,852
|
5.55
%
|
3,021,923
|
32,835
|
4.41
%
|
|
|
$
616,077,722
|
$
6,859,285
|
4.52
%
|
$
588,365,277
|
$
6,323,576
|
4.36
%
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities
|
|
|
|
|
|
|
|
Interest-bearing
transaction accounts
|
$
125,066,219
|
$
102,132
|
0.33
%
|
$
115,735,842
|
$
57,213
|
0.20
%
|
|
Money market
accounts
|
104,032,828
|
277,675
|
1.08
%
|
84,633,510
|
203,898
|
0.98
%
|
|
Savings
deposits
|
97,240,882
|
30,306
|
0.13
%
|
92,565,385
|
28,425
|
0.12
%
|
|
Time
deposits
|
113,651,692
|
276,950
|
0.99
%
|
118,947,370
|
248,253
|
0.85
%
|
|
Borrowed
funds
|
3,551,333
|
16
|
0.00
%
|
21,773,444
|
42,688
|
0.80
%
|
|
Repurchase
agreements
|
29,745,775
|
31,206
|
0.43
%
|
29,419,726
|
21,527
|
0.30
%
|
|
Capital lease
obligations
|
363,353
|
7,467
|
8.22
%
|
467,557
|
9,547
|
8.17
%
|
|
Junior
subordinated debentures
|
12,887,000
|
142,997
|
4.50
%
|
12,887,000
|
122,860
|
3.87
%
|
|
|
$
486,539,082
|
$
868,749
|
0.72
%
|
$
476,429,834
|
$
734,411
|
0.63
%
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
$
5,990,536
|
|
|
$
5,589,165
|
|
|
Net interest spread
(3)
|
|
|
3.80
%
|
|
|
3.73
%
|
|
Net interest margin
(4)
|
|
|
3.94
%
|
|
|
3.85
%
|
|
(1)
Included in gross loans are non-accrual loans with an average
balance of $3,309,117 and $2,535,919 for the three
|
|
months
ended March 31, 2018 and 2017, respectively. Loans are stated
before deduction of unearned discount
|
|
and
allowance for loan losses, less loans held-for-sale.
|
|
(2)
Included in other investments is the Company’s FHLBB Stock
with average balances of $1,115,500 and $2,046,773
|
|
respectively,
and a dividend rate of approximately 5.66% and 4.02%, respectively,
for the first three months of
|
|
2018
and 2017, respectively.
|
|
(3) Net
interest spread is the difference between the average yield on
average interest-earning assets and the average
|
|
rate
paid on average interest-bearing liabilities.
|
|
(4) Net
interest margin is net interest income divided by average earning
assets.
|
34
The
average volume of interest-earning assets for the three-month
period ended March 31, 2018 increased 4.7% compared to the same
period last year. Average yield on interest-earning assets for the
first quarter increased 16 bps, to 4.52%, compared to 4.36% for the
same period last year.
The
average volume of loans increased over the three-month comparison
period of 2018 versus 2017, by 4.4%, while the average yield on
loans increased 23 bps for the first quarter, to 4.92%, compared to
4.69% for the first quarter of 2017
.
This increase was due
to a combination of the steadily increasing federal funds rate over
the periods noted, and a shift in asset mix toward commercial
loans; however, this has been partially offset by continued
pressure on medium term (5-10 year) fixed rates. Interest earned on
the loan portfolio as a percentage of total interest income
increased slightly for the first quarter ended March 31, 2018,
comprising approximately 89.5% of total interest income versus
88.8%, for the same period last year.
The
average volume of the taxable investment portfolio (classified as
AFS) increased 12.4% during the first quarter of 2018 compared to
the same period last year. This increase is due primarily to an
effort to continue to incrementally grow the investment portfolio
as the balance sheet grows in order to provide additional liquidity
and pledge quality assets.
Average yields on the taxable
investment portfolio increased 34 bps during the first quarter of
2018 compared to the same period last year, due primarily to rising
market rates, as the mix of the portfolio remained relatively
stable. The average volume of the tax-exempt portfolio (classified
as HTM and consisting of municipal securities) decreased 8.0%
during the first quarter of 2018 compared to the same period last
year, as competitive pressures for municipal loan and deposit
relationships increase and market pricing has not yet fully
reflected the effect of lower federal interest rates due to the
2017 Tax Act. The average tax-equivalent yield on the tax-exempt
portfolio decreased 51 bps during the first quarter of 2018
compared to the same period last year, due to the effect of the
lower tax rate on the existing tax-exempt portfolio.
The
average volume of sweep and interest-earning accounts, which
consists primarily of an interest-bearing account at the FRBB and
two correspondent banks, increased 52.1% during the three-month
period ended March 31, 2018 compared to the same period last year,
and the average yield on these funds increased 91 bps. This
increase in volume is attributable to a higher balance of cash
periodically held on hand in anticipation of funding loan growth
and other liquidity needs. The increase in rate is directly related
to the increases in the fed funds rate.
The
average volume of interest-bearing liabilities for the three-month
period ended March 31, 2018 increased 2.1% compared to the same
period last year. The average rate paid on interest-bearing
liabilities increased nine bps during the first quarter of 2018
compared to the same period last year.
The
average volume of interest-bearing transaction accounts increased
8.1% during the first quarter of 2018, compared to the same period
last year, and the average rate paid on these accounts increased 13
bps. The average volume of money market accounts increased 22.9%
during the three-month period ended March 31, 2018 compared to the
same period in 2017, and the average rate paid on these deposits
increased 10 bps during the first quarter of 2018 comparison
period. The average volume of savings accounts increased by 5.1%
for the three-month comparison period of 2018 versus
2017.
Some of the
increase is due to the continued shift in product mix from retail
time deposits to savings accounts as consumers anticipate higher
rates in the near future. Compared to the same period in 2017, the
average volume of retail time deposits decreased 3.8% during the
first quarter, while the average volume of wholesale time deposits
decreased 7.7%.
Following the
most recent increase in short term rates, there has been more
pressure for higher rates from the more rate sensitive deposit
holders and the local market is now showing signs of a willingness
to pay higher rates on deposit products. While the Company relied
less on wholesale time deposits during this reporting period, the
brokered deposit market is still considered a beneficial source of
funding to help smooth out the fluctuations in core deposit
balances without the need to disrupt deposit pricing in the
Company’s local markets. These funds can be obtained
relatively quickly on an as-needed basis, making them a valuable
alternative to traditional term borrowings from the
FHLBB.
The
average volume of borrowed funds decreased 83.7% for the
three-month comparison period of 2018 versus 2017. The average rate
paid on these borrowings decreased 80 bps for the three-month
period as compared to 2017. The average volume of repurchase
agreements increased 1.1% for three-month period ended March 31,
2018, compared to the same period in 2017, while the average rate
paid on repurchase agreements increased 13 bps during the
three-month period ended March 31, 2018, compared to the same
period in 2017.
Between
the three month periods ended March 31, 2018 and 2017, the average
yield on interest-earning assets increased 16 bps, while the
average rate paid on interest-bearing liabilities increased nine
bps. Net interest spread for the first quarter of 2018 was 3.80%,
an increase of seven bps from 3.73% for the same period in 2017.
Net interest margin increased nine bps during the first quarter of
2018 to 3.94%, compared to 3.85% for the first quarter of
2017.
35
The
following table summarizes the variances in interest income and
interest expense on a fully tax-equivalent basis for the periods
presented for 2018 and 2017 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
|
|||
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
||
|
|
Variance
|
Variance
|
|
|
|
Due
to
|
Due
to
|
Total
|
|
|
Rate
(1)(2)
|
Volume
(1)(2)
|
Variance
|
|
Average
Interest-Earning Assets
|
|
|
|
|
Loans
|
$
277,398
|
$
246,279
|
$
523,677
|
|
Taxable
investment securities
|
32,374
|
18,785
|
51,159
|
|
Tax-exempt
investment securities
|
(64,819
)
|
(34,293
)
|
(99,112
)
|
|
Sweep and
interest-earning accounts
|
13,677
|
14,249
|
27,926
|
|
Other
investments
|
62,278
|
(30,219
)
|
32,059
|
|
|
$
320,908
|
$
214,801
|
$
535,709
|
|
|
|
|
|
|
Average
Interest-Bearing Liabilities
|
|
|
|
|
Interest-bearing
transaction accounts
|
$
40,318
|
$
4,601
|
$
44,919
|
|
Money market
accounts
|
26,900
|
46,877
|
73,777
|
|
Savings
deposits
|
498
|
1,383
|
1,881
|
|
Time
deposits
|
41,624
|
(12,927
)
|
28,697
|
|
Borrowed
funds
|
(42,672
)
|
0
|
(42,672
)
|
|
Repurchase
agreements
|
9,438
|
241
|
9,679
|
|
Capital lease
obligations
|
32
|
(2,112
)
|
(2,080
)
|
|
Junior
subordinated debentures
|
20,137
|
0
|
20,137
|
|
|
$
96,275
|
$
38,063
|
$
134,338
|
|
|
|
|
|
|
Changes
in net interest income
|
$
224,633
|
$
176,738
|
$
401,371
|
|
(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
|
|
(2) Tax
equivalent interest income is calculated utilizing an effective tax
rate of 21% for 2018 and 34% for 2017.
|
36
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
|
||
|
|
2018
|
2017
|
Income
|
Percent
|
|
|
|
|
|
|
|
Service
fees
|
$
770,082
|
$
748,117
|
$
21,965
|
2.94
%
|
|
Income from sold
loans
|
183,619
|
190,295
|
(6,676
)
|
-3.51
%
|
|
Other income from
loans
|
212,270
|
185,617
|
26,653
|
14.36
%
|
|
Net realized (loss)
gain on sale of securities AFS
|
(3,860
)
|
2,130
|
(5,990
)
|
-281.22
%
|
|
Income from CFSG
Partners
|
128,183
|
113,180
|
15,003
|
13.26
%
|
|
SERP fair value
adjustment
|
0
|
30,114
|
(30,114
)
|
-100.00
%
|
|
Other
income
|
105,376
|
100,765
|
4,611
|
4.58
%
|
|
Total
non-interest income
|
$
1,395,670
|
$
1,370,218
|
$
25,452
|
1.86
%
|
Total
non-interest income increased $25,452, or 1.9%, for the first
quarter of 2018 versus the same period in 2017, with significant
changes noted in the following:
●
Service fees on
deposit accounts increased $21,965, or 2.9%, for the first quarter
due primarily to an increase in fee income from interchange
income.
●
Other income from
loans increased $26,653 or 14.4% for the first quarter of 2018
compared to the same period in 2017 due mostly to an increase in
commercial loan documentation fees.
●
Income from CFSG
Partners increased $15,003, or 13.3%, for the first quarter due to
an increase in asset management fees, which are primarily tied to
the market value of assets under management.
●
SERP fair value
adjustment decreased $30,114, or 100.0%, for the first quarter. The
final payment of SERP benefits to the last participant was made on
July 1, 2017 and the related asset was liquidated shortly
thereafter. There will no longer be an impact to earnings from this
line item in future periods.
37
Non-interest Expense
The
components of non-interest expense for the periods presented are as
follows:
|
|
Three
Months Ended
|
|
|
|
|
|
March
31,
|
Change
|
||
|
|
2018
|
2017
|
Expense
|
Percent
|
|
|
|
|
|
|
|
Salaries and
wages
|
$
1,615,386
|
$
1,711,124
|
$
(95,738
)
|
-5.60
%
|
|
Employee
benefits
|
674,002
|
641,561
|
32,441
|
5.06
%
|
|
Occupancy expenses,
net
|
674,873
|
687,433
|
(12,560
)
|
-1.83
%
|
|
Other
expenses
|
|
|
|
|
|
Service
contracts - administrative
|
125,958
|
95,008
|
30,950
|
32.58
%
|
|
Marketing
expense
|
138,501
|
120,506
|
17,995
|
14.93
%
|
|
Audit
fees
|
107,626
|
76,500
|
31,126
|
40.69
%
|
|
Consultant
services
|
65,083
|
48,480
|
16,603
|
34.25
%
|
|
Collection
& non-accruing loan expense
|
53,286
|
3,655
|
49,631
|
1357.89
%
|
|
Amortization
of CDI
|
0
|
68,175
|
(68,175
)
|
-100.00
%
|
|
Other
miscellaneous expenses
|
1,276,401
|
1,278,677
|
(2,276
)
|
-0.18
%
|
|
Total
non-interest expense
|
$
4,731,116
|
$
4,731,119
|
$
(3
)
|
0.00
%
|
Total
non-interest expense remained virtually unchanged, decreasing $3,
or 0%, for the first quarter of 2018 compared to the same period in
2017 with significant changes noted in the following:
●
Salaries and wages
decreased as a result of a decrease in the total bonus paid out in
the first quarter of 2018 compared to the same period in
2017.
●
Employee benefits
increased due to increases in the cost of the employee health
insurance plan.
●
Service contracts
– administrative increased $30,950 or 32.6% during the first
quarter of 2018 compared to the same period in 2017 due to the
increasing cost to support information technology and branch
infrastructure.
●
Marketing expense
increased $17,995, or 14.9%, for the first quarter due to the
Company’s strategic decision to enhance marketing efforts,
including a shift to television ads from paper and radio and
marketing efforts to promote strategic initiatives.
●
Audit fees
increased $31,126, or 40.7%, for the first quarter due to increased
audit requirements on internal controls over financial
reporting.
●
Consultant services
increased $16,603, or 34.3%, for the first quarter partly due to a
contract with a consultant for technology related
projects.
●
Collection &
non-accruing loan expense increased $49,631, or 1357.9%, for the
first quarter of 2018. The variance in the comparison period is due
primarily to non-recurring recovery of expenses of approximately
$30,000 in the first quarter of 2017 compared to none in the first
quarter of 2018. Expenses on non-performing loans are increasing
due to the length of time it takes to go through the foreclosure
process.
●
The CDI from the
2007 acquisition of LyndonBank was fully amortized in 2017,
accounting for the absence of a CDI amortization expense during the
first quarter of 2018, compared to an expense of $68,175 for the
same quarter last year.
APPLICABLE INCOME TAXES
The
provision for income taxes decreased $86,765, or 17.5%, to $410,100
for the first quarter of 2018 compared to $496,865 for the same
period in 2017. This decrease is due primarily to a decrease in the
corporate tax rate from 34% to 21% effective January 1, 2018,
resulting from passage of the 2017 Tax Act. Income before taxes
increased $481,562, or 25.2%, for the first quarter of 2018
compared to the same quarter in 2017. Tax credits related to
limited partnerships amounted to $100,140 and $106,599,
respectively, for the first quarter of 2018 and 2017.
Amortization
expense related to limited partnership investments is included as a
component of income tax expense and amounted to $94,371 and
$105,414, respectively, for the first quarter of 2018 and 2017.
These investments provide tax benefits, including tax credits, and
are designed to provide a targeted effective yield between 7% and
10%.
38
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, 2018
|
December
31, 2017
|
March
31, 2017
|
|||
|
Assets
|
|
|
|
|
|
|
|
Loans
|
$
504,033,558
|
75.68
%
|
$
502,864,651
|
75.39
%
|
$
485,722,245
|
75.55
%
|
|
Securities
AFS
|
38,694,065
|
5.81
%
|
38,450,653
|
5.76
%
|
33,852,571
|
5.27
%
|
|
Securities
HTM
|
47,899,857
|
7.19
%
|
48,824,965
|
7.32
%
|
53,879,934
|
8.38
%
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Demand
deposits
|
109,656,422
|
16.47
%
|
117,245,565
|
17.58
%
|
105,880,429
|
16.47
%
|
|
Interest-bearing
transaction accounts
|
131,469,439
|
19.74
%
|
132,633,533
|
19.88
%
|
121,953,444
|
18.97
%
|
|
Money market
accounts
|
106,878,746
|
16.05
%
|
93,392,005
|
14.00
%
|
86,938,154
|
13.52
%
|
|
Savings
deposits
|
99,528,104
|
14.94
%
|
97,516,284
|
14.62
%
|
96,883,558
|
15.07
%
|
|
Time
deposits
|
110,696,835
|
16.62
%
|
119,847,593
|
17.97
%
|
120,764,113
|
18.78
%
|
|
Short-term
advances
|
0
|
0.00
%
|
0
|
0.00
%
|
10,000,000
|
1.56
%
|
|
Long-term
advances
|
3,550,000
|
0.53
%
|
3,550,000
|
0.53
%
|
1,550,000
|
0.24
%
|
The
Company's total loan portfolio at March 31, 2018 increased
$1,168,907, or 0.2%, from December 31, 2017 and $18,311,313, or
3.8%, year over year. AFS securities increased $243,412 or 0.6%,
year to date, and $4,841,494, or 14.3%, year over year. HTM
securities decreased $925,108 or 1.9%, year to date, and decreased
$5,980,077, or 11.1%, year over year. HTM securities consist
entirely of investments from the Company’s municipal
customers in its service areas. The Company has used maturing
securities AFS to fund loan growth in recent periods, which provide
an important source of liquidity. Accordingly, management has
sought to expand the AFS portfolio in recent periods to keep the
Company’s on-balance-sheet liquidity proportional to the
overall asset base.
Total
deposits decreased $2,405,434, or 0.4%, from December 31, 2017 to
March 31, 2018, and an increase of $25,809,848, or 4.9%, is noted
year over year. Demand deposits decreased $7,589,143, or 6.5%, year
to date and increased $3,775,993, or 3.6% year over year. Business
checking accounts account for most of the fluctuations in balances
with a decrease in balances of $5,773,133 year to date, and an
increase of $5,077,759 year over year. The Company is seeing growth
in the business customer base and improvements in financial health
of existing business customers. Money market accounts increased
$13,486,741, or 14.4%, year to date, and $19,940,592, or 22.9% year
over year. Savings deposits increased in both periods, with
increases of $2,011,820, or 2.1%, year to date and $2,644,546, or
2.7%, year over year. Time deposits decreased $9,150,758, or 7.6%,
year to date and $10,067,278, or 8.3%, year over year. These
decreases in part reflected a reduced reliance on brokered time
deposits for liquidity funding, resulting in a decrease in brokered
time deposits of $8,377,310 for the first quarter of 2018 and
$6,285,545 for the same period last year. There were no overnight
purchases and short-term advances from the FHLBB at March 31, 2018
and December 31, 2017 and $10,000,000 at March 31, 2017. In
addition, there were outstanding long-term advances from the FHLBB
of $3,550,000 at March 31, 2018 and December 31, 2017, and
$1,550,000 at March 31, 2017.
Interest Rate Risk and Asset and Liability Management
-
Management actively monitors and manages the Company’s
interest rate risk exposure and attempts to structure the balance
sheet to maximize net interest income while controlling its
exposure to interest rate risk. The Company's ALCO is made up of
the Executive Officers and certain Vice Presidents of the Bank
representing major business lines. The ALCO formulates strategies
to manage interest rate risk by evaluating the impact on earnings
and capital of such factors as current interest rate forecasts and
economic indicators, potential changes in such forecasts and
indicators, liquidity and various business strategies. The ALCO
meets at least quarterly to review financial statements, liquidity
levels, yields and spreads to better understand, measure, monitor
and control the Company’s interest rate risk. In the ALCO
process, the committee members apply policy limits set forth in the
Asset Liability, Liquidity and Investment policies approved and
periodically reviewed by the Company’s Board of Directors.
The ALCO's methods for evaluating interest rate risk include an
analysis of the effects of interest rate changes on net interest
income and an analysis of the Company's interest rate sensitivity
"gap", which provides a static analysis of the maturity and
repricing characteristics of the entire balance sheet. The ALCO
Policy also includes a contingency funding plan to help management
prepare for unforeseen liquidity restrictions, including
hypothetical severe liquidity crises.
39
Interest
rate risk represents the sensitivity of earnings to changes in
market interest rates. As interest rates change, the interest
income and expense streams associated with the Company’s
financial instruments also change, thereby impacting NII, the
primary component of the Company’s earnings. Fluctuations in
interest rates can also have an impact on liquidity. The ALCO uses
an outside consultant to perform rate shock simulations to the
Company's net interest income, as well as a variety of other
analyses. It is the ALCO’s function to provide the
assumptions used in the modeling process. Assumptions used in prior
period simulation models are regularly tested by comparing
projected NII with actual NII. The ALCO utilizes the results of the
simulation model to quantify the estimated exposure of NII and
liquidity to sustained interest rate changes. The simulation model
captures the impact of changing interest rates on the interest
income received and interest expense paid on all interest-earning
assets and interest-bearing liabilities reflected on the
Company’s balance sheet. The model also simulates the balance
sheet’s sensitivity to a prolonged flat rate environment. All
rate scenarios are simulated assuming a parallel shift of the yield
curve; however further simulations are performed utilizing
non-parallel changes in the yield curve. The results of this
sensitivity analysis are compared to the ALCO policy limits which
specify a maximum tolerance level for NII exposure over a 1-year
horizon, assuming no balance sheet growth, given a 200 bps shift
upward and a 100 bps 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 increases in
the federal funds rate have generated a positive impact to the
Company’s NII as variable rate loans reprice; however the
behavior of the long end of the yield curve will also be very
important to the Company’s margins going forward, as funding
costs continue to rise and the long end remains relatively
anchored.
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, 2018:
|
Rate
Change
|
Percent
Change in NII
|
|
|
|
|
Down 100
bps
|
-3.0
%
|
|
Up 200
bps
|
3.7
%
|
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 42.0% 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 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 21.5%
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.
40
Consistent
with the strategic focus on commercial lending, commercial and CRE
loan demand continued through 2017 with the funding of construction
projects and draws on lines of credit. Commercial loan balances
held steady into the first quarter of 2018 with some seasonal low
balances on lines of credit offset by new loan and line
originations. The first quarter of 2018 increase in CRE loans was
driven by a combination of construction draws and new CRE term
loans. Commercial and commercial real estate loans together
comprised 57.0% of the Company’s loan portfolio at March 31,
2018, 56.5% at December 31, 2017 and March 30, 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 along the I-89 corridor from
White River Junction through 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, 2018
|
December
31, 2017
|
March
31, 2017
|
|||
|
|
|
|
|
|
|
|
|
Commercial &
industrial
|
$
76,968,888
|
15.27
%
|
$
77,110,747
|
15.33
%
|
$
69,064,985
|
14.22
%
|
|
Commercial real
estate
|
210,135,736
|
41.69
%
|
207,044,227
|
41.17
%
|
205,140,487
|
42.23
%
|
|
Residential real
estate - 1st lien
|
166,435,383
|
33.02
%
|
168,184,135
|
33.45
%
|
162,929,247
|
33.54
%
|
|
Residential real
estate - Jr lien
|
45,459,718
|
9.02
%
|
45,256,862
|
9.00
%
|
41,820,775
|
8.61
%
|
|
Consumer
|
5,033,833
|
1.00
%
|
5,268,680
|
1.05
%
|
6,766,751
|
1.39
%
|
|
Total
loans
|
504,033,558
|
100.00
%
|
502,864,651
|
100.00
%
|
485,722,245
|
99.99
%
|
|
Deduct
(add):
|
|
|
|
|
|
|
|
Allowance for loan
losses
|
5,341,220
|
|
5,438,099
|
|
5,258,440
|
|
|
Deferred net loan
costs
|
(329,244
)
|
|
(318,651
)
|
|
(321,285
)
|
|
|
Net
loans
|
$
499,021,582
|
|
$
497,745,203
|
|
$
480,785,090
|
|
Risk in
the Company’s commercial & industrial and CRE loan
portfolios is mitigated in part by government guarantees issued by
federal agencies such as the SBA and RD. At March 31, 2018, the
Company had $26,352,548 in guaranteed loans with guaranteed
balances of $19,700,578, compared to $25,457,081 in guaranteed
loans with guaranteed balances of $19,101,965 at December 31, 2017
and $23,376,997 in guaranteed loans with guaranteed balances of
$17,250,407 at March 31, 2017.
The
Company works actively with customers early in the delinquency
process to help them to avoid default and foreclosure. Commercial
& industrial and CRE loans are generally placed on non-accrual
status when there is deterioration in the financial position of the
borrower, payment in full of principal and interest is not
expected, and/or principal or interest has been in default for 90
days or more. However, such a loan need not be placed on
non-accrual status if it is both well secured and in the process of
collection. Residential mortgages and home equity loans are
considered for non-accrual status at 90 days past due and are
evaluated on a case-by-case basis. The Company obtains current
property appraisals or market value analyses and considers the cost
to carry and sell collateral in order to assess the level of
specific allocations required. Consumer loans are generally not
placed in non-accrual but are charged off by the time they reach
120 days past due. When a loan is placed in non-accrual status, the
Company reverses the accrued interest against current period income
and discontinues the accrual of interest until the borrower clearly
demonstrates the ability and intention to resume normal payments,
typically demonstrated by regular timely payments for a period of
not less than six months. Interest payments received on non-accrual
or impaired loans are generally applied as a reduction of the loan
book balance.
The
Company’s non-performing assets decreased $121,743, or 2.6%,
during the first three months of 2018. Reductions in past due
residential mortgages were in part offset by one CRE loan
relationship moving into non-accrual status. Claims receivable on
related government guarantees were $170,771 at March 31, 2018
compared to $6,771 at December 31, 2017 and $27,542 at March 31,
2017, with numerous RD and SBA claims settled and paid throughout
2017, and two new claims pending settlement in 2018. Non-performing
loans as of March 31, 2018 carried RD and SBA guarantees totaling
$302,298, compared to $59,617 at December 31, 2017 and $201,395 at
March 31, 2017.
41
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, 2018
|
December
31, 2017
|
March
31, 2017
|
|||
|
|
|
|
|
|
|
|
|
Loans
past due 90 days or more
|
|
|
|
|
|
|
|
and
still accruing (1)
|
|
|
|
|
|
|
|
Commercial
& industrial
|
$
8,207
|
0.18
%
|
$
0
|
0.00
%
|
$
0
|
0.00
%
|
|
Residential
real estate - 1st lien
|
466,704
|
10.35
%
|
1,249,241
|
26.97
%
|
668,569
|
17.91
%
|
|
Residential
real estate - Jr lien
|
113,578
|
2.52
%
|
0
|
0.00
%
|
27,905
|
0.75
%
|
|
Consumer
|
0
|
0.00
%
|
1,484
|
0.03
%
|
1,903
|
0.05
%
|
|
|
588,489
|
13.05
%
|
1,250,725
|
27.00
%
|
698,377
|
18.71
%
|
|
|
|
|
|
|
|
|
|
Non-accrual
loans (1)
|
|
|
|
|
|
|
|
Commercial
& industrial
|
185,012
|
4.11
%
|
98,806
|
2.14
%
|
135,379
|
3.62
%
|
|
Commercial
real estate
|
1,588,084
|
35.21
%
|
1,065,385
|
23.00
%
|
744,989
|
19.96
%
|
|
Residential
real estate - 1st lien
|
1,518,759
|
33.68
%
|
1,585,473
|
34.23
%
|
1,148,848
|
30.78
%
|
|
Residential
real estate - Jr lien
|
345,214
|
7.65
%
|
346,912
|
7.49
%
|
442,960
|
11.87
%
|
|
|
3,637,069
|
80.65
%
|
3,096,576
|
66.86
%
|
2,472,176
|
66.23
%
|
|
|
|
|
|
|
|
|
|
Other
real estate owned
|
284,235
|
6.30
%
|
284,235
|
6.14
%
|
561,979
|
15.06
%
|
|
|
|
|
|
|
|
|
|
|
$
4,509,793
|
100.00
%
|
$
4,631,536
|
100.00
%
|
$
3,732,532
|
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 consisted of one residential
property and one commercial property at March 31, 2018 and December
31, 2017 and two residential properties and two commercial
properties at March 31, 2017. The residential properties were
acquired through the normal foreclosure process. The Company took
control of the commercial property in 2017, which failed to sell at
auction in May 2017 and is listed for sale.
The
Company’s TDRs are principally a result of extending loan
repayment terms to relieve cash flow difficulties. The Company has
only infrequently reduced interest rates below the current market
rate. The Company has not forgiven principal or reduced accrued
interest within the terms of original restructurings. Management
evaluates each TDR situation on its own merits and does not
foreclose the granting of any particular type of
concession.
The
non-performing assets in the table above include the following TDRs
that were past due 90 days or more or in non-accrual status as of
the dates presented:
|
|
March
31, 2018
|
December
31, 2017
|
March
31, 2017
|
|||
|
|
Number
of
|
Principal
|
Number
of
|
Principal
|
Number
of
|
Principal
|
|
|
Loans
|
Balance
|
Loans
|
Balance
|
Loans
|
Balance
|
|
|
|
|
|
|
|
|
|
Commercial &
industrial
|
1
|
$
24,685
|
1
|
$
24,685
|
2
|
$
135,379
|
|
Commercial real
estate
|
4
|
590,239
|
3
|
531,117
|
2
|
346,444
|
|
Residential real
estate - 1st lien
|
7
|
689,696
|
7
|
412,134
|
8
|
457,430
|
|
Residential real
estate - Jr lien
|
0
|
0
|
0
|
0
|
2
|
113,064
|
|
|
12
|
$
1,304,620
|
11
|
$
967,937
|
14
|
$
1,052,317
|
42
The
remaining TDRs were performing in accordance with their modified
terms as of the dates presented and consisted of the
following:
|
|
March
31, 2018
|
December
31, 2017
|
March
31, 2017
|
|||
|
|
Number
of
|
Principal
|
Number
of
|
Principal
|
Number
of
|
Principal
|
|
|
Loans
|
Balance
|
Loans
|
Balance
|
Loans
|
Balance
|
|
|
|
|
|
|
|
|
|
Commercial real
estate
|
1
|
$
110,232
|
2
|
$
308,460
|
5
|
$
1,329,461
|
|
Residential real
estate - 1st lien
|
56
|
3,038,209
|
54
|
2,837,572
|
29
|
2,695,521
|
|
Residential real
estate - Jr lien
|
1
|
8,151
|
1
|
8,358
|
2
|
63,713
|
|
|
58
|
$
3,156,593
|
57
|
$
3,154,389
|
36
|
$
4,088,695
|
As of
the balance sheet dates, the Company evaluates whether it is
contractually committed to lend additional funds to debtors with
impaired, non-accrual or modified loans. The Company is
contractually committed to lend on one SBA guaranteed line of
credit to a borrower whose lending relationship was previously
restructured.
Allowance for loan losses and provisions
- The Company
maintains an ALL at a level that management believes is appropriate
to absorb losses inherent in the loan portfolio as of the
measurement date (See Note 5 to the accompanying unaudited interim
consolidated financial statements). Although the Company, in
establishing the ALL, considers the inherent losses in individual
loans and pools of loans, the ALL is a general reserve available to
absorb all credit losses in the loan portfolio. No part of the ALL
is segregated to absorb losses from any particular loan or segment
of loans.
When
establishing the ALL 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. The Company applies numerous qualitative
factors to each segment of the loan portfolio. Those factors
include the levels of and trends in delinquencies and non-accrual
loans, criticized and classified assets, volumes and terms of
loans, and the impact of any loan policy changes. Experience,
ability and depth of lending personnel, levels of policy and
documentation exceptions, national and local economic trends, the
competitive environment, and concentrations of credit are also
factors considered.
Specific
allocations to the ALL are made for certain impaired loans.
Impaired loans include all troubled debt restructurings regardless
of amount, and all loans to a borrower that in aggregate are
greater than $100,000 and that are in non-accrual status. A loan is
considered impaired when it is probable that the Company will be
unable to collect all amounts due, including interest and
principal, according to the contractual terms of the loan
agreement. The Company 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.
43
The
following table summarizes the Company's loan loss experience for
the periods presented:
|
|
As
of or Three Months Ended March 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Loans outstanding,
end of period
|
$
504,033,558
|
$
485,722,245
|
|
Average loans
outstanding during period
|
$
506,584,535
|
$
485,288,232
|
|
Non-accruing loans,
end of period
|
$
3,637,069
|
$
2,472,176
|
|
Non-accruing loans,
net of government guarantees
|
$
3,334,771
|
$
2,334,256
|
|
|
|
|
|
Allowance,
beginning of period
|
$
5,438,099
|
$
5,278,445
|
|
Loans charged
off:
|
|
|
|
Commercial
& industrial
|
(88,894
)
|
(21,024
)
|
|
Commercial
real estate
|
(121,000
)
|
(160,207
)
|
|
Residential
real estate - 1st lien
|
(33,072
)
|
(4,735
)
|
|
Residential
real estate - Jr lien
|
(24,000
)
|
0
|
|
Consumer
loans
|
(33,630
)
|
(5,441
)
|
|
Total
loans charged off
|
(300,596
)
|
(191,407
)
|
|
Recoveries(1):
|
|
|
|
Commercial
& industrial
|
5,014
|
7,141
|
|
Residential
real estate - 1st lien
|
8,858
|
6,236
|
|
Residential
real estate - Jr lien
|
435
|
60
|
|
Consumer
loans
|
9,410
|
7,965
|
|
Total
recoveries
|
23,717
|
21,402
|
|
Net loans charged
off
|
(276,879
)
|
(170,005
)
|
|
Provision charged
to income
|
180,000
|
150,000
|
|
Allowance, end of
period
|
$
5,341,220
|
$
5,258,440
|
|
|
|
|
|
Net charge offs to
average loans outstanding
|
0.055
%
|
0.035
%
|
|
Provision charged
to income as a percent of average loans
|
0.036
%
|
0.031
%
|
|
Allowance to
average loans outstanding
|
1.054
%
|
1.084
%
|
|
Allowance to
non-accruing loans
|
146.855
%
|
212.705
%
|
|
Allowance to
non-accruing loans net of government guarantees
|
160.168
%
|
225.273
%
|
(1)
There were no commercial real estate recoveries during the periods
presented.
The
provision increased $30,000, or 20.0%, for the first three months
of 2018 compared to the same period in 2017. The higher 2018
budgeted provision level is intended to support continued growth in
the Company’s loan portfolio and to compensate for loan
charge off activity. The first quarter 2018 provision supported
higher losses driven by one particular CRE charge off and two
commercial loan relationship charge offs. The reserve requirement
remained relatively unchanged with a reduction in specific reserves
as a result of those charge offs, a drop in unguaranteed pooled
loan balances at quarter-end, along with improvement in some
qualitative factor adjustments.
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.
The
first quarter ALL analysis shows the reserve balance of $5,341,220
at March 31, 2018 is sufficient in management’s view to cover
losses that are probable and estimable, with an unallocated reserve
of $266,601 compared to $267,551 at December 31, 2017. The reserve
balance and unallocated amount continue to be directionally
consistent with the overall risk profile of the Company’s
loan portfolio and credit risk appetite. The portion of the ALL
termed "unallocated" is established to absorb inherent losses that
exist as of the measurement date although not specifically
identified through management's process for estimating credit
losses. While the ALL is described as consisting of separate
allocated portions, the entire ALL is available to support loan
losses, regardless of category. Unallocated reserves 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 ALL 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
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. 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 2018, 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,
|
|
|
2018
|
2017
|
|
|
|
|
|
Unused portions of
home equity lines of credit
|
$
29,929,397
|
$
29,529,411
|
|
Residential
construction lines of credit
|
1,071,732
|
3,767,168
|
|
Commercial real
estate and other construction lines of credit
|
30,254,454
|
27,315,198
|
|
Commercial and
industrial commitments
|
40,121,861
|
38,369,010
|
|
Other commitments
to extend credit
|
49,083,636
|
48,233,850
|
|
Standby letters of
credit and commercial letters of credit
|
1,463,759
|
1,939,759
|
|
Recourse on sale of
credit card portfolio
|
301,180
|
302,775
|
|
MPF credit
enhancement obligation, net of liability recorded
|
634,575
|
634,340
|
Since
many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent
future cash requirements.
LIQUIDITY AND CAPITAL RESOURCES
Managing
liquidity risk is essential to maintaining both depositor
confidence and stability in earnings. Liquidity management refers
to the ability of the Company to adequately cover fluctuations in
assets and liabilities. Meeting loan demand (assets) and covering
the withdrawal of deposit funds (liabilities) are two key
components of the liquidity management process. The Company’s
principal sources of funds are deposits, amortization and
prepayment of loans and securities, maturities of investment
securities, sales of loans available-for-sale, and earnings and
funds provided from operations. Maintaining a relatively stable
funding base, which is achieved by diversifying funding sources,
competitively pricing deposit products, and extending the
contractual maturity of liabilities, reduces the Company’s
exposure to rollover risk on deposits and limits reliance on
volatile short-term borrowed funds. Short-term funding needs arise
from declines in deposits or other funding sources and from funding
requirements for loan commitments. The Company’s strategy is
to fund assets to the maximum extent possible with core deposits
that provide a sizable source of relatively stable and low-cost
funds.
45
The
Company recognizes that, at times, when loan demand exceeds deposit
growth or the Company has other liquidity demands, it may be
desirable to utilize alternative sources of deposit funding to
augment retail deposits and borrowings. One-way deposits acquired
through the CDARS program provide an alternative funding source
when needed. Such deposits are generally considered a form of
brokered deposits.
At
March 31, 2018, the Company had one-way CDARS outstanding totaling
$6,612,232 compared to $12,258,265 at December 31, 2017 and
$5,000,000 at March 31, 2017. In addition, two-way CDARS deposits,
as well as reciprocal ICS money market and demand deposits allow
the Company to provide FDIC deposit insurance to its customers in
excess of account coverage limits by exchanging deposits with other
participating FDIC-insured financial institutions. At March 31,
2018, the Company reported $2,826,523 in two-way CDARS deposits,
representing exchanged deposits with other CDARS participating
banks, compared to $2,817,715 at December 31, 2017 and $3,053,119
at March 31, 2017. The balance in ICS reciprocal money market
deposits was $19,627,786 at March 31, 2018, compared to $17,137,985
at December 31, 2017 and $13,978,066 at March 31, 2017, and the
balance in ICS reciprocal demand deposits as of those dates was
$10,090,723, $9,951,078 and $5,239,185, respectively.
At
March 31, 2018, December 31, 2017 and March 31, 2017, borrowing
capacity of $108,237,681, $109,726,508 and $65,193,219,
respectively, was available through the FHLBB, secured by the
Company's qualifying loan portfolio (generally, residential
mortgage and commercial loans), reduced by outstanding advances and
by collateral pledges securing FHLBB letters of credit
collateralizing public unit deposits. During the second quarter of
2017, the Company began pledging residential mortgage loans in a
detail listing instead of a summary listing, and also began
pledging qualifying multifamily and other commercial real estate
loans, accounting for the increase in the portfolio of qualifying
loans for the first quarter of 2018 compared to the same period in
2017. The Company also has an unsecured Federal Funds credit line
with the FHLBB with an available balance of $500,000 and no
outstanding advances during any of the respective comparison
periods. Interest is chargeable at a rate determined daily,
approximately 25 bps higher than the rate paid on federal funds
sold.
The
following table reflects the Company’s outstanding FHLBB
advances against the respective lines as of the dates
indicated:
|
|
March
31,
|
December
31,
|
March
31,
|
|
|
2018
|
2017
|
2017
|
|
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 November 22, 2021
|
1,000,000
|
1,000,000
|
1,000,000
|
|
FHLBB term advance,
0.00%, due June 09, 2022
|
2,000,000
|
2,000,000
|
0
|
|
FHLBB term advance,
0.00%, due September 22, 2023
|
200,000
|
200,000
|
200,000
|
|
|
3,550,000
|
3,550,000
|
1,550,000
|
|
|
|
|
|
|
Short-Term
Advances
|
|
|
|
|
FHLBB term advance
0.92% fixed rate, due June 14, 2017
|
0
|
0
|
10,000,000
|
|
|
$
3,550,000
|
$
3,550,000
|
$
11,550,000
|
(1)
The Company has
borrowed a total of $3,550,000 under the FHLBB’s 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.
46
The
Company has a 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 $44,930,988,
$45,305,894, and $48,061,944, respectively, at March 31, 2018,
December 31, 2017 and March 31, 2017. 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 225 bps. The Company had no outstanding
advances against this credit line during any of the periods
presented.
The
Company has unsecured lines of credit with three correspondent
banks with aggregate available borrowing capacity totaling
$12,500,000 as of March 31, 2018, December 31, 2017 and March 31,
2017. 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, 2018, December 31, 2017 and March 31,
2017, the Company had outstanding repurchase agreement balances of
$30,246,926, $28,647,848 and $27,747,451, respectively. These
repurchase agreements mature and are repriced daily.
The
following table illustrates the changes in shareholders' equity
from December 31, 2017 to March 31, 2018, including a partial
redemption of the Company’s Series A non-cumulative perpetual
preferred stock, effective March 31, 2018:
|
Balance at December
31, 2017 (book value $10.84 per common share)
|
$
57,935,854
|
|
Net
income
|
1,982,543
|
|
Issuance
of stock through the DRIP
|
240,553
|
|
Redemption
of preferred stock
|
(500,000
)
|
|
Dividends
declared on common stock
|
(869,128
)
|
|
Dividends
declared on preferred stock
|
(28,125
)
|
|
Unrealized
loss on securities AFS during the period, net of tax
|
(452,876
)
|
|
Balance at March
31, 2018 (book value $10.99 per common share)
|
$
58,308,821
|
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 2017 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 MD&A 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 was 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% of risk-weighted assets.
A banking organization with a conservation buffer of less than 2.5%
(or the required phase-in amount in years prior to 2019) is 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 6.06% and 5.96%, respectively, at March 31,
2018. As of March 31, 2018, 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, 2018, 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.
47
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, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier
1 capital
|
|
|
|
|
|
|
|
(to
risk-weighted assets)
|
|
|
|
|
|
|
|
Company
|
$
60,349
|
12.91
%
|
$
21,034
|
4.50
%
|
N/A
|
N/A
|
|
Bank
|
$
59,820
|
12.81
%
|
$
21,015
|
4.50
%
|
$
30,355
|
6.50
%
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to
risk-weighted assets)
|
|
|
|
|
|
|
|
Company
|
$
60,349
|
12.91
%
|
$
28,046
|
6.00
%
|
N/A
|
N/A
|
|
Bank
|
$
59,820
|
12.81
%
|
$
28,020
|
6.00
%
|
$
37,360
|
8.00
%
|
|
|
|
|
|
|
|
|
|
Total capital (to
risk-weighted assets)
|
|
|
|
|
|
|
|
Company
|
$
65,734
|
14.06
%
|
$
37,394
|
8.00
%
|
N/A
|
N/A
|
|
Bank
|
$
65,205
|
13.96
%
|
$
37,360
|
8.00
%
|
$
46,700
|
10.00
%
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to
average assets)
|
|
|
|
|
|
|
|
Company
|
$
60,349
|
9.34
%
|
$
25,853
|
4.00
%
|
N/A
|
N/A
|
|
Bank
|
$
59,820
|
9.26
%
|
$
25,835
|
4.00
%
|
$
32,294
|
5.00
%
|
|
|
|
|
|
|
|
|
|
December
31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier
1 capital
|
|
|
|
|
|
|
|
(to
risk-weighted assets)
|
|
|
|
|
|
|
|
Company
|
$
59,523
|
12.75
%
|
$
21,003
|
4.50
%
|
N/A
|
N/A
|
|
Bank
|
$
58,920
|
12.64
%
|
$
20,972
|
4.50
%
|
$
30,293
|
6.50
%
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to
risk-weighted assets)
|
|
|
|
|
|
|
|
Company
|
$
59,523
|
12.75
%
|
$
28,004
|
6.00
%
|
N/A
|
N/A
|
|
Bank
|
$
58,920
|
12.64
%
|
$
27,963
|
6.00
%
|
$
37,284
|
8.00
%
|
|
|
|
|
|
|
|
|
|
Total capital (to
risk-weighted assets)
|
|
|
|
|
|
|
|
Company
|
$
65,005
|
13.93
%
|
$
37,338
|
8.00
%
|
N/A
|
N/A
|
|
Bank
|
$
64,401
|
13.82
%
|
$
37,284
|
8.00
%
|
$
46,605
|
10.00
%
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to
average assets)
|
|
|
|
|
|
|
|
Company
|
$
59,523
|
9.05
%
|
$
26,304
|
4.00
%
|
N/A
|
N/A
|
|
Bank
|
$
58,920
|
8.97
%
|
$
26,279
|
4.00
%
|
$
32,849
|
5.00
%
|
(1)
Applicable to banks, but not bank holding companies.
The
Company's ability to pay dividends to its shareholders is largely
dependent on the Bank's ability to pay dividends to the Company. In
general, a national bank may not pay dividends that exceed net
income for the current and preceding two years regardless of
statutory restrictions, as a matter of regulatory policy, banks and
bank holding companies should pay dividends only out of current
earnings and only if, after paying such dividends, they remain
adequately capitalized.
48
I
TEM 3. Quantitative and
Qualitative Disclosures about Market Risk
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 2017 Annual Report on Form 10-K.
I
TEM 4. Controls and
Procedures
Disclosure Controls and Procedures
Management
is responsible for establishing and maintaining effective
disclosure controls and procedures, as defined in Rule 13a-15(e)
under the Exchange Act. As of March 31, 2018, 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, 2018 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, 2018 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over
financial reporting.
I
TEM 1. Legal
Proceedings
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.
I
TEM 1A. Risk
Factors
The
Risk Factors identified in our Annual Report on Form 10-K for the
year ended December 31, 2017, continue to represent the most
significant risks to the Company's future results of operations and
financial condition.
49
I
TEM 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
The
following table provides information as to the purchases of the
Company’s common stock during the three months ended March
31, 2018, by the Company or by any affiliated purchaser (as defined
in SEC Rule 10b-18). During the monthly periods presented, the
Company did not have any publicly announced repurchase plans or
programs.
|
|
Total
Number
|
Average
|
|
|
of
Shares
|
Price
Paid
|
|
For the
period:
|
Purchased(1)(2)
|
Per
Share
|
|
|
|
|
|
January 1 - January
31
|
0
|
$
0.00
|
|
February 1 –
February 28
|
0
|
0.00
|
|
March 1 - March
31
|
5,411
|
17.50
|
|
Total
|
5,411
|
$
17.50
|
(1) All
5,411 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
DRIP.
I
TEM 6. Exhibits
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, 2018 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, 2018 and 2017, (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 Exchange Act, or otherwise subject to the
liability of that section, and shall not be deemed to be
incorporated by reference into any filing under the Securities Act
of 1933 or the Exchange Act.
50
S
IGNATURES
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 10, 2018
|
/s/Kathryn
M. Austin
|
|
|
|
Kathryn
M. Austin, President
|
|
|
|
&
Chief Executive Officer
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
DATED:
May 10, 2018
|
/s/Louise
M. Bonvechio
|
|
|
|
Louise
M. Bonvechio, Corporate
|
|
|
|
Secretary
& Treasurer
|
|
|
|
(Principal
Financial Officer)
|
|
51
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, 2018
COMMUNITY BANCORP.
EXHIBITS
E
XHIBIT INDEX
|
Certification
from the Chief Executive Officer (Principal Executive Officer) of
the Company pursuant to section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
Certification
from the Treasurer (Principal Financial Officer) of the Company
pursuant to section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
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*
|
|
|
|
|
|
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, 2018 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, 2018 and 2017, (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 Exchange Act, or otherwise subject to the
liability of that section, and shall not be deemed to be
incorporated by reference into any filing under the Securities Act
of 1933 or the Exchange Act.
52
TABLE OF CONTENTS
Part I. Financial InformationNote 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 EventPart II. Other Information