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EXCEL - IDEA: XBRL DOCUMENT - MERCHANTS BANCSHARES INCFinancial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the quarterly period ended September 30, 2014

 

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:

0-11595

 

Merchants Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

03-0287342

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

275 Kennedy Drive, South Burlington, VT

 

 

05403

(Address of principal executive offices)

 

(Zip Code)

 

802-658-3400

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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 such reports), and (2) has been subject to such filing requirements for the past 90 days.    [ X ] Yes     [  ] 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).  [X] Yes[  ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated 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.

Large Accelerated Filer [   ]Accelerated Filer [ X ]Nonaccelerated Filer [   ]  Smaller Reporting Company [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

[  ] Yes  [ X ] No

 

As of October 27, 2014, there were 6,331,650 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

 

 

 

 


 

 

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES

FORM 10-Q 

 

TABLE OF CONTENTS

 

 

 

 

 

 

PART I – FINANCIAL INFORMATION

Page Reference

Item 1

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets (Unaudited)

 

 

As of September 30, 2014 and December 31, 2013

3

 

 

 

 

Consolidated Statements of Income (Unaudited)

 

 

Three and nine months ended September 30, 2014 and 2013

4

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

 

 

Three and nine months ended September 30, 2014 and 2013

5

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited)

 

 

Nine months ended September  30, 2014 and 2013

6

 

 

 

 

Notes to Interim Unaudited Consolidated Financial Statements

7

 

 

 

Item 2

Management's Discussion and Analysis of Financial Condition and Results of Operations

28

Item 3

Quantitative and Qualitative Disclosures about Market Risk

40

Item 4

Controls and Procedures

42

 

 

 

PART II - OTHER INFORMATION

 

Item 1

Legal Proceedings

43

Item 1A

Risk Factors

43

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 3

Defaults Upon Senior Securities

43

Item 4

Mine Safety Disclosure

43

Item 5

Other Information

43

Item 6

Exhibits

43

 

Signatures

44

 

 

 

 

 

 

 

 

 

 

 

2

 

 


 

ITEM 1 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Merchants Bancshares, Inc.

Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

 

 

 

September 30

December 31,

(In thousands except share and per share data)

2014

2013

ASSETS

 

 

 

 

Cash and due from banks

$

27,283 

$

30,434 

Interest earning deposits with banks and other short-term investments

 

92,374 

 

85,037 

Total cash and cash equivalents

 

119,657 

 

115,471 

Investments:

 

 

 

 

Securities available for sale, at fair value

 

186,049 

 

252,513 

Securities held to maturity (fair value of $140,411 and $137,087)

 

142,110 

 

140,826 

Total investments

 

328,159 

 

393,339 

Loans

 

1,156,663 

 

1,166,233 

Less: Allowance for loan losses

 

12,019 

 

12,042 

Net loans

 

1,144,644 

 

1,154,191 

Federal Home Loan Bank stock

 

4,378 

 

7,496 

Bank premises and equipment, net

 

15,922 

 

15,572 

Investment in real estate limited partnerships

 

5,511 

 

4,631 

Bank owned life insurance

 

10,237 

 

10,000 

Other assets

 

19,078 

 

24,769 

Total assets

$

1,647,586 

$

1,725,469 

LIABILITIES

 

 

 

 

Deposits:

 

 

 

 

Demand (noninterest bearing)

$

544,425 

$

266,299 

Savings, interest bearing checking and money market accounts

 

525,680 

 

752,171 

Time deposits $100 thousand and greater

 

83,741 

 

115,204 

Other time deposits

 

150,235 

 

189,902 

Total deposits

 

1,304,081 

 

1,323,576 

Securities sold under agreements to repurchase

 

188,157 

 

250,314 

Other long-term debt

 

2,341 

 

2,403 

Junior subordinated debentures issued to unconsolidated subsidiary trust

 

20,619 

 

20,619 

Other liabilities

 

6,644 

 

8,946 

Total liabilities

 

1,521,842 

 

1,605,858 

Commitments and contingencies (Note 9)

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

Preferred stock

 

 

 

 

Preferred stock

 

-  

 

-  

Class A non-voting shares authorized - 200,000,  none outstanding

 

-  

 

-  

Common stock, $.01 par value

 

67 

 

67 

Authorized: 10,000,000 shares; Issued: 6,651,760 at September 30, 2014 and December 31, 2013

 

 

 

 

Outstanding: 6,329,958 at September 30, 2014 and 6,318,708 at December 31, 2013

 

 

 

 

Capital in excess of par value

 

37,176 

 

37,129 

Retained earnings

 

99,967 

 

95,657 

Treasury stock, at cost: 321,802 shares at September 30, 2014 and 333,052 shares at December 31, 2013

 

(13,656)

 

(14,043)

Deferred compensation arrangements: 304,118 shares at September 30, 2014 and 319,854 shares at December 31, 2013

 

6,324 

 

6,521 

Accumulated other comprehensive loss

 

(4,134)

 

(5,720)

Total shareholders' equity

 

125,744 

 

119,611 

Total liabilities and shareholders' equity

$

1,647,586 

$

1,725,469 

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

 

3

 

 


 

Merchants Bancshares, Inc.

Consolidated Statements of Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

Nine Months Ended

 

September

September

(In thousands except per share data)

2014

2013

2014

2013

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

Interest and fees on loans

$

10,642 

$

11,070 

$

32,160 

$

32,864 

Investment income:

 

 

 

 

 

 

 

 

Interest and dividends on investment securities

 

1,885 

 

2,301 

 

6,145 

 

7,649 

Interest on interest earning deposits with banks and other short-term investments

 

37 

 

13 

 

110 

 

38 

Total interest and dividend income

 

12,564 

 

13,384 

 

38,415 

 

40,551 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Savings, interest bearing checking and money market accounts

 

370 

 

416 

 

1,283 

 

758 

Time deposits $100 thousand and greater

 

155 

 

193 

 

503 

 

605 

Other time deposits

 

278 

 

339 

 

855 

 

1,059 

Securities sold under agreement to repurchase and other short-term debt

 

62 

 

83 

 

241 

 

817 

Long-term debt

 

201 

 

201 

 

598 

 

602 

Total interest expense

 

1,066 

 

1,232 

 

3,480 

 

3,841 

Net interest income

 

11,498 

 

12,152 

 

34,935 

 

36,710 

Provision for credit losses

 

 

400 

 

150 

 

800 

Net interest income after provision for credit losses

 

11,498 

 

11,752 

 

34,785 

 

35,910 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

Trust division income

 

856 

 

759 

 

2,537 

 

2,278 

Net debit card income

 

678 

 

720 

 

2,014 

 

2,114 

Overdraft income

 

639 

 

704 

 

1,919 

 

2,078 

Service charges on deposits

 

331 

 

291 

 

977 

 

894 

Net gains (losses) on investment securities

 

(37)

 

 

106 

 

(12)

Loss on sale of other assets

 

 

 

(35)

 

Other

 

409 

 

311 

 

1,217 

 

846 

Total noninterest income

 

2,876 

 

2,786 

 

8,735 

 

8,198 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

Compensation and benefits

 

5,145 

 

4,754 

 

14,906 

 

14,059 

Occupancy expense

 

1,064 

 

1,021 

 

3,296 

 

3,085 

Equipment expense

 

978 

 

889 

 

2,916 

 

2,768 

Legal and professional fees

 

681 

 

695 

 

2,012 

 

2,001 

Marketing

 

521 

 

393 

 

1,163 

 

1,158 

State franchise  taxes

 

340 

 

363 

 

1,096 

 

1,082 

FDIC insurance

 

218 

 

215 

 

651 

 

655 

Conversion costs

 

442 

 

 

830 

 

Other

 

1,336 

 

1,299 

 

4,104 

 

4,147 

Total noninterest expense

 

10,725 

 

9,629 

 

30,974 

 

28,955 

Income before provision for income taxes

 

3,649 

 

4,909 

 

12,546 

 

15,153 

Provision for income taxes

 

843 

 

1,235 

 

2,923 

 

3,845 

NET INCOME

$

2,806 

$

3,674 

$

9,623 

$

11,308 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

$

0.44 

$

0.58 

$

1.52 

$

1.80 

Diluted earnings per common share

$

0.44 

$

0.58 

$

1.52 

$

1.79 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

4

 

 


 

Merchants Bancshares, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

Nine Months Ended

 

September

September

(In thousands)

2014

2013

2014

2013

Net income

$

2,806 

$

3,674 

$

9,623 

$

11,308 

Other comprehensive income (loss),  net of tax:

 

 

 

 

 

 

 

 

Change in net unrealized gain (loss) on securities available for sale, net of taxes of $(317),  $1,453,  $594 and $(2,929)

 

(589)

 

2,698 

 

1,102 

 

(5,440)

Unrealized holding loss arising during the period for securities transferred from available for sale to held to maturity, net of taxes of $0,  $(1,701),  $4 and $(1,701)

 

 

(3,159)

 

 

(3,159)

Accretion of unrealized holding losses of securities transferred from available for sale to held to maturity, net of taxes of $68,  $70,  $189 and $70

 

127 

 

129 

 

351 

 

129 

Reclassification adjustments for net securities losses (gains) included in net income, net of taxes of $13,  $0,  $(37) and $4

 

24 

 

 

(69)

 

Change in net unrealized loss on interest rate swaps, net of taxes of $36,  $3,  $71 and $93

 

66 

 

 

131 

 

172 

Pension liability adjustment, net of taxes of $10,  $30,  $34 and $93

 

21 

 

57 

 

63 

 

173 

Other comprehensive income (loss)

 

(351)

 

(269)

 

1,586 

 

(8,117)

Comprehensive income (loss)

$

2,455 

$

3,405 

$

11,209 

$

3,191 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

5

 

 


 

Merchants Bancshares, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

(In thousands)

2014

2013

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net income

$

9,623 

$

11,308 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

Provision for loan losses

 

150 

 

800 

Depreciation and amortization

 

1,944 

 

1,526 

Amortization of investment security premiums and accretion of discounts, net

 

477 

 

974 

Stock based compensation

 

136 

 

141 

Net (gain) loss on sales of investment securities

 

(106)

 

12 

Accretion of deferred gain on sale of premises

 

(387)

 

(317)

Net gains on sale of premises, equipment and other assets

 

 -

 

82 

Loss on sale of other real estate owned

 

35 

 

 -

Equity in losses of real estate limited partnerships, net

 

981 

 

811 

Increase in cash surrender value of bank owned life insurance

 

(237)

 

 -

Changes in assets and liabilities:

 

 

 

 

Net change in interest receivable

 

673 

 

819 

Net change in other assets

 

4,118 

 

2,872 

Net change in interest payable

 

(43)

 

(18)

Net change in other liabilities

 

(1,722)

 

161 

Net cash provided by operating activities

 

15,642 

 

19,171 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Proceeds from sales of investment securities available for sale

 

56,889 

 

53,215 

Proceeds from maturities of investment securities available for sale

 

28,560 

 

87,877 

Proceeds from maturities of investment securities held to maturity

 

11,692 

 

4,073 

Proceeds from redemption of Federal Home Loan Bank stock

 

3,118 

 

649 

Purchases of investment securities available for sale

 

(30,190)

 

(55,774)

Loan originations less than (in excess of) principal payments

 

9,449 

 

(85,240)

Proceeds from sales of loans, net

 

 -

 

2,378 

Proceeds from sale of premises and equipment

 

 -

 

64 

Proceeds from sales of other real estate owned

 

68 

 

140 

Real estate limited partnership investments

 

(1,823)

 

(102)

Purchases of bank premises and equipment

 

(2,293)

 

(2,052)

Net cash provided by investing activities

 

75,470 

 

5,228 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

Net increase (decrease) in deposits

 

(19,495)

 

60,166 

Net increase in short-term borrowings

 

 -

 

8,200 

Net decrease in securities sold under agreement to repurchase, short-term

 

(62,157)

 

(108,030)

Principal payments on long-term debt

 

(62)

 

(60)

Cash dividends paid

 

(5,312)

 

(4,827)

Sale of treasury stock

 

 -

 

12 

Increase in deferred compensation arrangements

 

176 

 

186 

Repurchased restricted stock to pay taxes on vested awards

 

(82)

 

 -

Tax benefit from exercise of stock options

 

 

Net cash used in financing activities

 

(86,926)

 

(44,345)

Decrease in cash and cash equivalents

 

4,186 

 

(19,946)

Cash and cash equivalents beginning of period

 

115,471 

 

77,228 

Cash and cash equivalents end of period

$

119,657 

$

57,282 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

Total interest payments

$

3,523 

$

3,859 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

Distribution of stock under deferred compensation arrangements

$

553 

$

450 

Distribution of treasury stock in lieu of cash dividend under dividend reinvestment plan

 

 -

 

460 

Non-cash exercise of stock options

 

124 

 

181 

Transfer of loans to other real estate owned

 

 -

 

163 

Transfer of securities from available for sale to held to maturity

 

12,626 

 

144,428 

 

 

See accompanying notes to unaudited consolidated financial statements

6

 

 


 

 

 

Notes To Interim Unaudited Consolidated Financial Statements

For additional information, see the Merchants Bancshares, Inc. (“Merchants,” “we,” “us,” “our”) Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2014.

 

NOTE 1: FINANCIAL STATEMENT PRESENTATION

 

Principles of Consolidation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. All adjustments necessary for a fair presentation of our interim consolidated financial statements as of September 30, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and 2013 have been included. The information was prepared from our unaudited financial statements and the unaudited financial statements of our subsidiaries, Merchants Bank and MBVT Statutory Trust I.  Amounts reported for prior periods are reclassified, where necessary, to be consistent with the current period presentation. 

Management’s Use of Estimates in Preparation of Financial Statements 

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting periods. The most significant estimates include those used in determining the allowance for credit losses, income taxes, interest income recognition on loans and investments and analysis of other-than-temporary impairment of our investment securities portfolio. Operating results in the future may vary from the amounts derived from Management's estimates and assumptions.

 

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-01, “Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects.” The amendments in this ASU modify the conditions that a reporting entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments. If the modified conditions are met, the amendments permit an entity to amortize the initial cost of the investment in proportion to the amount of tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense (benefit). Additionally, the amendments introduce new recurring disclosures about all investments in qualified affordable housing projects irrespective of the method used to account for the investments.  The amendments in this ASU are effective for public entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014.  In the first quarter of 2014, we early adopted this ASU for the reporting of our equity investments in qualified affordable housing projects.  The investments are recorded using the proportional amortization method whereby an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit).  The application of this standard reduced total noninterest expense by $327 thousand and $981 thousand for the three and nine months ended September 30, 2014, respectively; and by $271 thousand and $811 thousand for the three and nine months ended September 30, 2013, respectively.  The application of the standard also increased our effective tax rate to 23% from 16% for the three months and 17% for the nine months ended September 30, 2014, and to 25% from 21% for the three and nine months ended September 30, 2013, respectively.  This ASU was applied retrospectively and prior periods have been reclassified accordingly.

 

In May 2014, FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The ASU provides guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2016. Early adoption is not permitted.  Management is currently evaluating the impact of the adoption of this guidance on our financial statements.

 

7

 

 


 

NOTE 3: INVESTMENT SECURITIES

 

Investments in securities are classified as available for sale or held to maturity as of September 30, 2014 and December 31, 2013. The amortized cost and fair values of the securities classified as available for sale and held to maturity as of September 30, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

(In thousands)

 

Cost

 

Gains

 

Losses

 

Value

Available for Sale:

 

 

 

 

 

 

 

 

U.S. Treasury Obligations

$

20,057 

$

-  

$

40 

$

20,017 

Residential Real Estate Mortgage-backed Securities ("Agency MBSs")

 

87,162 

 

2,584 

 

479 

 

89,267 

Agency Commercial Mortgage Backed Securities ("Agency CMBSs")

 

17,988 

 

-  

 

528 

 

17,460 

Agency Collateralized Mortgage Obligations ("Agency CMOs")

 

59,118 

 

190 

 

391 

 

58,917 

Asset Backed Securities ("ABSs")

 

353 

 

35 

 

-  

 

388 

Total Available for Sale

$

184,678 

$

2,809 

$

1,438 

$

186,049 

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

Unrecognized

 

Unrecognized

 

Fair

(In thousands)

 

Cost

 

Gains

 

Losses

 

Value

Held to Maturity:

 

 

 

 

 

 

 

 

U.S. Agency Obligations

$

22,259 

$

147 

$

27 

$

22,379 

U.S. Government Sponsored Enterprises ("U.S. GSEs")

 

9,483 

 

-  

 

148 

 

9,335 

Federal Home Loan Bank ("FHLB") Obligations

 

4,711 

 

 

-  

 

4,712 

Agency MBSs

 

8,347 

 

117 

 

-  

 

8,464 

Agency CMOs

 

97,310 

 

11 

 

1,800 

 

95,521 

Total Held to Maturity

$

142,110 

$

276 

$

1,975 

$

140,411 

 

The amortized cost and fair values of the securities classified as available for sale and held to maturity as of December 31, 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

(In thousands)

 

Cost

 

Gains

 

Losses

 

Value

Available for Sale:

 

 

 

 

 

 

 

 

U.S. Treasury Obligations

$

100 

$

-  

$

-  

$

100 

Agency MBSs

 

97,882 

 

2,876 

 

1,487 

 

99,271 

Agency CMBSs

 

18,398 

 

-  

 

760 

 

17,638 

Agency CMOs

 

98,162 

 

254 

 

1,207 

 

97,209 

CLOs

 

37,834 

 

73 

 

-  

 

37,907 

ABSs

 

357 

 

31 

 

-  

 

388 

Total Available for Sale

$

252,733 

$

3,234 

$

3,454 

$

252,513 

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

Unrecognized

 

Unrecognized

 

Fair

(In thousands)

 

Cost

 

Gains

 

Losses

 

Value

Held to Maturity:

 

 

 

 

 

 

 

 

U.S. Agency Obligations

$

23,580 

 

-  

$

458 

$

23,122 

U.S. GSEs

 

9,442 

 

-  

 

512 

 

8,930 

FHLB Obligations

 

4,684 

 

-  

 

191 

 

4,493 

Agency CMOs

 

94,105 

 

-  

 

2,426 

 

91,679 

Agency MBSs

 

9,015 

 

25 

 

177 

 

8,863 

Total Held to Maturity

$

140,826 

$

25 

$

3,764 

$

137,087 

 

8

 

 


 

The contractual final maturity distribution of the debt securities classified as available for sale as of September 30, 2014, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After One

 

After Five

 

 

 

 

 

 

Within

 

But Within

 

But Within

 

After Ten

 

 

(In thousands)

 

One Year

 

Five Years

 

Ten Years

 

Years

 

Total

Available for Sale (at fair value):

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Obligations

$

 -

$

20,017 

$

-  

$

-  

$

20,017 

Agency MBSs

 

61 

 

3,077 

 

17,472 

 

68,657 

 

89,267 

Agency CMBSs

 

-  

 

4,883 

 

8,359 

 

4,218 

 

17,460 

Agency CMOs

 

-  

 

-  

 

2,481 

 

56,436 

 

58,917 

ABSs

 

-  

 

-  

 

-  

 

388 

 

388 

Total Available for Sale

$

61 

$

27,977 

$

28,312 

$

129,699 

$

186,049 

Available for Sale (at amortized cost):

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Obligations

$

 -

$

20,057 

$

-  

$

-  

$

20,057 

Agency MBSs

 

58 

 

2,911 

 

16,693 

 

67,500 

 

87,162 

Agency CMBSs

 

-  

 

4,964 

 

8,618 

 

4,406 

 

17,988 

Agency CMOs

 

-  

 

-  

 

2,469 

 

56,649 

 

59,118 

ABSs

 

-  

 

-  

 

-  

 

353 

 

353 

Total Available for Sale

$

58 

$

27,932 

$

27,780 

$

128,908 

$

184,678 

 

The contractual final maturity distribution of the debt securities classified as held to maturity as of September 30, 2014, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After One

 

After Five

 

 

 

 

 

 

Within

 

But Within

 

But Within

 

After Ten

 

 

(In thousands)

 

One Year

 

Five Years

 

Ten Years

 

Years

 

Total

Held to Maturity (at fair value):

 

 

 

 

 

 

 

 

 

 

U.S. Agency Obligations

$

-  

$

-  

$

-  

$

22,379 

$

22,379 

U.S. GSEs

 

-  

 

-  

 

9,335 

 

-  

 

9,335 

FHLB Obligations

 

-  

 

-  

 

4,712 

 

-  

 

4,712 

Agency MBSs

 

-  

 

16 

 

115 

 

8,333 

 

8,464 

Agency CMOs

 

-  

 

-  

 

-  

 

95,521 

 

95,521 

Total Held to Maturity

$

-  

$

16 

$

14,162 

$

126,233 

$

140,411 

Held to Maturity (at amortized cost):

 

 

 

 

 

 

 

 

 

 

U.S. Agency Obligations

$

-  

$

-  

$

-  

$

22,259 

$

22,259 

U.S. GSEs

 

-  

 

-  

 

9,483 

 

-  

 

9,483 

FHLB Obligations

 

-  

 

-  

 

4,711 

 

-  

 

4,711 

Agency MBSs

 

-  

 

16 

 

101 

 

8,230 

 

8,347 

Agency CMOs

 

-  

 

-  

 

-  

 

97,310 

 

97,310 

Total Held to Maturity

$

-  

$

16 

$

14,295 

$

127,799 

$

142,110 

 

Actual maturities will differ from contractual maturities because borrowers may have rights to call or prepay obligations. Maturities of Agency MBSs and Agency CMOs in the tables above are based on final contractual maturities.

 

9

 

 


 

The following table presents the proceeds, gross gains and gross losses on available for sale securities for the three and nine months ended September 30, 2014 and 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

 

2014

 

2013

 

2014

 

2013

Proceeds

$

11,674 

$

2,001 

$

56,889 

$

53,215 

Gross gains

 

 -

 

 

302 

 

548 

Gross losses

 

(37)

 

 -

 

(196)

 

(560)

Net gains

$

(37)

$

$

106 

$

(12)

 

Securities with a carrying amount of $254.67 million and $315.53 million at September 30, 2014 and December 31, 2013, respectively, were pledged to secure U.S. Treasury borrowings, public deposits, securities sold under agreements to repurchase, and for other purposes required by law.

 

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at September 30, 2014, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

 

Fair

 

 

 

Fair

 

 

 

Fair

 

 

(In thousands)

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Obligations

$

20,017 

$

40 

$

 -

$

 -

$

20,017 

$

40 

Agency MBSs

 

9,532 

 

48 

 

27,847 

 

431 

 

37,379 

 

479 

Agency CMBSs

 

-  

 

-  

 

17,460 

 

528 

 

17,460 

 

528 

Agency CMOs

 

20,912 

 

98 

 

11,374 

 

293 

 

32,286 

 

391 

Total Available for Sale

$

50,461 

$

186 

$

56,681 

$

1,252 

$

107,142 

$

1,438 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency Obligations

$

8,817 

$

27 

$

-  

$

-  

$

8,817 

$

27 

U.S. GSEs

 

-  

 

-  

 

9,335 

 

148 

 

9,335 

 

148 

Agency CMOs

 

50,726 

 

834 

 

36,534 

 

966 

 

87,260 

 

1,800 

Total Held to Maturity

$

59,543 

$

861 

$

45,869 

$

1,114 

$

105,412 

$

1,975 

 

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position over our entire holding period, at December 31, 2013, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

 

Fair

 

 

 

Fair

 

 

 

Fair

 

 

(In thousands)

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

Agency MBSs

$

46,547 

$

1,487 

$

-  

$

-  

$

46,547 

$

1,487 

Agency CMBSs

 

12,778 

 

578 

 

4,860 

 

182 

 

17,638 

 

760 

Agency CMOs

 

57,904 

 

977 

 

3,557 

 

230 

 

61,461 

 

1,207 

Total Available for Sale

$

117,229 

$

3,042 

$

8,417 

$

412 

$

125,646 

$

3,454 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency Obligations

$

13,722 

$

307 

$

9,400 

$

151 

$

23,122 

$

458 

U.S. GSEs

 

8,930 

 

512 

 

-  

 

-  

 

8,930 

 

512 

FHLB Obligations

 

4,493 

 

191 

 

-  

 

-  

 

4,493 

 

191 

Agency CMOs

 

66,203 

 

1,410 

 

25,476 

 

1,016 

 

91,679 

 

2,426 

Agency MBSs

 

8,569 

 

177 

 

-  

 

-  

 

8,569 

 

177 

Total Held to Maturity

$

101,917 

$

2,597 

$

34,876 

$

1,167 

$

136,793 

$

3,764 

 

There were no securities classified as trading at September 30, 2014 and December 31, 2013.

 

 

10

 

 


 

Unrealized losses on investment securities result from the cost basis of the security being higher than its current fair value. These discrepancies generally occur because of changes in interest rates since the time of purchase, or because the credit quality of the issuer has deteriorated. We perform a quarterly analysis of each security in our portfolio to determine if impairment exists, and if it does, whether that impairment is other-than-temporary.

 

At September 30, 2014, all of our Agency MBSs and Agency CMOs held were issued by U.S. government-sponsored entities and agencies, primarily the Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corp (“FHLMC”), institutions which the government has affirmed its commitment to support.  Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because we do not have the intent to sell these securities and it is not likely that we will be required to sell the securities before their anticipated recovery, we do not consider these securities to be other-than-temporarily impaired at September 30, 2014.

 

During the second and third quarters of 2014, we sold all of our CLOs.  We sold a total of $35.75 million for a small loss during the nine months ended September 30, 2014.  Under the Volker Rule, we may have been required to divest our CLOs by July 2017.

 

We use external pricing services to obtain fair market values for our investment portfolio.   We have obtained and reviewed the service providers’ pricing and reference data documentation. Evaluations are based on market data and vary by asset class and incorporate available trade, bid and other market information.  Because many fixed income securities do not trade on a daily basis, the service provider’s evaluated pricing applications apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations.  In addition, model processes, such as the Option Adjusted Spread model are used to assess interest rate impact and develop prepayment scenarios, with inputs determined based on knowledge of the market.  We periodically test the values provided to us by the pricing service by obtaining prices on all bonds from an alternative pricing source.

   

We do not intend to sell the investment securities that are in an unrealized loss position, and it is unlikely that we will be required to sell the investment securities before recovery of their amortized cost bases, which may be maturity.  During 2013 and the first quarter of 2014, we transferred securities from available for sale to held to maturity.  The unrealized holding loss at the time of transfer continues to be reported in accumulated other comprehensive income, net of tax and is amortized over the remaining lives of the securities as an adjustment of the yield.  The amortization of the unamortized holding loss reported in accumulated other comprehensive income will offset the effect on interest income of the discount for the transferred securities.  The remaining unamortized balance of the losses for the securities transferred from available for sale to held to maturity during 2013 and 2014 was $4.52 million, or $2.94 million, net of tax, at September 30, 2014.  

 

NOTE 4: LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

 

The composition of our loan portfolio at September 30, 2014 and December 31, 2013 was as follows:

 

 

 

 

 

 

 

(In thousands)

 

September 30, 2014

 

December 31, 2013

Commercial, financial and agricultural

$

183,069 

$

172,810 

Municipal loans

 

96,258 

 

94,007 

Real estate loans – residential

 

472,986 

 

489,706 

Real estate loans – commercial

 

381,301 

 

371,319 

Real estate loans – construction

 

17,970 

 

31,841 

Installment loans

 

4,793 

 

5,655 

All other loans

 

286 

 

895 

Total loans

$

1,156,663 

$

1,166,233 

 

We primarily originate residential real estate, commercial, commercial real estate, municipal obligations and installment loans to customers throughout the state of Vermont. There are no significant industry concentrations in the loan portfolio. Total loans in the table above included $646 thousand and $618 thousand of net deferred loan origination costs at September 30, 2014 and December 31, 2013, respectively. The aggregate amount of overdrawn deposit balances classified as loan balances was $286 thousand and $895 thousand at September 30, 2014 and December 31, 2013, respectively. 

 

11

 

 


 

The following table reflects our loan loss experience and activity in the allowance for credit losses by portfolio segment for the three months ended September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

financial and

 

 

Real estate-

Real estate-

Real estate-

 

 

 

 

 

 

(In thousands)

agricultural

Municipal

residential

commercial

construction

Installment

All Other

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

3,656 

$

386 

$

3,246 

$

5,089 

$

494 

$

18 

$

17 

$

12,906 

Charge-offs

 

 -

 

 -

 

(7)

 

 -

 

 -

 

 -

 

(48)

 

(55)

Recoveries

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 

Provision (credit)

 

(253)

 

316 

 

42 

 

(45)

 

(94)

 

(2)

 

36 

 

 -

Ending balance

$

3,403 

$

702 

$

3,281 

$

5,044 

$

400 

$

16 

$

12 

$

12,858 

 

The following table reflects our loan loss experience and activity in the allowance for credit losses by portfolio segment for the nine months ended September 30, 2014: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

financial and

 

 

Real estate-

Real estate-

Real estate-

 

 

 

 

 

 

(In thousands)

agricultural

Municipal

residential

commercial

construction

Installment

All Other

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

3,354 

 

768 

 

3,081 

 

5,085 

 

512 

 

18 

 

10 

$

12,828 

Charge-offs

 

(34)

 

-  

 

(25)

 

-  

 

-  

 

-  

 

(99)

 

(158)

Recoveries

 

 

-  

 

20 

 

-  

 

-  

 

 

14 

 

38 

Provision (credit)

 

80 

 

(66)

 

205 

 

(41)

 

(112)

 

(3)

 

87 

 

150 

Ending balance

$

3,403 

$

702 

$

3,281 

$

5,044 

$

400 

$

16 

$

12 

$

12,858 

 

 

The following table reflects our loan loss experience and activity in the allowance for credit losses by portfolio segment for the three months ended September 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

financial and

 

 

Real estate-

Real estate-

Real estate-

 

 

 

 

 

 

(In thousands)

agricultural

Municipal

residential

commercial

construction

Installment

All Other

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

3,274 

$

400 

$

3,385 

$

5,018 

$

551 

$

21 

$

$

12,658 

Charge-offs

 

 -

 

 -

 

(49)

 

 -

 

 -

 

(9)

 

(27)

 

(85)

Recoveries

 

13 

 

 -

 

 -

 

 -

 

 

 -

 

 

18 

Provision (credit)

 

137 

 

346 

 

(192)

 

100 

 

(19)

 

 

22 

 

400 

Ending balance

$

3,424 

$

746 

$

3,144 

$

5,118 

$

533 

$

18 

$

$

12,991 

 

12

 

 


 

The following table reflects our loan loss experience and activity in the allowance for credit losses by portfolio segment for the nine months ended September 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

financial and

 

 

Real estate-

Real estate-

Real estate-

 

 

 

 

 

 

(In thousands)

agricultural

Municipal

residential

commercial

construction

Installment

All Other

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

3,447 

 

522 

 

3,421 

 

4,660 

 

234 

 

17 

 

11 

$

12,312 

Charge-offs

 

-  

 

-  

 

(152)

 

(1)

 

-  

 

(9)

 

(75)

 

(237)

Recoveries

 

62 

 

-  

 

 

40 

 

 

-  

 

 

116 

Provision (credit)

 

(85)

 

224 

 

(129)

 

419 

 

297 

 

10 

 

64 

 

800 

Ending balance

$

3,424 

$

746 

$

3,144 

$

5,118 

$

533 

$

18 

$

$

12,991 

 

 

The allowance for credit losses consists of the allowance for loan losses and the reserve for undisbursed lines of credit. The reserve for undisbursed lines of credit is included in other liabilities on the balance sheet. The following presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based upon impairment method at September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

financial and

 

 

Real estate-

Real estate-

Real estate-

 

 

All  

 

 

(In thousands)

agricultural

Municipal

residential

commercial

construction

Installment

Other

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance individually
evaluated for impairment

$

-  

$

-  

$

34 

$

66 

$

-  

$

-  

$

-  

$

100 

Ending balance collectively
evaluated for impairment

 

3,403 

 

702 

 

3,247 

 

4,978 

 

400 

 

16 

 

12 

 

12,758 

Totals

$

3,403 

$

702 

$

3,281 

$

5,044 

$

400 

$

16 

$

12 

$

12,858 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance individually
evaluated for impairment

$

64 

$

-  

$

514 

$

154 

$

-  

$

-  

$

-  

$

732 

Ending balance collectively
evaluated for impairment

 

183,005 

 

96,258 

 

472,472 

 

381,147 

 

17,970 

 

4,793 

 

286 

 

1,155,931 

Totals

$

183,069 

$

96,258 

$

472,986 

$

381,301 

$

17,970 

$

4,793 

$

286 

$

1,156,663 

Components:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

$

2,798 

$

688 

$

3,195 

$

5,005 

$

305 

$

16 

$

12 

$

12,019 

Reserve for undisbursed
lines of credit

 

605 

 

14 

 

86 

 

39 

 

95 

 

-  

 

-  

 

839 

Total allowance for
credit losses

$

3,403 

$

702 

$

3,281 

$

5,044 

$

400 

$

16 

$

12 

$

12,858 

 

13

 

 


 

The following presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based upon impairment method at December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

financial and

 

 

Real estate-

Real estate-

Real estate-

 

 

All  

 

 

(In thousands)

agricultural

Municipal

residential

commercial

construction

Installment

Other

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance individually
evaluated for impairment

$

$

-  

$

41 

$

69 

$

-  

$

-  

$

-  

$

112 

Ending balance collectively
evaluated for impairment

 

3,352 

 

768 

 

3,040 

 

5,016 

 

512 

 

18 

 

10 

 

12,716 

Totals

$

3,354 

$

768 

$

3,081 

$

5,085 

$

512 

$

18 

$

10 

$

12,828 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance individually
evaluated for impairment

$

20 

$

-  

$

722 

$

164 

$

-  

$

-  

$

-  

$

906 

Ending balance collectively
evaluated for impairment

 

172,790 

 

94,007 

 

488,984 

 

371,155 

 

31,841 

 

5,655 

 

895 

 

1,165,327 

Totals

$

172,810 

$

94,007 

$

489,706 

$

371,319 

$

31,841 

$

5,655 

$

895 

$

1,166,233 

Components:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

$

2,740 

$

758 

$

2,995 

$

5,040 

 

481 

$

18 

$

10 

$

12,042 

Reserve for undisbursed
lines of credit

 

614 

 

10 

 

86 

 

45 

 

31 

 

-  

 

-  

 

786 

Total allowance for
credit losses

$

3,354 

$

768 

$

3,081 

$

5,085 

$

512 

$

18 

$

10 

$

12,828 

 

The table below presents the recorded investment of loans, including nonaccrual and restructured loans, segregated by class, with delinquency aging as of September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater

 

30-59

60-89

90 Days

 

 

 

 

 

 

Than 90

 

Days

Days

or More

Total Past

 

 

 

 

Days and

(In thousands)

Past Due

Past Due

Past Due

Due

Current

Total

Accruing

Commercial, financial and agricultural

$

43 

$

95 

$

-  

$

138 

$

182,931 

$

183,069 

$

-  

Municipal

 

-  

 

-  

 

-  

 

-  

 

96,258 

 

96,258 

 

-  

Real estate-residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage

 

-  

 

 

176 

 

185 

 

434,722 

 

434,907 

 

-  

Second mortgage

 

28 

 

-  

 

79 

 

107 

 

37,972 

 

38,079 

 

-  

Real estate-commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

-  

 

-  

 

-  

 

-  

 

241,480 

 

241,480 

 

-  

Non-owner occupied

 

-  

 

-  

 

-  

 

-  

 

139,821 

 

139,821 

 

-  

Real estate-construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

-  

 

-  

 

-  

 

-  

 

3,374 

 

3,374 

 

-  

Commercial

 

-  

 

-  

 

-  

 

-  

 

14,596 

 

14,596 

 

-  

Installment

 

-  

 

-  

 

-  

 

-  

 

4,793 

 

4,793 

 

-  

All other loans

 

-  

 

-  

 

-  

 

-  

 

286 

 

286 

 

-  

Total

$

71 

$

104 

$

255 

$

430 

$

1,156,233 

$

1,156,663 

$

-  

 

Of the total past due loans in the aging table above, $255 thousand are non-performing, none of which are restructured or greater than 90 days past due and accruing.  There were $175 thousand past due performing loans at September 30, 2014.

 

14

 

 


 

The table below presents the recorded investment of loans, including nonaccrual and restructured loans, segregated by class, with delinquency aging as of December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater

 

30-59

60-89

90 Days

 

 

 

 

 

 

Than 90

 

Days

Days

or More

Total Past

 

 

 

 

Days and

(In thousands)

Past Due

Past Due

Past Due

Due

Current

Total

Accruing

Commercial, financial and agricultural

$

-  

$

-  

$

20 

$

20 

$

172,790 

$

172,810 

$

-  

Municipal

 

-  

 

-  

 

-  

 

-  

 

94,007 

 

94,007 

 

-  

Real estate-residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage

 

 

294 

 

341 

 

639 

 

452,440 

 

453,079 

 

-  

Second mortgage

 

-  

 

 

181 

 

185 

 

36,442 

 

36,627 

 

75 

Real estate-commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

-  

 

-  

 

-  

 

-  

 

224,416 

 

224,416 

 

-  

Non-owner occupied

 

72 

 

-  

 

-  

 

72 

 

146,831 

 

146,903 

 

-  

Real estate-construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

-  

 

-  

 

-  

 

-  

 

2,495 

 

2,495 

 

-  

Commercial

 

-  

 

-  

 

-  

 

-  

 

29,346 

 

29,346 

 

-  

Installment

 

-  

 

-  

 

-  

 

-  

 

5,655 

 

5,655 

 

-  

All other loans

 

-  

 

-  

 

-  

 

-  

 

895 

 

895 

 

-  

Total

$

76 

$

298 

$

542 

$

916 

$

1,165,317 

$

1,166,233 

$

75 

 

Of the total past due loans in the aging table above, $542 thousand are non-performing, of which $42 thousand are restructured loans and $75 thousand are greater than 90 days past due and accruing.  There were $374 thousand past due performing loans at December 31, 2013.

 

Impaired loans by class at September 30, 2014 and for the three and nine months ended September 30, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

Nine Months Ended

 

 

 

 

 

 

 

September 30, 2014

September 30, 2014

 

 

 

Unpaid

 

 

Average

Interest

Average

Interest

 

Recorded

Principal

Related

Recorded

Income

Recorded

Income

(In thousands)

Investment

Balance

Allowance

Investment

Recognized

Investment

Recognized

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

$

64 

$

65 

$

-  

$

66 

$

$

65 

$

Real estate – residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage

 

280 

 

418 

 

-  

 

283 

 

 

284 

 

Second mortgage

 

78 

 

78 

 

-  

 

131 

 

-  

 

156 

 

Real estate – commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

-  

 

-  

 

-  

 

-  

 

-  

 

17 

 

With related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

-  

 

-  

 

-  

 

-  

 

-  

 

16 

 

-  

Real estate – residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage

 

155 

 

155 

 

34 

 

190 

 

-  

 

189 

 

-  

Real estate – commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

155 

 

173 

 

66 

 

156 

 

-  

 

159 

 

-  

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

64 

 

65 

 

-  

 

66 

 

 

81 

 

Real estate – residential

 

513 

 

651 

 

34 

 

604 

 

 

629 

 

Real estate – commercial

 

155 

 

173 

 

66 

 

156 

 

-  

 

176 

 

Total

$

732 

$

889 

$

100 

$

826 

$

$

886 

$

11 

 

15

 

 


 

Impaired loans by class at December 31, 2013 and for the three and nine months ended September 30, 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

Nine Months Ended

 

 

 

 

 

 

 

September 30, 2013

September 30, 2013

 

 

 

Unpaid

 

 

Average

Interest

Average

Interest

 

Recorded

Principal

Related

Recorded

Income

Recorded

Income

(In thousands)

Investment

Balance

Allowance

Investment

Recognized

Investment

Recognized

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

$

-  

$

-  

$

-  

$

272 

$

15 

$

223 

$

42 

Real estate – residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage

 

410 

 

629 

 

-  

 

463 

 

24 

 

622 

 

68 

Second mortgage

 

181 

 

218 

 

-  

 

188 

 

 

133 

 

Real estate – commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

-  

 

-  

 

-  

 

107 

 

-  

 

83 

 

15 

Installment

 

-  

 

-  

 

-  

 

-  

 

-  

 

 

-  

With related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

20 

 

21 

 

 

333 

 

-  

 

342 

 

-  

Real estate – residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage

 

131 

 

135 

 

41 

 

399 

 

-  

 

523 

 

-  

Second mortgage

 

-  

 

-  

 

-  

 

18 

 

-  

 

317 

 

-  

Real estate – commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

164 

 

175 

 

69 

 

168 

 

-  

 

171 

 

-  

Installment

 

-  

 

-  

 

-  

 

 

-  

 

 

-  

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

20 

 

21 

 

 

605 

 

15 

 

565 

 

42 

Real estate – residential

 

722 

 

982 

 

41 

 

1,068 

 

25 

 

1,595 

 

70 

Real estate – commercial

 

164 

 

175 

 

69 

 

275 

 

-  

 

254 

 

15 

Installment

 

-  

 

-  

 

-  

 

 

-  

 

 

-  

Total

$

906 

$

1,178 

$

112 

$

1,954 

$

40 

$

2,421 

$

127 

 

Residential and commercial loans serviced for others at September 30, 2014 and December 31, 2013 amounted to approximately $13.33 million and $13.83 million, respectively. 

 

 

Nonperforming loans at September 30, 2014 and December 31, 2013 are as follows:

 

 

 

 

 

 

(In thousands)

 

September 30, 2014

 

December 31, 2013

Nonaccrual  loans

$

308 

$

425 

Loans greater than 90 days and accruing

 

 -

 

75 

Troubled debt restructurings ("TDRs")

 

424 

 

406 

Total nonperforming loans

$

732 

$

906 

 

Of the total TDRs in the table above, $222 thousand at September 30, 2014 and $235 thousand at December 31, 2013, are nonaccruing. We have reviewed all restructurings that occurred on or after January 1, 2014 for identification as TDRs. There were four TDRs that were restructured during 2014. We did not identify as a TDR any loan for which the allowance for credit losses had been measured under a general allowance for credit losses methodology.

 

TDRs represent balances where the existing loan was modified involving a concession in rate, term or payment amount due to the distressed financial condition of the borrower. All TDRs at September 30, 2014 continue to pay as agreed according to the modified terms and all but one of these loans are considered well-secured.  At September 30, 2014, there were no commitments to lend additional funds to borrowers whose loans have been modified in a TDR. We had no commitments to lend additional funds to borrowers whose loans were in nonaccrual status or to borrowers whose loans were 90 days past due and still accruing at September 30, 2014. Interest income on restructured loans during the three and nine months ended September 30, 2014 and 2013 was insignificant.

16

 

 


 

Nonaccrual loans by class as of September 30, 2014 and December 31, 2013 are as follows:

 

 

 

 

 

 

(In thousands)

 

September 30, 2014

 

December 31, 2013

Commercial, financial and agricultural

$

11 

$

20 

Real estate - residential:

 

 

 

 

First mortgage

 

218 

 

299 

Second mortgage

 

79 

 

106 

Total nonaccruing non-TDR loans

 

308 

 

425 

Nonaccruing TDR’s

 

 

 

 

Commercial, financial and agricultural

 

 

 -

Real estate – residential:

 

 

 

 

First mortgage

 

62 

 

71 

Real estate - commercial:

 

 

 

 

Owner occupied

 

155 

 

164 

Total nonaccrual loans including TDRs

$

530 

$

660 

 

Commercial Grading System

We use risk rating definitions for our commercial loan portfolios and certain residential loans which are generally consistent with regulatory and banking industry norms. Loans are assigned a credit quality grade which is based upon management’s on going assessment of risk based upon an evaluation of the quantitative and qualitative aspects of each credit. This assessment is a dynamic process and risk ratings are adjusted as each borrower’s financial situation changes. This process is designed to provide timely recognition of a borrower’s financial condition and appropriately focus management resources.

 

Pass rated loans exhibit acceptable risk to the bank in terms of financial capacity to repay the loan as well as possessing acceptable fallback repayment sources, typically collateral and personal guarantees. Pass rated commercial loan relationships with a total exposure of $1 million or greater are subject to a formal annual review process; additionally, management reviews the risk rating at the time of any late payments, overdrafts or other sign of deterioration in the interim.

 

Loans rated Pass-Watch require more than usual attention and monitoring by the account officer, though not to the extent that a formal remediation plan is warranted. Borrowers can be rated Pass-Watch based upon a weakened capital structure, marginally adequate cash flow and/or collateral coverage or early-stage declining trends in operations or financial condition.

 

Loans rated Special Mention possess potential weakness that may expose the bank to some risk of loss in the future. These loans require more frequent monitoring and formal reporting to Management.

 

Substandard loans reflect well-defined weaknesses in the current repayment capacity, collateral or net worth of the borrower with the possibility of some loss to the bank if these weaknesses are not corrected. Action plans are required for these loans to address the inherent weakness in the credit and are formally reviewed.

 

Residential Real Estate and Consumer Loans

We do not use a grading system for our performing residential real estate and consumer loans. Credit quality for these loans is based on performance and payment status.

 

17

 

 


 

Below is a summary of loans by credit quality indicator as of September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass-

 

Special

 

Sub-

 

 

(In thousands)

 

Unrated

 

Pass

 

Watch

 

Mention

 

Standard

 

Total

Commercial, financial and agricultural

$

247 

$

153,403 

$

10,772 

$

13,043 

$

5,604 

$

183,069 

Municipal

 

55 

 

73,502 

 

20,804 

 

1,897 

 

 -

 

96,258 

Real estate – residential:

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage

 

431,494 

 

3,004 

 

172 

 

 -

 

237 

 

434,907 

Second mortgage

 

38,079 

 

 -

 

 -

 

 -

 

 -

 

38,079 

Real estate – commercial:

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

166 

 

200,491 

 

20,668 

 

4,308 

 

15,847 

 

241,480 

Non-owner occupied

 

130 

 

119,757 

 

18,095 

 

258 

 

1,581 

 

139,821 

Real estate – construction:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

149 

 

2,022 

 

1,203 

 

 -

 

 -

 

3,374 

Commercial

 

190 

 

11,999 

 

444 

 

 -

 

1,963 

 

14,596 

Installment

 

4,756 

 

37 

 

 -

 

 -

 

 -

 

4,793 

All other loans

 

286 

 

 -

 

 -

 

 -

 

 -

 

286 

Total

$

475,552 

$

564,215 

$

72,158 

$

19,506 

$

25,232 

$

1,156,663 

 

Below is a summary of loans by credit quality indicator as of December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass-

 

Special

 

Sub-

 

 

(In thousands)

 

Unrated

 

Pass

 

Watch

 

Mention

 

Standard

 

Total

Commercial, financial and agricultural

$

242 

$

152,466 

$

14,092 

$

96 

$

5,914 

$

172,810 

Municipal

 

28 

 

65,474 

 

26,548 

 

1,957 

 

 -

 

94,007 

Real estate – residential:

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage

 

449,951 

 

2,520 

 

 -

 

65 

 

543 

 

453,079 

Second mortgage

 

36,599 

 

 -

 

 -

 

 -

 

28 

 

36,627 

Real estate – commercial:

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

165 

 

187,779 

 

17,236 

 

2,342 

 

16,894 

 

224,416 

Non-owner occupied

 

171 

 

134,222 

 

9,841 

 

270 

 

2,399 

 

146,903 

Real estate – construction:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

904 

 

1,591 

 

 -

 

 -

 

 -

 

2,495 

Commercial

 

738 

 

28,127 

 

481 

 

 -

 

 -

 

29,346 

Installment

 

5,655 

 

 -

 

 -

 

 -

 

 -

 

5,655 

All other loans

 

895 

 

 -

 

 -

 

 -

 

 -

 

895 

Total

$

495,348 

$

572,179 

$

68,198 

$

4,730 

$

25,778 

$

1,166,233 

 

The amount of interest which was not earned, but which would have been earned had our nonaccrual and restructured loans performed in accordance with their original terms and conditions, was approximately $11 thousand and $32 thousand for the three months ended September 30, 2014 and 2013, respectively; and $29 thousand and $108 thousand for the nine months ended September 30, 2014 and 2013, respectively.

 

It is our policy to make loans to directors, executive officers, and associates of such persons on substantially the same terms, including interest rates and collateral, as those prevailing for comparable lending transactions with other persons.

18

 

 


 

 

NOTE 5: FAIR VALUE OF FINANCIAL INSTRUMENTS

 

We record certain assets and liabilities at fair value.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value measurements are also utilized to determine the initial value of certain assets and liabilities, to perform impairment assessments, and for disclosure purposes. We use quoted market prices and observable inputs to the maximum extent possible when measuring fair value.  In the absence of quoted market prices, various valuation techniques are utilized to measure fair value.  When possible, observable market data for identical or similar financial instruments are used in the valuation.  When market data is not available, fair value is determined using valuation models that incorporate Management’s estimates of the assumptions a market participant would use in pricing the asset or liability.

 

Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While Management believes our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.  A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

 

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

 

Ø

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

Ø

Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

 

Ø

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. We do not adjust the quoted price for such instruments.

 

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds; less liquid mortgage products, agency securities, listed equities, state, municipal and provincial obligations; and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy.

 

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions; valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, Management’s best estimate will be used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Subsequent to inception, Management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

 

19

 

 


 

Financial instruments on a recurring basis

The table below presents the balance of financial assets and liabilities at September 30, 2014 measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

Quoted Prices in 

 

Significant

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

 

Assets

 

Inputs

 

Inputs

(In thousands)

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets

 

 

 

 

 

 

 

 

U.S. Treasury Obligations

$

20,017 

$

-  

$

20,017 

$

-  

Agency MBSs

 

89,267 

 

-  

 

89,267 

 

-  

Agency CMBSs

 

17,460 

 

-  

 

17,460 

 

-  

Agency CMOs

 

58,917 

 

-  

 

58,917 

 

-  

ABSs

 

388 

 

-  

 

388 

 

-  

Interest rate swap agreements

 

381 

 

-  

 

381 

 

-  

    Total assets

$

186,430 

$

-  

$

186,430 

$

-  

Liabilities

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

906 

 

-  

 

906 

 

-  

    Total liabilities

$

906 

$

-  

$

906 

$

-  

 

The table below presents the balance of financial assets and liabilities at December 31, 2013 measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

Quoted Prices in 

 

Significant

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

 

Assets

 

Inputs

 

Inputs

(In thousands)

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets

 

 

 

 

 

 

 

 

U.S. Treasury Obligations

$

100 

$

-  

$

100 

$

-  

Agency MBSs

 

99,271 

 

-  

 

99,271 

 

-  

Agency CMBSs

 

17,638 

 

-  

 

17,638 

 

-  

Agency CMOs

 

97,209 

 

-  

 

97,209 

 

-  

CLOs

 

37,907 

 

-  

 

37,907 

 

-  

ABSs

 

388 

 

-  

 

388 

 

-  

Interest rate swap agreements

 

803 

 

-  

 

803 

 

-  

Total assets

$

253,316 

$

-  

$

253,316 

$

-  

Liabilities

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

1,529 

 

-  

 

1,529 

 

-  

Total liabilities

$

1,529 

$

-  

$

1,529 

$

-  

 

Investment securities are reported at fair value utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service or dealer market participant with whom we have historically transacted both purchases and sales of investment securities. Prices obtained from these sources include market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.  More information regarding our investment securities can be found in Note 3 to these consolidated financial statements.

20

 

 


 

 

The interest rate swaps are reported at their fair value utilizing Level 2 inputs from third parties. The fair value of our interest rate swaps are determined using prices obtained from a third party advisor.  The fair value measurement of the interest rate swap is determined by netting the discounted future fixed cash payments and the discounted expected variable cash receipts.  The variable cash receipts are based on the expectation of future interest rates derived from observed market interest rate curves.

 

There were no transfers between Level 1 and Level 2 for the three and nine months ended September 30, 2014.  There were no Level 3 assets measured at fair value on a recurring basis during the three and nine months ended September 30, 2014.

 

Financial instruments on a non-recurring basis

Certain financial assets are also measured at fair value on a non-recurring basis; however, they were not material at September 30, 2014 or December 31, 2013. These financial assets include impaired loans and OREO.

 

The table below presents the balance of financial instruments by class at September 30, 2014 measured at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

 

 

 

 

 

 

(In thousands)

 

Amount

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

Cash and cash equivalents

$

119,657 

$

119,657 

$

119,657 

$

-  

$

-  

Securities available for sale

 

186,049 

 

186,049 

 

-  

 

186,049 

 

-  

Securities held to maturity

 

142,110 

 

140,411 

 

-  

 

140,411 

 

-  

FHLB stock

 

4,378 

 

N/A

 

N/A

 

N/A

 

N/A

Loans, net of allowance for loan losses

 

1,144,644 

 

1,143,582 

 

-  

 

-  

 

1,143,582 

Interest rate contract-cash flow hedge

 

381 

 

381 

 

-  

 

381 

 

-  

Accrued interest receivable

 

3,309 

 

3,309 

 

-  

 

806 

 

2,503 

Total assets

$

1,600,528 

$

1,593,389 

$

119,657 

$

327,647 

$

1,146,085 

 

 

 

 

 

 

 

 

 

 

 

Deposits

$

1,304,081 

$

1,304,361 

$

1,070,105 

$

234,256 

$

-  

Securities sold under agreement to repurchase

 

188,157 

 

188,140 

 

-  

 

188,140 

 

-  

Other long-term debt

 

2,341 

 

2,275 

 

-  

 

2,275 

 

-  

Junior subordinated debentures issued to unconsolidated subsidiary trust

 

20,619 

 

14,259 

 

-  

 

14,259 

 

-  

Interest rate contract-cash flow hedge

 

906 

 

906 

 

-  

 

906 

 

-  

Accrued interest payable

 

171 

 

171 

 

15 

 

156 

 

-  

Total liabilities

$

1,516,275 

$

1,510,112 

$

1,070,120 

$

439,992 

$

-  

 

The table below presents the balance of financial instruments by class at December 31, 2013 measured at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

 

 

 

 

 

 

(In thousands)

 

Amount

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

Cash and cash equivalents

$

115,471 

$

115,471 

$

115,471 

$

-  

$

-  

Securities available for sale

 

252,513 

 

252,513 

 

-  

 

252,513 

 

-  

Securities held to maturity

 

140,826 

 

137,087 

 

-  

 

137,087 

 

-  

FHLB stock

 

7,496 

 

N/A

 

N/A

 

N/A

 

N/A

Loans, net of allowance for loan losses

 

1,154,191 

 

1,155,348 

 

-  

 

-  

 

1,155,348 

Interest rate swap agreement

 

803 

 

803 

 

-  

 

803 

 

-  

Accrued interest receivable

 

3,982 

 

3,982 

 

-  

 

958 

 

3,024 

Total assets

$

1,675,282 

$

1,665,204 

$

115,471 

$

391,361 

$

1,158,372 

 

 

 

 

 

 

 

 

 

 

 

Deposits

$

1,323,576 

$

1,324,634 

$

1,018,470 

$

306,162 

$

-  

Securities sold under agreement to repurchase

 

250,314 

 

250,290 

 

-  

 

250,290 

 

-  

Other long-term debt

 

2,403 

 

2,287 

 

-  

 

2,287 

 

-  

Junior subordinated debentures issued to unconsolidated subsidiary trust

 

20,619 

 

14,189 

 

-  

 

14,189 

 

-  

Interest rate swap agreement

 

1,529 

 

1,529 

 

-  

 

1,529 

 

-  

Accrued interest payable

 

214 

 

214 

 

15 

 

199 

 

-  

Total liabilities

$

1,598,655 

$

1,593,143 

$

1,018,485 

$

574,656 

$

-  

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accrued interest receivable and

21

 

 


 

accrued interest payable approximate fair value. It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

 

The methodologies for other financial assets and financial liabilities are discussed below.

 

Loans - The fair value for loans is estimated using discounted cash flow analyses, using interest rates and spreads currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously.  The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

   

Deposits - The fair value of deposits with no stated maturity, which includes demand, savings, interest bearing checking and money market accounts, is equal to the amount payable on demand resulting in a Level 1 classification. The fair value of variable rate, fixed term certificates of deposit also approximates the carrying amount reported in the consolidated balance sheets. The fair value of fixed rate and fixed term certificates of deposit is estimated using a discounted cash flow method which applies interest rates currently being offered for deposits of similar remaining maturities resulting in a Level 2 classification.

   

Debt - The fair value of debt is estimated using current market rates for borrowings of similar remaining maturity resulting in a Level 2 classification.

   

Commitments to Extend Credit and Standby Letters of Credit - The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of financial standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The fair value of commitments to extend credit and standby letters of credit is approximately $76 thousand at September 30, 2014 and $47 thousand as of December 31, 2013, respectively.

 

Limitations ‑ Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments.  Because no market exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other such factors.

 

These estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument.  These estimates are subjective in nature and require considerable judgment to interpret market data. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize in a current market exchange, nor are they intended to represent the fair value of us as a whole.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.  The fair value estimates presented herein are based on pertinent information available to Management as of the respective balance sheet date.  Although we are not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.

 

Other significant assets, such as premises and equipment, other assets, and liabilities not defined as financial instruments, are not included in the above disclosures.  Also, the fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

 

 

 

22

 

 


 

NOTE 6: EMPLOYEE BENEFIT PLANS

 

Pension Plan

Prior to January 1995, we maintained a noncontributory defined benefit plan (the “Pension Plan”) covering all eligible employees. During 1995, the Pension Plan was curtailed. Accordingly, all accrued benefits were fully vested and no additional years of service or age will be accrued.

 

The following tables summarize the components of net periodic benefit cost and other changes in Pension Plan assets and benefit obligations recognized for the three and nine months ended September 30, 2014 and 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

Nine Months

 

 

Ended September

 

Ended September

(In thousands)

 

2014

 

2013

 

2014

 

2013

Interest cost

$

116 

$

105 

$

348 

$

314 

Expected return on plan assets

 

(265)

 

(247)

 

(795)

 

(741)

Service costs

 

11 

 

10 

 

33 

 

40 

Net loss amortization

 

31 

 

87 

 

97 

 

266 

Net periodic pension cost

$

(107)

$

(45)

$

(317)

$

(121)

 

We have no minimum required contribution for 2014.

 

Our Pension Investment Policy Statement sets forth the investment objectives and constraints of the Pension Plan. The purpose of the policy is to assist our Retirement Plan Committee in effectively supervising, monitoring, and evaluating the Pension Plan.

 

 

 

NOTE 7: EARNINGS PER SHARE

 

The following table presents reconciliations of the calculations of basic and diluted earnings per share for the three and nine months ended September 30, 2014 and 2013:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

Nine Months

 

 

Ended September 30,

 

Ended September 30,

(In thousands except per share data)

2014

2013

2014

2013

Net income

$

2,806 

$

3,674 

$

9,623 

$

11,308 

Weighted average common shares outstanding

 

6,329 

 

6,309 

 

6,325 

 

6,298 

Dilutive effect of common stock equivalents

 

16 

 

15 

 

19 

 

13 

Weighted average common and common equivalent

 

 

 

 

 

 

 

 

shares outstanding

 

6,345 

 

6,324 

 

6,344 

 

6,311 

Basic earnings per common share

$

0.44 

$

0.58 

$

1.52 

$

1.80 

Diluted earnings per common share

$

0.44 

$

0.58 

$

1.52 

$

1.79 

 

Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding for the three and nine months ended September 30, 2014 and 2013. The computation of diluted earnings per share excludes the effect of assuming the exercise of certain outstanding stock options because the effect would be anti-dilutive. There were no anti-dilutive options outstanding for the three and nine months ended September 30, 2014 or 2013.

 

 

 

NOTE 8: STOCK REPURCHASE PROGRAM

 

We extended our stock buyback program through January 2015. Under the program, which was originally adopted in January 2007, we may repurchase up to 200,000 shares of our common stock on the open market from time to time, and have purchased 143,475 shares at an average price per share of $22.94 since the program’s adoption. We did not repurchase any of our shares during 2013 or during the first nine months of 2014, and do not expect to repurchase shares in the near future. 

23

 

 


 

 

NOTE 9: COMMITMENTS AND CONTINGENCIES

 

Financial Instruments with Off-Balance Sheet Risk

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments primarily include commitments to extend credit and financial guarantees. Such instruments involve, to varying degrees, elements of credit and interest rate risk that are not recognized in the accompanying consolidated balance sheets.

 

Disclosures are required regarding liability-recognition for the fair value at issuance of certain guarantees. We do not issue any guarantees that would require liability-recognition or disclosure, other than our standby letters of credit. We have issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled approximately $7.58 million and $4.73 million at September 30, 2014 and December 31, 2013, respectively, and represent the maximum potential future payments we could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Our policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral.

 

We may enter into commitments to sell loans, which involve market and interest rate risk. There were no such commitments at September 30, 2014 or December 31, 2013.

 

Legal Proceedings

We have been named as defendants in various legal proceedings arising from our normal business activities. Although the amount of any ultimate liability with respect to such proceedings cannot be determined, in the opinion of Management, based upon input from counsel on the outcome of such proceedings, any such liability will not have a material effect on our financial condition and results of operations.

24

 

 


 

 

NOTE 10: COMPREHENSIVE INCOME

 

The accumulated balances for each classification of other comprehensive income are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

Gains

 

 

 

 

 

 

 

 

 

(Losses) on

 

 

 

 

 

 

 

 

 

Securities

 

 

 

 

 

 

 

Unrealized 

Transferred

 

 

 

 

 

 

 

Gains (Losses)

From

 

 

 

 

Accumulated

 

on Securities

Available-For-

 

 

 

 

Other

 

Available-For-

Sale to Held-

Pension 

Interest Rate 

Comprehensive

(In thousands)

Sale

To-Maturity

Plan

Swaps

Income (Loss)

Balance June 30, 2014

$

1,436 

$

(3,064)

$

(1,748)

$

(407)

$

(3,783)

Other comprehensive income before reclassifications

 

(589)

 

-  

 

-  

 

66 

 

(523)

Accretion of unrealized losses of securities transferred from available-for-sale to held-to-maturity recognized in other comprehensive income

 

-  

 

127 

 

-  

 

-  

 

127 

Reclassification adjustments for (gains) losses reclassified into income

 

24 

 

-  

 

21 

 

-  

 

45 

Net current period other comprehensive income

 

(565)

-  

127 

 

21 

 

66 

 

(351)

Balance September 30, 2014

$

871 

$

(2,937)

$

(1,727)

$

(341)

$

(4,134)

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance December 31, 2013

$

(162)

$

(3,296)

$

(1,790)

$

(472)

$

(5,720)

Other comprehensive income before reclassifications

 

1,110 

 

-  

 

-  

 

131 

 

1,241 

Transfer of securities from available-for-sale to held-to-maturity

 

(8)

 

 

-  

 

-  

 

-  

Accretion of unrealized losses of securities transferred from available-for-sale to held-to-maturity recognized in other comprehensive income

 

-  

 

351 

 

-  

 

-  

 

351 

Reclassification adjustments for (gains) losses reclassified into income

 

(69)

 

-  

 

63 

 

-  

 

(6)

Net current period other comprehensive income

 

1,033 

 

359 

 

63 

 

131 

 

1,586 

Balance September 30, 2014

$

871 

$

(2,937)

$

(1,727)

$

(341)

$

(4,134)

 

All amounts in the tables above are net of tax. Amounts in parentheses indicate debits.

 

25

 

 


 

Details of amounts reclassified from accumulated comprehensive income for the three and nine months ended September 30, 2014 and  2013 are presented below:

 

 

 

 

 

 

 

 

 

 

Three Months

Nine Months

 

Details about Accumulated Other

Ended

Ended

 

Comprehensive Income Components

September 30,

September 30,

Affected Line Item in the Statement

(In thousands)

2014

2014

Where Net Income is Presented

Unrealized gains on securities

$

37 

$

(106)

Net (gains) losses on investment securities

 

 

37 

 

(106)

Total before tax

 

 

(13)

 

37 

Provision for income taxes

 

$

24 

$

(69)

Net of tax

 

 

 

 

 

 

Pension and postretirement benefit plans

$

31 

$

97 

Compensation and benefits

 

 

31 

 

97 

Total before tax

 

 

(10)

 

(34)

Provision for income taxes

 

$

21 

$

63 

Net of tax

 

 

 

 

 

 

Total reclassification adjustments

$

45 

$

(6)

 

 

 

 

 

 

 

 

 

 

Three Months

Nine Months

 

Details about Accumulated Other

Ended

Ended

 

Comprehensive Income Components

September 30,

September 30,

Affected Line Item in the Statement

(In thousands)

2013

2013

Where Net Income is Presented

Unrealized gains on securities

$

(1)

$

12 

Net (gains) losses on investment securities

 

 

(1)

 

12 

Total before tax

 

 

 

(4)

Provision for income taxes

 

$

 -

$

Net of tax

 

 

 

 

 

 

Pension and postretirement benefit plans

$

87 

$

266 

Compensation and benefits

 

 

87 

 

266 

Total before tax

 

 

(30)

 

(93)

Provision for income taxes

 

$

57 

$

173 

Net of tax

 

 

 

 

 

 

Total reclassification adjustments

$

57 

$

181 

 

 

 

26

 

 


 

 

 

 

NOTE 11: DERIVATIVE FINANCIAL INSTRUMENTS

 

At September 30, 2014 and December 31, 2013, we had an interest rate swap with a notional amount of $10 million that was designated as a cash flow hedge. The swap was used to convert a portion of the floating rate interest on our trust preferred issuance to a fixed rate of interest. Each quarter we assess the effectiveness of the hedging relationships by comparing the changes in cash flows of the derivative hedging instruments with the changes in cash flows of the designated hedged item. There was no ineffective portion recognized in earnings during the three and nine months ended September 30, 2014 or September 30, 2013. The fair value of $(524) thousand and $(726) thousand was reflected in other comprehensive income in the accompanying consolidated balance sheets at September 30, 2014 and December 31, 2013, respectively.

 

We are party to interest rate swaps with a notional amount of $40.2 million with certain of our commercial customers.  In order to minimize our risk, these customer derivatives (pay floating/receive fixed swaps) have been offset with essentially matching interest rate swaps with our counterparty totaling $40.2 million (pay fixed/receive floating swaps). At September 30, 2014, the weighted average receive rate of these interest rate swaps was 1.84%, the weighted average pay rate was 3.63% and the weighted average maturity was 12.3 years.  The fair values of $381 thousand were reflected in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets at September 30, 2014.  The fair values of $803 thousand were reflected in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets at December 31, 2013.  Hedge accounting has not been applied for these derivatives.  Because the terms of the swaps with our customer and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact our results of operations.

 

We are party to interest rate swaps with notional amounts totaling $9.36 million that were designated as fair value hedges of certain fixed rate loans with municipalities. At September 30, 2014, the weighted average receive rate of these interest rate swaps was 1.54%, the weighted average pay rate was 3.26% and the weighted average maturity was 17.8 years. The amounts recognized in earnings and other assets for the ineffective portion of the interest swaps were immaterial.

 

We assessed our counterparty risk at September 30, 2014 and determined any credit risk inherent in our derivative contracts was insignificant. Information about the fair value of derivative financial instruments can be found in Note 5 to these consolidated financial statements.

 

27

 

 


 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. These statements, which are based on certain assumptions and describe Merchants’ future plans, strategies and expectations, can generally be identified by the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. Our actual results could differ materially from those projected in the forward-looking statements as a result of, among others, continued weakness in general, national, regional or local economic conditions, the performance of our investment portfolio, quality of credits or the overall demand for services; changes in loan default and charge-off rates which could affect the allowance for credit losses; declines in the equity and financial markets; reductions in deposit levels which could necessitate increased and/or higher cost borrowing to fund loans and investments; declines in mortgage loan refinancing, equity loan and line of credit activity which could reduce net interest and non-interest income; changes in the domestic interest rate environment and inflation; changes in the carrying value of investment securities and other assets; misalignment of our interest-bearing assets and liabilities; increases in loan repayment rates affecting interest income and the value of mortgage servicing rights; changing business, banking, or regulatory conditions or policies, or new legislation affecting the financial services industry that could lead to changes in the competitive balance among financial institutions, restrictions on bank activities, changes in costs (including deposit insurance premiums), increased regulatory scrutiny, declines in consumer confidence in depository institutions, or changes in the secondary market for bank loan and other products; and changes in accounting rules, federal and state laws, IRS regulations, and other regulations and policies governing financial holding companies and their subsidiaries which may impact our ability to take appropriate action to protect our financial interests in certain loan situations.    

Investors should not place undue reliance on our forward-looking statements, and are cautioned that forward-looking statements are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, which are included in more detail in our Annual Report on Form 10-K, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the Securities and Exchange Commission. We do not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.

 

USE OF NON-GAAP FINANCIAL MEASURES

Certain information in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  We use these “non-GAAP” measures in our analysis of our performance and believe that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of our results with prior periods and with the results of other financial institutions.  These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

 

In several places net interest income is presented on a fully taxable equivalent basis. Specifically included in interest income is tax-exempt interest income from certain tax-exempt loans. An amount equal to the tax benefit derived from this tax exempt income is added back to the interest income total, to produce net interest income on a fully taxable equivalent basis. We believe the disclosure of taxable equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in our results of operations. Other financial institutions commonly present net interest income on a taxable equivalent basis. This adjustment is considered helpful in the comparison of one financial institution’s net interest income to that of another, as each will have a different proportion of taxable exempt interest from its earning assets. Moreover, net interest income is a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, other financial institutions generally use taxable equivalent net interest income. We follow these practices. A reconciliation of taxable equivalent financial information to our consolidated financial statements prepared in accordance with GAAP appears at the bottom of the table entitled “Distribution of Assets, Liabilities and Shareholders Equity; Interest Rates and Net Interest Margin.” A 35.0% tax rate was used in both 2014 and 2013. An additional non-GAAP financial measure we use is the tangible capital ratio. Because we have no intangible assets, our tangible shareholder’s equity is the same as our shareholder’s equity.

 

28

 

 


 

GENERAL

The following discussion and analysis of financial condition as of September 30, 2014 and December 31, 2013 and results of operations of Merchants and its subsidiaries for the three and nine months ended September  30, 2014 and 2013 should be read in conjunction with the consolidated financial statements and notes thereto and selected statistical information appearing elsewhere in this Quarterly Report on Form 10-Q. The financial condition and results of operations of Merchants essentially reflect the operations of its principal subsidiary, Merchants Bank.

 

RESULTS OF OPERATIONS

 

Overview

We realized net income of $2.81 million and $9.62 million, or diluted earnings per share of $0.44 and $1.52 for the three and nine months ended September 30, 2014, respectively.  This compares to net income of $3.67 million and $11.31 million, or diluted earnings per share of $0.58 and $1.79 for the three and nine months ended September 30, 2013, respectively. The return on average assets was 0.68% and 0.77% for the three and nine months ended September 30, 2014, respectively, compared to 0.88% and 0.90% for the same periods in 2013. The return on average equity was 9.02% and 10.48% for the three and nine months ended September 30, 2014, respectively, compared to 12.89% and 12.94% for the same periods in 2013. We declared and distributed dividends of $0.28 and $0.84 per share during the three and nine months ended September 30, 2014, respectively. We declared a dividend of $0.28 per share, payable November 13, 2014, to shareholders of record as of October 30, 2014.

 

 

Shareholders’ equity ended the quarter at $125.74 million, and our book value per share increased to $19.86 per share at September 30, 2014 from $18.93 at December 31, 2013.  Our capital ratios remain strong at September 30, 2014. Our capital ratios remain strong, with a Tier 1 leverage ratio of 8.95%, a total risk-based capital ratio of 17.29% and a tangible capital ratio of 7.63%.  At September 30, 2014 our Tier 1 leverage ratio was 8.95%, total risk-based capital ratio was 17.29% and our tangible capital ratio was 7.63%.

 

Ø

Net interest income - Our taxable equivalent net interest income was $12.01 million and $36.50 million for the three and nine months ended September 30, 2014, respectively, compared to $12.71 million and $38.24 million for the same periods in 2013.  Our taxable equivalent net interest margin was 3.03% and 3.07% for the quarter and nine months ended September 30, 2014, compared to 3.14% and 3.17% for the same periods in 2013.

Ø

Provision for Credit Losses – We did not book a provision for credit losses for the third quarter of 2014.  Asset quality continues to improve and net charge-offs were negligible.

Ø

Loans - Quarterly average loan balances for the third quarters of 2014 and 2013 were $1.16 billion and $1.15 billion, respectively, and ending loan balances were $1.16 billion and $1.17 billion at September 30, 2014 and September 30, 2013, respectively.  

Ø

Deposits – Quarterly average deposits for the third quarters of 2014 and 2013 were $1.34 billion and ending deposit balances were $1.30 billion and $1.33 billion at September 30, 2014 and 2013, respectively.

Ø

Non-interest income - Total noninterest income increased $90 thousand to $2.88 million for the third quarter of 2014 compared to the third quarter of 2013 and increased $537 thousand for the first nine months of 2014 compared to the first nine months of 2013.

Ø

Non-interest expenseTotal noninterest expense increased $1.10 million to $10.72 million for the third quarter of 2014 compared to the same period in 2013. Excluding core system conversion costs of $442 thousand and a severance accrual of $410 thousand total noninterest expense increased $244 thousand for the third quarter of 2014 compared to the same period in 2013. 

 

Net Interest Income

As shown on the tables on pages 31 and 32, our taxable equivalent net interest income was $12.01 million and $36.50 million for the three and nine months ended September 30, 2014, respectively, compared to $12.71 million and $38.24 million for the same periods in 2013.   Our taxable equivalent net interest margin was 3.03% and 3.07% for the quarter and nine months ended September 30, 2014, compared to 3.14% and 3.17% for the same periods in 2013. The margin decreased by three basis points during the third quarter of 2014 and has decreased by seven basis points over the course of 2014.  We have continued to increase balance sheet liquidity  and  reduce  price  volatility  exposure  in  our  investment  portfolio  by  allowing  the investment portfolio to run off and holding a larger percentage of our balance sheet in cash, which has compressed asset yields.  These changes have shortened our assets and caused us to give up some current income, but have reduced price volatility exposure on our balance sheet and better positioned us for rising rates. At the same time our loan yields have continued to compress due to a combination of the extended low interest rate environment, tighter credit spreads and competitive  pressures.   Additionally, we have continued to increase our variable rate loan portfolio.   Average variable rate loans for the third quarter of 2014 were $321.33 million, a $17.27 million increase over the third quarter of 2013.  These loans have a lower current yield than fixed rate loans, but will have higher yields when rates start to rise.

29

 

 


 

The following tables present an analysis of net interest income and illustrate interest income earned and interest expense charged for each major component of interest earning assets and interest bearing liabilities. Yields/rates are computed on a fully taxable-equivalent basis, using a 35% rate.  Nonaccrual loans are included in the average loan balance outstanding.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

September 30, 2014

 

September 30, 2013

 

 

Interest

 

 

 

Interest

 

 

Average

Income/

Average

 

Average

Income/

Average

(In thousands, fully taxable equivalent)

Balance

Expense

Rate

 

Balance

Expense

Rate

ASSETS:

 

 

 

 

 

 

 

Loans, including fees on loans

$    1,162,236

$     11,151

3.81% 

 

$    1,154,967

$    11,631

4.00% 

Investments

341,165 
1,885 
2.19% 

 

427,414 
2,301 
2.14% 

Interest-earning deposits with banks and other short-term
investments

72,400 
37 
0.20% 

 

21,700 
13 
0.24% 

Total interest earning assets

1,575,801 

$     13,073

3.29% 

 

1,604,081 
13,945 
3.45% 

Allowance for loan losses

(12,090)

 

 

 

(11,946)

 

 

Cash and due from banks

27,871 

 

 

 

27,913 

 

 

Bank premises and equipment, net

15,923 

 

 

 

16,392 

 

 

Bank owned life insurance

10,190 

 

 

 

 -

 

 

Other assets

24,695 

 

 

 

25,077 

 

 

Total assets

$    1,642,390

 

 

 

$    1,661,517

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

Savings, interest bearing checking and money market accounts

$       612,811

$          370

0.24% 

 

$       772,234

$         416

0.21% 

Time deposits

247,297 
433 
0.70% 

 

318,795 
532 
0.66% 

Total interest bearing deposits

860,108 
803 
0.37% 

 

1,091,029 
948 
0.34% 

Short-term borrowings

96 
0.00% 

 

26,451 
21 
0.32% 

Securities sold under agreements to repurchase, short-term

152,451 
62 
0.16% 

 

145,962 
62 
0.17% 

Other long-term debt

2,348 
12 
2.04% 

 

2,430 
12 
2.04% 

Junior subordinated debentures issued to unconsolidated subsidiary trust

20,619 
189 
3.71% 

 

20,619 
189 
3.71% 

Total borrowed funds

175,514 
263 
0.60% 

 

195,462 
284 
0.58% 

Total interest bearing liabilities

1,035,622 

$       1,066

0.41% 

 

1,286,491 

$      1,232

0.38% 

Noninterest bearing deposits

475,101 

 

 

 

252,795 

 

 

Other liabilities

7,250 

 

 

 

8,150 

 

 

Shareholders' equity

124,417 

 

 

 

114,081 

 

 

Total liabilities and shareholders' equity

$    1,642,390

 

 

 

$    1,661,517

 

 

 

 

 

 

 

 

 

 

Net interest earning assets

$       540,179

 

 

 

$       317,590

 

 

 

 

 

 

 

 

 

 

Net interest income (fully taxable equivalent)

 

$     12,007

 

 

 

$    12,713

 

Tax equivalent adjustment

 

(509)

 

 

 

(561)

 

Net interest income

 

$     11,498

 

 

 

$    12,152

 

 

 

 

 

 

 

 

 

Net interest rate spread

 

 

2.88% 

 

 

 

3.07% 

 

 

 

 

 

 

 

 

Net interest margin

 

 

3.03% 

 

 

 

3.14% 

 

 

 

 

 

 

 

 

 

30

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30, 2014

 

September 30, 2013

 

 

Interest

 

 

 

Interest

 

 

Average

Income/

Average

 

Average

Income/

Average

(In thousands, fully taxable equivalent)

Balance

Expense

Rate

 

Balance

Expense

Rate

ASSETS:

 

 

 

 

 

 

 

Loans, including fees on loans

$    1,166,197

$     33,727

3.86% 

 

$    1,121,404

$    34,392

4.10% 

Investments

360,790 
6,145 
2.28% 

 

470,911 
7,649 
2.17% 

Interest-earning deposits with banks and other short-term
investments

64,328 
110 
0.23% 

 

21,265 
38 
0.24% 

Total interest earning assets

1,591,315 

$     39,982

3.36% 

 

1,613,580 
42,079 
3.49% 

Allowance for loan losses

(12,138)

 

 

 

(11,827)

 

 

Cash and due from banks

27,646 

 

 

 

26,232 

 

 

Bank premises and equipment, net

15,578 

 

 

 

16,368 

 

 

Bank owned life insurance

10,110 

 

 

 

 

 

Other assets

26,858 

 

 

 

30,373 

 

 

Total assets

$    1,659,369

 

 

 

$    1,674,726

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

Savings, interest bearing checking and money market accounts

$       715,869

$       1,283

0.24% 

 

$       727,042

$         758

0.14% 

Time deposits

271,062 
1,358 
0.67% 

 

325,718 
1,664 
0.68% 

Total interest bearing deposits

986,931 
2,641 
0.36% 

 

1,052,760 
2,422 
0.31% 

Short-term borrowings

283 

 -

0.00% 

 

23,009 
51 
0.29% 

Securities sold under agreements to repurchase, short-term

181,002 
241 
0.18% 

 

212,755 
766 
0.48% 

Other long-term debt

2,369 
37 
2.09% 

 

2,450 
37 
2.03% 

Junior subordinated debentures issued to unconsolidated subsidiary trust

20,619 
561 
3.70% 

 

20,619 
565 
3.73% 

Total borrowed funds

204,273 
839 
0.55% 

 

258,833 
1,419 
0.73% 

Total interest bearing liabilities

1,191,204 

$       3,480

0.39% 

 

1,311,593 

$      3,841

0.39% 

Noninterest bearing deposits

337,546 

 

 

 

238,655 

 

 

Other liabilities

8,204 

 

 

 

7,952 

 

 

Shareholders' equity

122,415 

 

 

 

116,526 

 

 

Total liabilities and shareholders' equity

$    1,659,369

 

 

 

$    1,674,726

 

 

 

 

 

 

 

 

 

 

Net interest earning assets

$       400,111

 

 

 

$       301,987

 

 

 

 

 

 

 

 

 

 

Net interest income (fully taxable equivalent)

 

$     36,502

 

 

 

$    38,238

 

Tax equivalent adjustment

 

(1,567)

 

 

 

(1,528)

 

Net interest income

 

$     34,935

 

 

 

$    36,710

 

 

 

 

 

 

 

 

 

Net interest rate spread

 

 

2.97% 

 

 

 

3.10% 

 

 

 

 

 

 

 

 

Net interest margin

 

 

3.07% 

 

 

 

3.17% 

 

 

31

 

 


 

 

The following tables present the extent to which changes in interest rates and changes in the volume of earning assets and interest bearing liabilities have affected interest income and interest expense during the periods indicated. Information is presented in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume) and (iii) changes in volume/rate (change in volume multiplied by change in rate).

 

Analysis of Changes in Fully Taxable Equivalent Net Interest Income

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

September 30,

Increase

Due to

(In thousands)

2014

2013

(Decrease)

Volume

Rate

Volume/Rate

Fully taxable equivalent interest income:

 

 

 

 

 

 

Loans

$         11,151

$         11,631

$             (480)

$             73

$            (531)

$             (22)

Investments

1,885 
2,301 
(416)
(464)
61 
(13)

Interest earning deposits with banks and other short-term investments

37 
13 
24 
30 
(2)
(4)

Total interest income

13,073 
13,945 
(872)
(361)
(472)
(39)

Less interest expense:

 

 

 

 

 

 

Savings, interest bearing checking and money market accounts

370 
416 
(46)
(86)
51 
(11)

Time deposits

433 
532 
(99)
(119)
27 
(7)

FHLB and other short-term borrowings

21 
(21)
(21)

 -

 -

Securities sold under agreements to repurchase, short-term

62 
62 
(0)
(3)

 -

Other long-term debt

12 
12 

 -

 -

 -

 -

Junior subordinated debentures issued to unconsolidated subsidiary trust

189 
189 

 -

 -

(1)

Total interest expense

1,066 
1,232 
(166)
(223)
76 
(19)

Net interest income

$         12,007

$         12,713

$             (706)

$           (138)

$            (548)

$             (20)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,

Increase

Due to

(In thousands)

2014

2013

(Decrease)

Volume

Rate

Volume/Rate

Fully taxable equivalent interest income:

 

 

 

 

 

 

Loans

$         33,727

$         34,392

$             (665)

$        1,374

$         (1,976)

$             (63)

Investments

6,145 
7,649 
(1,504)
(1,787)
377 
(94)

Interest earning deposits with banks and other short-term investments

110 
38 
72 
77 
(2)
(3)

    Total interest income

39,982 
42,079 
(2,097)
(336)
(1,601)
(160)

Less interest expense:

 

 

 

 

 

 

Savings, interest bearing checking and money market accounts

1,283 
758 
525 
(12)
542 
(5)

Time deposits

1,358 
1,664 
(306)
(278)
(25)
(3)

FHLB and other short-term borrowings

 -

51 
(51)
(51)

 -

 -

Securities sold under agreements to repurchase, short-term

241 
766 
(525)
(114)
(480)
69 

Other long-term debt

37 
37 
(1)

 -

Junior subordinated debentures issued to unconsolidated subsidiary trust

561 
565 
(4)

 -

(20)
16 

    Total interest expense

3,480 
3,841 
(361)
(456)
18 
77 

    Net interest income

$         36,502

$         38,238

$          (1,736)

$           120

$         (1,619)

$           (237)

 

32

 

 


 

Provision for Credit Losses

 

We did not record a provision for credit losses during the third quarter of 2014, and year to date we have recorded a $150 thousand  provision for credit losses compared to $400 thousand and $800 thousand for the three and nine months ended  September 30, 2013.  Credit quality improved further during the quarter.  Our nonperforming loans were 0.02% of total loans at September 30, 2014, and loans past due 30-89 days were 0.01% of total loans at September 30, 2014. Net charge-offs during 2014 have been negligible. For a more detailed discussion of the Allowance and nonperforming assets, see “Credit Quality and Allowance for Credit Losses” beginning on page 35.

 

NONINTEREST INCOME AND EXPENSES

 

Noninterest income

Total noninterest income increased $90 thousand to $2.88 million for the third quarter of 2014 compared to the third quarter of 2013 and increased $537 thousand for the first nine months of 2014 compared to the first nine months of 2013. Excluding net gains (losses) on investment securities, total noninterest income increased $128 thousand and $419 thousand for the third quarter and first nine months of 2014, respectively, compared to the same periods in 2013.   Trust division income increased $97 thousand and $259 thousand for the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013 as trust division assets under management have continued to show strong growth and now total $628 million. Service charges on deposits increased $40 thousand and $83 thousand for the three and nine months ended September 30, 2014 compared to the same periods in 2013, a result of an increase in cash management fees and business checking service charges.   We continue to experience pressure on our overdraft and net debit card fee income.

 

Noninterest expense

Total noninterest expense increased $1.10 million to $10.72 million for the third quarter of 2014 compared to the same period in 2013 and increased $2.02 million to $30.97 million for the first nine months of 2014 compared to the same period in 2013. We absorbed $442 thousand and $830 thousand in core conversion expenses during the three and nine months ended September 30, 2014.  Excluding core conversion expenses and a one-time $410 thousand severance accrual recorded during the third quarter, total noninterest expenses increased $244 thousand and $779 thousand for the three and nine months ended September 30, 2014.  In total, we expect to incur approximately $1.30 million in expenses related to the core conversion during 2014 and expect to realize annual cost savings and additional revenue opportunities of approximately $800 thousand starting in November of this year.

 

Compensation and benefits increased $391 thousand and $847 thousand for the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013. The increase was a result of additional investments we have made in the Finance and Risk areas combined with lower credits related to loan originations, as well as the previously mentioned severance accrual. Occupancy and equipment costs were $132 thousand higher for the third quarter of 2014 compared to 2013, and were $359 thousand higher for the first three quarters of 2014 compared to 2013, a result of investments we have made recently to update, and in some cases, combine our facilities.  Marketing expenses for the third quarter of 2014 were $521 thousand, $128 thousand higher than the third quarter of 2013, and were $1.16 million year to date, unchanged from the first nine months of 2013.

 

 

Income Taxes

During the first quarter of 2014 we adopted, and applied retrospectively, Financial Accounting Standards Board Accounting Standards Update 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects” which allows investors in low income housing tax credit entities that meet certain conditions to account for the investments entirely in income tax expense, which we believe more accurately reflects the economics of the investment.  The application of this standard reduced total noninterest expense by $327 thousand and $981 thousand for the quarter and nine months ended September 30, 2014, respectively; and by $271 thousand and $811 thousand for the quarter and nine months ended September 30, 2013, respectively and increased income tax expense by an equivalent amount.  The application of the standard also increased our effective tax rate to 23% from 16%  and 17% for the three months and nine months ended September 30, 2014, respectively, and to 25% from 21% for the three and nine months ended September 30, 2013, respectively.

    

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BALANCE SHEET ANALYSIS

 

Loans

Quarterly average loan balances for the third quarter of 2014 were $1.16 billion, $7.27 million higher than quarterly average balances for the third quarter of 2013, but $7.70 million lower than quarterly average balances for the fourth quarter of last year. Loan balances reflect modest origination activity which was more than offset by amortization and prepayments.

The composition of our loan portfolio is shown in the following table as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

September 30, 2014

 

June 30, 2014

 

December 31, 2013

 

September 30, 2013

Commercial, financial and agricultural

$

183,069 

$

193,806 

$

172,810 

$

163,138 

Municipal loans

 

96,258 

 

46,358 

 

94,007 

 

96,491 

Real estate loans – residential

 

472,986 

 

476,696 

 

489,706 

 

493,667 

Real estate loans – commercial

 

381,301 

 

372,825 

 

371,319 

 

373,085 

Real estate loans – construction

 

17,970 

 

32,336 

 

31,841 

 

32,768 

Installment loans

 

4,793 

 

4,238 

 

5,655 

 

5,898 

All other loans

 

286 

 

252 

 

895 

 

454 

Total loans

$

1,156,663 

$

1,126,511 

$

1,166,233 

$

1,165,501 

 

Totals above are shown net of deferred loan fees of $646 thousand, $582 thousand, $618 thousand, and $561 thousand for September 30, 2014, June 30, 2014, December 31, 2013, and September 30, 2013, respectively

 

 

Investments

 

The investment portfolio is used to generate interest income, manage liquidity and mitigate interest rate sensitivity. The  average  investment  portfolio  for  the  third  quarter  of  2014  was  $336.29 million,  a  reduction  of $66.71 million from average balances for the fourth quarter of 2013.  The ending balance in the investment portfolio at September 30, 2014 was $328.16 million, compared to $335.44 million at June 30, 2014 and $393.34 million at December 31, 2013. The book balance of the portfolio at September 30, 2014 includes a $1.37 million unrealized gain on the available for sale portion of the investment portfolio, compared to an unrealized loss of ($220) thousand at December 31, 2013. Interest rates have trended down over the course of 2014 which has positively impacted the value of our largely fixed rate investment portfolio.  We sold $14.35 million in securities during the quarter for a small loss.  We sold bonds that had higher than average price volatility and lower than average yields to continue to reduce the exposure to rising rates and the risk to tangible capital in the investment portfolio. We also took advantage of an opportunity to unwind our remaining CLO portfolio.    

 

The composition of our investment portfolio as of September 30, 2014, including both available for sale and held to maturity securities, consisted of the following:

 

 

 

 

 

 

 

 

Amortized

 

Fair

(In thousands)

 

Cost

 

Value

Available for Sale:

 

 

 

 

U.S. Treasury Obligations

$

20,057 

$

20,017 

Residential Real Estate Mortgage-backed Securities ("Agency MBSs")

 

87,162 

 

89,267 

Agency Commercial Mortgage Backed Securities ("Agency CMBSs")

 

17,988 

 

17,460 

Non-agency Collateralized Mortgage Obligations ("Non-agency CMOs")

 

59,118 

 

58,917 

Asset Backed Securities ("ABSs")

 

353 

 

388 

Total Available for Sale

$

184,678 

 

186,049 

Held to Maturity:

 

 

 

 

U.S. Agency Obligations

 

22,259 

 

22,379 

U.S. Government Sponsored Enterprises ("U.S. GSEs")

 

9,483 

 

9,335 

Federal Home Loan Bank ("FHLB") Obligations

 

4,711 

 

4,712 

Agency Collateralized Mortgage Obligations

 

8,347 

 

8,464 

Agency MBSs

 

97,310 

 

95,521 

Total Held to Maturity

 

142,110 

 

140,411 

Total Securities

$

326,788 

$

326,460 

 

Agency MBSs and Agency CMOs consist of pools of residential mortgages which are guaranteed by the FNMA, FHLMC, or Government National Mortgage Association (“GNMA”) with various origination dates and maturities.  Agency CMBSs consist of bonds backed by commercial real estate which are guaranteed by FNMA.

We do not intend to sell the investment securities that are in an unrealized loss position, and it is unlikely that we will be required to sell the investment securities before recovery of their amortized cost bases, which may be maturity. 

Deposits and Other Liabilities

34

 

 


 

Quarterly average deposits for the third quarter of 2014 were $1.34 billion, an $8.62 million decrease compared to quarterly average deposits for the third quarter of 2013. Growth in business demand deposits and retail money market categories has been offset by reduced time deposit balances. During the quarter we reduced our interest rate on our free checking for life accounts from 0.01% to zero and reclassed balances totaling $214.93 million at September 30, 2014 from interest bearing deposits to noninterest bearing deposits. Average securities sold under agreement to repurchase, which represent collateralized customer accounts, declined to $152.45 million at September 30, 2014 from $212.31 million at December 31, 2013 as a result of seasonal municipal cash flows; average balances were $6.49 million higher compared to the third quarter of 2013.

 

CREDIT QUALITY AND ALLOWANCE FOR CREDIT LOSSES

The United States economy continues to show improvement into 2014; however, high unemployment and foreclosure rates continue in certain parts of the country.  Although Vermont, our primary market, has not been immune to this economic turmoil, the state has one of the lowest foreclosure rates in the country, home price depreciation has been muted, and the unemployment rate is lower than the national average.

Credit quality

Credit quality is a major strategic focus and strength of our company.  Although we actively manage current nonperforming and classified loans, there is no assurance that we will not have increased levels of problem assets in the future.  The pool of nonperforming loans is dynamic with accounts moving in and out of this category over time.

The following table summarizes our nonperforming loans and nonperforming assets as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

September 30, 2014

 

June 30, 2014

 

December 31, 2013

 

September 30, 2013

Nonaccrual loans

$

308 

$

372 

$

425 

$

2,236 

Loans past due 90 days or more and still accruing

 

 -

 

79 

 

75 

 

83 

Troubled debt restructurings ("TDR")

 

424 

 

437 

 

406 

 

365 

Total nonperforming loans ("NPL")

 

732 

 

888 

 

906 

 

2,684 

OREO

 

 -

 

 -

 

108 

 

23 

Total nonperforming assets ("NPA")

$

732 

$

888 

$

1,014 

$

2,707 

 

Non-performing loans at September  30, 2014 were $732 thousand, 0.06% of total loans. Of the $732 thousand in nonperforming loans in the table above, $219 thousand are commercial and commercial real estate loans and $513 thousand are residential mortgages and home equity loans. 

 

We originate traditional mortgage and home equity products that are fully documented and underwritten. We take a proactive risk management approach by conducting periodic stress-testing of the existing residential loan portfolio and adjusting underwriting requirements, if necessary, based upon the results of the analysis. The assumptions used in the stress testing include: credit score migration; calculation of possible losses using conservative assumptions of market decline; review of life-of-loan delinquency levels relative to loan size and credit score; analysis of the portfolio by loan size, and distribution within the portfolio by loan-to-value ratios. Based upon the results of assessments of the residential loan portfolio, Management concluded that current reserve levels were adequate.

Our analysis indicates that, through a combination of estimated collateral value and, where needed, an appropriately allocated reserve, any additional loss exposure on current non-accruing loans is minimal. 

TDRs represent balances where the existing loan was modified involving a concession in rate, term or payment amount due to the distressed financial condition of the borrower. At September 30, 2014, $222 thousand of TDRs were in nonaccrual status and $202 thousand were accruing interest. 

Excluded from the nonperforming balances discussed above are loans that are 30 to 89 days past due, which are not necessarily considered classified or impaired.  Accruing loans 30 to 89 days past due as a percentage of total loans as of the periods indicated are presented in the following table:

 

 

Period Ended

30-89 Days

September  30, 2014

0.02%

June  30, 2014

0.01%

December 31, 2013

0.03%

September 30, 2013

0.01%

 

Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days. If a loan or a portion of a loan is internally classified as impaired or is partially charged-off, the loan is generally classified as nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt. Income accruals are suspended on all nonaccruing

35

 

 


 

loans, and all previously accrued and uncollected interest is charged against current income. 

Loans may be returned to accrual status when there is a sustained period of repayment performance (generally a minimum of three months) by the borrower, in accordance with the contractual terms of the loans and all principal and interest amounts contractually due, including arrearages, are reasonably assured of repayment within an acceptable period of time.

While a loan is classified as nonaccrual and the future collectability of the recorded loan balance is uncertain, any payments received are generally applied to reduce the principal balance. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan has been partially charged-off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Interest collections in excess of that amount are recorded as a reduction of principal.

A loan remains in nonaccruing status until the factors which suggest doubtful collectability no longer exist, the loan is liquidated, or when the loan is determined to be uncollectible, and is charged off against the allowance for loan losses.  In those cases where a nonaccruing loan is secured by real estate, we can, and may, initiate foreclosure proceedings.  The result of such action will either be to cause repayment of the loan with the proceeds of a foreclosure sale or to give us possession of the collateral in order to manage a future resale of the real estate.  Foreclosed property is recorded at the lower of its cost or estimated fair value, less any estimated costs to sell and is actively marketed.  Any cost in excess of the estimated fair value on the transfer date is charged to the allowance for loan losses, while further declines in market values are recorded as OREO expense in the consolidated statements of income. Impaired loans, which primarily consist of non-accruing residential mortgage and commercial real estate loans and TDRs, totaled $732 thousand and $906 thousand at September 30, 2014 and December 31, 2013, respectively.  At September 30, 2014, impaired loans with a recorded investment were $310 thousand and had specific reserve allocations totaling $100 thousand. 

Substandard loans at September 30, 2014 totaled $25.23 million, of which $24.83 million in loans continue to accrue interest.   Loans identified as substandard have well-defined weaknesses that, if not addressed, could result in a loss.  These accruing substandard loans have generally continued to pay promptly and Management conducts regularly scheduled comprehensive reviews of the borrowers’ financial condition, payment performance, accrual status and collateral.  These reviews also ensure that these troubled accounts are properly administered with a focus on loss mitigation and that any potential loss exposures are appropriately quantified, and reserved for. The findings of this review process are a key component in assessing the adequacy of our loan loss reserve.

Accruing substandard loans at September 30, 2014 reflect a $400 thousand decrease in balances since December 31, 2013. At September 30, 2014, accruing substandard loans related to owner-occupied commercial and construction real estate totaled $16.73 million, investor commercial real estate loans totaled $1.23 million, residential mortgage loans totaled $4 thousand, residential investment real estate loans totaled $1.28 million, and $5.59 million in substandard loans are outstanding to corporate borrowers in a variety of different industries. Eleven borrowers in a variety of industries account for 85% of the total accruing substandard loans, and approximately $659 thousand of the total accruing substandard loans carry some form of government guarantee.

To date, with very few exceptions, payments due from accruing substandard borrowers have been made as agreed and Management’s ongoing evaluation of these borrowers’ financial condition and collateral indicates a reasonable certainty that these exposures are adequately secured.

Management monitors asset quality closely and continuously performs detailed and extensive reviews on larger credits and problematic credits identified on the watched asset list, nonperforming asset listings and internal credit rating reports.  In addition to frequent financial analysis and review of well-rated and adversely graded loans, Management incorporates active monitoring of key credit and non-credit risks for each customer, assessing risk through the daily reviews of overdrafts, delinquencies and usage of electronic banking products and tracking for timely receipt of all required financial statements.

 

Allowance for Credit Losses

The Allowance is made up of two components: the allowance for loan losses (“ALL”) and the reserve for undisbursed lines.  The ALL is based on Management's estimate of the amount required to reflect the probable incurred losses in the loan portfolio, based on circumstances and conditions known at each reporting date. We review the adequacy of the ALL quarterly. Factors considered in evaluating the adequacy of the ALL include previous loss experience, the size and composition of the portfolio, risk rating composition, current economic and real estate market conditions and their effect on the borrowers, the performance of individual loans in relation to contractual terms and estimated fair values of properties that secure impaired loans.

The adequacy of the ALL is determined using a consistent, systematic methodology, consisting of a review of both specific reserves for loans identified as impaired and general reserves for the various loan portfolio classifications.  When a loan is impaired, we determine its impairment loss by comparing the excess, if any, of the loan’s carrying amount over (1) the present value of expected future cash flows discounted at the loan’s original effective interest rate, (2) the observable market price of the impaired loan, or (3) the fair value of the collateral securing a collateral-dependent loan.  When a loan is deemed to have an impairment loss, the loan is either charged down to its estimated net realizable value, or a specific reserve is established as part of the overall allowance for loan losses if Management needs more time to evaluate all of the facts and circumstances relevant to that particular loan.

The general allowance for loan losses is a percentage-based reflection of historical loss experience adjusted for qualitative factors and assigns a required allocation by loan classification based on a fixed percentage of all outstanding loan balances. The general allowance

36

 

 


 

for loan losses employs a risk-rating model that grades loans based on their general characteristics of credit quality and relative risk. Appropriate reserve levels are estimated based on Management’s judgments regarding the historical loss experience, current economic trends, trends in the portfolio mix, volume and trends in delinquencies and non-accrual loans.

Losses are charged against the ALL when Management believes that the collectability of principal is doubtful. To the extent Management determines the level of anticipated losses in the portfolio has increased or decreased, the ALL is adjusted through current earnings. Overall, Management believes that the ALL is maintained at an adequate level, in light of historical and current factors, to reflect the level of credit risk in the loan portfolio. Loan loss experience and nonperforming asset data are presented and discussed in relation to their impact on the adequacy of the ALL.

 

The following table reflects our loan loss experience and activity in the Allowance for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

Nine Months

 

Three Months

 

Nine Months

 

 

Ended

 

Ended

 

Ended

 

Ended

(In thousands)

 

September 30, 2014

 

September 30, 2014

 

September 30, 2013

 

September 30, 2013

Average loans during the period

$

1,162,236 

$

1,166,197 

$

1,154,967 

$

1,121,404 

Allowance beginning of the year

 

12,906 

 

12,828 

 

12,658 

 

12,312 

Charge-offs:

 

 

 

 

 

 

 

 

Commercial, financial & agricultural

 

 -

 

(34)

 

 -

 

 -

Real estate - residential

 

(7)

 

(25)

 

(49)

 

(152)

Real estate - commercial

 

 -

 

 -

 

 -

 

(1)

Other

 

(48)

 

(99)

 

(36)

 

(84)

Total charge-offs

 

(55)

 

(158)

 

(85)

 

(237)

Recoveries:

 

 

 

 

 

 

 

 

Commercial, financial & agricultural

 

 -

 

 

13 

 

62 

Real estate - residential

 

 -

 

20 

 

 -

 

Real estate - commercial

 

 -

 

 -

 

 -

 

40 

Real estate - construction

 

 -

 

 -

 

 

Installment

 

 -

 

 

 -

 

 -

Other

 

 

14 

 

 

Total recoveries

 

 

38 

 

18 

 

116 

Net recoveries (charge-offs)

 

(48)

 

(120)

 

(67)

 

(121)

Provision for credit losses

 

 -

 

150 

 

400 

 

800 

Allowance end of year

$

12,858 

$

12,858 

$

12,991 

$

12,991 

Ratio of net (charge-offs) recoveries to average loans outstanding

 

(0.02)%   

 

(0.01)% 

 

(0.02)% 

 

(0.01)% 

 

 

 

 

 

 

 

 

 

Components:

 

 

 

 

 

 

 

 

Allowance for loan losses

$

12,019 

$

12,019 

$

12,199 

$

12,199 

Reserve for undisbursed lines of credit

 

839 

 

839 

 

792 

 

792 

Allowance for credit losses

$

12,858 

$

12,858 

$

12,991 

$

12,991 

 

 

The following table reflects our nonperforming asset and coverage ratios as of the dates indicated:

 

 

 

 

 

 

September 30, 2014

June 30, 2014

December 31, 2013

NPL to total loans

0.06% 
0.08% 
0.08% 

NPA to total assets

0.04% 
0.06% 
0.06% 

Allowance for loan losses to total loans

1.04% 
1.07% 
1.03% 

Allowance for loan losses to NPL

1642% 
1356% 
1329% 

 

We will continue to take all appropriate measures to restore nonperforming assets to performing status or otherwise liquidate these assets in an orderly fashion so as to maximize their value. There can be no assurances that we will be able to complete the disposition of nonperforming assets without incurring further losses.

 

Loan Portfolio Monitoring

 

Our Board of Directors grants each loan officer the authority to originate loans on our behalf, subject to certain limitations. The Board of Directors also establishes restrictions regarding the types of loans that may be granted and the distribution of loan types within our portfolio, and sets loan authority limits for each lender. These authorized lending limits are reviewed at least annually and are based upon the lender's experience. Loan requests that exceed a lender's authority require the signature of our Senior Lender, the Senior Credit Officer, and/or our President. With the exception of certain municipal loans, all extensions of credit of $5.0 million or greater to

37

 

 


 

any one borrower, or related party interest, are reviewed and approved by the Loan Committee of Merchants Bank’s Board of Directors. Short-term revenue anticipation and tax anticipation extensions of credit of $8.0 million or greater to a municipality are reviewed and approved by the Loan Committee of Merchants Bank’s Board of Directors.

 

The Loan Committee and the credit department regularly monitor our loan portfolio. The entire loan portfolio, as well as individual loans, is reviewed for loan performance, compliance with internal policy requirements and banking regulations, creditworthiness, and strength of documentation. We monitor loan concentrations by individual borrowers, industries and loan types. As part of the annual credit policy review process, targets are set by loan type for the total portfolio. Credit risk ratings assessing inherent risk in individual loans are assigned to commercial loans at origination and are routinely reviewed by lenders and Management on a periodic basis according to total exposure and risk rating. These internal reviews assess the adequacy of all aspects of credit administration, additionally, we maintain an on-going active monitoring process of loan performance during the year.  We have also hired external loan review firms to assist in monitoring the commercial, municipal and residential loan portfolios. The commercial loan review firm annually reviews, at a minimum, 60% in dollar volume of our commercial loan portfolio and certain transactions based on amount and maturity date for our municipal loan portfolio. These comprehensive reviews assessed the accuracy of our risk rating system as well as the effectiveness of credit administration in managing overall credit risks.

 

All loan officers are required to service their loan portfolios and account relationships. Loan officers, a commercial workout officer, or collection personnel take remedial actions to assure full and timely payment of loan balances as necessary, with the supervision of the Senior Lender and the Senior Credit Officer.

 

Liquidity and Capital Resource Management

 

General

Liquid assets are maintained at levels considered adequate to meet our liquidity needs.  Liquidity is adjusted as appropriate to meet asset and liability management objectives. Liquidity is monitored by the Asset and Liability Committee (“ALCO”) of Merchants Bank’s Board of Directors, based upon Merchants Bank’s policies. Our primary sources of liquidity are deposits, amortization and prepayment of loans, maturities of investment securities and other short-term investments, periodic principal repayments on mortgage-backed and other amortizing securities, advances from the FHLBB, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan and investment prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. Interest rates on deposits are priced to maintain a desired level of total deposits.

 

As of September 30, 2014, we could borrow up to $65 million in overnight funds through unsecured borrowing lines established with correspondent banks.  We have established both overnight and longer term lines of credit with the FHLBB.  FHLBB borrowings are secured by residential mortgage loans. The total amount of loans pledged to the FHLBB for both short- and long-term borrowing arrangements totaled $265.68 million at September 30, 2014. We have additional borrowing capacity with the FHLBB of $249.16 million as of September 30, 2014.  We have also established a borrowing facility with the Board of Governors of the Federal Reserve System (“FRB”) which will enable us to borrow at the discount window. Additionally, we have the ability to borrow through the use of repurchase agreements, collateralized by Agency MBSs and Agency CMOs, with certain approved counterparties. Our investment portfolio, which is managed by the ALCO, has a cost basis of $326.79 million at September 30, 2014, of which $254.67 million was pledged.  The portfolio is a reliable source of cash flow for us. We closely monitor our short term cash position.  Any excess funds are left on deposit at the FRB.

 

The following table presents information regarding our short-term borrowings as of the dates indicated:

 

 

 

 

 

 

 

 

Three Months

 

Nine Months

 

 

Ended

 

Ended

(In thousands)

 

September 30, 2014

 

September 30, 2014

FHLBB and other short-term borrowings

 

 

 

 

Amount outstanding at end of period

$

 -

$

 -

Maximum during the period amount outstanding

 

4,400 

 

18,900 

Average amount outstanding

 

96 

 

283 

Weighted-average rate during the period

 

0.36% 

 

0.31% 

Weighted-average rate at period end

 

0.00% 

 

0.00% 

Securities sold under agreement to repurchase, short-term

 

 

 

 

Amount outstanding at end of period

$

188,157 

$

188,157 

Maximum during the period amount outstanding

 

203,996 

 

247,153 

Average amount outstanding

 

152,451 

 

181,002 

Weighted-average rate during the period

 

0.16% 

 

0.18% 

Weighted-average rate at period end

 

0.17% 

 

0.17% 

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Commitments and Off-Balance Sheet Risk

 

We are a party to financial instruments with off‑balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments primarily include commitments to extend credit and financial guarantees. Contingent obligations under standby letters of credit totaled approximately $7.58 million and $5.02 million at September 30, 2014 and September 30, 2013, respectively, and represent the maximum potential future payments we could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. The fair value of our standby letters of credit at September 30, 2014 and 2013 was insignificant.

 

Capital Resources

 

We are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements results in certain mandatory, and the possibility  of additional discretionary, actions by regulators that could have a direct material effect on our financial statements. Under capital adequacy guidelines, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. It is the policy of the FRB that banks and bank holding companies should pay dividends only out of current earnings and only if, after paying such dividends, the bank or bank holding company would remain adequately capitalized. We are also subject to the regulatory framework for prompt corrective action that requires us to meet specific capital guidelines to be considered well capitalized. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of September 30, 2014, that Merchants met all capital adequacy requirements to which it is subject.

 

As of September 30, 2014, the most recent notification from the FDIC categorized Merchants Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that Management believes have changed Merchants Bank’s category. We continue to be considered well capitalized under current applicable regulations.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) required the federal banking agencies to establish minimum leverage and risk-based capital requirements for insured banks and their holding companies.  The federal banking agencies issued a joint final rule, or the Final Capital Rule, that implements the Basel III capital standards and establishes the minimum capital levels required under the Dodd-Frank Act.  We must comply with the Final Capital Rule by January 1, 2015.  The Final Capital Rule establishes a minimum common equity Tier 1 capital ratio of 6.5% of risk-weighted assets for a “well capitalized” institution and increases the minimum Tier 1 capital ratio for a “well capitalized” institution from 6% to 8%. Additionally, the Final Capital Rule requires an institution to maintain a 2.5% common equity Tier 1 capital conservation buffer over the 6.5% minimum risk-based capital requirement to avoid restrictions on the ability to pay dividends, discretionary bonuses, and engage in share repurchases.  The Final Capital Rule permanently grandfathers trust preferred securities issued before May 19, 2010, subject to a limit of 25% of Tier 1 capital.  As of September 30, 2014, our capital ratios exceed all Basel III minimums, including the capital conservation buffer.

 

The following table represents our actual capital ratios and capital adequacy requirements as of September 30, 2014. 

 

 

 

 

 

 

 

 

 

 

 

 

 

To Be Well-

 

 

 

 

 

Capitalized Under

 

 

 

For Capital

Prompt Corrective

 

Actual

Adequacy Purposes

Action Provisions

(In thousands)

Amount

Percent

Amount

Percent

Amount

Percent

Merchants Bancshares, Inc.:

 

 

 

 

 

 

Tier 1 Leverage Capital

$      146,942

8.95% 

$        65,696

4.00% 

N/A

N/A

Tier 1 Risk-Based Capital

146,942 
16.04% 
36,640 
4.00% 

N/A

N/A

Total Risk-Based Capital

158,409 
17.29% 
73,280 
8.00% 

N/A

N/A

 

 

 

 

 

 

 

Merchants Bank:

 

 

 

 

 

 

Tier 1 Leverage Capital

$      144,594

8.79% 

$        65,820

4.00% 

$        82,275

5.00% 

Tier 1 Risk-Based Capital

144,594 
15.68% 
36,892 
4.00% 
55,339 
6.00% 

Total Risk-Based Capital

156,139 
16.93% 
73,785 
8.00% 
92,231 
10.00% 

 

Capital amounts for Merchants Bancshares, Inc. include $20 million in trust preferred securities issued in December 2004. These hybrid securities qualify as regulatory capital up to certain regulatory limits.

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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General

Our Management and Board of Directors are committed to sound risk management practices throughout the organization. We have developed and implemented a centralized risk management monitoring program. Risks associated with our business activities and products are identified and measured as to probability of occurrence and impact on us (low, moderate, or high), and the control or other activities in place to manage those risks are identified and assessed. Periodically, department-level and senior managers re-evaluate and report on the risk management processes for which they are responsible. This documented program provides Management with a comprehensive framework for monitoring our risk profile from a macro perspective; it also serves as a tool for assessing internal controls over financial reporting as required under the Federal Deposit Insurance Corporation Improvement Act and the Sarbanes-Oxley Act of 2002.

 

Liquidity Risk

Our liquidity is measured by our ability to raise cash when needed at a reasonable cost.  We must be capable of meeting expected and unexpected obligations to customers at any time.  Given the uncertain nature of customer demands as well as the need to maximize earnings, we must have available reasonably priced sources of funds that can be accessed quickly in time of need.  As discussed previously under “Liquidity and Capital Resources,” we have several sources of readily available funds, including the ability to borrow using our investment portfolio as collateral. We also monitor our liquidity in compliance with our Liquidity Contingency Plan.

 

Market Risk – Interest Rate Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. Our primary market risk exposure is interest rate risk. An important component of our asset and liability management process is the ongoing monitoring and management of this risk, which is governed by established policies that are reviewed and approved annually by our Bank’s Board of Directors. Our investment policy details the types of securities that may be purchased, and establishes portfolio limits and maturity limits for the various sectors. Our investment policy also establishes specific investment quality limits. Our Bank’s Board of Directors has established a Board-level Asset and Liability Committee (“ALCO”), which delegates responsibility for carrying out the asset/liability management policies to the Management-level Asset and Liability Committee (“Management ALCO”). The Management ALCO, chaired by the Chief Financial Officer and composed of members of senior management, develops guidelines and strategies impacting our asset and liability management-related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. The Management ALCO manages the investment portfolio. Our goal is to maximize net interest income while mitigating market and interest rate risk.  We accomplish this through careful monitoring of the overall duration and average life of the portfolio, thorough analysis of securities we are considering for purchase, monitoring of individual securities, occasional repositioning of the investment portfolio, as well as selective sales of specific securities.

The Management ALCO is responsible for evaluating and managing the interest rate risk which arises naturally from imbalances in repricing, maturity and cash flow characteristics of our assets and liabilities. Techniques used by the Management ALCO take into consideration the cash flow and repricing attributes of balance sheet and off-balance sheet items and their relation to possible changes in interest rates. The Management ALCO manages interest rate exposure primarily by using on-balance sheet strategies, generally accomplished through the management of the duration, rate sensitivity and average lives of our various investments, and by extending or shortening maturities of borrowed funds, as well as carefully managing and monitoring the maturities and pricing of loans and deposits. The Management ALCO also considers the use of off-balance sheet strategies, such as interest rate caps and floors and interest rate swaps, to help minimize our exposure to changes in interest rates.  By using derivative financial instruments to hedge exposures to changes in interest rates we expose ourselves to credit risk and market risk.  Credit risk is the failure of the counterparty to perform under the terms of the derivative contract.  When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us.  We minimize the credit risk in derivative instruments by entering into transactions only with high-quality counterparties and monitoring their financial condition.  The market risk associated with interest rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

The ALCO is responsible for ensuring that our Bank’s Board of Directors receives accurate information regarding our interest rate risk position at least quarterly. The ALCO uses an outside consultant to perform rate shocks of our balance sheet, and to perform a variety of other analyses. The ALCO consultant meets with the Board and Management-level ALCOs on a quarterly basis. During these meetings, the ALCO consultant reviews our current position and discusses future strategies, as well as reviewing the result of rate shocks of our balance sheet and a variety of other analyses. The consultant’s most recent review was as of September 30, 2014. The consultant ran a base simulation assuming no changes in rates as well as a 200 basis point rising and, because rates are quite low, a 100 basis point falling interest rate scenario which assumes a parallel and pro rata shift of the yield curve over a one-year period, and no growth assumptions.  The consultant also ran simulations in a 400 basis points rising scenario and a 500 basis point flattening scenario. Additionally, the consultant ran simulations with other changes in the yield curve and with prepayment speed changes.  A summary of the results is as follows:

Current/Flat Rates: If rates remain at current levels net interest income is projected to trend downward for the entire simulation as asset yields will continue to decline while funding costs provide little to no relief.

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Falling Rates: If rates fall 100 basis points, our net interest income is projected to trend in line with the base case over the first year as we bring funding costs down to near zero.  Thereafter net interest income is reduced as increased prepayment speeds accelerate asset cash flow putting added pressure on asset yields, while deposit rate reductions are limited as they are at or near their floors. 

Rising Rates: Higher rates are better for us under all scenarios. If rates rise in a parallel fashion net interest income rises above the base case immediately and continues to increase throughout the simulation as asset yields improve and outpace assumed funding costs increases.  This asset sensitivity holds true even if the yield curve were to flatten as rates rise.   

We have established a target range for the change in net interest income in year one of zero to 7.5%. The net interest income simulation as of September 30, 2014 showed that the change in net interest income for the next 12 months from our expected or “most likely” forecast was as follows:

 

 

Rate Change

Percent Change in Net Interest Income

Up 200 basis points

3.7% 

 

Down 100 basis points

0.3% 

 

 

The change in net interest income in the second year of the simulation shows a much more pronounced downward trend in the flat and down 100 basis points scenarios, the projected change is (3.9)% and (10.6)%, respectively, while the up 200 basis points simulation produces an increase of 7.5%.  The degree to which this exposure materializes will depend, in part, on our ability to manage our balance sheet as interest rates rise or fall.

The preceding sensitivity analysis does not represent our forecast and should not be relied upon as being indicative of expected operating results.  These estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit run-off rates, pricing decisions on loans and deposits and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.

The model used to perform the base case balance sheet simulation assumes a parallel shift of the yield curve over twelve months and reprices every interest earning asset and interest bearing liability on our balance sheet. Prepayment assumptions for all residential mortgage products take into account prepayment assumptions most recently published by Applied Financial Technologies. Prepayment assumptions for commercial loan and commercial mortgage products are derived through an analysis of historical prepayment patterns combined with analysis of the current characteristics of the portfolio. Investment securities with call provisions are examined on an individual basis in each rate environment to estimate the likelihood of a call. The model uses product-specific assumptions for deposits which are subject to repricing based on current market conditions

The most significant ongoing factor affecting market risk exposure of net interest income during the quarter ended September 30, 2014 was the sustained low interest rate environment.  Net interest income exposure is also significantly affected by the shape and level of the U.S. Government securities and interest rate swap yield curves, and changes in the size and composition of the loan, investment and deposit portfolios. 

As market conditions vary from those assumed in the sensitivity analysis, actual results will likely differ due to: the varying impact of changes in the balances and mix of loans and deposits differing from those assumed, the impact of possible off balance sheet hedging strategies, and other internal/external variables. Furthermore, the sensitivity analysis does not reflect all actions that the ALCO might take in responding to or anticipating changes in interest rates.

 

Credit Risk

The Board of Directors reviews and approves our loan policy on an annual basis. Among other things, the loan policy establishes restrictions regarding the types of loans that may be granted, and the distribution of loan types within our portfolio. Our Board of Directors grants each loan officer the authority to originate loans on our behalf, subject to certain limitations. These authorized lending limits are reviewed at least annually and are based upon the lender’s experience. Loan requests that exceed a lender’s authority require the signature of our Credit Division Manager, Senior Loan Officer, and/or President. With the exception of certain municipal loans, all extensions of credit of $5.0 million or greater to any one borrower, or related party interest, are reviewed and approved by the Loan Committee of Merchants Bank’s Board of Directors. Short-term revenue anticipation and tax anticipation extensions of credit of $8.0 million or greater to a municipality are reviewed and approved by the Loan Committee of Merchants Bank’s Board of Directors. Our loan portfolio is continuously monitored for performance, creditworthiness and strength of documentation through the use of a variety of management reports and the assistance of an external loan review firm.  Credit ratings are assigned to commercial loans and are routinely reviewed. Loan officers, under the supervision of the Senior Lender and Senior Credit Officer, take remedial actions to assure full and timely payment of loan balances when necessary.  Our policy is to discontinue the accrual of interest on loans when scheduled payments become contractually past due 90 or more days and the ultimate collectability of principal or interest becomes doubtful.  In certain instances the accrual of interest is discontinued prior to 90 days past due if Management determines that the borrower will not be able to continue making timely payments.

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Item 4. Controls and Procedures 

Our principal executive officer, principal financial officer, and other members of our senior management have evaluated our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that the disclosure controls and procedures effectively ensure that information required to be disclosed in our filings and submissions with the SEC under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management (including the principal executive officer and principal financial officer), and is recorded, processed, summarized and reported within the time periods specified by the SEC. In addition, we have reviewed our internal control over financial reporting and there have been no changes in our internal control over financial reporting during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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MERCHANTS BANCSHARES, INC.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, please read the factors discussed in Part I – Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC on March 10, 2014, which could materially adversely affect our business, financial condition and operating results. These risks are not the only ones facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and operating results. 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None. 

 

Item 3. Defaults Upon Senior Securities

 

None. 

 

Item 4. Mine Safety Disclosure

 

Not applicable. 

 

Item 5. Other Information

 

None. 

 

Item 6. Exhibits

 

31.1* Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended

 

31.2* Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended

 

32.1** Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2** Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101** The following materials from Merchants Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2014 and December 31, 2013; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013; and (v) Notes to Interim Unaudited Consolidated Financial Statements. 

_______________________________

* Filed herewith

** Furnished herewith

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MERCHANTS BANCSHARES, INC.

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Merchants Bancshares, Inc. 

 

/s/ Michael R. Tuttle

Michael R. Tuttle

President & Chief Executive Officer

 

/s/ Janet P. Spitler

Janet P. Spitler

Chief Financial Officer & Treasurer

 

 

October 30, 2014 

Date

 

 

44