Attached files
file | filename |
---|---|
10-K - 10-K REPORT FOR COMMUNITY BANCORP. - COMMUNITY BANCORP /VT | cmtv_10-k2019.htm |
EX-32.2 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - COMMUNITY BANCORP /VT | exhibit32_2certificationl.htm |
EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - COMMUNITY BANCORP /VT | exhibit32_1certificationk.htm |
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - COMMUNITY BANCORP /VT | exhibit31_2certificationl.htm |
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - COMMUNITY BANCORP /VT | exhibit31_1certificationk.htm |
EX-23 - CONSENTS OF EXPERTS AND COUNSEL - COMMUNITY BANCORP /VT | exhibit23_consent2019.htm |
EX-21 - SUBSIDIARIES OF THE REGISTRANT - COMMUNITY BANCORP /VT | exhibit21_subsidiaries.htm |
EX-4 - CMTV COMMON STOCK AND PREFERRED STOCK DETAIL - COMMUNITY BANCORP /VT | exhibit4iiicmtvstock.htm |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
The
Management of the Company is responsible for the preparation and
fair presentation of the consolidated financial statements and
other financial information contained in this Form 10-K. Management
is also responsible for establishing and maintaining adequate
internal control over financial reporting and for identifying the
framework used to evaluate its effectiveness. Management has
designed processes, internal control and a business culture that
foster financial integrity and accurate reporting. The
Company’s comprehensive system of internal control over
financial reporting was designed to provide reasonable assurances
regarding the reliability of financial reporting and the
preparation of the consolidated financial statements of the Company
in accordance with generally accepted accounting principles. The
Company’s accounting policies and internal control over
financial reporting, established and maintained by Management, are
under the general oversight of the Company’s Board of
Directors, including the Board of Directors’ Audit
Committee.
Management
has made a comprehensive review, evaluation, and assessment of the
Company’s internal control over financial reporting as of
December 31, 2019. The standard measures adopted by Management in
making its evaluation are the measures in the 2013 Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based upon its review and evaluation, Management concluded that the
Company maintained effective internal control over financial
reporting as of December 31, 2019.
Berry
Dunn McNeil & Parker, LLC, an independent registered public
accounting firm, which has audited and reported on the consolidated
financial statements contained in this Form 10-K, has issued its
written audit report on the Company’s internal control over
financial reporting which follows this report.
|
|
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|
Ms.
Kathryn M. Austin, President & Chief Executive
Officer
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|
(Principal
Executive Officer)
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Ms.
Louise M. Bonvechio, Corporate Secretary &
Treasurer
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(Principal
Financial Officer)
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|
1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Board
of Directors and Shareholders
Community
Bancorp. and Subsidiary
Opinions on the Financial Statements and Internal Control over
Financial Reporting
We have
audited the accompanying consolidated balance sheets of Community
Bancorp. and Subsidiary (the Company) as of December 31, 2019 and
2018, and the related consolidated statements of income,
comprehensive income, changes in shareholders' equity, and cash
flows for the years then ended, and the related notes (collectively
referred to as the financial statements). We have also audited the
Company’s internal control over financial reporting as of
December 31, 2019, based on criteria established in the
Internal Control —
Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO).
In our
opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Community
Bancorp. and Subsidiary as of December 31, 2019 and 2018, and the
results of their operations and their cash flows for the years then
ended in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2019, based on criteria established in
Internal Control –
Integrated Framework (2013) issued by COSO.
Basis for Opinion
The
Company's management is responsible for these financial statements,
for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Company's financial statements and an opinion on the Company's
internal control over financial reporting based on our audits. We
are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud,
and whether effective internal control over financial reporting was
maintained in all material respects.
Our
audits of the financial statements included performing procedures
to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the financial statements. Our audit of internal control over
financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
2
Board
of Directors and Shareholders
Community
Bancorp. and Subsidiary
Page
2
Definition and Limitations of Internal Control Over Financial
Reporting
A
company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
We have
served as the Company's auditor since 2003.
Portland,
Maine
March
16, 2020
Vermont
Registration No. 92-0000278
Maine
● New Hampshire ● Massachusetts ● Connecticut
● West Virginia ● Arizona
berrydunn.com
3
Community
Bancorp. and Subsidiary
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December 31,
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December 31,
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Consolidated
Balance Sheets
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2019
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2018
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Assets
|
|
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Cash
and due from banks
|
$10,263,535
|
$14,906,529
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Federal
funds sold and overnight deposits
|
38,298,677
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53,028,286
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Total
cash and cash equivalents
|
48,562,212
|
67,934,815
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Securities
available-for-sale
|
45,966,750
|
39,366,831
|
Restricted
equity securities, at cost
|
1,431,850
|
1,749,450
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Loans
|
606,988,937
|
578,450,517
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Allowance
for loan losses
|
(5,926,491)
|
(5,602,541)
|
Deferred
net loan costs
|
362,415
|
363,614
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Net
loans
|
601,424,861
|
573,211,590
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Bank
premises and equipment, net
|
10,959,403
|
9,713,455
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Accrued
interest receivable
|
2,336,553
|
2,300,841
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Bank
owned life insurance
|
4,903,012
|
4,814,099
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Goodwill
|
11,574,269
|
11,574,269
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Other
real estate owned
|
966,738
|
201,386
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Other
assets
|
9,829,671
|
9,480,762
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Total
assets
|
$737,955,319
|
$720,347,498
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Liabilities
and Shareholders' Equity
|
|
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Liabilities
|
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Deposits:
|
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Demand,
non-interest bearing
|
$125,089,403
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$122,430,805
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Interest-bearing
transaction accounts
|
185,102,333
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177,815,417
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Money
market funds
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91,463,661
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85,261,685
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Savings
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97,167,652
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93,129,875
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Time
deposits, $250,000 and over
|
14,565,559
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14,395,291
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Other
time deposits
|
101,632,760
|
115,783,492
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Total
deposits
|
615,021,368
|
608,816,565
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Borrowed
funds
|
2,650,000
|
1,550,000
|
Repurchase
agreements
|
33,189,848
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30,521,565
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Junior
subordinated debentures
|
12,887,000
|
12,887,000
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Accrued
interest and other liabilities
|
5,312,424
|
3,968,657
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Total
liabilities
|
669,060,640
|
657,743,787
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Shareholders'
Equity
|
|
|
Preferred
stock, 1,000,000 shares authorized, 15 and 20 shares issued
and
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outstanding
at December 31, 2019 and 2018, respectively
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($100,000
liquidation value, per share)
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1,500,000
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2,000,000
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Common
stock - $2.50 par value; 15,000,000 shares authorized,
5,449,857
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|
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and
5,382,103 shares issued at December 31, 2019 and 2018,
respectively
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(including
16,267 and 17,442 shares issued February 1, 2020 and
2019,
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respectively)
|
13,624,643
|
13,455,258
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Additional
paid-in capital
|
33,464,381
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32,536,532
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Retained
earnings
|
22,667,949
|
17,882,282
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Accumulated
other comprehensive income (loss)
|
260,483
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(647,584)
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Less:
treasury stock, at cost; 210,101 shares at December 31, 2019 and
2018
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(2,622,777)
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(2,622,777)
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Total
shareholders' equity
|
68,894,679
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62,603,711
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Total
liabilities and shareholders' equity
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$737,955,319
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$720,347,498
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Book value per
common share outstanding
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$12.86
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$11.72
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The
accompanying notes are an integral part of these consolidated
financial statements.
4
Community
Bancorp. and Subsidiary
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Years Ended December
31,
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|
Consolidated
Statements of Income
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2019
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2018
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Interest
income
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Interest
and fees on loans
|
$29,883,352
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$27,609,505
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Interest
on taxable debt securities
|
1,089,201
|
895,165
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Dividends
|
100,609
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125,973
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Interest
on federal funds sold and overnight deposits
|
685,646
|
483,960
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Total
interest income
|
31,758,808
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29,114,603
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Interest
expense
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Interest
on deposits
|
5,124,651
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3,547,798
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Interest
on borrowed funds
|
24,550
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95,936
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Interest
on repurchase agreements
|
299,347
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190,993
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Interest
on junior subordinated debentures
|
694,573
|
650,361
|
Total
interest expense
|
6,143,121
|
4,485,088
|
|
|
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Net
interest income
|
25,615,687
|
24,629,515
|
Provision for
loan losses
|
1,066,167
|
780,000
|
Net
interest income after provision for loan losses
|
24,549,520
|
23,849,515
|
|
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Non-interest
income
|
|
|
Service
fees
|
3,313,833
|
3,238,954
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Income
from sold loans
|
706,306
|
780,622
|
Other
income from loans
|
904,156
|
879,887
|
Net
realized loss on sale of securities AFS
|
(26,490)
|
(32,718)
|
Other
income
|
1,048,261
|
1,314,563
|
Total
non-interest income
|
5,946,066
|
6,181,308
|
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Non-interest
expense
|
|
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Salaries
and wages
|
7,271,722
|
7,203,001
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Employee
benefits
|
3,118,631
|
2,880,048
|
Occupancy
expenses, net
|
2,605,995
|
2,545,959
|
Other
expenses
|
6,884,932
|
7,266,018
|
Total
non-interest expense
|
19,881,280
|
19,895,026
|
|
|
|
Income
before income taxes
|
10,614,306
|
10,135,797
|
Income tax
expense
|
1,789,860
|
1,738,265
|
Net
income
|
$8,824,446
|
$8,397,532
|
|
|
|
Earnings per
common share
|
$1.68
|
$1.61
|
Weighted
average number of common shares
|
|
|
used in
computing earnings per share
|
5,204,768
|
5,139,297
|
Dividends
declared per common share
|
$0.76
|
$0.74
|
The
accompanying notes are an integral part of these consolidated
financial statements.
5
Community
Bancorp. and Subsidiary
|
|
|
Consolidated
Statements of Comprehensive Income
|
|
|
|
Years Ended December
31,
|
|
|
2019
|
2018
|
|
|
|
Net
income
|
$8,824,446
|
$8,397,532
|
|
|
|
Other comprehensive
income (loss), net of tax:
|
|
|
Unrealized
holding gain (loss) on securities AFS arising during the
period
|
1,122,961
|
(505,487)
|
Reclassification
adjustment for loss realized in income
|
26,490
|
32,718
|
Unrealized
gain (loss) during the period
|
1,149,451
|
(472,769)
|
Tax
effect
|
(241,384)
|
99,282
|
Other
comprehensive income (loss), net of tax
|
908,067
|
(373,487)
|
Total
comprehensive income
|
$9,732,513
|
$8,024,045
|
The
accompanying notes are an integral part of these consolidated
financial statements.
6
Community Bancorp. and Subsidiary
|
Consolidated Statements of Changes in Shareholders'
Equity
|
Years Ended December 31, 2019 and 2018
|
|
Common stock
|
Preferred stock
|
||
|
Shares
|
Amount
|
Shares
|
Amount
|
|
|
|
|
|
Balances, December
31, 2017
|
5,322,320
|
$13,305,800
|
25
|
$2,500,000
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
Net
income
|
0
|
0
|
0
|
0
|
Other comprehensive
loss
|
0
|
0
|
0
|
0
|
|
|
|
|
|
Total comprehensive
income
|
|
|
|
|
|
|
|
|
|
Cash dividends
declared - common stock
|
0
|
0
|
0
|
0
|
Cash dividends
declared - preferred stock
|
0
|
0
|
0
|
0
|
Issuance of common
stock
|
59,783
|
149,458
|
0
|
0
|
|
|
|
|
|
Redemption of
preferred stock
|
0
|
0
|
(5)
|
(500,000)
|
|
|
|
|
|
Balances, December
31, 2018
|
5,382,103
|
13,455,258
|
20
|
2,000,000
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
Net
income
|
0
|
0
|
0
|
0
|
Other comprehensive
income
|
0
|
0
|
0
|
0
|
|
|
|
|
|
Total comprehensive
income
|
|
|
|
|
|
|
|
|
|
Cash dividends
declared - common stock
|
0
|
0
|
0
|
0
|
Cash dividends
declared - preferred stock
|
0
|
0
|
0
|
0
|
Issuance of common
stock
|
67,754
|
169,385
|
0
|
0
|
|
|
|
|
|
Redemption of
preferred stock
|
0
|
0
|
(5)
|
(500,000)
|
|
|
|
|
|
Balances, December
31, 2019
|
5,449,857
|
$13,624,643
|
15
|
$1,500,000
|
The
accompanying notes are an integral part of these consolidated
financial statements.
7
|
|
Accumulated
|
|
|
Additional
|
|
other
|
|
Total
|
paid-in
|
Retained
|
comprehensive
|
Treasury
|
shareholders'
|
capital
|
earnings
|
(loss) income
|
stock
|
equity
|
|
|
|
|
|
$31,639,189
|
$13,387,739
|
($274,097)
|
($2,622,777)
|
$57,935,854
|
|
|
|
|
|
|
|
|
|
|
0
|
8,397,532
|
0
|
0
|
8,397,532
|
0
|
0
|
(373,487)
|
0
|
(373,487)
|
|
|
|
|
|
|
|
|
|
8,024,045
|
|
|
|
|
|
0
|
(3,799,864)
|
0
|
0
|
(3,799,864)
|
0
|
(103,125)
|
0
|
0
|
(103,125)
|
897,343
|
0
|
0
|
0
|
1,046,801
|
|
|
|
|
|
0
|
0
|
0
|
0
|
(500,000)
|
|
|
|
|
|
32,536,532
|
17,882,282
|
(647,584)
|
(2,622,777)
|
62,603,711
|
|
|
|
|
|
|
|
|
|
|
0
|
8,824,446
|
0
|
0
|
8,824,446
|
0
|
0
|
908,067
|
0
|
908,067
|
|
|
|
|
|
|
|
|
|
9,732,513
|
|
|
|
|
|
0
|
(3,951,279)
|
0
|
0
|
(3,951,279)
|
0
|
(87,500)
|
0
|
0
|
(87,500)
|
927,849
|
0
|
0
|
0
|
1,097,234
|
|
|
|
|
|
0
|
0
|
0
|
0
|
(500,000)
|
|
|
|
|
|
$33,464,381
|
$22,667,949
|
$260,483
|
($2,622,777)
|
$68,894,679
|
8
Community
Bancorp. and Subsidiary
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
Years Ended December
31,
|
|
|
2019
|
2018
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
Net
income
|
$8,824,446
|
$8,397,532
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
operating
activities:
|
|
|
Depreciation
and amortization, bank premises and equipment
|
930,035
|
981,691
|
Provision
for loan losses
|
1,066,167
|
780,000
|
Deferred
income tax
|
96,236
|
(11,359)
|
Net
realized loss on sale of securities AFS
|
26,490
|
32,718
|
Gain
on sale of loans
|
(290,116)
|
(345,780)
|
Loss
(gain) on sale of bank premises and equipment
|
30,797
|
(260,013)
|
Loss
on sale of OREO
|
817
|
2,397
|
Income
from CFS Partners
|
(588,696)
|
(514,485)
|
Amortization
of bond premium, net
|
120,295
|
128,469
|
Write
down of OREO
|
95,008
|
78,447
|
Proceeds
from sales of loans held for sale
|
14,098,560
|
14,793,920
|
Originations
of loans held for sale
|
(13,808,444)
|
(13,410,853)
|
Increase
(decrease) in taxes payable
|
522
|
(23,758)
|
Increase
in interest receivable
|
(35,712)
|
(248,923)
|
Decrease
in mortgage servicing rights
|
65,371
|
78,338
|
Decrease
in right-of-use assets
|
236,395
|
0
|
Decrease
in operating lease liabilities
|
(227,606)
|
0
|
Decrease
(increase) in other assets
|
335,167
|
(790,320)
|
Increase
in cash surrender value of BOLI
|
(88,913)
|
(92,317)
|
Amortization
of limited partnerships
|
312,106
|
411,061
|
Decrease
(increase) in unamortized loan costs
|
1,199
|
(44,963)
|
Increase
in interest payable
|
26,204
|
12,524
|
Increase
in accrued expenses
|
66,100
|
149,648
|
(Decrease)
increase in other liabilities
|
(45,772)
|
62,805
|
Net
cash provided by operating activities
|
11,246,656
|
10,166,779
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
Investments
- AFS
|
|
|
Maturities,
calls, pay downs and sales
|
19,998,076
|
8,543,078
|
Purchases
|
(25,595,329)
|
(10,093,214)
|
Proceeds
from redemption of restricted equity securities
|
493,600
|
1,147,500
|
Purchases
of restricted equity securities
|
(176,000)
|
(1,193,300)
|
Increase
in limited partnership contributions payable
|
184,000
|
388,750
|
Investments
in limited liability entities
|
(811,000)
|
(877,000)
|
Increase
in loans, net
|
(30,365,217)
|
(27,835,972)
|
Capital
expenditures net of proceeds from sales of bank
|
|
|
premises
and equipment
|
(952,396)
|
(90,957)
|
Proceeds
from sales of OREO
|
105,561
|
335,056
|
Recoveries
of loans charged off
|
117,842
|
126,462
|
Net
cash used in investing activities
|
(37,000,863)
|
(29,549,597)
|
9
|
2019
|
2018
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
Net
increase in demand and interest-bearing transaction
accounts
|
9,945,514
|
50,367,124
|
Net
increase (decrease) in money market and savings
accounts
|
10,239,753
|
(12,516,729)
|
Net
(decrease) increase in time deposits
|
(13,980,464)
|
10,331,190
|
Net
increase in repurchase agreements
|
2,668,283
|
1,873,717
|
Proceeds
from long-term borrowings
|
1,100,000
|
0
|
Repayments
on long-term borrowings
|
0
|
(2,000,000)
|
Decrease
in finance lease obligations
|
(166,924)
|
(115,060)
|
Redemption
of preferred stock
|
(500,000)
|
(500,000)
|
Dividends
paid on preferred stock
|
(87,500)
|
(103,125)
|
Dividends
paid on common stock
|
(2,837,058)
|
(2,672,985)
|
Net
cash provided by financing activities
|
6,381,604
|
44,664,132
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
(19,372,603)
|
25,281,314
|
Cash
and cash equivalents:
|
|
|
Beginning
|
67,934,815
|
42,653,501
|
Ending
|
$48,562,212
|
$67,934,815
|
|
|
|
Supplemental
Schedule of Cash Paid During the Period:
|
|
|
Interest
|
$6,116,917
|
$4,472,564
|
|
|
|
Income
taxes, net of refunds
|
$1,381,000
|
$1,365,000
|
|
|
|
Supplemental
Schedule of Noncash Investing and Financing
Activities:
|
|
|
Change
in unrealized gain (loss) on securities AFS
|
$1,149,451
|
$(472,769)
|
|
|
|
Loans
transferred to OREO
|
$966,738
|
$333,051
|
|
|
|
Common
Shares Dividends Paid:
|
|
|
Dividends
declared
|
$3,951,279
|
$3,799,864
|
Increase
in dividends payable attributable to dividends
declared
|
(16,987)
|
(80,078)
|
Dividends
reinvested
|
(1,097,234)
|
(1,046,801)
|
|
$2,837,058
|
$2,672,985
|
The
accompanying notes are an integral part of these consolidated
financial statements.
10
COMMUNITY BANCORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1. Significant Accounting Policies
The
accounting policies of Community Bancorp. and Subsidiary (the
Company) are in conformity, in all material respects, with U.S.
generally accepted accounting principles (US GAAP) and general
practices within the banking industry. The following is a
description of the Company’s significant accounting
policies.
Basis of presentation and consolidation
In
addition to the definitions provided elsewhere in this Annual
Report, the definitions, acronyms and abbreviations identified
below are used throughout this Annual Report, including these
“Notes to Consolidated Financial Statements” and the
section labeled “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” immediately
following. These definitions are intended to aid the reader and
provide a reference page when reviewing this Annual
Report.
ABS and OAS:
|
Asset backed or other amortizing security
|
FHA:
|
Federal Housing Administration
|
ACBB:
|
Atlantic Community Bankers Bank
|
FHLBB:
|
Federal Home Loan Bank of Boston
|
ACBI:
|
Atlantic Community Bancshares, Inc.
|
FHLMC :
|
Federal Home Loan Mortgage Corporation
|
ACH:
|
Automated Clearing House
|
FICO:
|
Financing Corporation
|
AFS:
|
Available-for-sale
|
FLA:
|
First Loss Account
|
Agency MBS:
|
MBS issued by a US government agency
|
FOMC:
|
Federal Open Market Committee
|
|
or GSE
|
FRB:
|
Federal Reserve Board
|
ALCO:
|
Asset Liability Committee
|
FRBB:
|
Federal Reserve Bank of Boston
|
ALL:
|
Allowance for loan losses
|
GAAP:
|
Generally Accepted Accounting Principles
|
AML:
|
Anti-money laundering laws
|
|
in the United States
|
AOCI:
|
Accumulated other comprehensive income
|
GSE:
|
Government sponsored enterprise
|
ASC:
|
Accounting Standards Codification
|
HMDA:
|
Home Mortgage Disclosure Act
|
ASU:
|
Accounting Standards Update
|
HTM:
|
Held-to-maturity
|
ATMs:
|
Automatic teller machines
|
ICS:
|
Insured Cash Sweeps of the Promontory
|
Bancorp:
|
Community Bancorp.
|
|
Interfinancial Network
|
Bank:
|
Community National Bank
|
IRS:
|
Internal Revenue Service
|
BHG
|
Bankers Healthcare Group
|
JNE:
|
Jobs for New England
|
BIC:
|
Borrower-in-Custody
|
Jr:
|
Junior
|
Board:
|
Board of Directors
|
LIBOR:
|
London Interbank Offered Rate
|
BOLI:
|
Bank owned life insurance
|
LLC:
|
Limited liability corporation
|
bp or bps:
|
Basis point(s)
|
MBS:
|
Mortgage-backed security
|
BSA:
|
Bank Secrecy Act
|
MPF:
|
Mortgage Partnership Finance
|
CBLR:
|
Community Bank Leverage Ratio
|
MSAs
|
Metropolitan Statistical Areas
|
CDARS:
|
Certificate of Deposit Accounts Registry
|
MSRs:
|
Mortgage servicing rights
|
|
Service of the Promontory Interfinancial
|
NII:
|
Net interest income
|
|
Network
|
NMTC:
|
New Market Tax Credits
|
CDs:
|
Certificates of deposit
|
OCI:
|
Other comprehensive income (loss)
|
CDI:
|
Core deposit intangible
|
OFAC:
|
Office of Foreign Asset Control
|
CECL:
|
Current Expected Credit Loss
|
OREO:
|
Other real estate owned
|
CEO:
|
Credit Enhancement Obligation
|
OTTI:
|
Other-than-temporary impairment
|
CFPB:
|
Consumer Financial Protection Bureau
|
PMI:
|
Private mortgage insurance
|
CFSG:
|
Community Financial Services Group, LLC
|
QM(s):
|
Qualified Mortgage(s)
|
CFS Partners:
|
Community Financial Services Partners,
|
RD:
|
USDA Rural Development
|
|
LLC
|
RESPA:
|
Real Estate Settlement Procedures Act
|
Company:
|
Community Bancorp. and Subsidiary
|
SBA:
|
U.S. Small Business Administration
|
CRA:
|
Community Reinvestment Act
|
SEC:
|
U.S. Securities and Exchange Commission
|
CRE:
|
Commercial Real Estate
|
SERP:
|
Supplemental Employee Retirement Plan
|
DDA or DDAs:
|
Demand Deposit Account(s)
|
SOX:
|
Sarbanes-Oxley Act of 2002
|
DIF:
|
Deposit Insurance Fund
|
TDR:
|
Troubled-debt restructuring
|
DTC:
|
Depository Trust Company
|
TILA:
|
Truth in Lending Act
|
DRIP:
|
Dividend Reinvestment Plan
|
USDA:
|
U.S. Department of Agriculture
|
Exchange Act:
|
Securities Exchange Act of 1934
|
VA:
|
U.S. Veterans Administration
|
FASB:
|
Financial Accounting Standards Board
|
VIE:
|
Variable interest entities
|
FDIA:
|
Federal Deposit Insurance Act
|
2017 Tax Act:
|
Tax Cut and Jobs Act of 2017
|
FDIC:
|
Federal Deposit Insurance Corporation
|
2018
|
Economic Growth, Regulatory Relief and
|
FDICIA:
|
Federal Deposit Insurance Company
|
Regulatory
|
Consumer Protection Act of 2018
|
|
Improvement Act of 1991
|
Relief Act:
|
|
11
The
consolidated financial statements include the accounts of the
Bancorp. and its wholly-owned subsidiary, the Bank. All significant
intercompany accounts and transactions have been eliminated. The
Company is considered a “smaller reporting company”
under the disclosure rules of the SEC, as amended in 2018.
Accordingly, the Company has elected to provide its audited
consolidated statements of income, comprehensive income, cash flows
and changes in shareholders’ equity for a two year, rather
than a three year, period, and intends to provide smaller reporting
company scaled disclosures where management deems it appropriate.
Beginning with its periodic reports filed in 2018, the Company is
considered an accelerated filer under the financial reporting rules
of the SEC.
FASB
ASC Topic 810, “Consolidation”, in part, addresses
limited purpose trusts formed to issue trust preferred securities.
It also establishes the criteria used to identify VIE, and to
determine whether or not to consolidate a VIE. In general, ASC
Topic 810 provides that the enterprise with the controlling
financial interest, known as the primary beneficiary, consolidates
the VIE. In 2007, the Company formed CMTV Statutory Trust I for the
purposes of issuing trust preferred securities to unaffiliated
parties and investing the proceeds from the issuance thereof and
the common securities of the trust in junior subordinated
debentures issued by the Company. The Company is not the primary
beneficiary of CMTV Statutory Trust I; accordingly, the trust is
not consolidated with the Company for financial reporting purposes.
CMTV Statutory Trust I is considered an affiliate of the Company
(see Note 11).
During
the years 2011 through 2018, the Company was the sole owner of a
LLC formed to facilitate the Company’s purchase of federal
NMTC under an investment structure designed by a local community
development entity. The NMTC financing matured in the fourth
quarter of 2018 and the Company exited the investment and
terminated its interest in the LLC. Management evaluated the
Company’s interest in the LLC under the ASC guidance relating
to VIEs in light of the overall structure and purpose of the NMTC
financing transaction and concluded that the LLC should not be
consolidated in the Company’s financial statements for
financial reporting purposes, as the Company was not the primary
beneficiary of the NMTC structure, did not exercise control within
the overall structure and was not obligated to absorb a majority of
any losses of the NMTC structure (see Note 8).
Nature of operations
The
Company provides a variety of deposit and lending services to
individuals, municipalities, and business customers through its
branches, ATMs and telephone, mobile and internet banking
capabilities in northern and central Vermont, which is primarily a
small business and agricultural area. The Company's primary deposit
products are checking and savings accounts and certificates of
deposit. Its primary lending products are commercial, real estate,
municipal and consumer loans.
Concentration of risk
The
Company's operations are affected by various risk factors,
including interest rate risk, credit risk, and risk from geographic
concentration of its deposit taking and lending activities.
Management attempts to manage interest rate risk through various
asset/liability management techniques designed to match maturities
and repricing of assets and liabilities. Loan policies and
administration are designed to provide assurance that loans will
only be granted to creditworthy borrowers, although credit losses
are expected to occur because of subjective factors inherent in
management’s estimate of credit risk and factors beyond the
control of the Company. While the Company has a diversified loan
portfolio by loan type, most of its lending activities are
conducted within the geographic area where its banking offices are
located. As a result, the Company and its borrowers may be
especially vulnerable to the consequences of changes in the local
economy in northern and central Vermont. In addition, a substantial
portion of the Company's loans are secured by real estate, which is
susceptible to a decline in value, especially during times of
adverse economic conditions.
Use of estimates
The
preparation of consolidated financial statements in conformity with
US 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 revenues and
expenses during the reporting period. These estimates and
assumptions involve inherent uncertainties. Accordingly, actual
results could differ from those estimates and those differences
could be material.
Material
estimates that are particularly susceptible to significant change
relate to the determination of the ALL and the valuation of OREO.
In connection with evaluating loans for impairment or assigning the
carrying value of OREO, management generally obtains independent
evaluations or appraisals for significant properties. While the ALL
and the carrying value of OREO are determined using management's
best estimate of probable loan and OREO losses, respectively, as of
the balance sheet date, the ultimate collection of a substantial
portion of the Company's loan portfolio and the recovery of a
substantial portion of the fair value of OREO are susceptible to
uncertainties and changes in a number of factors, especially local
real estate market conditions. The amount of the change that is
reasonably possible cannot be estimated.
12
While
management uses available information to recognize losses on loans
and OREO, future additions to the allowance or write-downs of OREO
may be necessary based on changes in local economic conditions or
other relevant factors. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the
Company's allowance for losses on loans and the carrying value of
OREO. Such agencies may require the Company to recognize additions
to the allowance or write-downs of OREO based on their judgment
about information available to them at the time of their
examination.
MSRs
associated with loans originated and sold in the secondary market,
where servicing is retained, are capitalized and included in other
assets in the consolidated balance sheets. MSRs are amortized
against non-interest income in proportion to, and over the period
of, estimated future net servicing income of the underlying loans.
The value of capitalized servicing rights represents the present
estimated value of the future servicing fees arising from the right
to service loans for third parties. The carrying value of the MSRs
is periodically reviewed for impairment based on management’s
estimate of fair value as compared to amortized cost, and
impairment, if any, is recognized through a valuation allowance and
is recorded as a write down. Critical accounting policies for MSRs
relate to the initial valuation and subsequent impairment tests.
The methodology used to determine the valuation of MSRs requires
the development and use of estimates, including anticipated
principal amortization and prepayments. Events that may
significantly affect the estimates used are changes in interest
rates and the payment performance of the underlying loans.
Management uses a third party consultant to assist in estimating
the fair value of the Company’s MSRs.
Management
evaluates securities for OTTI on at least a quarterly basis, and
more frequently when economic or market conditions warrant such
evaluation. Consideration is given to various factors, including
the length of time and the extent to which the fair value has been
less than cost; the nature of the issuer and its financial
condition and near-term prospects; and the intent and ability of
the Company to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in fair
value. The evaluation of these factors is a subjective process and
involves estimates and assumptions about matters that are
inherently uncertain. Should actual factors and conditions differ
materially from those used by management, the actual realization of
gains or losses on investment securities could differ materially
from the amounts recorded in the financial statements.
Accounting
for a business combination that was completed prior to 2009
requires the application of the purchase method of accounting.
Under the purchase method, the Company was required to record the
assets and liabilities acquired through the LyndonBank merger in
2007 at fair market value, with the excess of the purchase price
over the fair value of the net assets recorded as goodwill and
evaluated annually for impairment. Management uses various
assumptions in evaluating goodwill for impairment.
Management
utilizes numerous techniques to estimate the carrying value of
various other assets held by the Company, including, but not
limited to, bank premises and equipment and deferred taxes. The
assumptions considered in making these estimates are based on
historical experience and on various other factors that are
believed by management to be reasonable under the circumstances.
Management acknowledges that the use of different estimates or
assumptions could produce different estimates of carrying
values.
Presentation of cash flows
For
purposes of presentation in the consolidated statements of cash
flows, cash and cash equivalents includes cash on hand, amounts due
from banks (including cash items in process of clearing), federal
funds sold (generally purchased and sold for one day periods) and
overnight deposits.
Investment securities
Change in Accounting Principle
Prior
to 2019, the entire balance of the Company’s HTM investment
portfolio consisted of Municipal notes. Effective January 1, 2019,
and in accordance with ASC 250 (Accounting Changes and Error
Corrections), the Company chose to reclassify these debt
instruments from the investment portfolio into the loan portfolio.
This change represents a voluntary reclassification of municipal
debt instruments from classification as investment securities under
ASC 320 (Investments – Debt and Equity Securities) to
classification as loans under ASC 310 (Receivables). All periods
presented have been restated to conform to this change.
Accordingly, for all periods presented below, the Company’s
investment portfolio consists entirely of AFS investments and
municipal debt obligations are reported as a component of the
Company’s loan portfolio (See Note 3). The reclassification
of the municipal debt instruments in this portfolio did not have a
material impact on the Company’s consolidated financial
statements or results of operations.
13
Debt
securities the Company has purchased with the possible intent to
sell before maturity are classified as AFS, and are carried at fair
value, with unrealized gains and losses, net of tax and
reclassification adjustments, reflected as a net amount in the
shareholders’ equity section of the consolidated balance
sheets and in the statements of changes in shareholders’
equity. Investment securities transactions are accounted for on a
trade date basis. The specific identification method is used to
determine realized gains and losses on sales of debt securities AFS
and equity securities. Premiums and discounts are recognized in
interest income using the interest method over the period to
maturity or call date. The Company does not hold any securities
purchased for the purpose of selling in the near term and
classified as trading. As a result of the reclassification noted in
the first paragraph of this section, the Company does not hold any
securities purchased with the positive intent and ability to hold
to maturity and classified as HTM.
For
individual debt securities that the Company does not intend to sell
and it is not more likely than not that the Company will be
required to sell the security before recovery of its amortized cost
basis, the other-than-temporary decline in the fair value of the
debt security related to (1) credit loss is recognized in earnings
and (2) other factors is recognized in other comprehensive income
or loss. Credit loss is deemed to exist if the present value of
expected future cash flows using the interest rates at acquisition
is less than the amortized cost basis of the debt security. For
individual debt securities where the Company intends to sell the
security or more likely than not will be required to sell the
security before recovery of its amortized cost, the OTTI is
recognized in earnings equal to the entire difference between the
security’s cost basis and its fair value at the balance sheet
date.
Other investments
In
December 2011, the Company made an equity investment in a NMTC
financing structure, which was fully amortized in 2017 (see Note
8). The Company’s investment in the NMTC financing structure
was amortized using the effective yield method.
From
time to time, the Company acquires partnership interests in limited
partnerships for low income housing projects. New investments in
limited partnerships are amortized using the proportional
amortization method. All investments made before January 1, 2015
are amortized using the effective yield method.
The
Company has a one-third ownership interest in CFS Partners, which
in turn owns 100% of CFSG, a non-depository trust company (see Note
8). The Company's investment in CFS Partners is accounted for under
the equity method of accounting.
Restricted equity securities
The
Company holds certain restricted equity securities acquired for
non-investment purposes, and required as a matter of law or as a
condition to the receipt of certain financial products and
services. These securities are carried at cost. As a member of the
FRBB, the Company is required to invest in FRBB stock in an amount
equal to 6% of the Bank's capital stock and surplus.
As a
member of the FHLBB, the Company is required to invest in $100 par
value stock of the FHLBB in an amount that approximates 1% of
unpaid principal balances on qualifying loans, plus an additional
amount to satisfy an activity based requirement. The stock is
nonmarketable and redeemable at par value, subject to the
FHLBB’s right to temporarily suspend such redemptions.
Members are subject to capital calls in some circumstances to
ensure compliance with the FHLBB’s capital plan.
In
order to access correspondent banking services from the ACBB, the
Company is required to invest in a minimum of 20 shares of the
common stock of ACBB’s parent company, ACBI.
Loans held-for-sale
Loans
originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses, if any, are recognized through a
valuation allowance by charges to income.
Loans
As
disclosed earlier in Note 1 under the heading “Investment
Securities”, effective January 1, 2019 and in accordance with
ASC 250 (Accounting Changes and Error Corrections), the Company
chose to reclassify its municipal debt instruments from the
investment portfolio into the loan portfolio. This change
represents a voluntary reclassification of municipal debt
instruments by management from classification as investment
securities under ASC 320 (Investments – Debt and Equity
Securities) to classification as loans under ASC 310 (Receivables).
As stated earlier in this section, the reclassification of this
portfolio did not have a material impact on the Company’s
consolidated financial statements or results of
operations.
Loans
receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at
their outstanding principal balance, adjusted for any charge-offs,
the ALL, loan premiums or discounts for acquired loans and any
unearned fees or costs on originated loans.
14
Loan
interest income is accrued daily on the outstanding balances. For
all loan segments, the accrual of interest is discontinued when a
loan is specifically determined to be impaired or when the loan is
delinquent 90 days and management believes, after considering
collection efforts and other factors, that the borrower's financial
condition is such that collection of interest is doubtful. Any
unpaid interest previously accrued on those loans is reversed from
income. Interest income is generally not recognized on specific
impaired loans unless the likelihood of further loss is considered
by management to be remote. Interest payments received on
non-accrual loans are generally applied as a reduction of the loan
principal balance. Loans are returned to accrual status when
principal and interest payments are brought current and the
customer has demonstrated the intent and ability to make future
payments on a timely basis. Loans are written down or charged off
when collection of principal is considered doubtful.
Loan
origination and commitment fees and certain direct loan origination
costs are deferred and the net amount is amortized as an adjustment
of the related loan's yield. The Company generally amortizes these
amounts over the contractual life of the loans.
Loan
premiums and discounts on loans acquired in the merger with
LyndonBank were amortized as an adjustment to yield on loans. At
December 31, 2019, the remainder of these premiums and discounts
were fully amortized.
Allowance for loan losses
The ALL
is established through a provision for loan losses charged to
earnings. Loan losses are charged against the allowance when
management believes that future payments of a loan balance are
unlikely. Subsequent recoveries, if any, are credited to the
allowance.
Unsecured
loans, primarily consumer loans, are charged off when they become
uncollectible and no later than 120 days past due. Unsecured loans
to customers who subsequently file bankruptcy are charged off
within 30 days of receipt of the notification of filing or by the
end of the month in which the loans become 120 days past due,
whichever occurs first. For secured loans, both residential and
commercial, the potential loss on impaired loans is carried as a
loan loss reserve specific allocation; the loss portion is charged
off when collection of the full loan appears unlikely. The
unsecured portion of a real estate loan is that portion of the loan
exceeding the "fair value" of the collateral less the estimated
cost to sell. Value of the collateral is determined in accordance
with the Company’s appraisal policy. The unsecured portion of
an impaired real estate secured loan is charged off by the end of
the month in which the loan becomes 180 days past due.
As
described below, the allowance consists of general, specific and
unallocated components. However, the entire allowance is available
to absorb losses in the loan portfolio, regardless of specific,
general and unallocated components considered in determining the
amount of the allowance.
General component
The
general component of the ALL is based on historical loss experience
and various qualitative factors and is stratified by the following
loan segments: commercial and industrial, CRE, residential real
estate 1st lien, residential real estate Jr lien and consumer
loans. The Company does not disaggregate its portfolio segments
further into classes.
Loss
ratios are calculated by loan segment for one year, two year, three
year, four year and five year look back periods. Management uses an
average of historical losses based on a time frame appropriate to
capture relevant loss data for each loan segment in the current
economic climate. During periods of economic stability, a
relatively longer period (e.g., five years) may be appropriate.
During periods of significant expansion or contraction, the Company
may appropriately shorten the historical time period. The Company
is currently using an extended look back period of five
years.
Qualitative
factors include the levels of and trends in delinquencies and
non-performing loans, levels of and trends in loan risk groups,
trends in volumes and terms of loans, effects of any changes in
loan related policies, experience, ability and the depth of
management, documentation and credit data exception levels,
national and local economic trends, external factors such as
competition and regulation and lastly, concentrations of credit
risk in a variety of areas, including portfolio product mix, the
level of loans to individual borrowers and their related interests,
loans to industry segments, and the geographic distribution of CRE
loans. This evaluation is inherently subjective as it requires
estimates that are susceptible to revision as more information
becomes available.
The
qualitative factors are determined based on the various risk
characteristics of each loan segment. The Company has policies,
procedures and internal controls that management believes are
commensurate with the risk profile of each of these segments. Major
risk characteristics relevant to each portfolio segment are as
follows:
15
Commercial & Industrial – Loans in this segment
include commercial and industrial loans and to a lesser extent
loans to finance agricultural production. Commercial loans are made
to businesses and are generally secured by assets of the business,
including trade assets and equipment. While not the primary
collateral, in many cases these loans may also be secured by the
real estate of the business. Repayment is expected from the cash
flows of the business. A weakened economy, soft consumer spending,
unfavorable foreign trade conditions and the rising cost of labor
or raw materials are examples of issues that can impact the credit
quality in this segment.
Commercial Real Estate – Loans in this segment are
principally made to businesses and are generally secured by either
owner-occupied, or non-owner occupied CRE. A relatively small
portion of this segment includes farm loans secured by farm land
and buildings. As with commercial and industrial loans, repayment
of owner-occupied CRE loans is expected from the cash flows of the
business and the segment would be impacted by the same risk factors
as commercial and industrial loans. The non-owner occupied CRE
portion includes both residential and commercial construction
loans, vacant land and real estate development loans, multi-family
dwelling loans and commercial rental property loans. Repayment of
construction loans is expected from permanent financing takeout;
the Company generally requires a commitment or eligibility for the
take-out financing prior to construction loan origination. Real
estate development loans are generally repaid from the sale of the
subject real property as the project progresses. Construction and
development lending entail additional risks, including the project
exceeding budget, not being constructed according to plans, not
receiving permits, or the pre-leasing or occupancy rate not meeting
expectations. Repayment of multi-family loans and commercial rental
property loans is expected from the cash flow generated by rental
payments received from the individuals or businesses occupying the
real estate. CRE loans are impacted by factors such as competitive
market forces, vacancy rates, cap rates, net operating incomes,
lease renewals and overall economic demand. In addition, loans in
the recreational and tourism sector can be affected by weather
conditions, such as unseasonably low winter snowfalls. CRE lending
also carries a higher degree of environmental risk than other real
estate lending.
Municipal – Loans in this segment are made to local
municipalities, attributable to municipal financing transactions
and backed by the full faith and credit of town governments or
dedicated governmental revenue sources, with no historical losses
recognized by the Company.
Residential Real Estate - 1st
Lien – All loans in
this segment are collateralized by first mortgages on 1 – 4
family owner-occupied residential real estate and repayment is
dependent on the credit quality of the individual borrower. The
overall health of the economy, including unemployment rates and
housing prices, has an impact on the credit quality of this
segment.
Residential Real Estate – Jr Lien – All loans in
this segment are collateralized by junior lien mortgages on 1
– 4 family residential real estate and repayment is primarily
dependent on the credit quality of the individual borrower. The
overall health of the economy, including unemployment rates and
housing prices, has an impact on the credit quality of this
segment.
Consumer – Loans in this segment are made to
individuals for consumer and household purposes. This segment
includes both loans secured by automobiles and other consumer
goods, as well as loans that are unsecured. This segment also
includes overdrafts, which are extensions of credit made to both
individuals and businesses to cover temporary shortages in their
deposit accounts and are generally unsecured. The Company maintains
policies restricting the size and term of these extensions of
credit. The overall health of the economy, including unemployment
rates, has an impact on the credit quality of this
segment.
Specific component
The
specific component of the ALL relates to loans that are impaired.
Impaired loans are loan(s) to a borrower that in the aggregate are
greater than $100,000 and that are in non-accrual status or are
TDRs regardless of amount. A specific allowance is established for
an impaired loan when its estimated impaired basis is less than the
carrying value of the loan. For all loan segments, except consumer
loans, a loan is considered impaired when, based on current
information and events, in management’s estimation it is
probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status,
collateral value and probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant
or temporary payment delays and payment shortfalls generally are
not classified as impaired. Management evaluates the significance
of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length and frequency of the
delay, the reasons for the delay, the borrower’s prior
payment record and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by
loan basis, by either the present value of expected future cash
flows discounted at the loan’s effective interest rate, the
loan’s obtainable market price, or the fair value of the
collateral if the loan is collateral dependent.
16
Impaired
loans also include troubled loans that are restructured. A TDR
occurs when the Company, for economic or legal reasons related to
the borrower’s financial difficulties, grants a concession to
the borrower that would otherwise not be granted. TDRs may include
the transfer of assets to the Company in partial satisfaction of a
troubled loan, a modification of a loan’s terms, or a
combination of the two.
Large
groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not
separately identify individual consumer loans for impairment
evaluation, unless such loans are subject to a restructuring
agreement.
Unallocated component
An
unallocated component of the ALL is maintained to cover
uncertainties that could affect management’s estimate of
probable losses. The unallocated component reflects
management’s estimate of the margin of imprecision inherent
in the underlying assumptions used in the methodologies for
estimating specific and general losses in the
portfolio.
Bank premises and equipment
Bank
premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the assets.
The cost of assets sold or otherwise disposed of, and the related
accumulated depreciation, are eliminated from the accounts and the
resulting gains or losses are reflected in the consolidated
statements of income. Maintenance and repairs are charged to
current expense as incurred and the cost of major renewals and
betterments is capitalized.
Other real estate owned
Real
estate properties acquired through or in lieu of loan foreclosure
or properties no longer used for bank operations are initially
recorded at fair value less estimated selling cost at the date of
acquisition, foreclosure or transfer. Fair value is determined, as
appropriate, either by obtaining a current appraisal or evaluation
prepared by an independent, qualified appraiser, by obtaining a
broker’s market value analysis, and finally, if the Company
has limited exposure and limited risk of loss, by the opinion of
management as supported by an inspection of the property and its
most recent tax valuation. During periods of declining market
values, the Company will generally obtain a new appraisal or
evaluation. Any write-down based on the asset's fair value at the
date of acquisition or institution of foreclosure is charged to the
ALL. After acquisition through or in lieu of foreclosure, these
assets are carried at the lower of their new cost basis or fair
value. Costs of significant property improvements are capitalized,
whereas costs relating to holding the property are expensed as
incurred. Appraisals by an independent, qualified appraiser are
performed periodically on properties that management deems
significant, or evaluations may be performed by management or a
qualified third party on OREO properties in the portfolio that are
deemed less significant or less vulnerable to market conditions.
Subsequent write-downs are recorded as a charge to other expense.
Gains or losses on the sale of such properties are included in
income when the properties are sold.
Intangible assets
Intangible
assets include the excess of the purchase price over the fair value
of net assets acquired (goodwill) in the Company’s 2007
acquisition of LyndonBank. Goodwill is not amortizable and is
reviewed for impairment annually, or more frequently as events or
circumstances warrant.
Income taxes
The
Company recognizes income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
established for the temporary differences between the accounting
bases and the tax bases of the Company's assets and liabilities at
enacted tax rates expected to be in effect when the amounts related
to such temporary differences are realized or settled. Adjustments
to the Company's deferred tax assets are recognized as deferred
income tax expense or benefit based on management's judgments
relating to the outcome of such asset.
Mortgage servicing
Servicing
assets are recognized as separate assets when rights are acquired
through purchase or retained upon the sale of loans. Capitalized
servicing rights are reported in other assets and initially
recorded at fair value, and are amortized against non-interest
income in proportion to, and over the period of, the estimated
future net servicing income of the underlying loans. Servicing
rights are periodically evaluated for impairment, based upon the
estimated fair value of the rights as compared to amortized cost.
Impairment is determined by stratifying the rights by predominant
characteristics, such as interest rates and terms. Fair value is
determined using prices for similar assets with similar
characteristics, when available, or based upon discounted cash
flows using market-based assumptions. Impairment is recognized
through a valuation allowance and is recorded as amortization of
other assets, to the extent that estimated fair value is less than
the capitalized amount at the valuation date. Subsequent
improvement, if any, in the estimated fair value of impaired MSRs
is reflected in a positive valuation adjustment and is recognized
in other income up to (but not in excess of) the amount of the
prior impairment.
17
Pension costs
Pension
costs are charged to salaries and employee benefits expense and
accrued over the active service period.
Advertising costs
The
Company expenses advertising costs as incurred.
Comprehensive income
US GAAP
generally requires recognized revenue, expenses, gains and losses
to be included in net income. Certain changes in assets and
liabilities, such as the after-tax effect of unrealized gains and
losses on available-for-sale securities, are not reflected in the
consolidated statement of income, but the cumulative effect of such
items from period-to-period is reflected as a separate component of
the shareholders’ equity section of the consolidated balance
sheet (accumulated other comprehensive income or loss). Other
comprehensive income or loss, along with net income, comprises the
Company's total comprehensive income.
Preferred stock
In
December, 2007 the Company issued 25 shares of fixed-to-floating
rate non-cumulative perpetual preferred stock, without par value
and having a liquidation preference of $100,000 per share. There
were 15 shares and 20 shares of preferred stock outstanding as of
December 31, 2019 and 2018, respectively. Under the terms of the
preferred stock, the Company pays non-cumulative cash dividends
quarterly, when, as and if declared by the Board. Dividends are
payable at a variable dividend rate equal to the Wall Street
Journal Prime Rate in effect on the first business day of each
quarterly dividend period. A variable rate of 4.50% was in effect
for the first quarter of 2018, with increases during 2018 on a
quarterly basis, to a rate of 5.25% for the fourth quarter of 2018.
The variable rate increased to 5.50% for the dividend payments due
in each of the first three quarters of 2019, followed by a decrease
to a rate of 5.00% for the dividend payment in the fourth quarter
of 2019. The rate that will be in effect for the first quarter of
2020 is 4.75%. The Company redeemed five shares of preferred stock
on March 31, 2019 and 2018, at a redemption price of $500,000 for
each such partial redemption, plus accrued dividends.
Earnings per common share
Earnings
per common share amounts are computed based on net income, net of
dividends to preferred shareholders, and on the weighted average
number of shares of common stock issued during the period,
including DRIP shares issuable upon reinvestment of dividends
(retroactively adjusted for stock splits and stock dividends, if
any) and reduced for shares held in treasury.
The
following table illustrates the calculation of earnings per common
share for the periods presented, as adjusted for the cash dividends
declared on the preferred stock:
Years
Ended December 31,
|
2019
|
2018
|
|
|
|
Net income, as
reported
|
$8,824,446
|
$8,397,532
|
Less: dividends to
preferred shareholders
|
87,500
|
103,125
|
Net income
available to common shareholders
|
$8,736,946
|
$8,294,407
|
Weighted average
number of common shares
|
|
|
used
in calculating earnings per share
|
5,204,768
|
5,139,297
|
Earnings per common
share
|
$1.68
|
$1.61
|
18
Off-balance-sheet financial instruments
In the
ordinary course of business, the Company is a party to
off-balance-sheet financial instruments consisting of commitments
to extend credit, commercial and municipal letters of credit,
standby letters of credit, and risk-sharing commitments on
residential mortgage loans sold through the FHLBB’s MPF
program. Such financial instruments are recorded in the
consolidated financial statements when they are
funded.
Transfers of financial assets
Transfers
of financial assets are accounted for as sales when control over
the assets has been surrendered. Control over transferred assets is
deemed to be surrendered when (1) the assets have been isolated
from the Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right)
to pledge or exchange the transferred assets, and (3) the Company
does not maintain effective control over the transferred assets
through an agreement to repurchase them before their
maturity.
Impact of recently issued accounting standards
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU was issued
to increase transparency and comparability among organizations by
recognizing lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing arrangements. In July
2018, the FASB amended the updated guidance and provided an
additional transition method for adoption of the guidance. The ASU
is effective for annual periods beginning after December 15, 2018,
including interim periods within those fiscal years. The ASU and
related guidance became effective for the Company on January 1,
2019. The impact of adopting this ASU was not material to the
Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. Under the new guidance, which will replace the
existing incurred loss model for recognizing credit losses, banks
and other lending institutions will be required to recognize the
full amount of expected credit losses. The new guidance, which is referred
to as the current expected credit loss, or CECL model, requires
that expected credit losses for financial assets held at the
reporting date that are accounted for at amortized cost be measured
and recognized based on historical experience and current and
reasonably supportable forecasted conditions to reflect the full
amount of expected credit losses. A modified version of these requirements also
applies to debt securities classified as available for sale, which
will require that credit losses on those securities be recorded
through an allowance for credit losses rather than a
write-down. The ASU and related guidance may have a material
impact on the Company's consolidated financial statements upon
adoption as it will require a change in the Company's methodology
for calculating its ALL and allowance on unused commitments. The
Company will transition from an incurred loss model to an expected
loss model, which will likely result in an increase in the ALL upon
adoption and may negatively impact the Company’s and the
Bank's regulatory capital ratios. The Company has formed a
committee to assess the implications of this new pronouncement and
transitioned to a software solution for preparing the ALL
calculation and related reports that management believes provides
the Company with stronger data integrity, ease and efficiency in
ALL preparation. The new software solution also provides numerous
training opportunities for the appropriate personnel within the
Company. The Company has gathered and is continuing to analyze the
historical data to serve as a basis for estimating the ALL under
CECL and continues to evaluate the
impact of the adoption of the ASU on its consolidated
financial statements. As initially proposed, the ASU
was to be effective
for fiscal years
beginning
after December 15,
2019, including
interim periods
within
those
fiscal years, with early adoption permitted for fiscal years
beginning after December 15, 2018, including interim periods within
such years. However, in November 2019, the FASB issued ASU No.
2019-10, Financial Instruments-Credit
Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases
(Topic 842). The ASU extends
the effective date for compliance with the ASU by smaller reporting
companies, which are now required to comply with the ASU for fiscal
years beginning after December 15, 2022, including interim periods
within those fiscal years, with early adoption permitted. The
Company qualifies for this extension and does not intend to early
adopt the ASU at this time. Management will continue to evaluate
the Company’s CECL compliance and implementation timetable in
light of the extension.
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment. The ASU was issued to
reduce the cost and complexity of the goodwill impairment test. To
simplify the subsequent measurement of goodwill, step two of the
goodwill impairment test was eliminated. Instead, a company will
recognize an impairment of goodwill should the carrying value of a
reporting unit exceed its fair value (i.e., step one). As initially
proposed, the ASU was to be effective for the Company on January 1,
2020; however similar to ASU No. 2016-13, the effective date for
this ASU was also extended and will be effective for the Company on
January 1, 2023. The Company has evaluated the impact of this ASU
and as permitted, plans to early adopt on January 1, 2020, with no
material impact expected on its consolidated financial
statements.
The
Company has goodwill from its acquisition of LyndonBank in 2007 and
performs an impairment test annually or more frequently if
circumstances warrant (see Note 7).
19
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure
Framework—Changes to the Disclosure Requirements for Fair
Value Measurement. This ASU eliminates, adds and modifies
certain disclosure requirements for fair value measurements as part
of its disclosure framework project. The standard is effective for
all entities for fiscal years beginning after December 15, 2019,
and interim periods within those fiscal years. Early adoption is
permitted. The ASU became effective for the Company on January 1,
2020. The Company does not anticipate that adoption of this ASU
will have any material impact on its consolidated financial
statements.
Note 2. Investment Securities
Change in Accounting Principle
Prior
to 2019, the entire balance of the Company’s HTM investment
portfolio consisted of Municipal notes. Effective January 1, 2019,
and in accordance with ASC 250 (Accounting Changes and Error
Corrections), the Company chose to reclassify these debt
instruments from the investment portfolio into the loan portfolio.
This change represents a voluntary reclassification of municipal
debt instruments from classification as investment securities under
ASC 320 (Investments – Debt and Equity Securities) to
classification as loans under ASC 310 (Receivables). All periods
presented have been restated to conform to this change.
Accordingly, for all periods presented below, the Company’s
investment portfolio consists entirely of AFS investments and
municipal debt obligations are reported as a component of the
Company’s loan portfolio (See Note 3). The reclassification
of the municipal debt instruments in this portfolio did not have a
material impact on the Company’s consolidated financial
statements or results of operations.
Debt
securities AFS consist of the following:
|
|
Gross
|
Gross
|
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|
Cost
|
Gains
|
Losses
|
Value
|
|
|
|
|
|
December
31, 2019
|
|
|
|
|
U.S. GSE debt
securities
|
$18,002,549
|
$99,743
|
$40,672
|
$18,061,620
|
Agency
MBS
|
16,169,819
|
86,874
|
51,318
|
16,205,375
|
ABS and
OAS
|
2,799,657
|
55,418
|
2,166
|
2,852,909
|
Other
investments
|
8,665,000
|
181,846
|
0
|
8,846,846
|
Total
|
$45,637,025
|
$423,881
|
$94,156
|
$45,966,750
|
|
|
|
|
|
December
31, 2018
|
|
|
|
|
U.S. GSE debt
securities
|
$14,010,100
|
$394
|
$259,391
|
$13,751,103
|
Agency
MBS
|
16,020,892
|
2,701
|
449,068
|
15,574,525
|
ABS and
OAS
|
1,988,565
|
3,806
|
6,242
|
1,986,129
|
Other
investments
|
8,167,000
|
8,472
|
120,398
|
8,055,074
|
Total
|
$40,186,557
|
$15,373
|
$835,099
|
$39,366,831
|
Investments
pledged as collateral for larger dollar repurchase agreement
accounts and for other purposes as required or permitted by law
consisted of U.S. GSE debt securities, Agency MBS, ABS and OAS, and
CDs. These repurchase agreements mature daily. These investments as
of the balance sheet dates were as follows:
|
Amortized
|
Fair
|
|
Cost
|
Value
|
|
|
|
December 31,
2019
|
$45,637,025
|
$45,966,750
|
December 31,
2018
|
40,186,557
|
39,366,831
|
Proceeds
from sales of debt securities AFS were $6,553,118 in 2019 and
$5,715,525 in 2018 with gains of $1,570 and $0, respectively, and
losses of $28,060 and $32,718, respectively.
The
carrying amount and estimated fair value of securities by
contractual maturity are shown below. Expected maturities will
differ from contractual maturities because issuers may call or
prepay obligations with or without call or prepayment penalties,
pursuant to contractual terms. Because the actual maturities of
Agency MBS usually differ from their contractual maturities due to
the right of borrowers to prepay the underlying mortgage loans,
usually without penalty, those securities are not presented in the
following table by contractual maturity date.
20
The
scheduled maturities of debt securities AFS at December 31, 2019
were as follows:
|
Amortized
|
Fair
|
|
Cost
|
Value
|
|
|
|
Due in one year or
less
|
$2,760,515
|
$2,766,254
|
Due from one to
five years
|
9,674,948
|
9,862,450
|
Due from five to
ten years
|
15,042,170
|
15,147,201
|
Due after ten
years
|
1,989,573
|
1,985,470
|
Agency
MBS
|
16,169,819
|
16,205,375
|
Total
|
$45,637,025
|
$45,966,750
|
Debt
securities with unrealized losses as of the balance sheet dates are
presented in the tables below.
|
Less than 12
months
|
12 months or
more
|
Totals
|
||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Number of
|
Fair
|
Unrealized
|
|
Value
|
Loss
|
Value
|
Loss
|
Securities
|
Value
|
Loss
|
December
31, 2019
|
|
|
|
|
|
|
|
U.S. GSE debt
securities
|
$7,964,192
|
$40,672
|
$0
|
$0
|
7
|
$7,964,192
|
$40,672
|
Agency
MBS
|
5,273,683
|
24,648
|
2,920,091
|
26,670
|
13
|
8,193,774
|
51,318
|
Other
investments
|
1,000,490
|
2,166
|
0
|
0
|
1
|
1,000,490
|
2,166
|
Total
|
$14,238,365
|
$67,486
|
$2,920,091
|
$26,670
|
21
|
$17,158,456
|
$94,156
|
|
|
|
|
|
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
U.S. GSE debt
securities
|
$1,465,947
|
$6,752
|
$11,284,761
|
$252,639
|
11
|
$12,750,708
|
$259,391
|
Agency
MBS
|
2,317,838
|
22,029
|
12,223,386
|
427,039
|
24
|
14,541,224
|
449,068
|
ABS and
OAS
|
976,226
|
6,242
|
0
|
0
|
1
|
976,226
|
6,242
|
Other
investments
|
1,956,914
|
20,086
|
4,113,688
|
100,312
|
25
|
6,070,602
|
120,398
|
Total
|
$6,716,925
|
$55,109
|
$27,621,835
|
$779,990
|
61
|
$34,338,760
|
$835,099
|
Management
evaluates securities for OTTI at least on a quarterly basis, and
more frequently when economic or market conditions, or adverse
developments relating to the issuer, warrant such evaluation.
Consideration is given to (1) the length of time and the extent to
which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer and (3) the intent
and ability of the Company to retain its investment in the issuer
for a period of time sufficient to allow for any anticipated
recovery in fair value. In analyzing an issuer's financial
condition, management considers whether the securities are issued
by the federal government or its agencies, whether downgrades by
bond rating agencies have occurred, and the results of reviews of
the issuer's financial condition.
As the
Company has the ability to hold its debt securities until maturity,
or for the foreseeable future if classified as AFS, and it is more
likely than not that the Company will not have to sell such
securities before recovery of their cost basis, no declines in such
securities were deemed to be other-than-temporary as of the balance
sheet dates presented.
The
Bank is a member of the FHLBB. The FHLBB is a cooperatively owned
wholesale bank for housing and finance in the six New England
States. Its mission is to support the residential mortgage and
community-development lending activities of its members, which
include over 450 financial institutions across New England. The
Company obtains much of its wholesale funding from the FHLBB. As a
requirement of membership in the FHLBB, the Bank must own a minimum
required amount of FHLBB stock, calculated periodically based
primarily on the Bank’s level of borrowings from the FHLBB.
As a result of the Bank’s level of borrowings during 2019 and
2018, the Bank was required to purchase additional FHLBB stock in
aggregate totaling $176,000 and $1,103,300, respectively. As a
member of the FHLBB, the Company is also subject to future capital
calls by the FHLBB in order to maintain compliance with its capital
plan. During 2019 and 2018, FHLBB exercised capital call options
with redemptions totaling $493,600 and $1,147,500, respectively, on
the Company’s portfolio of FHLBB stock. As of December 31,
2019 and 2018, the Company’s investment in FHLBB stock was
$753,700 and $1,071,300, respectively.
21
The
Company periodically evaluates its investment in FHLBB stock for
impairment based on, among other factors, the capital adequacy of
the FHLBB and its overall financial condition. No impairment losses
have been recorded through December 31, 2019.
The
Company’s investment in FRBB Stock was $588,150 at December
31, 2019 and 2018.
In
2018, the Company purchased 20 shares of common stock in ACBI at a
purchase price of $90,000, for the purpose of obtaining access to
correspondent banking services from ABCI’s subsidiary, ACBB.
These shares are subject to contractual resale restrictions and
considered by management to be restricted and are recorded in the
balance sheet at cost amounting to $90,000 at December 31, 2019 and
2018.
Note 3. Loans, Allowance for Loan Losses and Credit
Quality
Change in Accounting Principle
As
disclosed in Note 2 (Investment Securities), effective January 1,
2019 and in accordance with ASC 250 (Accounting Changes and Error
Corrections), the Company chose to reclassify its municipal debt
instruments from the investment portfolio into the loan portfolio.
This change represents a voluntary reclassification of municipal
debt instruments by management from classification as investment
securities under ASC 320 (Investments – Debt and Equity
Securities) to classification as loans under ASC 310 (Receivables).
As stated in Note 2, the reclassification of this portfolio did not
have a material impact on the Company’s consolidated
financial statements or results of operations.
The
composition of net loans as of the balance sheet dates was as
follows:
December
31,
|
2019
|
2018
|
|
|
|
Commercial &
industrial
|
$98,930,831
|
$80,766,693
|
Commercial real
estate
|
246,282,726
|
235,318,148
|
Municipal
|
55,817,206
|
47,067,023
|
Residential real
estate - 1st lien
|
158,337,296
|
165,665,175
|
Residential real
estate - Jr lien
|
43,230,873
|
44,544,987
|
Consumer
|
4,390,005
|
5,088,491
|
Total
loans
|
606,988,937
|
578,450,517
|
Deduct
(add):
|
|
|
ALL
|
5,926,491
|
5,602,541
|
Deferred net loan
costs
|
(362,415)
|
(363,614)
|
Net
loans
|
$601,424,861
|
$573,211,590
|
The
following is an age analysis of loans (including non-accrual), as
of the balance sheet dates, by portfolio segment:
|
|
|
|
|
|
|
90 Days or
|
|
|
90 Days
|
Total
|
|
|
Non-Accrual
|
More and
|
December
31, 2019
|
30-89 Days
|
or More
|
Past Due
|
Current
|
Total Loans
|
Loans
|
Accruing
|
|
|
|
|
|
|
|
|
Commercial &
industrial
|
$68,532
|
$44,503
|
$113,035
|
$98,817,796
|
$98,930,831
|
$480,083
|
$0
|
Commercial real
estate
|
1,690,307
|
151,723
|
1,842,030
|
244,440,696
|
246,282,726
|
1,600,827
|
0
|
Municipal
|
0
|
0
|
0
|
55,817,206
|
55,817,206
|
0
|
0
|
Residential real
estate
|
|
|
|
|
|
|
|
- 1st
lien
|
3,871,045
|
1,217,098
|
5,088,143
|
153,249,153
|
158,337,296
|
2,112,267
|
530,046
|
- Jr
lien
|
331,416
|
147,976
|
479,392
|
42,751,481
|
43,230,873
|
240,753
|
112,386
|
Consumer
|
49,607
|
0
|
49,607
|
4,340,398
|
4,390,005
|
0
|
0
|
Totals
|
$6,010,907
|
$1,561,300
|
$7,572,207
|
$599,416,730
|
$606,988,937
|
$4,433,930
|
$642,432
|
22
|
|
|
|
|
|
|
90 Days or
|
|
|
90 Days
|
Total
|
|
|
Non-Accrual
|
More and
|
December
31, 2018
|
30-89 Days
|
or More
|
Past Due
|
Current
|
Total Loans
|
Loans
|
Accruing
|
|
|
|
|
|
|
|
|
Commercial &
industrial
|
$217,385
|
$0
|
$217,385
|
$80,549,308
|
$80,766,693
|
$84,814
|
$0
|
Commercial real
estate
|
1,509,839
|
190,789
|
1,700,628
|
233,617,520
|
235,318,148
|
1,742,993
|
0
|
Municipal
|
0
|
0
|
0
|
47,067,023
|
47,067,023
|
0
|
0
|
Residential real
estate
|
|
|
|
|
|
|
|
- 1st
lien
|
4,108,319
|
1,371,061
|
5,479,380
|
160,185,795
|
165,665,175
|
2,026,939
|
622,486
|
- Jr
lien
|
484,855
|
353,914
|
838,769
|
43,706,218
|
44,544,987
|
408,540
|
104,959
|
Consumer
|
43,277
|
1,661
|
44,938
|
5,043,553
|
5,088,491
|
0
|
1,661
|
Totals
|
$6,363,675
|
$1,917,425
|
$8,281,100
|
$570,169,417
|
$578,450,517
|
$4,263,286
|
$729,106
|
For all
loan segments, loans over 30 days past due are considered
delinquent.
As of
the balance sheet dates presented, residential mortgage loans in
process of foreclosure consisted of the following:
|
Number of loans
|
Balance
|
December 31,
2019
|
9
|
$495,943
|
December 31,
2018
|
12
|
961,709
|
The
following summarizes changes in the ALL and select loan
information, by portfolio segment:
As of or for the year ended December 31, 2019
|
|
|
|
Residential
|
Residential
|
|
|
|
|
Commercial
|
Commercial
|
|
Real Estate
|
Real Estate
|
|
|
|
|
& Industrial
|
Real Estate
|
Municipal
|
1st Lien
|
Jr Lien
|
Consumer
|
Unallocated
|
Total
|
|
|
|
|
|
|
|
|
|
ALL beginning
balance
|
$697,469
|
$3,019,868
|
$0
|
$1,421,494
|
$273,445
|
$56,787
|
$133,478
|
$5,602,541
|
Charge-offs
|
(175,815)
|
(116,186)
|
0
|
(242,244)
|
(222,999)
|
(102,815)
|
0
|
(860,059)
|
Recoveries
|
10,768
|
50,388
|
0
|
15,776
|
2,200
|
38,710
|
0
|
117,842
|
Provision
|
304,344
|
227,576
|
0
|
193,538
|
237,038
|
59,111
|
44,560
|
1,066,167
|
ALL ending
balance
|
$836,766
|
$3,181,646
|
$0
|
$1,388,564
|
$289,684
|
$51,793
|
$178,038
|
$5,926,491
|
|
|
|
|
|
|
|
|
|
ALL evaluated for
impairment
|
|
|
|
|
|
|
|
|
Individually
|
$0
|
$0
|
$0
|
$103,836
|
$712
|
$0
|
$0
|
$104,548
|
Collectively
|
836,766
|
3,181,646
|
0
|
1,284,728
|
288,972
|
51,793
|
178,038
|
5,821,943
|
Total
|
$836,766
|
$3,181,646
|
$0
|
$1,388,564
|
$289,684
|
$51,793
|
$178,038
|
$5,926,491
|
|
||||||||
Loans evaluated for
impairment
|
|
|
|
|
|
|
|
|
Individually
|
$420,933
|
$1,699,238
|
$0
|
$4,471,902
|
$156,073
|
$0
|
|
$6,748,146
|
Collectively
|
98,509,898
|
244,583,488
|
55,817,206
|
153,865,394
|
43,074,800
|
4,390,005
|
|
600,240,791
|
Total
|
$98,930,831
|
$246,282,726
|
$55,817,206
|
$158,337,296
|
$43,230,873
|
$4,390,005
|
|
$606,988,937
|
23
As of or for the year ended December 31, 2018
|
|
|
|
Residential
|
Residential
|
|
|
|
|
Commercial
|
Commercial
|
|
Real Estate
|
Real Estate
|
|
|
|
|
& Industrial
|
Real Estate
|
Municipal
|
1st Lien
|
Jr Lien
|
Consumer
|
Unallocated
|
Total
|
|
|
|
|
|
|
|
|
|
ALL beginning
balance
|
$675,687
|
$2,674,029
|
$0
|
$1,460,547
|
$316,982
|
$43,303
|
$267,551
|
$5,438,099
|
Charge-offs
|
(152,860)
|
(124,645)
|
0
|
(251,654)
|
(69,173)
|
(143,688)
|
0
|
(742,020)
|
Recoveries
|
60,192
|
0
|
0
|
26,832
|
1,420
|
38,018
|
0
|
126,462
|
Provision
(credit)
|
114,450
|
470,484
|
0
|
185,769
|
24,216
|
119,154
|
(134,073)
|
780,000
|
ALL ending
balance
|
$697,469
|
$3,019,868
|
$0
|
$1,421,494
|
$273,445
|
$56,787
|
$133,478
|
$5,602,541
|
|
|
|
|
|
|
|
|
|
ALL evaluated for
impairment
|
|
|
|
|
|
|
|
|
Individually
|
$0
|
$0
|
$0
|
$112,969
|
$1,757
|
$0
|
$0
|
$114,726
|
Collectively
|
697,469
|
3,019,868
|
0
|
1,308,525
|
271,688
|
56,787
|
133,478
|
5,487,815
|
Total
|
$697,469
|
$3,019,868
|
$0
|
$1,421,494
|
$273,445
|
$56,787
|
$133,478
|
$5,602,541
|
|
||||||||
Loans evaluated for
impairment
|
|
|
|
|
|
|
|
|
Individually
|
$60,846
|
$1,746,894
|
$0
|
$4,392,060
|
$319,321
|
$0
|
|
$6,519,121
|
Collectively
|
80,705,847
|
233,571,254
|
47,067,023
|
161,273,115
|
44,225,666
|
5,088,491
|
|
571,931,396
|
Total
|
$80,766,693
|
$235,318,148
|
$47,067,023
|
$165,665,175
|
$44,544,987
|
$5,088,491
|
|
$578,450,517
|
Impaired loans as of the balance sheet dates, by portfolio segment
were as follows:
|
As of December 31,
2019
|
2019
|
|||
|
|
Unpaid
|
|
Average
|
Interest
|
|
Recorded
|
Principal
|
Related
|
Recorded
|
Income
|
|
Investment
|
Balance
|
Allowance
|
Investment
|
Recognized
|
|
|
|
|
|
|
Related allowance
recorded
|
|
|
|
|
|
Commercial
& industrial
|
$0
|
$0
|
$0
|
$32,466
|
$0
|
Commercial
real estate
|
0
|
0
|
0
|
97,720
|
0
|
Residential
real estate
|
|
|
|
|
|
-
1st lien
|
878,439
|
902,000
|
103,836
|
982,158
|
86,039
|
-
Jr lien
|
6,121
|
6,101
|
712
|
6,869
|
648
|
Total
with related allowance
|
884,560
|
908,101
|
104,548
|
1,119,213
|
86,687
|
|
|
|
|
|
|
No related
allowance recorded
|
|
|
|
|
|
Commercial
& industrial
|
420,933
|
445,509
|
|
307,208
|
6,396
|
Commercial
real estate
|
1,699,772
|
2,031,764
|
|
1,812,836
|
21,591
|
Residential
real estate
|
|
|
|
|
|
-
1st lien
|
3,614,960
|
4,273,884
|
|
3,778,822
|
212,883
|
-
Jr lien
|
149,972
|
157,754
|
|
224,938
|
4,524
|
Total
with no related allowance
|
5,885,637
|
6,908,911
|
|
6,123,804
|
245,394
|
|
|
|
|
|
|
Total
impaired loans
|
$6,770,197
|
$7,817,012
|
$104,548
|
$7,243,017
|
$332,081
|
In the
table above, recorded investment in impaired loans as of December
31, 2019 includes accrued interest receivable and deferred net loan
costs of $22,051.
24
|
As of December 31,
2018
|
2018
|
|||
|
|
Unpaid
|
|
Average
|
Interest
|
|
Recorded
|
Principal
|
Related
|
Recorded
|
Income
|
|
Investment
|
Balance
|
Allowance
|
Investment
|
Recognized
|
|
|
|
|
|
|
Related allowance
recorded
|
|
|
|
|
|
Commercial
real estate
|
$0
|
$0
|
$0
|
$57,658
|
$0
|
Residential
real estate
|
|
|
|
|
|
-
1st lien
|
942,365
|
963,367
|
112,969
|
836,326
|
45,139
|
-
Jr lien
|
7,271
|
7,248
|
1,757
|
77,555
|
351
|
|
949,636
|
970,615
|
114,726
|
971,539
|
45,490
|
|
|
|
|
|
|
No related
allowance recorded
|
|
|
|
|
|
Commercial
& industrial
|
60,846
|
80,894
|
|
120,924
|
0
|
Commercial
real estate
|
1,748,323
|
1,975,831
|
|
1,663,794
|
13,131
|
Residential
real estate
|
|
|
|
|
|
-
1st lien
|
3,465,117
|
4,082,637
|
|
3,497,772
|
94,313
|
-
Jr lien
|
312,072
|
351,139
|
|
235,970
|
0
|
|
5,586,358
|
6,490,501
|
|
5,518,460
|
107,444
|
|
|
|
|
|
|
|
$6,535,994
|
$7,461,116
|
$114,726
|
$6,489,999
|
$152,934
|
In the
table above, recorded investment in impaired loans as of December
31, 2018 includes accrued interest receivable and deferred net loan
costs of $16,873.
Credit Quality Grouping
In
developing the ALL, management uses credit quality grouping to help
evaluate trends in credit quality. The Company groups credit risk
into Groups A, B and C. The manner the Company utilizes to assign
risk grouping is driven by loan purpose. Commercial purpose loans
are individually risk graded while the retail portion of the
portfolio is generally grouped by delinquency pool.
Group A loans - Acceptable Risk – are loans that are
expected to perform as agreed under their respective terms. Such
loans carry a normal level of risk that does not require management
attention beyond that warranted by the loan or loan relationship
characteristics, such as loan size or relationship size. Group A
loans include commercial purpose loans that are individually risk
rated and retail loans that are rated by pool. Group A retail loans
include performing consumer and residential real estate loans.
Residential real estate loans are loans to individuals secured by
1-4 family homes, including first mortgages, home equity and home
improvement loans. Loan balances fully secured by deposit accounts
or that are fully guaranteed by the federal government are
considered acceptable risk.
Group B loans – Management Involved - are loans that
require greater attention than the acceptable risk loans in Group
A. Characteristics of such loans may include, but are not limited
to, borrowers that are experiencing negative operating trends such
as reduced sales or margins, borrowers that have exposure to
adverse market conditions such as increased competition or
regulatory burden, or borrowers that have had unexpected or adverse
changes in management. These loans have a greater likelihood of
migrating to an unacceptable risk level if these characteristics
are left unchecked. Group B is limited to commercial purpose loans
that are individually risk rated.
Group C loans – Unacceptable Risk – are loans
that have distinct shortcomings that require a greater degree of
management attention. Examples of these shortcomings include a
borrower's inadequate capacity to service debt, poor operating
performance, or insolvency. These loans are more likely to result
in repayment through collateral liquidation. Group C loans range
from those that are likely to sustain some loss if the shortcomings
are not corrected, to those for which loss is imminent and
non-accrual treatment is warranted. Group C loans include
individually rated commercial purpose loans and retail loans
adversely rated in accordance with the Federal Financial
Institutions Examination Council’s Uniform Retail Credit
Classification Policy. Group C retail loans include 1-4 family
residential real estate loans and home equity loans past due 90
days or more with loan-to-value ratios greater than 60%, home
equity loans 90 days or more past due where the Bank does not hold
first mortgage, irrespective of loan-to-value, loans in bankruptcy
where repayment is likely but not yet established, and lastly
consumer loans that are 90 days or more past due.
25
Commercial
purpose loan ratings are assigned by the commercial account
officer; for larger and more complex commercial loans, the credit
rating is a collaborative assignment by the lender and the credit
analyst. The credit risk rating is based on the borrower's expected
performance, i.e., the likelihood that the borrower will be able to
service its obligations in accordance with the loan terms. Credit
risk ratings are meant to measure risk versus simply record
history. Assessment of expected future payment performance requires
consideration of numerous factors. While past performance is part
of the overall evaluation, expected performance is based on an
analysis of the borrower's financial strength, and historical and
projected factors such as size and financing alternatives, capacity
and cash flow, balance sheet and income statement trends, the
quality and timeliness of financial reporting, and the quality of
the borrower’s management. Other factors influencing the
credit risk rating to a lesser degree include collateral coverage
and control, guarantor strength and commitment, documentation,
structure and covenants and industry conditions. There are
uncertainties inherent in this process.
Credit
risk ratings are dynamic and require updating whenever relevant
information is received. Risk ratings are assessed on an ongoing
basis and at various points, including at delinquency or at the
time of other adverse events. For larger, more complex or adversely
rated loans, risk ratings are also assessed at the time of annual
or periodic review. Lenders are required to make immediate
disclosure to the Senior Credit Officer of any known increase in
loan risk, even if considered temporary in nature.
The
risk ratings within the loan portfolio, by segment, as of the
balance sheet dates were as follows:
As of December 31, 2019
|
|
|
|
Residential
|
Residential
|
|
|
|
Commercial
|
Commercial
|
|
Real Estate
|
Real Estate
|
|
|
|
& Industrial
|
Real Estate
|
Municipal
|
1st Lien
|
Jr Lien
|
Consumer
|
Total
|
|
|
|
|
|
|
|
|
Group
A
|
$93,774,871
|
$233,702,063
|
$55,817,206
|
$154,770,678
|
$42,725,543
|
$4,390,005
|
$585,180,366
|
Group
B
|
3,295,223
|
4,517,811
|
0
|
0
|
0
|
0
|
7,813,034
|
Group
C
|
1,860,737
|
8,062,852
|
0
|
3,566,618
|
505,330
|
0
|
13,995,537
|
Total
|
$98,930,831
|
$246,282,726
|
$55,817,206
|
$158,337,296
|
$43,230,873
|
$4,390,005
|
$606,988,937
|
As of December 31, 2018
|
|
|
|
Residential
|
Residential
|
|
|
|
Commercial
|
Commercial
|
|
Real Estate
|
Real Estate
|
|
|
|
& Industrial
|
Real Estate
|
Municipal
|
1st Lien
|
Jr Lien
|
Consumer
|
Total
|
|
|
|
|
|
|
|
|
Group
A
|
$78,585,348
|
$226,785,919
|
$47,067,023
|
$161,293,233
|
$43,817,872
|
$5,086,830
|
$562,636,225
|
Group
B
|
90,763
|
246,357
|
0
|
224,992
|
0
|
0
|
562,112
|
Group
C
|
2,090,582
|
8,285,872
|
0
|
4,146,950
|
727,115
|
1,661
|
15,252,180
|
Total
|
$80,766,693
|
$235,318,148
|
$47,067,023
|
$165,665,175
|
$44,544,987
|
$5,088,491
|
$578,450,517
|
Modifications of Loans and TDRs
A loan is classified as a TDR if, for economic or legal reasons
related to a borrower’s financial difficulties, the Company
grants a concession to the borrower that it would not otherwise
consider.
The Company is deemed to have granted such a concession if it has
modified a troubled loan in any of the following ways:
●
Reduced
accrued interest;
●
Reduced
the original contractual interest rate to a rate that is below the
current market rate for the borrower;
●
Converted
a variable-rate loan to a fixed-rate loan;
●
Extended
the term of the loan beyond an insignificant delay;
●
Deferred
or forgiven principal in an amount greater than three months of
payments; or
●
Performed
a refinancing and deferred or forgiven principal on the original
loan.
26
An insignificant delay or insignificant shortfall in the amount of
payments typically would not require the loan to be accounted for
as a TDR. However, pursuant to regulatory guidance, any payment
delay longer than three months is generally not considered
insignificant. Management’s assessment of whether a
concession has been granted also takes into account payments
expected to be received from third parties, including third-party
guarantors, provided that the third party has the ability to
perform on the guarantee.
The Company’s TDRs are principally a result of extending loan
repayment terms to relieve cash flow difficulties. The Company has
only, on a limited basis, reduced interest rates for borrowers
below the current market rate for the borrower. The Company has not
forgiven principal or reduced accrued interest within the terms of
original restructurings, nor has it converted variable rate terms
to fixed rate terms. However, the Company evaluates each TDR
situation on its own merits and does not foreclose the granting of
any particular type of concession.
New
TDRs, by portfolio segment, for the periods presented were as
follows:
Year ended December 31, 2019
|
|
Pre-
|
Post-
|
|
|
Modification
|
Modification
|
|
|
Outstanding
|
Outstanding
|
|
Number of
|
Recorded
|
Recorded
|
|
Contracts
|
Investment
|
Investment
|
|
|
|
|
Commercial &
industrial
|
6
|
$371,358
|
$372,259
|
Commercial real
estate
|
1
|
19,266
|
21,628
|
Residential real
estate
|
|
|
|
- 1st
lien
|
6
|
755,476
|
798,800
|
- Jr
lien
|
1
|
55,557
|
57,415
|
|
14
|
$1,201,657
|
$1,250,102
|
Year ended December 31, 2018
|
|
Pre-
|
Post-
|
|
|
Modification
|
Modification
|
|
|
Outstanding
|
Outstanding
|
|
Number of
|
Recorded
|
Recorded
|
|
Contracts
|
Investment
|
Investment
|
|
|
|
|
Commercial real
estate
|
1
|
$406,920
|
$406,920
|
Residential real
estate - 1st lien
|
10
|
1,031,330
|
1,142,089
|
|
11
|
$1,438,250
|
$1,549,009
|
The
TDRs for which there was a payment default during the twelve month
periods presented were as follows:
Year ended December 31, 2019
|
Number of
|
Recorded
|
|
Contracts
|
Investment
|
|
|
|
Commercial &
industrial
|
2
|
$27,818
|
Residential real
estate - 1st lien
|
1
|
227,907
|
Residential real
estate - Jr lien
|
1
|
55,010
|
|
4
|
$310,735
|
27
Year ended December 31, 2018
|
Number of
|
Recorded
|
|
Contracts
|
Investment
|
|
|
|
Commercial real
estate
|
1
|
$400,646
|
Residential real
estate - 1st lien
|
3
|
518,212
|
|
4
|
$918,858
|
TDRs
are treated as other impaired loans and carry individual specific
reserves with respect to the calculation of the ALL. These loans
are categorized as non-performing, may be past due, and are
generally adversely risk rated. The TDRs that have defaulted under
their restructured terms are generally in collection status and
their reserve is typically calculated using the fair value of
collateral method.
The
specific allowances related to TDRs as of the balance sheet dates
presented were as follows:
|
2019
|
2018
|
|
|
|
Specific
Allowance
|
$104,548
|
$114,726
|
As of
the balance sheet dates, the Company evaluates whether it is
contractually committed to lend additional funds to debtors with
impaired, non-accrual or modified loans. The Company is
contractually committed to lend under one SBA guaranteed line of
credit to a borrower whose lending relationship was previously
restructured.
Note 4. Loan Servicing
Mortgage
loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of
mortgage loans serviced for others were $167,673,467 and
$176,083,984 at December 31, 2019 and 2018, respectively. Net gain
realized on the sale of loans was $290,116 and $345,780 for the
years ended December 31, 2019 and 2018, respectively.
The
following table summarizes changes in MSRs for the years ended
December 31,
|
2019
|
2018
|
|
|
|
Balance at
beginning of year
|
$1,004,948
|
$1,083,286
|
MSRs
capitalized
|
114,580
|
110,209
|
MSRs
amortized
|
(179,951)
|
(188,547)
|
Balance at end of
year
|
$939,577
|
$1,004,948
|
There
was no valuation allowance in the periods presented.
Note 5. Bank Premises and Equipment
The
major classes of bank premises and equipment and accumulated
depreciation and amortization at December 31 were as
follows:
|
2019
|
2018
|
|
|
|
Buildings and
improvements
|
$10,575,514
|
$10,555,868
|
Land and land
improvements
|
2,650,671
|
2,586,373
|
Furniture and
equipment
|
6,848,263
|
6,460,625
|
Leasehold
improvements
|
1,161,073
|
1,155,284
|
Finance
lease
|
588,347
|
991,014
|
Operating
leases
|
1,490,779
|
0
|
Other prepaid
assets
|
159,914
|
55,406
|
|
23,474,561
|
21,804,570
|
Less accumulated
depreciation and amortization
|
(12,515,158)
|
(12,091,115)
|
Net bank premises
and equipment
|
$10,959,403
|
$9,713,455
|
28
Note 6. Leases
The
Company adopted ASU No. 2016-02 (Leases) on January 1, 2019 with no
required adjustment to prior periods presented or cumulative-effect
adjustment to retained earnings. The Company has operating and
finance leases for some of its bank premises, with remaining lease
terms of one year to seven years. Some of the operating leases have
options to renew, which are reflected in the seven years. The
Company’s operating lease right-of-use assets and finance
lease assets are included in “Bank premises and equipment,
net” in the consolidated balance sheet and operating lease
liabilities and finance lease liabilities are included in other
liabilities in the consolidated balance sheet.
The
components of lease expense for the periods presented were as
follows:
Years
Ended December 31,
|
2019
|
2018
|
|
|
|
Operating lease
cost
|
$255,475
|
$230,888
|
|
|
|
Finance lease
cost:
|
|
|
Amortization
of right-of-use assets
|
$70,667
|
$70,667
|
Interest
on lease liabilities
|
16,705
|
26,399
|
Variable
rent expense
|
33,940
|
33,940
|
Total
finance lease cost
|
$121,312
|
$131,006
|
Total
rental expense not associated with operating lease costs above
amounted to $16,601 and $16,924 for the years ended December 31,
2019 and 2018, respectively.
Supplemental
cash flow information related to right-of-use assets and for lease
obligations recorded upon adoption of ASU No. 2016-02 (Note 1) was
as follows:
Year
Ended December 31,
|
2019
|
|
|
Operating
Leases
|
$1,455,829
|
Supplemental
balance sheet information related to leases was as
follows:
December
31,
|
2019
|
2018
|
|
|
|
Operating
Leases
|
|
|
Operating lease
right-of-use assets
|
$1,254,384
|
$0
|
|
|
|
Operating lease
liabilities
|
$1,263,173
|
$0
|
|
|
|
Finance
Leases
|
|
|
Finance lease
right-of-use assets
|
$124,347
|
$213,679
|
|
|
|
Finance lease
liabilities
|
$99,823
|
$266,747
|
December
31,
|
2019
|
2018
|
|
|
|
Weighted
Average Remaining Lease Term
|
|
|
Operating
Leases
|
4.4 Years
|
5.9 Years
|
Finance
Leases
|
1.5 Years
|
2.0 Years
|
|
|
|
Weighted
Average Discount Rate
|
|
|
Operating
Leases
|
1.28%
|
N/A
|
Finance
Leases
|
7.50%
|
7.86%
|
29
Operating lease obligations
The
Company is obligated under non-cancelable operating leases for bank
premises expiring in various years through 2026, with options to
renew. Minimum future rental payments for these leases with
original terms in excess of one year as of December 31, 2019 for
each of the next five years and in aggregate are:
2020
|
$257,039
|
2021
|
210,350
|
2022
|
207,380
|
2023
|
210,232
|
2024
|
186,448
|
Subsequent to
2024
|
249,424
|
Total
|
$1,320,873
|
Finance lease obligations
The
following is a schedule by years of future minimum lease payments
under capital leases, together with the present value of the net
minimum lease payments as of December 31, 2019:
2020
|
$67,060
|
2021
|
39,119
|
Total minimum lease
payments
|
106,179
|
Less amount
representing interest
|
(6,356)
|
Present value of
net minimum lease payments
|
$99,823
|
A
reconciliation of the undiscounted cash flows in the maturity
analysis above and the lease liability recognized in the
consolidated balance sheet as of December 31, 2019, is shown
below:
|
Operating Leases
|
Finance Leases
|
|
|
|
Undiscounted cash
flows
|
$1,320,873
|
$106,179
|
Discount effect of
cash flows
|
(57,700)
|
(6,356)
|
Lease
liabilities
|
$1,263,173
|
$99,823
|
Note 7. Goodwill and Other Intangible Asset
As a
result of the acquisition of LyndonBank on December 31, 2007, the
Company recorded goodwill amounting to $11,574,269. The goodwill is
not amortizable and is not deductible for tax purposes. Management
evaluated goodwill for impairment at December 31, 2019 and 2018 and
concluded that no impairment existed as of such dates.
Note 8. Other Investments
In
2011, the Company established a single-member LLC to facilitate the
purchase of federal NMTC through an investment structure designed
by a local community development entity. The equity investment was
fully amortized at December 31, 2017, and the Company exited the
equity investment, including termination of its interest in the
LLC, during the last quarter of 2018.The LLC did not conduct any
business apart from its role in the NMTC financing
structure.
The
Company purchases from time to time interests in various limited
partnerships established to acquire, own and rent residential
housing for low and moderate income residents of northeastern and
central Vermont. The tax credits from these investments were
$415,099 and $437,229 for the years ended December 31, 2019 and
2018, respectively. Expenses related to amortization of the
investments in the limited partnerships are recognized as a
component of income tax expense, and were $312,106 and $410,061 for
2019 and 2018, respectively. The carrying values of the limited
partnership investments were $2,762,406 and $2,263,512 at December
31, 2019 and 2018, respectively, and are included in other
assets.
30
The
Bank has a one-third ownership interest in a non-depository trust
company, CFSG, based in Newport, Vermont, which is held indirectly
through CFS Partners, a Vermont LLC that owns 100% of the LLC
equity interests of CFSG. The Bank accounts for its investment in
CFS Partners under the equity method of accounting. The Company's
investment in CFS Partners, included in other assets, amounted to
$3,535,527 and $2,946,831 as of December 31, 2019 and 2018,
respectively. The Company recognized income of $588,696 and
$514,485 for 2019 and 2018, respectively, through CFS Partners from
the operations of CFSG.
Note 9. Deposits
The
following is a maturity distribution of time deposits at December
31, 2019:
2020
|
$55,256,906
|
2021
|
31,341,156
|
2022
|
12,249,473
|
2023
|
7,319,609
|
2024
|
10,031,175
|
Total
CDs
|
$116,198,319
|
Total
deposits in excess of the FDIC insurance level amounted to
$178,997,035 as of December 31, 2019.
Note
10. Borrowed Funds
Outstanding
advances for the Company as of the balance sheet dates presented
were as follows:
|
2019
|
2018
|
Long-Term
Advances(1)
|
|
|
FHLBB term advance,
0.00%, due February 26, 2021
|
$350,000
|
$350,000
|
FHLBB term advance,
0.00%, due November 22, 2021
|
1,000,000
|
1,000,000
|
FHLBB term advance,
0.00%, due September 22, 2023
|
200,000
|
200,000
|
FHLBB term advance,
0.00%, due November 12, 2025
|
300,000
|
0
|
FHLBB term advance,
0.00%, due November 13, 2028
|
800,000
|
0
|
|
$2,650,000
|
$1,550,000
|
(1)
The FHLBB is
providing a subsidy, funded by the FHLBB’s earnings, to write
down interest rates to zero percent on JNE advances that finance
qualifying loans to small businesses. JNE advances must support
small business in New England that create and/or retain jobs, or
otherwise contribute to overall economic development
activities.
Borrowings
from the FHLBB are secured by a blanket lien on qualified
collateral consisting primarily of loans with first mortgages
secured by 1-4 family residential properties, as well as certain
qualifying CRE loans. Qualified collateral for these borrowings
totaled $135,672,471 and $148,323,822 as of December 31, 2019 and
2018, respectively, and the Company's gross potential borrowing
capacity under this arrangement was $97,358,249 and $108,736,234,
respectively, before reduction for outstanding advances and
collateral pledges.
Under a
separate agreement with the FHLBB, the Company has the authority to
collateralize public unit deposits, up to its available borrowing
capacity, with letters of credit issued by the FHLBB. At December
31, 2019, $14,425,000 in FHLBB letters of credit was utilized as
collateral for these deposits compared to $2,625,000 at December
31, 2018. Total fees paid by the Company in connection with
issuance of these letters of credit were $41,069 for 2019 and
$46,620 for 2018.
The
Company also maintained a $500,000 IDEAL Way Line of Credit with
the FHLBB at December 31, 2019 and 2018, with no outstanding
advances under this line at either year-end date. Interest on these
borrowings is at a rate determined daily by the FHLBB and payable
monthly.
The
Company also has a line of credit with the FRBB, which is intended
to be used as a contingency funding source. For this BIC
arrangement, the Company pledged eligible commercial and industrial
loans, CRE loans not pledged to FHLBB and home equity loans,
resulting in an available line of $56,896,877 and $50,913,351 as of
December 31, 2019 and 2018, respectively. Credit advances in the
FRBB lending program are overnight advances with interest
chargeable at the primary credit rate (generally referred to as the
discount rate), which was 225 basis points as of December 31, 2019.
As of December 31, 2019 and 2018, the Company had no outstanding
advances against this line.
31
The
Company has unsecured lines of credit with three correspondent
banks, with aggregate available borrowing capacity totaling
$12,500,000 at December 31, 2019 and 2018. The Company had no
outstanding advances against these lines for the periods
presented.
Note 11. Junior Subordinated Debentures
As of
December 31, 2019 and 2018, the Company had outstanding $12,887,000
principal amount of Junior Subordinated Debentures due in 2037 (the
Debentures). The Debentures bear a floating rate equal to the
3-month London Interbank Offered Rate plus 2.85%. During 2019, the
floating rate averaged 5.33% per quarter compared to an average
rate of 4.95% per quarter for 2018. The Debentures mature on
December 15, 2037 and are subordinated and junior in right of
payment to all senior indebtedness of the Company, as defined in
the Indenture dated as of October 31, 2007 between the Company and
Wilmington Trust Company, as Trustee. The Debentures first became
redeemable, in whole or in part, by the Company on December 15,
2012. Interest paid on the Debentures for 2019 and 2018 was
$694,573 and $650,361, respectively, and is deductible for tax
purposes.
The
Debentures were issued and sold to CMTV Statutory Trust I (the
Trust). The Trust is a special purpose trust funded by a capital
contribution of $387,000 from the Company, in exchange for 100% of
the Trust’s common equity. The Trust was formed for the
purpose of issuing corporation-obligated mandatorily redeemable
Capital Securities (Capital Securities) in the principal amount of
$12.5 million to third-party investors and using the proceeds from
the sale of such Capital Securities and the Company’s initial
capital contribution to purchase the Debentures. The Debentures are
the sole asset of the Trust. Distributions on the Capital
Securities issued by the Trust are payable quarterly at a rate per
annum equal to the interest rate being earned by the Trust on the
Debentures. The Capital Securities are subject to mandatory
redemption, in whole or in part, upon repayment of the Debentures.
The Company has entered into an agreement which, taken
collectively, fully and unconditionally guarantees the payments on
the Capital Securities, subject to the terms of the
guarantee.
The
Debentures are currently includable in the Company’s Tier 1
capital up to 25% of core capital elements (see Note
21).
Note 12. Repurchase Agreements
Securities
sold under agreements to repurchase mature daily and consisted of
the following as of the balance sheet dates:
December
31,
|
2019
|
2018
|
|
|
|
Current
balance
|
$33,189,848
|
$30,521,565
|
Average
balance
|
33,545,527
|
30,554,953
|
Highest month-end
balance
|
38,868,833
|
32,938,807
|
Weighted average
interest rate
|
0.89%
|
0.63%
|
|
|
|
Pledged Investment
(1)
|
|
|
Amortized
Cost
|
45,637,025
|
40,186,557
|
Fair
Value
|
45,966,750
|
39,366,831
|
(1)
U.S. GSE securities, Agency MBS, ABS and OAS, and CDs were pledged
as collateral for the periods presented.
Note 13. Income Taxes
The
Company prepares its income tax return on a consolidated basis.
Income taxes are allocated to members of the consolidated group
based on taxable income.
The
components of the Provision for income taxes for the years ended
December 31 were as follows:
|
2019
|
2018
|
|
|
|
Currently
paid or payable
|
$1,693,624
|
$1,749,624
|
Deferred
expense (benefit)
|
96,236
|
(11,359)
|
Total income
tax expense(1)
|
$1,789,860
|
$1,738,265
|
(1)
Due to an increase
of loan activity in 2019 in the state of New Hampshire, the Company
is now subject to sales tax nexus on the income generated from this
loan activity. An estimated tax payment of $10,000 was made to the
state of New Hampshire during the fourth quarter of 2019 in
anticipation of tax due for the 2019 tax year.
32
Total
income tax expense differed from the amounts computed at the
statutory federal income tax rate of 21% primarily due to the
following for the years ended December 31:
|
2019
|
2018
|
|
|
|
Computed expense at
statutory rates
|
$2,236,904
|
$2,128,517
|
Tax exempt interest
and BOLI
|
(306,073)
|
(291,550)
|
Disallowed
interest
|
15,798
|
11,631
|
Partnership
rehabilitation and tax credits
|
(415,099)
|
(437,229)
|
Low income housing
investment amortization expense
|
246,564
|
323,948
|
Other
|
11,766
|
2,948
|
|
$1,789,860
|
$1,738,265
|
The
deferred income tax expense (benefit) consisted of the following
items for the years ended December 31:
|
2019
|
2018
|
|
|
|
Depreciation
|
$126,734
|
$25,782
|
MSRs
|
(13,728)
|
(16,451)
|
Deferred
compensation
|
3,701
|
3,681
|
Bad
debts
|
(68,029)
|
(34,533)
|
Limited partnership
amortization
|
60,588
|
(20,129)
|
Investment in CFS
Partners
|
(3,323)
|
(1,014)
|
Loan fair
value
|
(6,171)
|
(2,228)
|
OREO write
down
|
0
|
13,860
|
Prepaid
expenses
|
(10,741)
|
(846)
|
Other
|
7,205
|
20,519
|
Change
in deferred tax expense (benefit)
|
$96,236
|
$(11,359)
|
Listed
below are the significant components of the net deferred tax asset
at December 31:
|
2019
|
2018
|
|
|
|
Components of the
deferred tax asset:
|
|
|
Bad
debts
|
$1,244,563
|
$1,176,534
|
Deferred
compensation
|
12,898
|
16,599
|
Contingent
liability - MPF program
|
17,838
|
17,838
|
Finance
lease
|
11,930
|
23,287
|
Unrealized
loss on debt securities AFS
|
0
|
172,143
|
Other
|
16,346
|
11,968
|
Total
deferred tax asset
|
1,303,575
|
1,418,369
|
|
|
|
Components of the
deferred tax liability:
|
|
|
Depreciation
|
384,197
|
257,463
|
Limited
partnerships
|
76,995
|
16,407
|
MSRs
|
197,311
|
211,039
|
Unrealized
gain on debt securities AFS
|
69,242
|
0
|
Investment
in CFS Partners
|
71,054
|
74,377
|
Operating
lease
|
226
|
0
|
Prepaid
expenses
|
68,738
|
79,479
|
Fair
value adjustment on acquired loans
|
0
|
6,171
|
Total
deferred tax liability
|
867,763
|
644,936
|
Net
deferred tax asset
|
$435,812
|
$773,433
|
US GAAP
provides for the recognition and measurement of deductible
temporary differences (including general valuation allowances) to
the extent that it is more likely than not that the deferred tax
asset will be realized.
The net
deferred tax asset is included in other assets in the consolidated
balance sheets.
33
Note 14. 401(k) and Profit-Sharing Plan
The
Company has a defined contribution plan covering all employees who
meet certain age and service requirements. The pension expense was
$624,000 and $617,800 for 2019 and 2018, respectively. These
amounts represent discretionary matching contributions of a portion
of the voluntary employee salary deferrals under the 401(k) plan
and discretionary profit-sharing contributions under the
plan.
Note 15. Deferred Compensation and Supplemental Employee
Retirement Plans
The
Company maintains a directors’ deferred compensation plan
and, prior to 2005, maintained a retirement plan for its directors.
Participants are general unsecured creditors of the Company with
respect to these benefits. The benefits accrued under these plans
were $61,421 and $79,045 at December 31, 2019 and 2018,
respectively. Expenses associated with these plans were $376 and
$474 for the years ended December 31, 2019 and 2018,
respectively.
Note 16. Financial Instruments with Off-Balance-Sheet
Risk
The
Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs
of its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit, standby letters of credit and financial guarantees,
commitments to sell loans and risk-sharing commitments on certain
sold loans. Such instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized
in the balance sheet. The contract or notional amounts of those
instruments reflect the maximum extent of involvement the Company
has in particular classes of financial instruments.
The
Company's maximum exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit and
financial guarantees written is represented by the contractual
notional amount of those instruments. The Company applies the same
credit policies and underwriting criteria in making commitments and
conditional obligations as it does for on-balance-sheet
instruments.
The
Company generally requires collateral or other security to support
financial instruments with credit risk. At December 31, the
following off-balance-sheet financial instruments representing
credit risk were outstanding:
|
Contract or Notional
Amount
|
|
|
2019
|
2018
|
|
|
|
Unused portions of
home equity lines of credit
|
$32,784,105
|
$31,328,881
|
Residential and
commercial construction lines of credit
|
12,364,436
|
7,251,560
|
Commercial real
estate commitments
|
24,377,588
|
26,588,950
|
Commercial and
industrial commitments
|
47,659,341
|
45,135,452
|
Other commitments
to extend credit
|
64,469,012
|
53,586,720
|
Standby letters of
credit and commercial letters of credit
|
1,375,500
|
2,408,581
|
Recourse on sale of
credit card portfolio
|
254,430
|
284,680
|
MPF credit
enhancement obligation, net (See Note 17)
|
552,158
|
552,158
|
Commitments
to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future
funding requirements. At December 31, 2019 and 2018, the Company
had binding loan commitments to sell residential mortgages at fixed
rates totaling $1,643,200 and $391,840, respectively (see Note 17).
The recourse provision under the terms of the sale of the
Company’s credit card portfolio in 2007 is based on total
lines, not balances outstanding. Based on historical losses, the
Company does not expect any significant losses from this
commitment.
34
The
Company evaluates each customer's credit-worthiness on a
case-by-case basis. The amount of collateral obtained if deemed
necessary by the Company upon extension of credit, or a commitment
to extend credit, is based on management's credit evaluation of the
counter-party. Collateral or other security held varies but may
include real estate, accounts receivable, inventory, property,
plant and equipment, and income-producing commercial
properties.
Standby
letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to
support private borrowing arrangements. The credit risk involved in
issuing letters of credit or providing reimbursement guarantees for
the benefit of the Company’s commercial customers is
essentially the same as that involved in extending loans to
customers. The fair value of standby letters of credit and
reimbursement guarantees on letters of credit has not been included
in the balance sheets as the fair value is immaterial.
In
connection with its 2007 trust preferred securities financing, the
Company guaranteed the payment obligations under the $12,500,000 of
capital securities of its subsidiary, the Trust. The source of
funds for payments by the Trust on its capital trust securities is
payments made by the Company on its debentures issued to the Trust.
The Company's obligation under those debentures is fully reflected
in the Company's consolidated balance sheet, in the gross amount of
$12,887,000 as of the dates presented, of which $12,500,000
represents external financing through the issuance to investors of
capital securities by the Trust (see Note 11).
Note 17. Contingent Liability
The
Company sells first lien 1-4 family residential mortgage loans
under the MPF program with the FHLBB. Under this program the
Company shares in the credit risk of each mortgage loan, while
receiving fee income in return. The Company is responsible for a
CEO based on the credit quality of these loans. FHLBB funds a FLA
based on the Company's outstanding MPF mortgage balances. This
creates a laddered approach to sharing in any losses. In the event
of default, homeowner's equity and private mortgage insurance, if
any, are the first sources of repayment; the FHLBB's FLA funds are
then utilized, followed by the participant’s CEO, with the
balance of losses absorbed by FHLBB. These loans must meet specific
underwriting standards of the FHLBB. As of December 31, 2019 and
2018, the Company had $33,990,463 and $38,935,411, respectively, in
loans sold through the MPF program and on which the Company had a
CEO. As of December 31, 2019 and 2018, the notional amount of the
maximum CEO related to this program was $637,102, and the accrued
contingent liability for this CEO was $84,944. The contingent
liability is calculated by management based on the methodology used
in calculating the ALL, adjusted to reflect the risk sharing
arrangements with the FHLBB.
Note 18. Legal Proceedings
In the
normal course of business, the Company is involved in various
claims and legal proceedings. In the opinion of the Company's
management, any liabilities resulting from such proceedings are not
expected to be material to the Company's consolidated financial
condition or results of operations.
Note 19. Transactions with Related Parties
Aggregate
loan transactions of the Company with directors, principal
officers, their immediate families and affiliated companies in
which they are principal owners (commonly referred to as related
parties) as of December 31 were as follows:
|
2019
|
2018
|
|
|
|
Balance, beginning
of year
|
$6,730,842
|
$7,356,906
|
Loans - New
Directors
|
0
|
936,445
|
New loans to
existing Principal Officers/Directors
|
4,491,524
|
5,582,052
|
Repayment
|
(2,094,824)
|
(7,144,561)
|
Balance, end of
year
|
$9,127,542
|
$6,730,842
|
Total
funds of related parties on deposit with the Company were
$8,942,886 and $6,179,453 at December 31, 2019 and 2018,
respectively.
Prior
to May 2018, the Company leased 2,253 square feet of condominium
space in the state office building on Main Street in Newport,
Vermont to its trust company affiliate, CFSG, for its principal
offices. In May 2018, CFSG purchased the condominium space from the
Company. CFSG also leases offices in the Company’s Barre and
Lyndonville branches. The amount of rental income received from
CFSG for the years ended December 31, 2019 and 2018 was $9,821 and
$30,365, respectively.
35
The
Company utilizes the services of CFSG as an investment advisor for
the Company’s 401(k) plan. The Human Resources committee of
the Board of Directors is the Trustee of the plan, and CFSG
provides investment advice for the plan. CFSG also acts as
custodian of the retirement funds and makes investments on behalf
of the plan and its participants. In addition, prior to liquidation
of the SERP assets, CFSG served as investment advisor and custodian
of funds under the Company’s SERP. The Company pays monthly
management fees to CFSG for its services to the 401(k) plan
amounting to $57,209 and $47,676, respectively, for the years ended
December 31, 2019 and 2018.
Note 20. Restrictions on Cash and Due From
Banks
In the
ordinary course of business, the Company may, from time to time,
maintain amounts due from correspondent banks that exceed federally
insured limits. However, no losses have occurred in these accounts
and the Company believes it is not exposed to any significant risk
with respect to such accounts. The Company was required to maintain
contracted balances with a correspondent bank of $30,000 at
December 31, 2019 and 2018.
Note 21. Regulatory Capital Requirements
The
Company (on a consolidated basis) and the Bank are subject to
various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary
- actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank
must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain
off-balance-sheet items, as calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors. Additional prompt corrective action
capital requirements are applicable to banks, but not to bank
holding companies.
Under
current banking rules governing required regulatory capital, the
Company and the Bank are required to maintain minimum amounts and
ratios (set forth in the table on the following page) of Common
equity tier 1, Tier 1 and Total capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1
capital (as defined) to average assets (as defined). The
Company’s non-cumulative Series A preferred stock ($1.5
million liquidation preference in 2019 and $2.0 million in 2018) is
includable without limitation in its Common equity tier 1 and Tier
1 capital. The Company is allowed to include in Common equity tier
1 and Tier 1 capital an amount of trust preferred securities equal
to no more than 25% of the sum of all core capital elements, which
is generally defined as shareholders’ equity, less certain
intangibles, including goodwill, net of any related deferred income
tax liability, with the balance includable in Tier 2 capital.
Management believes that, as of December 31, 2019, the Company and
the Bank met all capital adequacy requirements to which they were
subject.
Under
the 2018 Regulatory Relief Act, these capital requirements have
been simplified for qualifying community banks and bank holding
companies. In September 2019, the OCC and the other federal bank
regulators approved a final joint rule that permits a qualifying
community banking organization to opt in to a simplified regulatory
capital framework. A qualifying institution that elects to utilize
the simplified framework must maintain a CBLR in excess of 9%, and
will thereby be deemed to have satisfied the generally applicable
risk-based and other leverage capital requirements and (if
applicable) the FDIC’s prompt corrective action framework. In
order to utilize the CBLR framework, in addition to maintaining a
CBLR of over 9%, a community banking organization must have less
than $10 billion in total consolidated assets and must meet certain
other criteria such as limitations on the amount of off-balance
sheet exposures and on trading assets and liabilities. The CBLR
will be calculated by dividing tangible equity capital by average
total consolidated assets. The final rule became effective on
January 1, 2020. Management believes that the Company and Bank
would qualify to utilize the CBLR framework on a pro forma basis as
of December 31, 2019 had it been in effect on that
date.
36
Beginning
in 2016, an additional capital conservation buffer was added to the
minimum requirements for capital adequacy purposes, subject to a
three year phase-in period. The capital conservation buffer was
fully phased-in on January 1, 2019 at 2.5% of risk-weighted assets.
A banking organization with a conservation buffer of less than 2.5%
is subject to limitations on capital distributions, including
dividend payments and certain discretionary bonus payments to
executive officers. The Company and the Bank were fully compliant
with a capital conservation buffer of 6.63% and 6.53%,
respectively, in effect at December 31, 2019, and 6.08% and 5.97%,
respectively, in effect at December 31, 2018.
As of
December 31, 2019, the Bank was considered well capitalized under
the regulatory capital framework for Prompt Corrective Action and
the Company exceeded applicable consolidated regulatory guidelines
for capital adequacy.
The
following table shows the regulatory capital ratios for the Company
and the Bank as of December 31:
|
|
|
|
|
Minimum
|
|
|
|
|
Minimum
|
To Be Well
|
||
|
|
|
For Capital
|
Capitalized
Under
|
||
|
|
|
Adequacy
|
Prompt
Corrective
|
||
|
Actual
|
Purposes:
|
Action
Provisions(1):
|
|||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
(Dollars in
Thousands)
|
|||||
December
31, 2019
|
|
|
|
|
|
|
Common equity tier
1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
Company
|
$69,947
|
13.48%
|
$23,352
|
4.50%
|
N/A
|
N/A
|
Bank
|
$69,330
|
13.38%
|
$23,325
|
4.50%
|
$33,691
|
6.50%
|
Tier 1 capital (to
risk-weighted assets)
|
|
|
|
|
|
|
Company
|
$69,947
|
13.48%
|
$31,135
|
6.00%
|
N/A
|
N/A
|
Bank
|
$69,330
|
13.38%
|
$31,099
|
6.00%
|
$41,466
|
8.00%
|
Total capital (to
risk-weighted assets)
|
|
|
|
|
|
|
Company
|
$75,943
|
14.63%
|
$41,514
|
8.00%
|
N/A
|
N/A
|
Bank
|
$75,326
|
14.53%
|
$41,466
|
8.00%
|
$51,832
|
10.00%
|
Tier 1 capital (to
average assets)
|
|
|
|
|
|
|
Company
|
$69,947
|
9.57%
|
$29,223
|
4.00%
|
N/A
|
N/A
|
Bank
|
$69,330
|
9.50%
|
$29,201
|
4.00%
|
$36,501
|
5.00%
|
|
|
|
|
|
|
|
December
31, 2018:
|
|
|
|
|
|
|
Common equity tier
1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
Company
|
$64,564
|
12.94%
|
$22,446
|
4.50%
|
N/A
|
N/A
|
Bank
|
$63,960
|
12.84%
|
$22,419
|
4.50%
|
$32,384
|
6.50%
|
Tier 1 capital (to
risk-weighted assets)
|
|
|
|
|
|
|
Company
|
$64,564
|
12.94%
|
$29,928
|
6.00%
|
N/A
|
N/A
|
Bank
|
$63,960
|
12.84%
|
$29,893
|
6.00%
|
$39,857
|
8.00%
|
Total capital (to
risk-weighted assets)
|
|
|
|
|
|
|
Company
|
$70,210
|
14.08%
|
$39,904
|
8.00%
|
N/A
|
N/A
|
Bank
|
$69,606
|
13.97%
|
$39,857
|
8.00%
|
$49,821
|
10.00%
|
Tier 1 capital (to
average assets)
|
|
|
|
|
|
|
Company
|
$64,564
|
9.26%
|
$27,890
|
4.00%
|
N/A
|
N/A
|
Bank
|
$63,960
|
9.18%
|
$27,867
|
4.00%
|
$34,834
|
5.00%
|
(1)
Applicable to banks, but not bank holding companies.
The
Company's ability to pay dividends to its shareholders is largely
dependent on the Bank's ability to pay dividends to the Company.
The Bank is restricted by law as to the amount of dividends that
can be paid. Dividends declared by national banks that exceed net
income for the current and preceding two years must be approved by
the Bank’s primary banking regulator, the Office of the
Comptroller of the Currency. Regardless of formal regulatory
restrictions, the Bank may not pay dividends that would result in
its capital levels being reduced below the minimum requirements
shown above.
37
Note 22. Fair Value
Certain
assets and liabilities are recorded at fair value to provide
additional insight into the Company’s quality of earnings.
The fair values of some of these assets and liabilities are
measured on a recurring basis while others are measured on a
non-recurring basis, with the determination based upon applicable
existing accounting pronouncements. For example, securities
available-for-sale are recorded at fair value on a recurring basis.
Other assets, such as MSRs, loans held-for-sale, impaired loans,
and OREO are recorded at fair value on a non-recurring basis using
the lower of cost or market methodology to determine impairment of
individual assets. The Company groups assets and liabilities which
are recorded at fair value in three levels, based on the markets in
which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value. The level within the
fair value hierarchy is based on the lowest level of input that is
significant to the fair value measurement (with Level 1 considered
highest and Level 3 considered lowest). A brief description of each
level follows.
Level
1
Quoted prices in
active markets for identical assets or liabilities. Level 1 assets
and liabilities include debt and equity securities and derivative
contracts that are traded in an active exchange market, as well as
U.S. Treasury, other U.S. Government debt securities that are
highly liquid and are actively traded in over-the-counter
markets.
Level
2
Observable inputs
other than Level 1 prices such as quoted prices for similar assets
and liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the
assets or liabilities. Level 2 assets and liabilities include debt
securities with quoted prices that are traded less frequently than
exchange-traded instruments and derivative contracts whose value is
determined using a pricing model with inputs that are observable in
the market or can be derived principally from or corroborated by
observable market data. This category generally includes MSRs,
collateral-dependent impaired loans and OREO.
Level
3
Unobservable inputs
that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. Level 3
assets and liabilities include financial instruments whose value is
determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for
which the determination of fair value requires significant
management judgment or estimation.
The
following methods and assumptions were used by the Company in
estimating its fair value measurements:
Debt Securities AFS: Fair
value measurement is based upon quoted prices for similar assets,
if available. If quoted prices are not available, fair values are
measured using matrix pricing models, or other model-based
valuation techniques requiring observable inputs other than quoted
prices such as yield curves, prepayment speeds and default rates.
Level 1 securities would include U.S. Treasury securities that are
traded by dealers or brokers in active over-the-counter markets.
Level 2 securities include federal agency securities.
Impaired loans: Impaired loans are
reported based on one of three measures: the present value of
expected future cash flows discounted at the loan’s effective
interest rate; the loan’s observable market price; or the
fair value of the collateral if the loan is collateral dependent.
If the fair value is less than an impaired loan’s recorded
investment, an impairment loss is recognized as part of the ALL.
Accordingly, certain impaired loans may be subject to measurement
at fair value on a non-recurring basis. Management has estimated
the fair values of collateral-dependent loans using Level 2 inputs,
such as the fair value of collateral based on independent
third-party appraisals.
Loans held-for-sale: The fair value of
loans held-for-sale is based upon an actual purchase and sale
agreement between the Company and an independent market
participant. The sale is executed within a reasonable period
following quarter end at the stated fair value.
MSRs: MSRs represent the
value associated with servicing residential mortgage loans.
Servicing assets and servicing liabilities are reported using the
amortization method and compared to fair value for impairment. In
evaluating the carrying values of MSRs, the Company obtains third
party valuations based on loan level data including note rate, and
the type and term of the underlying loans. The Company classifies
MSRs as non-recurring Level 2.
OREO: Real estate acquired
through or in lieu of foreclosure and bank properties no longer
used as bank premises are initially recorded at fair value. The
fair value of OREO is based on property appraisals and an analysis
of similar properties currently available. The Company records OREO
as non-recurring Level 2.
38
Assets Recorded at Fair Value on a Recurring Basis
Assets
measured at fair value on a recurring basis and reflected in the
consolidated balance sheets at December 31, segregated by fair
value hierarchy, are summarized below:
Level
2
|
2019
|
2018
|
Assets: (market
approach)
|
|
|
U.S. GSE debt
securities
|
$18,061,620
|
$13,751,103
|
Agency
MBS
|
16,205,375
|
15,574,525
|
ABS and
OAS
|
2,852,909
|
1,986,129
|
Other
investments
|
8,846,846
|
8,055,074
|
|
$45,966,750
|
$39,366,831
|
There
were no Level 1 or Level 3 assets or liabilities measured on a
recurring basis as of the balance sheet dates presented, nor were
there any transfers of assets between Levels during either 2019 or
2018.
Assets Recorded at Fair Value on a Non-Recurring Basis
The
following table includes assets measured at fair value on a
non-recurring basis that have had a fair value adjustment since
their initial recognition. Impaired loans measured at fair value
only include impaired loans with a related specific ALL and are
presented net of specific allowances as disclosed in Note 3, there
were none for 2019 and 2018.
Assets
measured at fair value on a non-recurring basis and reflected in
the consolidated balance sheets at December 31, segregated by fair
value hierarchy, are summarized below:
Level
2
|
2019
|
2018
|
Assets: (market
approach)
|
|
|
MSRs
(1)
|
$939,577
|
$1,004,948
|
OREO
|
966,738
|
201,386
|
(1)
Represents MSRs at lower of cost or fair value, including MSRs
deemed to be impaired and for which a valuation allowance was
established to carry at fair value at December 31, 2019 and
2018.
There
were no Level 1 or Level 3 assets or liabilities measured on a
non-recurring basis as of the balance sheet dates presented, nor
were there any transfers of assets between Levels during either
2019 or 2018.
FASB
ASC Topic 825, “Financial Instruments”, requires
disclosures of fair value information about financial instruments,
whether or not recognized in the balance sheet, if the fair values
can be reasonably determined. Fair value is best determined based
upon quoted market prices. However, in many instances, there are no
quoted market prices for the Company’s various financial
instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other
valuation techniques using observable inputs when available. Those
techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows.
Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument. Topic 825 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value
amounts presented may not necessarily represent the underlying fair
value of the Company.
39
The
carrying amounts and estimated fair values of the Company's
financial instruments were as follows:
December
31, 2019
|
|
Fair
|
Fair
|
Fair
|
Fair
|
|
Carrying
|
Value
|
Value
|
Value
|
Value
|
|
Amount
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
(Dollars in
Thousands)
|
||||
Financial
assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
$48,562
|
$48,562
|
$0
|
$0
|
$48,562
|
Debt securities
AFS
|
45,967
|
0
|
45,967
|
0
|
45,967
|
Restricted equity
securities
|
1,432
|
0
|
1,432
|
0
|
1,432
|
Loans and loans
held-for-sale, net of ALL
|
|
|
|
|
|
Commercial
& industrial
|
98,062
|
0
|
0
|
97,356
|
97,356
|
Commercial
real estate
|
243,022
|
0
|
0
|
242,735
|
242,735
|
Municipal
(1)
|
55,817
|
0
|
0
|
55,867
|
55,867
|
Residential
real estate - 1st lien
|
156,897
|
0
|
0
|
156,520
|
156,520
|
Residential
real estate - Jr lien
|
42,927
|
0
|
0
|
42,950
|
42,950
|
Consumer
|
4,337
|
0
|
0
|
4,306
|
4,306
|
MSRs
(2)
|
940
|
0
|
1,250
|
0
|
1,250
|
Accrued interest
receivable
|
2,337
|
0
|
2,337
|
0
|
2,337
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
Other
deposits
|
603,872
|
0
|
604,267
|
0
|
604,267
|
Brokered
deposits
|
11,149
|
0
|
11,153
|
0
|
11,153
|
Long-term
borrowings
|
2,650
|
0
|
2,427
|
0
|
2,427
|
Repurchase
agreements
|
33,190
|
0
|
33,190
|
0
|
33,190
|
Operating lease
obligations
|
1,263
|
0
|
1,263
|
0
|
1,263
|
Finance lease
obligations
|
100
|
0
|
100
|
0
|
100
|
Subordinated
debentures
|
12,887
|
0
|
12,831
|
0
|
12,831
|
Accrued interest
payable
|
139
|
0
|
139
|
0
|
139
|
(1)
Prior to
reclassification to the loan portfolio effective January 1, 2019,
all loans in this category were reported as HTM securities as a
component of Investment Securities. All prior periods have been
restated to conform to the reclassification.
(2)
Reported fair value
represents all MSRs for loans serviced by the Company at December
31, 2019, regardless of carrying amount.
40
December
31, 2018
|
|
Fair
|
Fair
|
Fair
|
Fair
|
|
Carrying
|
Value
|
Value
|
Value
|
Value
|
|
Amount
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
(Dollars in
Thousands)
|
||||
Financial
assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
$67,935
|
$67,935
|
$0
|
$0
|
$67,935
|
Debt securities
AFS
|
39,367
|
0
|
39,367
|
0
|
39,367
|
Restricted equity
securities
|
1,749
|
0
|
1,749
|
0
|
1,749
|
Loans and loans
held-for-sale, net of ALL
|
|
|
|
|
|
Commercial
& industrial
|
80,049
|
0
|
0
|
79,773
|
79,773
|
Commercial
real estate
|
232,239
|
0
|
0
|
230,532
|
230,532
|
Municipal
(1)
|
47,067
|
0
|
0
|
47,228
|
47,228
|
Residential
real estate - 1st lien
|
164,202
|
0
|
0
|
161,068
|
161,068
|
Residential
real estate - Jr lien
|
44,260
|
0
|
0
|
44,127
|
44,127
|
Consumer
|
5,031
|
0
|
0
|
5,063
|
5,063
|
MSRs
(2)
|
1,005
|
0
|
1,481
|
0
|
1,481
|
Accrued interest
receivable
|
2,301
|
0
|
2,301
|
0
|
2,301
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
Other
deposits
|
573,525
|
0
|
571,952
|
0
|
571,952
|
Brokered
deposits
|
35,292
|
0
|
35,247
|
0
|
35,247
|
Long-term
borrowings
|
1,550
|
0
|
1,425
|
0
|
1,425
|
Repurchase
agreements
|
30,522
|
0
|
30,522
|
0
|
30,522
|
Capital lease
obligations
|
267
|
0
|
267
|
0
|
267
|
Subordinated
debentures
|
12,887
|
0
|
12,807
|
0
|
12,807
|
Accrued interest
payable
|
113
|
0
|
113
|
0
|
113
|
(1)
Prior to
reclassification to the loan portfolio effective January 1, 2019,
all loans in this category were reported as HTM securities as a
component of Investment Securities. All prior periods have been
restated to conform to the reclassification.
(2)
Reported fair value
represents all MSRs for loans serviced by the Company at December
31, 2018, regardless of carrying amount.
The
estimated fair values of commitments to extend credit, letters of
credit and financial guarantees for the benefit of customers were
immaterial at December 31, 2019 and 2018.
41
Note 23. Condensed Financial Information (Parent Company
Only)
The
following condensed financial statements are for Community Bancorp.
(Parent Company Only), and should be read in conjunction with the
consolidated financial statements of the Company.
Community
Bancorp. (Parent Company Only)
|
December 31,
|
December 31,
|
Balance
Sheets
|
2019
|
2018
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Cash
|
$744,687
|
$720,620
|
Investment
in subsidiary - Community National Bank
|
81,164,447
|
74,886,386
|
Investment
in Capital Trust
|
387,000
|
387,000
|
Income
taxes receivable
|
213,071
|
207,244
|
Total
assets
|
$82,509,205
|
$76,201,250
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Junior
subordinated debentures
|
$12,887,000
|
$12,887,000
|
Dividends
payable
|
727,526
|
710,539
|
Total
liabilities
|
13,614,526
|
13,597,539
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
Preferred
stock, 1,000,000 shares authorized, 15 and 20 shares issued
and
|
|
|
outstanding
at December 31, 2019 and 2018, respectively
|
|
|
($100,000
liquidation value, per share)
|
1,500,000
|
2,000,000
|
Common
stock - $2.50 par value; 15,000,000 shares authorized,
5,449,857
|
|
|
and
5,382,103 shares issued at December 31, 2019 and 2018,
respectively
|
|
|
(including
16,267 and 17,442 shares issued February 1, 2020 and
2019,
|
|
|
respectively)
|
13,624,643
|
13,455,258
|
Additional
paid-in capital
|
33,464,381
|
32,536,532
|
Retained
earnings
|
22,667,949
|
17,882,282
|
Accumulated
other comprehensive income (loss)
|
260,483
|
(647,584)
|
Less:
treasury stock, at cost; 210,101 shares at December 31, 2019 and
2018
|
(2,622,777)
|
(2,622,777)
|
Total
shareholders' equity
|
68,894,679
|
62,603,711
|
|
|
|
Total
liabilities and shareholders' equity
|
$82,509,205
|
$76,201,250
|
The
investment in the subsidiary bank is carried under the equity
method of accounting. The investment and cash, which is on deposit
with the Bank, have been eliminated in consolidation.
42
Community
Bancorp. (Parent Company Only)
|
Years Ended December
31,
|
|
Condensed
Statements of Income
|
2019
|
2018
|
|
|
|
Income
|
|
|
Bank
subsidiary distributions
|
$4,256,000
|
$4,137,000
|
Dividends
on Capital Trust
|
20,858
|
19,530
|
Total
income
|
4,276,858
|
4,156,530
|
|
|
|
Expense
|
|
|
Interest
on junior subordinated debentures
|
694,573
|
650,361
|
Administrative
and other
|
340,904
|
356,055
|
Total
expense
|
1,035,477
|
1,006,416
|
|
|
|
Income before
applicable income tax benefit and equity in
|
|
|
undistributed
net income of subsidiary
|
3,241,381
|
3,150,114
|
Income tax
benefit
|
213,071
|
207,244
|
|
|
|
Income before
equity in undistributed net income of subsidiary
|
3,454,452
|
3,357,358
|
Equity in
undistributed net income of subsidiary
|
5,369,994
|
5,040,174
|
Net
income
|
$8,824,446
|
$8,397,532
|
Community
Bancorp. (Parent Company Only)
|
Years Ended December
31,
|
|
Condensed
Statements of Cash Flows
|
2019
|
2018
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
Net
income
|
$8,824,446
|
$8,397,532
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
operating
activities
|
|
|
Equity
in undistributed net income of subsidiary
|
(5,369,994)
|
(5,040,174)
|
(Increase)
decrease in income taxes receivable
|
(5,827)
|
82,980
|
Net
cash provided by operating activities
|
3,448,625
|
3,440,338
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
Redemption
of preferred stock
|
(500,000)
|
(500,000)
|
Dividends
paid on preferred stock
|
(87,500)
|
(103,125)
|
Dividends
paid on common stock
|
(2,837,058)
|
(2,672,985)
|
Net
cash used in financing activities
|
(3,424,558)
|
(3,276,110)
|
Net
increase in cash
|
24,067
|
164,228
|
|
|
|
Cash
|
|
|
Beginning
|
720,620
|
556,392
|
Ending
|
$744,687
|
$720,620
|
|
|
|
Cash
Received for Income Taxes
|
$207,244
|
$290,224
|
|
|
|
Cash
Paid for Interest
|
$694,573
|
$650,361
|
|
|
|
Dividends
paid:
|
|
|
Dividends
declared
|
$3,951,279
|
$3,799,864
|
Increase
in dividends payable attributable to dividends
declared
|
(16,987)
|
(80,078)
|
Dividends
reinvested
|
(1,097,234)
|
(1,046,801)
|
|
$2,837,058
|
$2,672,985
|
43
Note 24. Quarterly Financial Data
(Unaudited)
A
summary of financial data for the four quarters of 2019 and 2018 is
presented below:
2019
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
|
|
|
|
|
Interest
income
|
$7,698,368
|
$8,262,422
|
$7,906,454
|
$7,891,564
|
Interest
expense
|
1,538,540
|
1,546,953
|
1,509,033
|
1,548,595
|
Provision for loan
losses
|
212,503
|
141,666
|
412,499
|
299,499
|
Non-interest
income
|
1,318,700
|
1,434,138
|
1,597,332
|
1,595,896
|
Non-interest
expense
|
5,155,924
|
5,079,060
|
4,863,716
|
4,782,580
|
Net
income
|
1,771,905
|
2,419,298
|
2,261,943
|
2,371,300
|
Earnings per common
share
|
0.34
|
0.46
|
0.43
|
0.45
|
2018
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
|
|
|
|
|
Interest
income
|
$6,776,838
|
$7,028,859
|
$7,517,022
|
$7,791,884
|
Interest
expense
|
868,749
|
938,499
|
1,220,145
|
1,457,695
|
Provision for loan
losses
|
180,000
|
180,000
|
210,000
|
210,000
|
Non-interest
income
|
1,395,670
|
1,690,161
|
1,542,793
|
1,552,684
|
Non-interest
expense
|
4,731,116
|
5,103,975
|
4,874,332
|
5,185,603
|
Net
income
|
1,982,543
|
2,002,654
|
2,269,732
|
2,142,603
|
Earnings per common
share
|
0.38
|
0.39
|
0.44
|
0.40
|
|
|
|
|
|
Note
25. Other Income and Other Expenses
The
components of other income and other expenses which are in excess
of one percent of total revenues in either of the two years
disclosed are as follows:
|
2019
|
2018
|
Income
|
|
|
Income
from investment in CFS Partners
|
$588,696
|
$514,485
|
|
|
|
Expenses
|
|
|
Outsourcing
expense
|
$428,668
|
$480,563
|
Service
contracts - administration
|
539,510
|
512,902
|
Marketing
|
450,533
|
552,617
|
State
deposit tax
|
669,502
|
633,185
|
ATM
fees
|
434,270
|
412,813
|
Note 26. Subsequent Events
Declaration of Cash Dividend
On
December 16, 2019, the Company declared a cash dividend of $0.19
per share payable February 1, 2020 to shareholders of record as of
January 15, 2020. On March 11, 2020, the Company declared a
cash dividend of $0.19
per share payable May 1, 2020 to shareholders of record as of April
15, 2020. These dividends have been recorded as of each declaration
date, including shares issuable under the
DRIP.
For
purposes of accrual or disclosure in these financial statements,
the Company has evaluated subsequent events through the date of
issuance of these financial statements.
44
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
For the
Years Ended December 31, 2019 and 2018
The
following discussion analyzes the consolidated financial condition
of the Company and its wholly-owned subsidiary, Community National
Bank, as of December 31, 2019 and 2018, and its consolidated
results of operations for the years then ended. The Company is
considered a “smaller reporting company” under the
disclosure rules of the SEC (as amended in 2018). Accordingly, the
Company has elected to provide its audited statements of income,
comprehensive income, cash flows and changes in shareholders’
equity for a two year, rather than a three year, period and intends
to provide smaller reporting company scaled disclosures where
management deems it appropriate. Beginning with its periodic
reports filed in 2018, the Company is also considered an
accelerated filer under the financial reporting rules of the
SEC.
The
following discussion should be read in conjunction with the
Company’s audited consolidated financial statements and
related notes. Please refer to Note 1 in the accompanying audited
consolidated financial statements for a listing of acronyms and
defined terms used throughout the following
discussion.
FORWARD-LOOKING STATEMENTS
This
Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements
about the results of operations, financial condition and business
of the Company and its subsidiary. Words used in the discussion
below such as "believes," "expects," "anticipates," "intends,"
"estimates," "plans," "predicts," or similar expressions, indicate
that management of the Company is making forward-looking
statements.
Forward-looking
statements are not guarantees of future performance. They
necessarily involve risks, uncertainties and assumptions. Future
results of the Company may differ materially from those expressed
in these forward-looking statements. Examples of forward looking
statements included in this discussion include, but are not limited
to, estimated contingent liability related to assumptions made
within the asset/liability management process, management's
expectations as to the future interest rate environment and the
Company's related liquidity level, credit risk expectations
relating to the Company's loan portfolio and its participation in
the FHLBB MPF program, and management's general outlook for the
future performance of the Company or the local or national economy.
Although forward-looking statements are based on management's
current expectations and estimates, many of the factors that could
influence or determine actual results are unpredictable and not
within the Company's control. In addition, the factors set forth in
Part I, Item 1A-Risk Factors in this report and other cautionary
statements and information contained in this report should be
carefully considered and understood as being applicable to all
related forward-looking statements contained in this report, when
evaluating the business prospects of the Company and its
subsidiary.
Factors
that may cause actual results to differ materially from those
contemplated by these forward-looking statements include, among
others, the following possibilities:
●
general economic or
business conditions, either nationally, regionally or locally,
deteriorate, resulting in a decline in credit quality or a
diminished demand for the Company's products and
services;
●
competitive
pressures increase among financial service providers in the
Company's northern New England market area or in the financial
services industry generally, including competitive pressures from
non-bank financial service providers, from increasing consolidation
and integration of financial service providers, and from changes in
technology and delivery systems;
●
interest rates
change in such a way as to negatively affect the Company's net
income, asset valuations or margins;
●
changes in laws or
government rules, including the rules of the federal Consumer
Financial Protection Bureau, or the way in which courts or
government agencies interpret or implement those laws or rules,
increase our costs of doing business, causing us to limit or change
our product offerings or pricing, or otherwise adversely affect the
Company's business;
●
changes in federal
or state tax laws or policy;
●
changes in the
level of nonperforming assets and charge-offs;
●
changes in
applicable accounting policies, practices and standards, including,
without limitation, implementation of pending changes to the
measurement of credit losses in financial statements under US GAAP
pursuant to the CECL model;
●
changes in consumer
and business spending, borrowing and savings habits;
●
reductions in
deposit levels, which necessitate increased borrowings to fund
loans and investments;
●
the geographic
concentration of the Company’s loan portfolio and deposit
base;
●
losses due to the
fraudulent or negligent conduct of third parties, including the
Company’s service providers, customers and
employees;
45
●
cybersecurity risks
could adversely affect the Company’s business, financial
performance or reputation and could result in financial liability
for losses incurred by customers or others due to data breaches or
other compromise of the Company’s information security
systems;
●
higher-than-expected
costs are incurred relating to information technology or
difficulties arise in implementing technological
enhancements;
●
management’s
risk management measures may not be completely
effective;
●
changes in the
United States monetary and fiscal policies, including the interest
rate policies of the FRB and its regulation of the money
supply;
●
adverse changes in
the credit rating of U.S. government debt; and
●
the planned phase
out the London Interbank Offered Rate (LIBOR) by the end of 2021,
which could adversely affect the Company’s interest costs in
future periods on its $12,887,000 in principal amount of Junior
Subordinated Debentures due December 12, 2037, which bear interest
at a variable rate, adjusted quarterly, equal to 3-month LIBOR,
plus 2.85%.
Readers
are cautioned not to place undue reliance on such statements as
they speak only as of the date they are made. The Company does not
undertake, and disclaims any obligation, to revise or update any
forward-looking statements to reflect the occurrence or anticipated
occurrence of events or circumstances after the date of this
Report, except as required by applicable law. The Company claims
the protection of the safe harbor for forward-looking statements
provided in the Private Securities Litigation Reform Act of
1995.
NON-GAAP FINANCIAL MEASURES
Under
SEC Regulation G, public companies making disclosures containing
financial measures that are not in accordance with GAAP must also
disclose, along with each non-GAAP financial measure, certain
additional information, including a reconciliation of the non-GAAP
financial measure to the closest comparable GAAP financial measure,
as well as a statement of the company’s reasons for utilizing
the non-GAAP financial measure. The SEC has exempted from the
definition of non-GAAP financial measures certain commonly used
financial measures that are not based on GAAP. However, three
non-GAAP financial measures commonly used by financial
institutions, namely tax-equivalent net interest income and
tax-equivalent net interest margin (as presented in the tables in
the section labeled Interest Income Versus Interest Expense (NII))
and core earnings (as defined and discussed in the Results of
Operations section), have not been specifically exempted by the
SEC, and may therefore constitute non-GAAP financial measures under
Regulation G. We are unable to state with certainty whether the SEC
would regard those measures as subject to Regulation
G.
Management
believes that these non-GAAP financial measures are useful in
evaluating the Company’s financial performance and facilitate
comparisons with the performance of other financial institutions.
However, that information should be considered supplemental in
nature and not as a substitute for related financial information
prepared in accordance with GAAP.
OVERVIEW
The
Company’s consolidated assets at year-end 2019 were $738.0
million compared to $720.3 million at year-end 2018, an increase of
2.4%. Net loans increased 4.9% to $601.4 million, driven primarily
by an increase in commercial and municipal, loans with a combined
increase of $29.1 million year over year, to $345.2 million. Loan
growth during 2019 was also enhanced with approximately $7.2
million in purchased commercial loans from BHG and two commercial
real estate loans participations totaling $5.4 million with the
ACBB. Funding for these increases was provided, in part, by a $6.2
million net increase in deposits, primarily in the form of core
non-maturity deposits, as well as a decrease in cash of $19.4
million. The AFS portfolio increased $6.6 million, or 16.8% for
year over year. As noted in Note 1 to the accompanying audited
consolidated financial statements, the Company chose to reclassify
its HTM investment portfolio, which is made up entirely of
obligations to local municipalities, into the loan portfolio,
effective January 1, 2019. All prior period information has been
adjusted accordingly. The Company had no loans held-for-sale at
either year-end reporting period. Average non-maturity deposit
balances increased year over year, offset in part by a modest 1.3%
decline in retail CD balances as rate competition began to increase
during the year, drawing away some rate-sensitive
accounts. Capital grew to $68.9
million with a book value of $12.86 per common share on December
31, 2019, compared to $62.6 million in capital and a book value of
$11.72 per common share on December 31, 2018.
The
purchased loan volume mentioned above was through a new loan
purchasing program with BHG. BHG originates commercial loans to
medical professionals nationwide and sells them individually to a
secondary market, primarily banks, through a bid process. The Bank
has established conservative credit parameters and expects a low
risk of default in this portfolio. Average loan size is
approximately $200,000, with average term of 100 months. With
average duration expected to be slightly longer than the commercial
portfolio average, the Company’s participation in the BHG
program reduces exposure to falling rates in the near term. In
addition, this portfolio supports asset growth and provides
geographic diversification.
46
The
Company’s net income of $8.8 million, or $1.68 per common
share, for 2019 was up 5.1%, compared to net income of $8.4
million, or $1.61 per common share, in 2018. Net interest income
contributed significantly to the Company’s increase in
earnings. Average earning-assets increased $34.0 million, or 5.4%,
in 2019, and tax-equivalent interest income increased by $2.7
million, or 9.1%, resulting in an increase in average yield on
interest-earning assets of 16 basis points. The increase in
interest income is due in part to a $440,000 prepayment penalty
received in the second quarter of 2019, as well as increases in
short-term rates. While the increase in short-term rates has had a
positive impact on interest income earlier in the year, it later
put upward pressure on interest rates paid on deposit accounts and
other borrowings. This pressure has lessened somewhat, at least in
the near term, as short-term rates later declined in the third
quarter. Please refer to the interest rate sensitivity discussion
in the Interest Rate Risk and Asset and Liability Management
section for more information on the impact that changes in interest
rates and in the yield curve could have on net interest
income.
Average
interest-bearing liabilities increased $23.2 million, or 4.6%,
during the year, and the average rate paid on interest-bearing
liabilities increased 28 basis points, resulting in an increase in
interest expense of $1.7 million. The combined effect of the
changes in average yield and in average rate paid resulted in an
increase of $1.0 million in tax-equivalent net interest income, and
a slight decrease in net interest margin from 3.95% to 3.90% year
over year.
Growth
of the loan portfolio combined with charge off activity related to
write-down adjustments on several loans in workout required a
provision for loan losses of $1,066,167 for 2019 compared to
$780,000 for 2018, an increase of 36.7%. Please refer to the ALL
and provisions discussion in the Credit Risk section for more
information on these increases.
Non-interest
income decreased $235,242, or 3.8%, year over year due mostly to a
one-time gain during 2018 of $263,118 from the sale of certain
office premises to the Company’s affiliate CFSG. While
increases are noted in salaries, wages and employee benefits, both
periods were positively impacted by a decrease in other expenses
due to the distribution of $164,007 in Small Bank deposit-insurance
assessment credits issued by the FDIC, representing 69.5% of the
Company’s total FDIC assessment for 2019. Please refer to the Non-interest
Income and Non-interest Expense sections for more information on
these changes.
According
to the State of Vermont Department of Labor, Vermont’s
unemployment rate for December, 2019 was 2.3%, compared to 2.7% in
December, 2018, and remains well below the national average of
3.5%. General business conditions remain stable to improving with
improvements mainly in the Chittenden and Washington Counties,
offset by some continued weakness in rural markets. Of the
Company’s primary market areas, Orleans, Caledonia, and Essex
Counties continue to have the highest unemployment rates in the
state, while Washington and Franklin Counties are showing some
signs of improvement running slightly below the state average.
While employment numbers continue to look good, business expansion
is challenged by a lack of skilled workforce. In response to the
workforce challenges, the Vermont Department of Labor has placed
labor force expansion at the top of its priority list and has
created a State Registered Apprenticeship Program, which is an
employer-sponsored training program that includes both work
experience and industry-specific instruction. Travel and tourism
continues to be a focus of the Vermont economy with Orleans,
Caledonia and Essex Counties, in particular, focusing on the
outdoor recreation economy. The 2019-2020 winter season has been
favorable for outdoor recreation with plenty of snowfall and
relatively mild temperatures.
The
Company declared dividends of $0.76 per common share in 2019
compared to $0.74 per common share in 2018. As of December 31,
2019, the Company reported retained earnings of $22.7 million,
compared to $17.9 million as of December 31, 2018 and total
shareholders’ equity of $68.9 million and $62.6 million,
respectively. The Company is committed to remaining a
well-capitalized community bank, working to meet the needs of our
customers while providing a fair return to our
shareholders.
CRITICAL ACCOUNTING POLICIES
The
Company’s consolidated financial statements are prepared
according to US GAAP. The preparation of such financial statements
requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses
and related disclosure of contingent assets and liabilities in the
consolidated financial statements and related notes. The SEC has
defined a company’s critical accounting policies as those
that are most important to the portrayal of the Company’s
financial condition and results of operations, and which require
the Company to make its most difficult and subjective judgments,
often as a result of the need to make estimates of matters that are
inherently uncertain. Because of the significance of these
estimates and assumptions, there is a high likelihood that
materially different amounts would be reported for the Company
under different conditions or using different assumptions or
estimates. Management evaluates on an ongoing basis its judgment as
to which policies are considered to be critical.
ALL - Management believes that the calculation of the ALL is
a critical accounting policy that requires the most significant
judgments and estimates used in the preparation of its consolidated
financial statements. In estimating the ALL, management considers
historical experience as well as other qualitative factors,
including the effect of current economic indicators and their
probable impact on borrowers and collateral, trends in delinquent
and non-performing loans, trends in criticized and classified
assets, levels of exceptions, the impact of competition in the
market, concentrations of credit risk in a variety of areas,
including portfolio product mix, the level of loans to individual
borrowers and their related interests, loans to industry segments
and the geographic distribution of CRE loans. Management’s
estimates used in calculating the ALL may increase or decrease
based on changes in these factors, which in turn will affect the
amount of the Company’s provision for loan losses charged
against current period income. This evaluation is inherently
subjective and actual results could differ significantly from these
estimates under different assumptions, judgments or
conditions.
47
OREO – Real estate properties acquired through or in
lieu of foreclosure or properties no longer used for bank
operations, are initially recorded at fair value less estimated
selling cost at the date of acquisition, foreclosure or transfer.
Fair value is determined, as appropriate, either by obtaining a
current appraisal or evaluation prepared by an independent,
qualified appraiser, by obtaining a broker’s market value
analysis, and finally, if the Company has limited exposure and
limited risk of loss, by the opinion of management as supported by
an inspection of the property and its most recent tax valuation.
During periods of declining market values, the Company will
generally obtain a new appraisal or evaluation. The amount, if any,
by which the recorded amount of the loan exceeds the fair value,
less estimated cost to sell, is a loss which is charged to the
allowance for loan losses at the time of foreclosure or
repossession. The recorded amount of the loan is the loan balance
adjusted for any unamortized premium or discount and unamortized
loan fees or costs, less any amount previously charged off, plus
recorded accrued interest. After acquisition through or in lieu of
foreclosure, these assets are carried at the lower of their new
cost basis or fair value. Costs of significant property
improvements are capitalized, whereas costs relating to holding the
property are expensed as incurred. Appraisals by an independent,
qualified appraiser are performed periodically on properties that
management deems significant, or evaluations may be performed by
management or a qualified third party on properties in the
portfolio that are deemed less significant or less vulnerable to
market conditions. Subsequent write-downs are recorded as a charge
to other expense. Gains or losses on the sale of such properties
are included in income when the properties are sold.
Investment Securities - Management performs quarterly
reviews of individual debt securities in the investment portfolio
to determine whether a decline in the fair value of a security is
other than temporary. A review of OTTI requires management to make
certain judgments regarding the materiality of the decline and the
probability, extent and timing of a valuation recovery, the
Company’s intent to continue to hold the security and, in the
case of debt securities, the likelihood that the Company will not
have to sell the security before recovery of its cost basis.
Management assesses fair value declines to determine the extent to
which such changes are attributable to fundamental factors specific
to the issuer, such as financial condition and business prospects,
or to market-related or other external factors, such as interest
rates, and in the case of debt securities, the extent to which the
impairment relates to credit losses of the issuer, as compared to
other factors. Declines in the fair value of debt securities below
their cost that are deemed to be other than temporary, and declines
in fair value of debt securities below their cost that are related
to credit losses, are recorded in earnings as realized losses, net
of tax effect. The non-credit loss portion of an other than
temporary decline in the fair value of debt securities below their
cost basis (generally, the difference between the fair value and
the estimated net present value of expected future cash flows from
the debt security) is recognized in other comprehensive income as
an unrealized loss, provided that the Company does not intend to
sell the security and it is more likely than not that the Company
will not have to sell the security before recovery of its reduced
basis.
MSRs - MSRs associated with loans originated and sold, where
servicing is retained, are required to be capitalized and initially
recorded at fair value on the acquisition date and are subsequently
accounted for using the “amortization method”. Mortgage
servicing rights are amortized against non-interest income in
proportion to, and over the period of, estimated future net
servicing income of the underlying financial assets. The value of
capitalized servicing rights represents the estimated present value
of the future servicing fees arising from the right to service
loans for third parties. The carrying value of the mortgage
servicing rights is periodically reviewed for impairment based on a
determination of estimated fair value compared to amortized cost,
and impairment, if any, is recognized through a valuation allowance
and is recorded as a reduction of non-interest income. Subsequent
improvement (if any) in the estimated fair value of impaired
mortgage servicing rights is reflected in a positive valuation
adjustment and is recognized in non-interest income up to (but not
in excess of) the amount of the prior impairment. Critical
accounting policies for mortgage servicing rights relate to the
initial valuation and subsequent impairment tests. The methodology
used to determine the valuation of mortgage servicing rights
requires the development and use of a number of estimates,
including anticipated principal amortization and prepayments.
Factors that may significantly affect the estimates used are
changes in interest rates and the payment performance of the
underlying loans. The Company analyzes and accounts for the value
of its servicing rights with the assistance of a third party
consultant.
Goodwill - Goodwill from an acquisition accounted for under
the purchase accounting method, such as the Company’s 2007
acquisition of LyndonBank, is subject to ongoing periodic
impairment evaluation, which includes an analysis of the ongoing
assets, liabilities and revenues from the acquisition and an
estimation of the impact of business conditions. This evaluation is
inherently subjective.
48
Other - Management utilizes numerous techniques to estimate
the carrying value of various assets held by the Company,
including, but not limited to, bank premises and equipment and
deferred taxes. The assumptions considered in making these
estimates are based on historical experience and on various other
factors that are believed by management to be reasonable under the
circumstances. The use of different estimates or assumptions could
produce different estimates of carrying values and those
differences could be material in some circumstances.
RESULTS OF OPERATIONS
The
Company’s net income increased $426,914, or 5.1%, from 2018
to 2019, resulting in earnings per common share of $1.68 for 2019
versus $1.61 for 2018. Net interest income (core earnings)
increased $986,172, or 4.0%, for 2019 compared to 2018. This
increase in core earnings is attributable to an increase of $2.6
million, or 9.1% in interest income, which included a $440,000
prepayment penalty, versus an increase of $1.7 million, or 37.0%,
in interest expense, year over year. The increase in interest
expense is largely the result of higher rates paid on deposit
accounts, which have lagged behind increases in the Fed funds rate
during the prior year.
Non-interest
income decreased $235,242, or 3.8%, from 2018 to 2019. A one-time
gain of $263,118 in 2018, on the Company’s sale of an office
condominium unit to CFSG that it was renting prior to the one-time
sale, accounted for most of this decrease in 2019 versus 2018. The
largest component of non-interest income for 2019 was deposit
service fee income, which noted a moderate increase of $74,879, or
2.3%, primarily from an increase in fee income from interchange
fees and overdraft charges. This increase was offset by a decrease
in income from sold loans of $74,316, or 9.5% year over year.
Originations of residential mortgage loans sold in the secondary
market totaled $13.8 million in 2019 compared to $13.4 million in
2018, a 3.0% increase, with net gains from the sales of these
mortgages of $290,116 in 2019, compared to $345,780 in 2018, a
decrease of $55,664, or 16.1%. Servicing released loans, a
component of secondary market loans, generate more income at
origination due to the lack of serving income over the life of the
loan. The volume of originations of these loans decreased in 2019
compared to 2018, accounting for most of the $55,664 decrease in
net gains from sales of loans. Income from fees related to other
loan activity increased $24,269, or 2.8%, and while increased
commercial loan activity resulted in an increase in commercial loan
documentation fees of $43,297, or 8.8%, decreased residential
mortgage loan volume resulted in a decrease in residential loan
related fees, including home equity loan related fees of $28,290,
or 13.5%.
Non-interest
expense decreased by $13,746, or 0.1%. While some operating
expenses increased, most notably an increase in employee benefits
of $238,583, or 8.3%, however, increases were partially offset by a
$205,320 decrease in FDIC Insurance due to the Small Bank
deposit-insurance assessment credits issued by the FDIC in the
third quarter. Please refer to the non-interest income and
non-interest expense section of this report for more details on
other significant changes.
Return
on average assets, which is net income divided by average total
assets, measures how effectively a corporation uses its assets to
produce earnings. Return on average equity, which is net income
divided by average shareholders' equity, measures how effectively a
corporation uses its equity capital to produce
earnings.
The
following table shows these ratios, as well as other equity ratios,
for each of the last three fiscal years:
December
31,
|
2019
|
2018
|
2017
|
|
|
|
|
Return on average
assets
|
1.24%
|
1.24%
|
0.96%
|
Return on average
equity
|
13.91%
|
14.08%
|
11.16%
|
Dividend payout
ratio (1)
|
45.24%
|
45.96%
|
56.20%
|
Average equity to
average assets ratio
|
8.92%
|
8.83%
|
8.58%
|
(1)
Dividends declared per common share divided by earnings per common
share.
49
The
following table summarizes the earnings performance and certain
balance sheet and per share data of the Company during each of the
last five fiscal years:
As
of December 31,
|
2019
|
2018
|
2017
|
2016
|
2015
|
|
|
|
|
|
|
Balance
Sheet Data
|
|
|
|
|
|
Net loans
(1)
|
$601,424,861
|
$573,211,590
|
$546,570,168
|
$532,167,542
|
$496,778,461
|
Total
assets
|
737,955,319
|
720,347,498
|
667,045,595
|
637,653,665
|
596,134,709
|
Total
deposits
|
615,021,368
|
608,816,565
|
560,634,980
|
504,735,032
|
495,485,562
|
Borrowed
funds
|
2,650,000
|
1,550,000
|
3,550,000
|
31,550,000
|
10,000,000
|
Junior subordinated
debentures
|
12,887,000
|
12,887,000
|
12,887,000
|
12,887,000
|
12,887,000
|
Total
liabilities
|
669,060,640
|
657,743,787
|
609,109,741
|
583,202,148
|
544,720,053
|
Total shareholders'
equity
|
68,894,679
|
62,603,711
|
57,935,854
|
54,451,517
|
51,414,656
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Data
|
|
|
|
|
|
Total interest
income
|
$31,758,808
|
$29,114,603
|
$26,440,949
|
$24,248,114
|
$23,406,689
|
Total interest
expense
|
6,143,121
|
4,485,088
|
3,068,390
|
2,699,299
|
2,645,650
|
Net
interest income
|
25,615,687
|
24,629,515
|
23,372,559
|
21,548,815
|
20,761,039
|
|
|
|
|
|
|
Provision for loan
losses
|
1,066,167
|
780,000
|
650,000
|
500,000
|
510,000
|
Net
interest income after
|
|
|
|
|
|
provision
for loan losses
|
24,549,520
|
23,849,515
|
22,722,559
|
21,048,815
|
20,251,039
|
|
|
|
|
|
|
Non-interest
income
|
5,946,066
|
6,181,308
|
5,584,392
|
5,501,899
|
5,150,155
|
Non-interest
expense
|
19,881,280
|
19,895,026
|
19,166,323
|
19,142,524
|
18,810,973
|
Income
before income taxes
|
10,614,306
|
10,135,797
|
9,140,628
|
7,408,190
|
6,590,221
|
Applicable income
tax expense (2)
|
1,789,860
|
1,738,265
|
2,909,330
|
1,923,912
|
1,764,630
|
Net
income
|
$8,824,446
|
$8,397,532
|
$6,231,298
|
$5,484,278
|
$4,825,591
|
|
|
|
|
|
|
Per
Share Data
|
|
|
|
|
|
Earnings per common
share (3)
|
$1.68
|
$1.61
|
$1.21
|
$1.07
|
$0.96
|
Dividends declared
per common share
|
$0.76
|
$0.74
|
$0.68
|
$0.64
|
$0.64
|
Book value per
common share outstanding
|
$12.86
|
$11.72
|
$10.84
|
$10.27
|
$9.79
|
Weighted average
number of common
|
|
|
|
|
|
shares
outstanding
|
5,204,768
|
5,139,297
|
5,084,102
|
5,024,270
|
4,961,972
|
Number of common
shares outstanding,
|
|
|
|
|
|
period
end
|
5,239,756
|
5,172,002
|
5,112,219
|
5,058,952
|
4,994,416
|
(1) Net
loans reflects reclassification of obligations of local
municipalities from the investment portfolio into the loan
portfolio
|
as
of January 1, 2019 and conforming changes to the comparative
information presented for all prior periods. See Note
1
|
to
the accompanying audited consolidated financial statements for
additional information.
|
(2)
Applicable income tax expense assumes a 21% tax rate for 2019 and
2018 and a 34% tax rate for 2017, 2016 and 2015.
|
(3)
Computed based on the weighted average number of common shares
outstanding during the periods presented.
|
50
INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST
INCOME)
The
largest component of the Company’s operating income is net
interest income, which is the difference between interest earned on
loans and investments versus the interest paid on deposits and
other sources of funds (i.e., other borrowings). The
Company’s level of net interest income can fluctuate over
time due to changes in the level and mix of earning assets, and
sources of funds (volume) and from changes in the yield earned and
the cost of funds (rate paid). A portion of the Company’s
income from municipal loans is not subject to income taxes. Because
the proportion of tax-exempt items in the Company's portfolio
varies from year-to-year, to improve comparability of information
across years, the non-taxable income shown in the tables below has
been converted to a tax equivalent basis. The Company’s
corporate tax rate was 21% for 2019 and 2018, and 34% for previous
years. Therefore, to equalize tax-free and taxable income in the
comparison, we divide the tax-free income by 79% for 2019 and 2018,
and 66% for prior years, with the result that every tax-free dollar
is equivalent to $1.27 and $1.52 in taxable income,
respectively.
Tax-exempt
income is derived from municipal loans, amounting to $55.8 million,
$47.1 million and $48.8 million, at December 31, 2019, 2018 and
2017, respectively.
The
following table provides the reconciliation between net interest
income presented in the consolidated statements of income and the
non-GAAP tax equivalent net interest income presented in the table
immediately following for each of the last three
years.
Years
Ended December 31,
|
2019
|
2018
|
2017
|
|
(Dollars in
Thousands)
|
||
|
|
|
|
Net interest income
as presented
|
$25,616
|
$24,630
|
$23,373
|
Effect of
tax-exempt income
|
364
|
344
|
684
|
Net
interest income, tax equivalent
|
$25,980
|
$24,974
|
$24,057
|
The
following table presents average earning assets and average
interest-bearing liabilities supporting earning assets for each of
the last three fiscal years. Interest income (excluding interest on
non-accrual loans) and interest expense are both expressed on a tax
equivalent basis, both in dollars and as a rate/yield.
|
Years Ended December
31,
|
||||||||
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
Average
|
Income/
|
Rate/
|
Average
|
Income/
|
Rate/
|
Average
|
Income/
|
Rate/
|
|
Balance
|
Expense
|
Yield
|
Balance
|
Expense
|
Yield
|
Balance
|
Expense
|
Yield
|
|
(Dollars in
Thousands)
|
||||||||
Interest-Earning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(1)
|
$591,616
|
$30,247
|
5.11%
|
$568,511
|
$27,954
|
4.92%
|
$549,974
|
$26,116
|
4.75%
|
Taxable
investment securities
|
43,334
|
1,089
|
2.51%
|
38,372
|
895
|
2.33%
|
35,758
|
676
|
1.89%
|
Sweep and
interest-earning accounts
|
29,625
|
686
|
2.32%
|
23,256
|
484
|
2.08%
|
12,331
|
160
|
1.30%
|
Other
investments (2)
|
1,784
|
101
|
5.66%
|
2,249
|
126
|
5.60%
|
2,430
|
173
|
7.12%
|
Total
|
$666,359
|
$32,123
|
4.82%
|
$632,388
|
$29,459
|
4.66%
|
$600,493
|
$27,125
|
4.52%
|
Interest-Bearing
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
transaction accounts
|
$161,887
|
$1,523
|
0.94%
|
$137,547
|
$865
|
0.63%
|
$122,521
|
$324
|
0.26%
|
Money market
accounts
|
94,704
|
1,451
|
1.53%
|
91,641
|
1,057
|
1.15%
|
86,142
|
782
|
0.91%
|
Savings
deposits
|
96,088
|
162
|
0.17%
|
98,154
|
136
|
0.14%
|
96,551
|
124
|
0.13%
|
Time
deposits
|
120,937
|
1,988
|
1.64%
|
122,499
|
1,489
|
1.22%
|
124,134
|
1,126
|
0.91%
|
Borrowed
funds
|
1,996
|
8
|
0.40%
|
5,462
|
70
|
1.28%
|
9,975
|
65
|
0.65%
|
Repurchase
agreements
|
33,546
|
299
|
0.89%
|
30,555
|
191
|
0.63%
|
28,950
|
87
|
0.30%
|
Finance lease
obligations
|
197
|
17
|
8.63%
|
320
|
27
|
8.44%
|
430
|
35
|
8.14%
|
Junior
subordinated debentures
|
12,887
|
695
|
5.39%
|
12,887
|
650
|
5.04%
|
12,887
|
525
|
4.07%
|
Total
|
$522,242
|
$6,143
|
1.18%
|
$499,065
|
$4,485
|
0.90%
|
$481,590
|
$3,068
|
0.64%
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
$25,980
|
|
|
$24,974
|
|
|
$24,057
|
|
Net interest spread
(3)
|
|
|
3.64%
|
|
|
3.76%
|
|
|
3.88%
|
Net interest margin
(4)
|
|
|
3.90%
|
|
|
3.95%
|
|
|
4.01%
|
(1)
|
Included
in gross loans are non-accrual loans with an average balance of
$5.1 million, $4.0 million and $2.6 million for the years ended
December 31, 2019, 2018 and 2017, respectively. Loans are stated
before deduction of unearned discount and ALL, less loans
held-for-sale and includes tax-exempt loans to local municipalities
with average balances of $49.2 million, $48.8 million and $52.1
million for the years ended December 31, 2019, 2018, 2017,
respectively which were reclassified from the investment portfolio
effective January 1, 2019, and restated for the 2018 and 2017
comparison periods. See Note 1 to the accompanying audited
consolidated financial statements for additional
information.
|
(2)
|
Included
in other investments is the Company’s FHLBB Stock with an
average balance of $1.0 million, $1.2 million and $1.5 million,
respectively, for 2019, 2018 and 2017 and a dividend rate of
approximately 6.04%, 5.92% and 4.24%, respectively.
|
(3)
|
Net
interest spread is the difference between the average yield on
average earning assets and the average rate paid on average
interest-bearing liabilities.
|
(4)
|
Net
interest margin is net interest income divided by average earning
assets.
|
51
The
average volume of interest-earning assets for the year ended
December 31, 2019 increased 5.4% compared to December 31, 2018,
which increased 5.3% compared to December 31, 2017. Average yield
on interest-earning assets increased 16 basis points and 14 basis
points for the respective comparison periods.
The
average volume of loans increased 4.1% for 2019 versus 2018, and
3.4% for 2018 versus 2017, while the average yield on loans
increased 19 basis points to 5.11% for 2019 compared to an increase
of 17 basis points, to 4.92% for 2018 versus 2017. The increase in
yield during 2019 was partially due to a $440 thousand loan
prepayment penalty which added 6 basis points to the annual yield.
The remaining increase was due to loans repricing higher during the
year, and a shift in asset mix toward commercial loans; however,
this increase was partially offset by continued pressure on medium
term (5-10 year) fixed rates. The growth in the average volume of
loans during each of the last three years, along with the increase
in average yield on loans, were reflected in increases in interest
earned on the loan portfolio of $2.3 million in 2019 compared to
2018 and $1.8 million in 2018 compared to 2017. Interest earned on
the loan portfolio as a percentage of total interest income was
approximately 94.2%, 94.9% and 96.3%, respectively for 2019, 2018
and 2017.
The
average volume of the taxable investment portfolio (classified as
AFS) increased 21.7% for 2019 versus 2018 and 7.3% for 2018 versus
2017, and the average yield on the taxable investment portfolio
increased 18 basis points and 44 basis points, respectively. The
increase in both comparison periods is due primarily to an effort
to continue to grow the investment portfolio incrementally as the
balance sheet grows in order to provide additional liquidity and
pledge quality assets.
The
average volume of sweep and interest-earning accounts, which
consists primarily of an interest-bearing account at the FRBB and
two correspondent banks, increased 27.4% during 2019 and 88.6%
during 2018. This increase in volume is attributable to a higher
balance of cash periodically held on hand in anticipation of
funding loan growth and other liquidity needs. The average yield on
these funds increased 24 basis points and 78 basis points,
respectively, reflecting the changes in Fed Funds rate throughout
the comparison periods.
The
average volume of interest-bearing liabilities for the year ended
December 31, 2019 increased 4.6% compared to December 31, 2018, and
increased 3.6% at December 31, 2018 compared to December 31, 2017.
The average rate paid on interest-bearing liabilities increased 28
basis points during 2019 and 26 basis points during
2018.
The
average volume of interest-bearing transaction accounts increased
17.7% for 2019 versus 2018 and 12.3% for 2018 versus 2017,
reflecting strong deposit growth during both periods. The average
rate paid on these accounts increased 31 basis points for 2019
versus 2018 and 37 basis points for 2018 versus 2017, reflecting
the rising rate environment and competitive pressures on deposit
pricing.
The
average volume of money market accounts increased 3.4% during 2019
and 6.4% during 2018, and the average rate paid on these deposits
increased 38 basis points during 2019 and 24 basis points during
2018.
The
average volume of savings accounts decreased by 2.1% for 2019
versus 2018, but increased by 1.7% for 2018 versus 2017, while the
average rate paid on these accounts remained relatively stable.
With the recovery in market CD rates, funds have begun migrating
back toward CDs, which typically impacts savings account
balances.
The
average volume of time deposits decreased 1.3% for 2019 and 2018,
while the average rate paid increased 42 basis points and 31 basis
points, respectively. Interest paid on time deposits as a
percentage of total interest expense was 32.4%, 33.2% and 36.7%,
respectively for 2019, 2018 and 2017. Following the increase in
short term rates, there was pressure for higher rates from the more
rate sensitive deposit holders with the local market willing to pay
higher rates on deposit products. This pressure has lessened with
the reduction in interest rates in the third quarter of 2019.
Management still considers the brokered deposit market to be a
beneficial source of funding to help smooth out the fluctuations in
core deposit balances without the need to disrupt deposit pricing
in the Company’s local markets. These funds can be obtained
relatively quickly on an as-needed basis, making them a valuable
alternative to traditional term borrowings from the
FHLBB.
The
average volume of borrowed funds decreased 63.5% for 2019 versus
2018 and 45.2% for 2018 versus 2017, reflecting an increase in core
deposits and brokered deposits to fund loan growth during both
periods. The average rate paid on these accounts decreased 88 basis
points during 2019 to 0.40%, but increased 63 basis points to 1.28%
during 2018 compared 0.65% for 2017.
The
average volume of repurchase agreements increased 9.8% during 2019
and 5.5% during 2018, and the average rate paid on repurchase
agreements increased 26 basis points 0.89% for 2019 versus 2018 and
33 basis points to 0.63% for 2018 versus 2017.
In
summary, the average yield on interest-earning assets increased 16
basis points during 2019, while the average rate paid on
interest-bearing liabilities increased 28 basis points. During
2018, the average yield on interest-earning assets increased 14
basis points, while the average rate paid on interest-bearing
liabilities increased 26 basis points. Net interest spread
decreased 12 basis points in both comparison periods with 3.64% for
2019 compared to 3.76% for 2018, and 3.88% for 2017. Net interest
margin decreased five basis points during 2019 to 3.90%, and six
basis points to 3.95% for 2018, compared to 4.01% for
2017.
52
The
following table summarizes the variances in income for the years
presented, resulting from volume changes in interest-earning assets
and interest-bearing liabilities and fluctuations in rates earned
and paid compared to the prior year.
|
2019 versus 2018
|
2018 versus 2017
|
||||
|
Variance
|
Variance
|
|
Variance
|
Variance
|
|
|
Due to
|
Due to
|
Total
|
Due to
|
Due to
|
Total
|
|
Rate (1)
|
Volume (1)
|
Variance
|
Rate (1)
|
Volume (1)
|
Variance
|
|
(Dollars in
Thousands)
|
|||||
Average
Interest-Earning Assets
|
|
|
|
|
|
|
Loans
(2)
|
$1,156
|
$1,137
|
$2,293
|
$957
|
$881
|
$1,838
|
Taxable
investment securities
|
78
|
116
|
194
|
170
|
49
|
219
|
Sweep and
interest-earning accounts
|
70
|
132
|
202
|
182
|
142
|
324
|
Other
investments
|
1
|
(26)
|
(25)
|
(37)
|
(10)
|
(47)
|
Total
|
$1,305
|
$1,359
|
$2,664
|
$1,272
|
$1,062
|
$2,334
|
|
|
|
|
|
|
|
Average
Interest-Bearing Liabilities
|
|
|
|
|
|
|
Interest-bearing
transaction accounts
|
$505
|
$153
|
$658
|
$502
|
$39
|
$541
|
Money market
accounts
|
359
|
35
|
394
|
225
|
50
|
275
|
Savings
deposits
|
30
|
(4)
|
26
|
10
|
2
|
12
|
Time
deposits
|
525
|
(26)
|
499
|
383
|
(20)
|
363
|
Borrowed
funds
|
(48)
|
(14)
|
(62)
|
63
|
(58)
|
5
|
Repurchase
agreements
|
89
|
19
|
108
|
99
|
5
|
104
|
Finance lease
obligations
|
1
|
(11)
|
(10)
|
1
|
(9)
|
(8)
|
Junior
subordinated debentures
|
45
|
0
|
45
|
125
|
0
|
125
|
Total
|
$1,506
|
$152
|
$1,658
|
$1,408
|
$9
|
$1,417
|
|
|
|
|
|
|
|
Changes
in net interest income
|
$(201)
|
$1,207
|
$1,006
|
$(136)
|
$1,053
|
$917
|
(1)
Items which have shown a year-to-year increase in volume have
variances allocated as follows:
|
Variance
due to rate = Change in rate x new volume
|
Variance
due to volume = Change in volume x old rate
|
Items
which have shown a year-to-year decrease in volume have variances
allocated as follows:
|
Variance
due to rate = Change in rate x old volume
|
Variances
due to volume = Change in volume x new rate
|
(2)
Reflects reclassification of obligations of local municipalities
from investment securities to loans effective January 1, 2019, and
restated for the 2018 and 2017 comparison periods. See Note 1 to
the accompanying audited consolidated financial statements for
additional information.
|
53
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Non-interest Income
The
components of non-interest income for the annual periods presented
are as follows:
|
Years Ended
|
|
|
|
|
December 31,
|
Change
|
||
|
2019
|
2018
|
Income
|
Percent
|
|
|
|
|
|
Service
fees
|
$3,313,833
|
$3,238,954
|
$74,879
|
2.31%
|
Income from sold
loans
|
706,306
|
780,622
|
(74,316)
|
-9.52%
|
Other income from
loans
|
904,156
|
879,887
|
24,269
|
2.76%
|
Net realized loss
on sale of securities AFS
|
(26,490)
|
(32,718)
|
6,228
|
19.04%
|
Other
income
|
|
|
|
|
Income
from CFS Partners
|
588,696
|
514,486
|
74,210
|
14.42%
|
Rental
income
|
9,821
|
30,365
|
(20,544)
|
-67.66%
|
Gain on
sale of property
|
0
|
263,118
|
(263,118)
|
100.00%
|
VISA
card commission
|
70,994
|
93,377
|
(22,383)
|
-23.97%
|
Service
fee NMTC
|
0
|
43,602
|
(43,602)
|
-100.00%
|
Other
miscellaneous income
|
378,750
|
369,615
|
9,135
|
2.47%
|
Total
non-interest income
|
$5,946,066
|
$6,181,308
|
$(235,242)
|
-3.81%
|
Total
non-interest income decreased by $235,242 for the year ended
December 31, 2019 compared to the same period 2018, with
significant changes noted in the following:
●
Interchange fees, a
component of Service Fees, increased $55,279 for the year due to an
increase in debit card transaction activity, accounting for most of
the increase year over year.
●
Income from sold
loans decreased $74,316, or 9.5% as a result of a slowdown in
residential mortgage lending activity, as well as the decrease in
originations of servicing released loans as mentioned earlier in
the Results of Operations section.
●
Realized losses on
the sale of debt securities AFS of $26,490 for 2019 and $32,718 for
2018, resulted in a 19.0% reduction in net realized loss on sale of
such securities between periods. During 2019, the Company
continued to sell off low-yielding, short-duration securities held
in the Company’s AFS portfolio, which were replaced with
higher-yielding investments available in the current
market.
●
Income from the
Company’s trust and investment management affiliate, CFS
Partners, increased $74,210, or 14.4%, for the year. This increase
was mostly due to strong new business development during the year
that provided an increase in fee income.
●
Rental income
decreased $20,544, or 67.7%, for 2019 due to the Company’s
sale of an office condominium unit to CFS Partner’s
subsidiary, CFSG, during the second quarter of 2018. Prior to the
sale, CFSG had rented this unit from the Company since its
formation in 2002.
●
Gain on sale of
property of $263,118 during 2018 was attributable to the sale of an
office condominium unit to the Company’s affiliate, CFSG,
during the second quarter of 2018. There was no activity in 2019
that resulted in a gain on sale of property.
●
VISA card
commission income decreased $22,383 in 2019. The incentive premium
program began in 2018, and included a higher “1st year”
incentive premium.
●
A servicing fee of
$43,602, related to a NMTC investment, was recorded in 2018. There
was no servicing fee in 2019 as the Company exited this investment
in 2018.
54
Non-interest Expense
The
components of non-interest expense for the annual periods presented
are as follows:
|
Years Ended
|
|
|
|
|
December 31,
|
Change
|
||
|
2019
|
2018
|
Expense
|
Percent
|
|
|
|
|
|
Salaries and
wages
|
$7,271,722
|
$7,203,001
|
$68,721
|
0.95%
|
Employee
benefits
|
3,118,631
|
2,880,048
|
238,583
|
8.28%
|
Occupancy expenses,
net
|
2,605,995
|
2,545,959
|
60,036
|
2.36%
|
Other
expenses
|
|
|
|
|
Outsourcing
expense
|
428,668
|
480,563
|
(51,895)
|
-10.80%
|
Service
contracts - administrative
|
539,510
|
512,902
|
26,608
|
5.19%
|
Marketing
expense
|
450,533
|
552,617
|
(102,084)
|
-18.47%
|
FDIC
insurance
|
69,452
|
274,772
|
(205,320)
|
-74.72%
|
Audit
fees
|
407,303
|
448,439
|
(41,136)
|
-9.17%
|
Consultant
services
|
217,352
|
276,972
|
(59,620)
|
-21.53%
|
Collection
& non-accruing loan expense
|
185,963
|
145,009
|
40,954
|
28.24%
|
Subsequent
write downs on OREO
|
95,008
|
78,447
|
16,561
|
21.11%
|
Other
miscellaneous expenses
|
4,491,143
|
4,496,297
|
(5,154)
|
-0.11%
|
Total
non-interest expense
|
$19,881,280
|
$19,895,026
|
$(13,746)
|
-0.07%
|
Total
non-interest expense decreased $13,746, or 0.1%, for the year 2019
compared to the same period in 2018, with significant changes in
“Other expenses” categories noted in the
following:
●
Employee benefits
increased $238,583, or 8.3%, due to an increase in the cost of the
employee health insurance plan.
●
Outsourcing expense
decreased $51,895, or 10.8%, year over year primarily due to
credits received from the company core processing system toward
current year expense.
●
Marketing expense
decreased $102,084, or 18.5%, year over year due to a delay in the
scheduled creation of promotional television
commercials.
●
FDIC insurance
decreased $205,320, or 74.7%, due in part to the “Small Bank
Assessment Credit” issued during the third quarter of 2019,
as well as a reduction in the multiplier used to calculate the
quarterly assessments. This credit eliminated the assessments due
during the third and fourth quarters of 2019, and the remainder of
the credit ($56,113) will be applied to the assessment due in the
first quarter of 2020.
●
Audit fees
decreased $41,136, or 9.2%, year over year due mostly to increased
audit requirements in 2018 on internal control over financial
reporting as the Company transitioned to accelerated filer status
for SEC reporting purposes, as well as multiple audits during the
2018 calendar year resulting from a change in Information Security
audit vendors.
●
Consultant services
decreased $59,620, or 21.5%, year over year mostly due to the
completion of some technology projects in 2018.
●
Collections &
non-accruing loan expense increased $40,954, or 28.2%, year over
year mostly due to an increase in the non-performing assets
portfolio and the length of time, and the associated costs, it
takes to go through the foreclosure process.
●
The Company
recorded write downs of two OREO properties in 2019 compared to one
OREO property in 2018, all of which were subsequently
sold.
APPLICABLE INCOME TAXES
Income
before income taxes increased $478,509, or 4.7% for 2019 compared
to 2018, accounting for the increase in the provision for income
taxes of $51,595, or 3.0%. Tax credits from affordable housing
investments decreased $22,130, or 5.1%, from $437,229 in 2018 to
$415,099 in 2019.
55
Amortization
expense related to limited partnership investments is included as a
component of income tax expense and amounted to $312,106 and
$410,061 for 2019 and 2018, respectively. These investments provide
tax benefits, including tax credits, and are designed to provide an
effective yield between 7% and 10%.
CHANGES IN FINANCIAL CONDITION
The
following table provides a visual comparison of the breakdown of
average assets and average liabilities as well as average
shareholders' equity for the comparison periods and should be
reviewed in conjunction with the table on the following page which
provides volume changes and percent of change by
category.
Years
Ended December 31,
|
2019
|
2018
|
2017
|
|||
|
Balance
|
%
|
Balance
|
%
|
Balance
|
%
|
|
(Dollars in
Thousands)
|
|||||
Average
Assets
|
|
|
|
|
|
|
Cash and due from
banks
|
|
|
|
|
|
|
Non-interest
bearing
|
$11,043
|
1.55%
|
$10,838
|
1.61%
|
$16,427
|
2.53%
|
Federal funds
sold and overnight deposits
|
29,625
|
4.17%
|
23,256
|
3.44%
|
12,331
|
1.90%
|
Taxable investment
securities
|
43,591
|
6.13%
|
38,372
|
5.69%
|
35,758
|
5.50%
|
Other
securities
|
1,397
|
0.20%
|
1,862
|
0.28%
|
2,043
|
0.31%
|
Total
investment securities
|
44,988
|
6.33%
|
40,234
|
5.97%
|
37,801
|
5.81%
|
Gross loans
(1)
|
591,908
|
83.23%
|
568,860
|
84.29%
|
550,490
|
84.65%
|
ALL and deferred
net loan costs
|
(5,444)
|
-0.77%
|
(5,176)
|
-0.77%
|
(5,073)
|
-0.78%
|
Premises and
equipment
|
10,973
|
1.54%
|
9,958
|
1.47%
|
10,619
|
1.63%
|
OREO
|
188
|
0.03%
|
278
|
0.04%
|
377
|
0.06%
|
Investment in
Capital Trust
|
387
|
0.05%
|
387
|
0.06%
|
387
|
0.06%
|
BOLI
|
4,855
|
0.68%
|
4,765
|
0.71%
|
4,670
|
0.72%
|
CDI
|
0
|
0.00%
|
0
|
0.00%
|
129
|
0.02%
|
Goodwill
|
11,574
|
1.63%
|
11,574
|
1.71%
|
11,574
|
1.78%
|
Other
assets
|
11,067
|
1.56%
|
9,835
|
1.46%
|
10,574
|
1.63%
|
Total
average assets
|
$711,164
|
100%
|
$674,809
|
100%
|
$650,306
|
100%
|
Average
Liabilities
|
|
|
|
|
|
|
Demand
deposits
|
$120,689
|
16.97%
|
$113,412
|
16.81%
|
$109,920
|
16.90%
|
Interest-bearing
transaction accounts
|
161,887
|
22.76%
|
137,547
|
20.38%
|
122,521
|
18.84%
|
Money market
funds
|
94,704
|
13.32%
|
91,642
|
13.58%
|
86,141
|
13.25%
|
Savings
accounts
|
96,088
|
13.51%
|
98,154
|
14.55%
|
96,551
|
14.85%
|
Time
deposits
|
120,937
|
17.01%
|
122,499
|
18.15%
|
124,134
|
19.09%
|
Total
average deposits
|
594,305
|
83.57%
|
563,254
|
83.47%
|
539,267
|
82.93%
|
|
|
|
|
|
|
|
Borrowed
funds
|
1,996
|
0.28%
|
5,462
|
0.81%
|
9,975
|
1.53%
|
Repurchase
agreements
|
33,546
|
4.72%
|
30,555
|
4.53%
|
28,950
|
4.45%
|
Junior subordinated
debentures
|
12,887
|
1.81%
|
12,887
|
1.91%
|
12,887
|
1.98%
|
Other
liabilities
|
4,998
|
0.70%
|
3,019
|
0.45%
|
3,408
|
0.53%
|
Total
average liabilities
|
647,732
|
91.08%
|
615,177
|
91.17%
|
594,487
|
91.42%
|
Average
Shareholders' Equity
|
|
|
|
|
|
|
Preferred
stock
|
1,618
|
0.23%
|
2,119
|
0.31%
|
2,500
|
0.38%
|
Common
stock
|
13,527
|
1.90%
|
13,367
|
1.98%
|
13,230
|
2.03%
|
Additional paid-in
capital
|
32,925
|
4.63%
|
32,000
|
4.74%
|
31,159
|
4.79%
|
Retained
earnings
|
18,061
|
2.54%
|
15,563
|
2.31%
|
11,623
|
1.79%
|
Less: Treasury
stock
|
(2,623)
|
-0.37%
|
(2,623)
|
-0.39%
|
(2,623)
|
-0.40%
|
Accumulated other
comprehensive loss
|
(76)
|
-0.01%
|
(794)
|
-0.12%
|
(70)
|
-0.01%
|
Total
average shareholders' equity
|
63,432
|
8.92%
|
59,632
|
8.83%
|
55,819
|
8.58%
|
Total
average liabilities and shareholders' equity
|
$711,164
|
100%
|
$674,809
|
100%
|
$650,306
|
100%
|
(1)
Gross loans
reflects reclassification of obligations of local municipalities
from the investment portfolio into the loan portfolio as of January
1, 2019 and conforming changes to the comparative 2018 and 2017
information presented. See Note 1 to the accompanying audited
consolidated financial statements for additional
information.
56
The
following table provides a breakdown of volume changes and percent
of change by category for the table on the preceding page. Please
refer to the sections labeled “Interest Income and Interest
Expense (Net Interest Income)” and “Liquidity and
Capital Resources” for more in-depth discussion of
significant changes.
Years
Ended December 31,
|
2019
|
2018
|
2017
|
2019 vs 2018
|
2018 vs 2017
|
||
|
Average
|
Average
|
Average
|
Volume
|
% of
|
Volume
|
% of
|
Average
Assets
|
Balance
|
Balance
|
Balance
|
Change
|
Change
|
Change
|
Change
|
|
(Dollars in
Thousands)
|
||||||
Cash and due from
banks
|
|
|
|
|
|
|
|
Non-interest
bearing
|
$11,043
|
$10,838
|
$16,427
|
$205
|
1.89%
|
$(5,589)
|
-34.02%
|
Federal funds
sold and overnight deposits
|
29,625
|
23,256
|
12,331
|
6,369
|
27.39%
|
10,925
|
88.60%
|
Taxable investment
securities
|
43,591
|
38,372
|
35,758
|
5,219
|
13.60%
|
2,614
|
7.31%
|
Other
securities
|
1,397
|
1,862
|
2,043
|
(465)
|
-24.97%
|
(181)
|
-8.86%
|
Total
investment securities
|
44,988
|
40,234
|
37,801
|
4,754
|
11.82%
|
2,433
|
6.44%
|
Gross loans
(1)
|
591,908
|
568,860
|
550,490
|
23,048
|
4.05%
|
18,370
|
3.34%
|
ALL and deferred
net loan costs
|
(5,444)
|
(5,176)
|
(5,073)
|
(268)
|
5.18%
|
(103)
|
2.03%
|
Premises and
equipment
|
10,973
|
9,958
|
10,619
|
1,015
|
10.19%
|
(661)
|
-6.22%
|
OREO
|
188
|
278
|
377
|
(90)
|
-32.37%
|
(99)
|
-26.26%
|
Investment in
Capital Trust
|
387
|
387
|
387
|
0
|
0.00%
|
0
|
0.00%
|
BOLI
|
4,855
|
4,765
|
4,670
|
90
|
1.89%
|
95
|
2.03%
|
CDI
|
0
|
0
|
129
|
0
|
0.00%
|
(129)
|
-100.00%
|
Goodwill
|
11,574
|
11,574
|
11,574
|
0
|
0.00%
|
0
|
0.00%
|
Other
assets
|
11,067
|
9,835
|
10,574
|
1,232
|
12.53%
|
(739)
|
-6.99%
|
Total
average assets
|
$711,164
|
$674,809
|
$650,306
|
$36,355
|
5.39%
|
$24,503
|
3.77%
|
|
|
|
|
|
|
|
|
Average
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
$120,689
|
$113,412
|
$109,920
|
$7,277
|
6.42%
|
$3,492
|
3.18%
|
Interest-bearing
transaction accounts
|
161,887
|
137,547
|
122,521
|
24,340
|
17.70%
|
15,026
|
12.26%
|
Money market
funds
|
94,704
|
91,642
|
86,141
|
3,062
|
3.34%
|
5,501
|
6.39%
|
Savings
accounts
|
96,088
|
98,154
|
96,551
|
(2,066)
|
-2.10%
|
1,603
|
1.66%
|
Time
deposits
|
120,937
|
122,499
|
124,134
|
(1,562)
|
-1.28%
|
(1,635)
|
-1.32%
|
Total
average deposits
|
594,305
|
563,254
|
539,267
|
31,051
|
5.51%
|
23,987
|
4.45%
|
|
|
|
|
|
|
|
|
Borrowed
funds
|
1,996
|
5,462
|
9,975
|
(3,466)
|
-63.46%
|
(4,513)
|
-45.24%
|
Repurchase
agreements
|
33,546
|
30,555
|
28,950
|
2,991
|
9.79%
|
1,605
|
5.54%
|
Junior subordinated
debentures
|
12,887
|
12,887
|
12,887
|
0
|
0.00%
|
0
|
0.00%
|
Other
liabilities
|
4,998
|
3,019
|
3,408
|
1,979
|
65.55%
|
(389)
|
-11.41%
|
Total
average liabilities
|
647,732
|
615,177
|
594,487
|
32,555
|
5.29%
|
20,690
|
3.48%
|
|
|
|
|
|
|
|
|
Average
Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
1,618
|
2,119
|
2,500
|
(501)
|
-23.64%
|
(381)
|
-15.24%
|
Common
stock
|
13,527
|
13,367
|
13,230
|
160
|
1.20%
|
137
|
1.04%
|
Additional paid-in
capital
|
32,925
|
32,000
|
31,159
|
925
|
2.89%
|
841
|
2.70%
|
Retained
earnings
|
18,061
|
15,563
|
11,623
|
2,498
|
16.05%
|
3,940
|
33.90%
|
Less: Treasury
stock
|
(2,623)
|
(2,623)
|
(2,623)
|
0
|
0.00%
|
0
|
0.00%
|
Accumulated other
comprehensive loss
|
(76)
|
(794)
|
(70)
|
718
|
-90.43%
|
(724)
|
1034.29%
|
Total
average shareholders' equity
|
63,432
|
59,632
|
55,819
|
3,800
|
6.37%
|
3,813
|
6.83%
|
Total
average liabilities and shareholders' equity
|
$711,164
|
$674,809
|
$650,306
|
$36,355
|
5.39%
|
$24,503
|
3.77%
|
(1)
Gross loans
reflects reclassification of obligations of local municipalities
from the investment portfolio into the loan portfolio as of January
1, 2019 and conforming changes to the comparative 2018 and 2017
information presented. See Note 1 to the accompanying audited
consolidated financial statements for additional
information.
57
CERTAIN TIME DEPOSITS
Increments
of maturity of time CDs of $100,000 or more outstanding on December
31, 2019 are summarized as follows:
3 months or
less
|
$13,658,775
|
Over 3 through 6
months
|
6,910,082
|
Over 6 through 12
months
|
9,390,244
|
Over 12
months
|
34,613,090
|
|
$64,572,191
|
RISK MANAGEMENT
Interest Rate Risk and Asset and Liability Management -
Management actively monitors and manages the Company’s
interest rate risk exposure and attempts to structure the balance
sheet to maximize net interest income while controlling its
exposure to interest rate risk. The Company's ALCO is made up of
the Executive Officers and certain Vice Presidents of the Bank
representing major business lines. The ALCO formulates strategies
to manage interest rate risk by evaluating the impact on earnings
and capital of such factors as current interest rate forecasts and
economic indicators, potential changes in such forecasts and
indicators, liquidity and various business strategies. The ALCO
meets at least quarterly to review financial statements, liquidity
levels, yields and spreads to better understand, measure, monitor
and control the Company’s interest rate risk. In the ALCO
process, the committee members apply policy limits set forth in the
Asset Liability, Liquidity and Investment policies approved and
periodically reviewed by the Company’s Board of Directors.
The ALCO's methods for evaluating interest rate risk include an
analysis of the effects of interest rate changes on net interest
income and an analysis of the Company's interest rate sensitivity
"gap", which provides a static analysis of the maturity and
repricing characteristics of the entire balance sheet. The ALCO
Policy also includes a contingency funding plan to help management
prepare for unforeseen liquidity restrictions, including
hypothetical severe liquidity crises.
Interest
rate risk represents the sensitivity of earnings to changes in
market interest rates. As interest rates change, the interest
income and expense streams associated with the Company’s
financial instruments also change, thereby impacting NII, the
primary component of the Company’s earnings. Fluctuations in
interest rates can also have an impact on liquidity. The ALCO uses
an outside consultant to perform rate shock simulations to the
Company's net interest income, as well as a variety of other
analyses. It is the ALCO’s function to provide the
assumptions used in the modeling process. Assumptions used in prior
period simulation models are regularly tested by comparing
projected NII with actual NII. The ALCO utilizes the results of the
simulation model to quantify the estimated exposure of NII and
liquidity to sustained interest rate changes. The simulation model
captures the impact of changing interest rates on the interest
income received and interest expense paid on all interest-earning
assets and interest-bearing liabilities reflected on the
Company’s balance sheet. The model also simulates the balance
sheet’s sensitivity to a prolonged flat rate environment. All
rate scenarios are simulated assuming a parallel shift of the yield
curve; however further simulations are performed utilizing
non-parallel changes in the yield curve. The results of this
sensitivity analysis are compared to the ALCO policy limits which
specify a maximum tolerance level for NII exposure over a 1-year
horizon, assuming no balance sheet growth, given a 200 bp shift
upward and a 100 bp shift downward in interest rates.
Under
the Company’s interest rate sensitivity modeling, with the
continued asset sensitive balance sheet, in a rising rate
environment NII is expected to trend upward as the short-term asset
base (cash and adjustable rate loans) quickly cycle upward while
the retail funding base (deposits) lags the market. If rates paid
on deposits have to be increased more and/or more quickly than
projected due to competitive pressures, the expected benefit to
rising rates would be reduced. In a falling rate environment, NII
is expected to trend slightly downward compared with the current
rate environment scenario for the first year of the simulation as
asset yield erosion is not fully offset by decreasing funding
costs. Thereafter, net interest income is projected to experience
sustained downward pressure as funding costs reach their assumed
floors and asset yields continue to reprice into the lower rate
environment. Management expects that the recent decreases in the
federal funds rate, including three 25 basis point cuts in 2019,
will continue to generate a negative impact to the Company’s
NII in 2020 as variable rate loans reprice during the year; This,
coupled with the downward pressure on the long end of the yield
curve, will continue to adversely impact margins going
forward.
58
The
following table summarizes the estimated impact on the Company's
NII over a twelve month period, assuming a gradual parallel shift
of the yield curve beginning December 31, 2019:
One Year Horizon
|
Two Year Horizon
|
||
Rate Change
|
Percent Change in NII
|
Rate Change
|
Percent Change in NII
|
|
|
|
|
Down
100 basis points
|
-1.4%
|
Down
100 basis points
|
-5.3%
|
Up 200
basis points
|
1.8%
|
Up 200
basis points
|
9.8%
|
The
amounts shown in the table are within the ALCO Policy limits.
However, those amounts do not represent a forecast and should not
be relied upon as indicative of future results. While assumptions
used in the ALCO process, including the interest rate simulation
analyses, are developed based upon current economic and local
market conditions, and expected future conditions, the Company
cannot provide any assurances as to the predictive nature of these
assumptions, including how customer preferences or competitor
influences might change. As the market rates continue to increase,
the impact of a falling rate environment is more pronounced, and
the possibility more plausible than during the last several years
of near zero short rates.
As of
December 31, 2019, the Company had outstanding $12,887,000 in
principal amount of Junior Subordinated Debentures due December 15,
2037, which bear a quarterly floating rate of interest equal to the
3-month London Interbank Offered Rate (LIBOR), plus 2.85%. During
2017, the financial authorities in the United Kingdom that
administer LIBOR announced that LIBOR will be phased out by the end
of 2021. The Company has reviewed the pertinent language in the
Indenture governing the Debentures and believes that the Debenture
Trustee has sufficient authority under the Indenture to establish a
substitute interest rate benchmark without the need to amend the
Indenture. However, the Debenture Trustee has not yet informed the
Company as to how it intends to proceed. Aside from the Debentures,
the Company does not have any other exposures to the phase out of
LIBOR. The Company has not generally utilized LIBOR as an interest
rate benchmark for its variable rate commercial, residential or
other loans and does not utilize derivatives or other financial
instruments tied to LIBOR for hedging or investment purposes.
Accordingly, management expects that the Company’s exposure
to the phase out of LIBOR will be limited to the effect on the
interest rate paid on its Debentures.
Credit Risk - As a financial institution, one of the primary
risks the Company manages is credit risk, the risk of loss stemming
from borrowers’ failure to repay loans or inability to meet
other contractual obligations. The Company’s Board of
Directors prescribes policies for managing credit risk, including
Loan, Appraisal and Environmental policies. These policies are
supplemented by comprehensive underwriting standards and
procedures. The Company maintains a Credit Administration
department whose function includes credit analysis and monitoring
of and reporting on the status of the loan portfolio, including
delinquent and non-performing loan trends. The Company also
monitors concentration of credit risk in a variety of areas,
including portfolio mix, the level of loans to individual borrowers
and their related interest, loans to industry segments, and the
geographic distribution of CRE loans. Loans are reviewed
periodically by an independent loan review firm to help ensure
accuracy of the Company's internal risk ratings and compliance with
various internal policies, procedures and regulatory
guidance.
Residential
mortgages represented 33.2% of the Company’s loan balances at
December 31, 2019. The percentage of residential mortgage loans to
total loans has been on a gradual decline in recent years, with a
strategic shift to commercial lending. The Company maintains a
residential mortgage loan portfolio of traditional mortgage
products and does not engage in higher risk loans such as option
adjustable rate mortgage products, high loan-to-value products,
interest only mortgages, subprime loans and products with deeply
discounted teaser rates. Residential mortgages with loan-to-values
exceeding 80% are generally covered by PMI. A 90% loan-to-value
residential mortgage product without PMI is only available to
borrowers with excellent credit and low debt-to-income ratios and
has not been widely originated. Junior lien home equity products
make up 21.5% of the residential mortgage portfolio with maximum
loan-to-value ratios (including prior liens) of 80%. The Company
also originates some home equity loans greater than 80% under an
insured loan program with stringent underwriting
criteria.
Consistent
with the strategic focus on commercial lending, the commercial and
CRE loan portfolios have seen solid growth over recent years.
Commercial & industrial, CRE and Municipal loans collectively
comprised 59.8% of the Company’s loan portfolio at December
31, 2019, compared to 54.3% at December 31, 2018.
The
Municipal loan portfolio consists of tax-exempt obligations of
local municipalities, and is made up of three types of borrowings;
term lending, tax anticipation lending, non-arbitrage borrowing.
The portfolio increased $8.8 million, or 18.6%, to $55.8 million as
of December 31, 2019 compared to $47.1 million at December 31,
2018. During 2019, term lending increased $2.3 million, or 9.3%,
tax anticipation lending decreased $3.1 million, or 93.5%, and
non-arbitrage borrowing increased $9.6 million, or 49.5%. The
non-arbitrage and tax anticipation loans to municipalities are
issued annually on a competitive bid basis; as a result the
portfolio can fluctuate considerably from year to year based on
changes in competitive pressures.
59
Growth
in the CRE portfolio in recent years has been principally driven by
new loan volume in Chittenden County and northern Windsor County
around the White River Junction, I91-I93 interchange area. Credits
in the Chittenden County market are being managed by two commercial
lenders out of the Company’s Burlington loan production
office that know the area well, while Windsor County
is being served by a commercial lender from the St. Johnsbury
office with previous lending experience serving the greater White
River Junction area. On May 1, 2019, the Company opened a loan
production office in Lebanon, New Hampshire to provide a presence
in the greater White River Junction area including Grafton County,
New Hampshire. Larger transactions continue to be centrally
underwritten and monitored through the Company’s commercial
credit department. The types of CRE transactions driving the growth
have been a mix of construction, land and development, multifamily,
and other non-owner occupied CRE properties including hotels,
retail, office, and industrial properties. The largest components
of the $246 million CRE portfolio at December 31, 2019 were
approximately $93 million in owner-occupied CRE and $85 million in
non-owner occupied CRE.
The
Company’s home equity and commercial line of credit
portfolios contain for the most part variable rate loans with the
Wall Street Journal Prime rate as the underlying index and rates
repricing monthly. The Wall Street Journal Prime index fell to
3.25% in 2008 and remained there until December 2015. Since 2015
numerous rate hikes have increased the Wall Street Journal Prime
index by 225 percentage points to 5.5%, before falling 75
percentage points in 2019 to 4.75%. The home equity portfolio and
commercial line of credit portfolio have weathered these increases
and continue to perform well. Commercial and industrial term loans
are generally written on a fixed rate basis with limited risk
associated with rising interest rates. CRE loans generally have
included an initial fixed rate period typically of 5 years, then
enter a variable rate period, again usually tied to Wall Street
Prime. Approximately $163 million of CRE loans are scheduled to
reprice over the next five years with sizeable rate increases
projected based on the current Prime rate index. Many of these
loans will ultimately refinance or renegotiate pricing, while the
increase may adversely impact the repayment capacity of those CRE
loans of lesser credit quality and may ultimately result in higher
non-performing loans and losses.
The
following table reflects the composition of the Company's loan
portfolio, by portfolio segment, as a percentage of total loans as
of December 31,
|
2019
|
2018
|
2017
|
2016
|
2015
|
|||||
|
(Dollars in
Thousands)
|
|||||||||
Real estate
loans
|
|
|
|
|
|
|
|
|
|
|
Construction
& land
|
|
|
|
|
|
|
|
|
|
|
development
|
$21,085
|
3.47%
|
$26,826
|
4.64%
|
$21,968
|
3.98%
|
$14,991
|
2.79%
|
$21,445
|
4.28%
|
Farm
land
|
13,054
|
2.15%
|
10,209
|
1.76%
|
10,477
|
1.90%
|
13,011
|
2.42%
|
12,570
|
2.51%
|
1-4 Family
residential -
|
|
|
|
|
|
|
|
|
|
|
1st
lien
|
158,337
|
26.09%
|
165,665
|
28.64%
|
168,184
|
30.48%
|
166,692
|
31.03%
|
162,760
|
32.46%
|
Jr
lien
|
43,231
|
7.12%
|
44,545
|
7.70%
|
45,257
|
8.20%
|
42,927
|
7.99%
|
44,720
|
8.92%
|
Commercial
real estate
|
212,145
|
34.95%
|
198,283
|
34.28%
|
174,599
|
31.65%
|
173,727
|
32.34%
|
144,192
|
28.75%
|
Loans to
finance
|
|
|
|
|
|
|
|
|
|
|
agricultural
production
|
3,675
|
0.61%
|
2,797
|
0.48%
|
887
|
0.16%
|
996
|
0.19%
|
2,508
|
0.50%
|
Commercial &
industrial
|
95,255
|
15.69%
|
77,970
|
13.48%
|
76,224
|
13.82%
|
67,734
|
12.61%
|
62,683
|
12.50%
|
Municipal
|
55,817
|
9.20%
|
47,067
|
8.14%
|
48,825
|
8.85%
|
49,887
|
9.29%
|
43,354
|
8.64%
|
Consumer
|
4,390
|
0.72%
|
5,088
|
0.88%
|
5,269
|
0.96%
|
7,171
|
1.34%
|
7,241
|
1.44%
|
Gross
loans
|
606,989
|
100%
|
578,450
|
100%
|
551,690
|
100%
|
537,136
|
100%
|
501,473
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
ALL and
deferred net loan costs
|
(5,564)
|
|
(5,238)
|
|
(5,120)
|
|
(4,968)
|
|
(4,695)
|
|
Net
loans
|
$601,425
|
|
$573,212
|
|
$546,570
|
|
$532,168
|
|
$496,778
|
|
(1)
Gross loans
reflects reclassification of obligations of local municipalities
from the investment portfolio into the loan portfolio as of January
1, 2019 and conforming changes to the comparative prior period
information presented. See Note 1 to the accompanying audited
consolidated financial statements for additional
information.
60
The
following table shows the estimated maturity of the Company's
commercial loan portfolio as of December 31, 2019.
|
Fixed Rate Loans
|
Variable Rate
Loans
|
||||||
|
Within
|
2 - 5
|
After
|
|
Within
|
2 - 5
|
After
|
|
|
1 Year
|
Years
|
5 Years
|
Total
|
1 Year
|
Years
|
5 Years
|
Total
|
|
(Dollars in
Thousands)
|
|||||||
Real
estate
|
|
|
|
|
|
|
|
|
Construction
& land development
|
$1,226
|
$294
|
$2,943
|
$4,463
|
$1,320
|
$253
|
$15,049
|
$16,622
|
Secured
by farm land
|
0
|
459
|
47
|
506
|
116
|
471
|
11,961
|
12,548
|
Commercial
real estate
|
643
|
2,715
|
16,390
|
19,748
|
7,266
|
3,961
|
181,170
|
192,397
|
Loans to finance
agricultural production
|
146
|
205
|
33
|
384
|
608
|
1,365
|
1,318
|
3,291
|
Commercial &
industrial
|
1,215
|
21,646
|
19,730
|
42,591
|
25,968
|
18,353
|
8,343
|
52,664
|
Municipal
|
33,085
|
5,171
|
6,337
|
44,593
|
0
|
0
|
11,224
|
11,224
|
Total
|
$36,315
|
$30,490
|
$45,480
|
$112,285
|
$35,278
|
$24,403
|
$229,065
|
$288,746
|
Risk in
the Company’s commercial and CRE loan portfolios is mitigated
in part by government guarantees issued by federal agencies such as
the SBA and RD. At December 31, 2019 and 2018, although the mix of
loans by category varied, in total, the Company had approximately
$28.4 million in guaranteed loans with guaranteed balances of
approximately $21.0 million.
The
Company works actively with customers early in the delinquency
process to help them to avoid default and foreclosure. Commercial
& industrial and CRE loans are generally placed on non-accrual
status when there is deterioration in the financial position of the
borrower, payment in full of principal and interest is not
expected, and/or principal or interest has been in default for 90
days or more. However, such a loan need not be placed on
non-accrual status if it is both well secured and in the process of
collection. Residential mortgages and home equity loans are
considered for non-accrual status at 90 days past due and are
evaluated on a case-by-case basis. The Company obtains current
property appraisals or market value analyses and considers the cost
to carry and sell collateral in order to assess the level of
specific allocations required. Consumer loans are generally not
placed in non-accrual but are charged off by the time they reach
120 days past due. When a loan is placed in non-accrual status, the
Company reverses the accrued interest against current period income
and discontinues the accrual of interest until the borrower clearly
demonstrates the ability and intention to resume normal payments,
typically demonstrated by regular timely payments for a period of
not less than six months. Interest payments received on non-accrual
or impaired loans are generally applied as a reduction of the loan
book balance.
During
the five year period presented below, the level of non-performing
assets fluctuated, with the highest level reported in 2015,
followed by a substantial decrease in 2016 in large part due to the
restoration to accrual status of one large CRE relationship and
another commercial relationship secured by multiple residential
properties. Other reductions occurred through the foreclosure
process or through borrower initiated payments and payoffs. 2017
increases in non-performing assets generally resulted from numerous
smaller loans across the CRE and residential 1st lien portfolios.
The increase in 2018 was primarily attributable to higher
delinquency in the residential portfolio, and the decline of credit
quality in two CRE loans, while the increase in 2019 was primarily
due to a large CRE loan being transferred into the Company’s
OREO portfolio.
61
Non-performing
assets at the end of each of the last five fiscal years consisted
of the following:
December
31,
|
2019
|
2018
|
2017
|
2016
|
2015
|
|
(Dollars in
Thousands)
|
||||
Accruing loans past
due 90 days or more(1):
|
|
|
|
|
|
Commercial
& industrial
|
$0
|
$0
|
$0
|
$26
|
$14
|
Commercial
real estate
|
0
|
0
|
0
|
0
|
45
|
Residential
real estate - 1st lien
|
530
|
622
|
1,249
|
1,068
|
801
|
Residential
real estate - Jr lien
|
112
|
105
|
0
|
28
|
63
|
Consumer
|
0
|
2
|
1
|
2
|
0
|
Total
past due 90 days or more
|
642
|
729
|
1,250
|
1,124
|
923
|
|
|
|
|
|
|
Non-accrual
loans(1):
|
|
|
|
|
|
Commercial
& industrial
|
480
|
85
|
99
|
143
|
441
|
Commercial
real estate
|
1,601
|
1,743
|
1,065
|
766
|
2,401
|
Residential
real estate - 1st lien
|
2,112
|
2,027
|
1,585
|
1,227
|
2,009
|
Residential
real estate - Jr lien
|
241
|
408
|
347
|
339
|
386
|
Total
non-accrual loans
|
4,434
|
4,263
|
3,096
|
2,475
|
5,237
|
|
|
|
|
|
|
Total non-accrual
and past due loans
|
5,076
|
4,992
|
4,346
|
3,599
|
6,160
|
Other real estate
owned
|
967
|
201
|
284
|
394
|
262
|
Total
non-performing assets
|
$6,043
|
$5,193
|
$4,630
|
$3,993
|
$6,422
|
|
|
|
|
|
|
Percentage by
segment of non-performing loans:
|
|
|
|
|
|
Commercial
& industrial
|
9.46%
|
1.70%
|
2.28%
|
4.70%
|
7.39%
|
Commercial
real estate
|
31.54%
|
34.92%
|
24.51%
|
21.28%
|
39.71%
|
Residential
real estate - 1st lien
|
52.05%
|
53.06%
|
65.21%
|
63.77%
|
45.62%
|
Residential
real estate - Jr lien
|
6.95%
|
10.28%
|
7.98%
|
10.20%
|
7.29%
|
Consumer
|
0.00%
|
0.04%
|
0.02%
|
0.06%
|
0.00%
|
|
100.00%
|
100.00%
|
100.00%
|
100.00%
|
100.00%
|
|
|
|
|
|
|
Percent of gross
loans
|
1.00%
|
0.90%
|
0.84%
|
0.74%
|
1.28%
|
Reserve coverage of
non-performing assets
|
98.07%
|
107.87%
|
117.45%
|
132.18%
|
78.04%
|
(1) No
municipal loans were past due 90 days or more, and no municipal or
consumer loans were in non-accrual status as of any of the
consolidated balance sheet dates. In accordance with Company
policy, delinquent consumer loans are charged off at 120 days past
due.
The
Company’s OREO portfolio at December 31, 2019 consisted of
one residential and three commercial properties compared to two
commercial properties at December 31, 2018. The residential
property was acquired through the normal foreclosure process. Both
properties held at December 31, 2018 were sold during 2019, and all
the properties transferred to OREO in 2019 remain in the portfolio
and are listed for sale.
The
Company’s TDRs are principally a result of extending loan
repayment terms to relieve cash flow difficulties. The Company has
only infrequently reduced interest rates for borrowers below the
current market rates. The Company has not forgiven principal or
reduced accrued interest within the terms of original
restructurings. Management evaluates each TDR situation on its own
merits and does not foreclose the granting of any particular type
of concession.
62
The
Non-Performing Assets in the table above include the following TDRs
that were past due 90 days or more or in non-accrual status as of
the dates presented:
|
December 31,
2019
|
December 31,
2018
|
||
|
Number of
|
Principal
|
Number of
|
Principal
|
|
Loans
|
Balance
|
Loans
|
Balance
|
|
|
|
|
|
Commercial &
industrial
|
6
|
$331,767
|
1
|
$24,685
|
Commercial real
estate
|
4
|
772,894
|
4
|
862,713
|
Residential real
estate - 1st lien
|
14
|
1,468,415
|
12
|
1,082,187
|
Residential real
estate - Jr lien
|
1
|
55,011
|
0
|
0
|
Total
|
25
|
$2,628,085
|
17
|
$1,969,585
|
The
remainder of the Company’s TDRs were performing in accordance
with their modified terms as of the date presented and consisted of
the following:
|
December 31,
2019
|
December 31,
2018
|
||
|
Number of
|
Principal
|
Number of
|
Principal
|
|
Loans
|
Balance
|
Loans
|
Balance
|
|
|
|
|
|
Commercial real
estate
|
2
|
$106,913
|
1
|
$102,292
|
Residential real
estate - 1st lien
|
30
|
2,459,649
|
31
|
2,544,728
|
Residential real
estate - Jr lien
|
1
|
6,101
|
1
|
7,248
|
Total
|
33
|
$2,572,663
|
33
|
$2,654,268
|
As of
the balance sheet dates, the Company evaluates whether it is
contractually committed to lend additional funds to debtors with
impaired, non-accrual or modified loans. The Company is
contractually committed to lend under one SBA guaranteed line of
credit to a borrower whose lending relationship was previously
restructured.
ALL and provisions - The Company maintains an ALL at a level
that management believes is appropriate to absorb losses inherent
in the loan portfolio as of the measurement date (See Note 3 to the
accompanying audited consolidated financial statements). Although
the Company, in establishing the ALL, considers the inherent losses
in individual loans and pools of loans, the ALL is a general
reserve available to absorb all credit losses in the loan
portfolio. No part of the ALL is segregated to absorb losses from
any particular loan or segment of loans.
When
establishing the ALL each quarter, the Company applies a
combination of historical loss factors and qualitative factors to
loan segments, including residential first and junior lien
mortgages, CRE, commercial & industrial, and consumer loan
portfolios. The Company’s municipal portfolio has no
historical losses, therefore no allocation is calculated on this
portfolio. Other than the municipal portfolio, the Company applies
numerous qualitative factors to each segment of the loan portfolio.
Those factors include the levels of and trends in delinquencies and
non-accrual loans, criticized and classified assets, volumes and
terms of loans, and the impact of any loan policy changes.
Experience, ability and depth of lending personnel, levels of
policy and documentation exceptions, national and local economic
trends, the competitive environment, and concentrations of credit
are also factors considered.
Specific
allocations to the ALL are made for certain impaired loans.
Impaired loans include all troubled debt restructurings regardless
of amount, and all loans to a borrower that in aggregate are
greater than $100,000 and that are in non-accrual status. A loan is
considered impaired when it is probable that the Company will be
unable to collect all amounts due, including interest and
principal, according to the contractual terms of the loan
agreement. The Company will review all the facts and circumstances
surrounding non-accrual loans and on a case-by-case basis may
consider loans below the threshold as impaired when such treatment
is material to the financial statements. See Note 3 to the
accompanying audited consolidated financial statements for
information on the recorded investment in impaired loans and their
related allocations.
63
The
following table summarizes the Company's loan loss experience for
each of the last five years.
As
of or Years Ended December 31,
|
2019
|
2018
|
2017
|
2016
|
2015
|
|
(Dollars in
Thousands)
|
||||
|
|
|
|
|
|
Loans outstanding,
end of year (1)
|
$606,989
|
$578,450
|
$551,690
|
$537,136
|
$501,473
|
Average loans
outstanding during year (1)
|
$591,616
|
$568,511
|
$549,974
|
$521,973
|
$499,309
|
Non-accruing loans,
end of year
|
$4,434
|
$4,263
|
$3,096
|
$2,475
|
$5,237
|
Non-accruing loans,
net of government guarantees
|
$4,074
|
$3,887
|
$3,037
|
$2,328
|
$4,551
|
|
|
|
|
|
|
ALL, beginning of
year
|
$5,602
|
$5,438
|
$5,278
|
$5,012
|
$4,906
|
Loans charged
off:
|
|
|
|
|
|
Commercial
& industrial
|
(176)
|
(153)
|
(20)
|
(49)
|
(201)
|
Commercial
real estate
|
(116)
|
(124)
|
(160)
|
0
|
(15)
|
Residential
real estate - 1st lien
|
(242)
|
(252)
|
(160)
|
(244)
|
(151)
|
Residential
real estate - Jr lien
|
(223)
|
(69)
|
(118)
|
0
|
(66)
|
Consumer
|
(103)
|
(144)
|
(124)
|
(16)
|
(69)
|
|
(860)
|
(742)
|
(582)
|
(309)
|
(502)
|
Recoveries:
|
|
|
|
|
|
Commercial
& industrial
|
11
|
60
|
27
|
25
|
59
|
Commercial
real estate
|
50
|
0
|
0
|
0
|
0
|
Residential
real estate - 1st lien
|
16
|
27
|
27
|
24
|
6
|
Residential
real estate - Jr lien
|
2
|
1
|
1
|
0
|
0
|
Consumer
|
39
|
38
|
37
|
26
|
33
|
|
118
|
126
|
92
|
75
|
98
|
|
|
|
|
|
|
Net loans charged
off
|
(742)
|
(616)
|
(490)
|
(234)
|
(404)
|
Provision charged
to income
|
1,066
|
780
|
650
|
500
|
510
|
ALL, end of
year
|
$5,926
|
$5,602
|
$5,438
|
$5,278
|
$5,012
|
|
|
|
|
|
|
Net charge offs to
average loans outstanding
|
0.13%
|
0.11%
|
0.09%
|
0.04%
|
0.08%
|
Provision charged
to income as a percent of
|
|
|
|
|
|
average
loans
|
0.18%
|
0.14%
|
0.12%
|
0.10%
|
0.10%
|
ALL to average
loans outstanding
|
1.00%
|
0.99%
|
0.99%
|
1.01%
|
1.00%
|
ALL to non-accruing
loans
|
133.65%
|
131.41%
|
175.65%
|
213.25%
|
95.70%
|
ALL to non-accruing
loans, net of government
|
|
|
|
|
|
guarantees
|
145.46%
|
144.12%
|
179.06%
|
226.72%
|
110.13%
|
(1)
Reflects
reclassification of obligations of local municipalities from the
investment portfolio into the loan portfolio as of January 1, 2019
and conforming changes to the comparative 2018 – 2015
information presented. See Note 1 to the accompanying audited
consolidated financial statements for additional
information.
The
2015 provision was maintained at a level consistent with portfolio
growth and higher levels of non-performing loans. Despite lower net
losses during 2016 and sharply lower non-performing loans, the 2016
provision held steady at $500,000 to support the strong loan
growth, particularly in the CRE portfolio. The 2017 provision
increased to $650,000, principally to cover higher loan losses
experienced during the year, some qualitative adjustment increases
related to classified loan levels, along with solid loan portfolio
growth. As in 2017, the 2018 provision was increased principally to
support strong CRE loan growth along with the higher dollar volume
of losses in the Company’s growing loan portfolio. The 2019
provision increased significantly due to increase in the
loan portfolio combined with higher than anticipated loan charge
off activity during the third quarter of 2019 related to write-down
adjustments on several loans in workout. The Company has an
experienced collections department that continues to work actively
with borrowers to resolve problem loans and manage the OREO
portfolio, and management continues to monitor the loan portfolio
closely.
64
The
fourth quarter ALL analysis indicates that the reserve balance of
$5.9 million at December 31, 2019 is sufficient to cover losses
that are probable and estimable as of the measurement date, with an
unallocated reserve of approximately $178,000. Management believes
that the reserve balance and unallocated amount continue to be
directionally consistent with the overall risk profile of the
Company’s loan portfolio and credit risk appetite. The
portion of the ALL termed "unallocated" is established to absorb
inherent losses that exist as of the measurement date although not
specifically identified through management's process for estimating
credit losses. While the ALL is described as consisting of separate
allocated portions, the entire ALL is available to support loan
losses, regardless of category. Unallocated reserves are considered
by management to be appropriate in light of the Company’s
continued growth strategy and shift in the portfolio from
residential loans to commercial and CRE loans and the risk
associated with the relatively new, unseasoned loans in those
portfolios. The adequacy of the ALL is reviewed quarterly by the
risk management committee of the Board and then presented to the
full Board for approval.
The
following table shows the allocation of the ALL, as well as the
percent of each loan category to the total loan portfolio, as of
the balance sheet dates for each of the last five
years:
December
31,
|
2019
|
%
|
2018
|
%
|
2017
|
%
|
2016
|
%
|
2015
|
%
|
|
(Dollars in
Thousands)
|
|||||||||
Domestic
|
|
|
|
|
|
|
|
|
|
|
Commercial
& industrial
|
$837
|
16%
|
$697
|
14%
|
$676
|
14%
|
$726
|
13%
|
$713
|
13%
|
Commercial
real estate
|
3,181
|
41%
|
3,020
|
41%
|
2,674
|
38%
|
2,496
|
38%
|
2,152
|
36%
|
Municipal
(1)
|
0
|
9%
|
0
|
8%
|
0
|
9%
|
0
|
9%
|
0
|
9%
|
Residential
real estate
|
|
|
|
|
|
|
|
|
|
|
1st
lien
|
1,388
|
26%
|
1,422
|
28%
|
1,461
|
30%
|
1,370
|
31%
|
1,368
|
32%
|
Jr
lien
|
290
|
7%
|
273
|
8%
|
317
|
8%
|
371
|
8%
|
423
|
9%
|
Consumer
|
52
|
1%
|
57
|
1%
|
43
|
1%
|
84
|
1%
|
76
|
1%
|
Unallocated
|
178
|
0%
|
133
|
0%
|
267
|
0%
|
231
|
0%
|
280
|
0%
|
|
$5,926
|
100%
|
$5,602
|
100%
|
$5,438
|
100%
|
$5,278
|
100%
|
$5,012
|
100%
|
(1)
Gross loans
reflects reclassification of obligations of local municipalities
from the investment portfolio into the loan portfolio as of January
1, 2019 and conforming changes to the comparative 2018 – 2015
information presented. See Note 1 to the accompanying audited
consolidated financial statements for additional
information.
In
addition to credit risk in the Company’s loan portfolio and
liquidity risk in its loan and deposit-taking operations, the
Company’s business activities also generate market risk.
Market risk is the risk of loss in a financial instrument arising
from adverse changes in market prices and rates, foreign currency
exchange rates, commodity prices and equity prices. Declining
capital markets can result in fair value adjustments necessary to
record decreases in the value of the investment portfolio for
other-than-temporary-impairment. The Company does not have any
market risk sensitive instruments acquired for trading purposes.
The Company’s market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities. During
recessionary periods, a declining housing market can result in an
increase in loan loss reserves or ultimately an increase in
foreclosures. Interest rate risk is directly related to the
different maturities and repricing characteristics of
interest-bearing assets and liabilities, as well as to loan
prepayment risks, early withdrawal of time deposits, and the fact
that the speed and magnitude of responses to interest rate changes
vary by product. As discussed above under "Interest Rate Risk and
Asset and Liability Management", the Company actively monitors and
manages its interest rate risk through the ALCO
process.
INVESTMENT SECURITIES
The
Company maintains an investment portfolio of various securities to
diversify its revenue sources, as well as to provide interest rate
risk and credit risk diversification and to provide for its
liquidity and funding needs. The Company’s portfolio of AFS
debt securities increased $6.6 million, or 16.8% in 2019 to $46.0
million at December 31, 2019 from $39.4 million at December 31,
2018, and increased just under $1.0 million, or 2.4%, during 2018
from $38.5 million at December 31, 2017.
Accounting
standards require banks to recognize all appreciation or
depreciation of investments classified as either trading securities
or AFS, either through the income statement or on the balance sheet
even though a gain or loss has not been realized. Securities
classified as trading securities are marked to market with any gain
or loss net of tax effect, charged to income. The Company's
investment policy does not permit the holding of trading
securities. Debt securities classified as HTM are recorded at book
value, subject to adjustment for OTTI. As noted previously,
effective as of January 1, 2019, tax-exempt loans to
municipalities, which were previously classified as securities HTM
and constituted the entire HTM portfolio, were reclassified to the
loan portfolio, with prior period information restated accordingly.
Therefore, the Company did not hold any securities HTM as of
December 31, 2019, 2018 or 2017.
65
Debt
securities classified as AFS are marked to market with any gain or
loss after taxes charged to shareholders’ equity in the
consolidated balance sheets. These adjustments in the AFS portfolio
resulted in an accumulated unrealized income net of taxes of
$260,483 in 2019, compared to accumulated unrealized loss net of
taxes of $647,584 in 2018, and $274,097 in 2017. Included in the
2017 accumulated unrealized loss is a reclassification adjustment
of $45,106 for the deferred tax asset revaluation beginning in
2018. Other than the 2017 deferred tax asset reclassification
adjustment, the fluctuations in unrealized gains and losses are due
to market interest rate changes, and are not based on any
deterioration in credit quality of the underlying issuers. The
Company’s investment portfolio includes Agency MBS in order
to realize a more favorable yield in the portfolio and diversify
the holdings. Although classified as AFS, we anticipate holding
these securities until maturity. The unrealized loss positions
within the investment portfolio as of the balance sheet dates
presented are considered by management to be
temporary.
The
restricted equity securities comprise the Company’s
membership stock in the FRBB, FHLBB and ACBI. Membership in the
FRBB and FHLBB requires the purchase of their stock in specified
amounts. On December 31, 2019, 2018 and 2017, the Company held
$588,150 in FRBB stock and $753,700, $1.1 million and $1.1 million,
respectively, in FHLBB stock. In addition, as disclosed in Note 2
of the accompanying audited consolidated financial statements,
during 2018 the Company purchased $90,000 in stock in ACBI, a
holding company for ACBB, a correspondent bank. The purchase of
ACBI stock is required for receipt of correspondent banking
services from ACBB at more favorable pricing. These restricted
securities in the FRBB, FHLBB and ACBI are typically held for an
extended period of time and are subject to strict limitations on
resales. FRBB stock may only be sold back to the issuer, while
FHLBB stock may only be repurchased by the FHLBB or resold to a
member institution and ACBI stock may only be resold to other
depository institutions or their holding companies or subsidiaries,
or to the FDIC. Restricted equity stock is generally sold and
redeemed at par. Due to the unique nature of the restricted equity
stock, including the non-investment purpose for owning it, the
ownership structure and restrictions and the absence of a trading
market for the stock, these securities are not marked to market,
but carried at par. The FHLBB stock is subject to capital call
provisions.
Some of
the Company’s debt securities have a call feature, meaning
that the issuer may call in the investment before maturity, at
predetermined call dates and prices. In 2019, there were ten call
features exercised by the issuer, compared to no calls exercised
during 2018 or 2017.
The
Company's debt securities AFS as of December 31 in each of the last
three fiscal years were as follows:
|
|
Gross
|
Gross
|
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|
Cost
|
Gains
|
Losses
|
Value
|
|
(Dollars in
Thousands)
|
|||
December
31, 2019
|
|
|
|
|
U.S.
GSE debt securities
|
$18,003
|
$100
|
$41
|
$18,062
|
Agency
MBS
|
16,169
|
87
|
51
|
16,205
|
ABS
and OAS
|
2,800
|
55
|
2
|
2,853
|
Other
investments
|
8,665
|
182
|
0
|
8,847
|
|
$45,637
|
$424
|
$94
|
$45,967
|
|
|
|
|
|
Restricted Equity
Securities (1)
|
$1,432
|
$0
|
$0
|
$1,432
|
|
|
|
|
|
Total
|
$47,069
|
$424
|
$94
|
$47,399
|
December
31, 2018
|
|
|
|
|
U.S. GSE debt
securities
|
$14,010
|
$0
|
$259
|
$13,751
|
Agency
MBS
|
16,021
|
3
|
449
|
15,575
|
ABS and
OAS
|
1,988
|
4
|
6
|
1,986
|
Other
investments
|
8,167
|
8
|
120
|
8,055
|
|
$40,186
|
$15
|
$834
|
$39,367
|
|
|
|
|
|
Restricted Equity
Securities (1)
|
$1,749
|
$0
|
$0
|
$1,749
|
|
|
|
|
|
|
$41,935
|
$15
|
$834
|
$41,116
|
66
|
|
Gross
|
Gross
|
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|
Cost
|
Gains
|
Losses
|
Value
|
|
(Dollars in
Thousands)
|
|||
December
31, 2017
|
|
|
|
|
U.S.
GSE debt securities
|
$17,308
|
$0
|
$149
|
$17,159
|
Agency
MBS
|
16,782
|
11
|
180
|
16,613
|
Other
investments
|
4,707
|
0
|
29
|
4,678
|
|
$38,797
|
$11
|
$358
|
$38,450
|
|
|
|
|
|
Restricted Equity
Securities (1)
|
$1,704
|
$0
|
$0
|
$1,704
|
|
|
|
|
|
|
$40,501
|
$11
|
$358
|
$40,154
|
(1)
Required equity purchases for membership in the FRB System and the
FHLB System and for access to correspondent banking services from
ACBB.
The
Company did not have investments totaling more than 10% of
Shareholders’ equity in any one issuer during any of the
periods presented.
Realized
gains and losses in the Company’s AFS portfolio are presented
in the table below.
|
Realized gains
|
Realized losses
|
||||
|
2019
|
2018
|
2017
|
2019
|
2018
|
2017
|
U.S.
GSE debt securities
|
$0
|
$0
|
$2,021
|
$7,200
|
$32,718
|
$1,804
|
Agency
MBS
|
1,570
|
0
|
0
|
20,860
|
0
|
0
|
Other
investments
|
0
|
0
|
6,366
|
0
|
0
|
3,199
|
Total
|
$1,570
|
$0
|
$8,387
|
$28,060
|
$32,718
|
$5,003
|
67
The
following is an analysis of the maturities and yields of the debt
securities AFS in the Company’s investment portfolio for each
of the last three fiscal years:
December
31,
|
2019
|
2018
|
2017
|
|||
|
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
Fair
|
Average
|
Fair
|
Average
|
Fair
|
Average
|
|
Value
|
Yield
|
Value
|
Yield
|
Value
|
Yield
|
|
(Dollars in
Thousands)
|
|||||
|
|
|
|
|
|
|
U.S. GSE debt
securities
|
|
|
|
|
|
|
Due
in one year or less
|
$2,020
|
1.81%
|
$0
|
0.00%
|
$3,740
|
1.30%
|
Due
from one to five years
|
2,007
|
2.25%
|
4,944
|
1.69%
|
6,978
|
1.64%
|
Due
from five to ten years
|
12,049
|
2.81%
|
8,807
|
2.84%
|
6,441
|
2.62%
|
Due
after ten years
|
1,986
|
2.70%
|
0
|
0.00%
|
0
|
0.00%
|
Total
|
$18,062
|
2.63%
|
$13,751
|
2.42%
|
$17,159
|
1.93%
|
|
|
|
|
|
|
|
ABS/AOS
|
|
|
|
|
|
|
Due
from five to ten years
|
$2,853
|
2.94%
|
$1,986
|
3.33%
|
$0
|
0.00%
|
|
|
|
|
|
|
|
Other
Investments
|
|
|
|
|
|
|
Due
in one year or less
|
$746
|
2.03%
|
$0
|
0.00%
|
$0
|
0.00%
|
Due
from one to five years
|
7,856
|
2.72%
|
7,575
|
2.63%
|
4,190
|
2.25%
|
Due
from five to ten years
|
245
|
2.50%
|
480
|
2.50%
|
488
|
2.50%
|
Total
|
$8,847
|
2.65%
|
$8,055
|
2.62%
|
$4,678
|
2.28%
|
|
|
|
|
|
|
|
Agency MBS
(1)
|
$16,205
|
2.55%
|
$15,575
|
2.33%
|
$16,613
|
2.08%
|
|
|
|
|
|
|
|
FRBB Stock
(2)
|
$588
|
6.00%
|
$588
|
6.00%
|
$588
|
6.00%
|
|
|
|
|
|
|
|
FHLBB Stock
(2)
|
$754
|
6.04%
|
$1,071
|
5.92%
|
$1,116
|
5.53%
|
|
|
|
|
|
|
|
ACBI Stock
(2)(3)
|
$90
|
1.16%
|
$90
|
0.00%
|
$0
|
0.00%
|
(1)
|
Agency
MBS are not due at a single maturity date and have not been
allocated to maturity groupings for purposes of the maturity
table.
|
(2)
|
Required
equity purchases for membership in the FRB System and FHLB System
and for access to correspondent banking services from
ACBB.
|
(3)
|
The
Company’s holdings of ACBI stock were purchased during the
fourth quarter of 2018 and the first declared dividend was paid
during the first quarter of 2019, accounting for the absence in
yield for 2018.
|
COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET
ARRANGEMENTS
The
Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments
to extend credit, standby letters of credit and risk-sharing
commitments on certain sold loans. Such instruments involve, to
varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the balance sheet. The contract
or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial
instruments. During 2019, the Company did not engage in any
activity that created any additional types of off-balance-sheet
risk.
The
Company generally requires collateral or other security to support
financial instruments with credit risk. The Company's financial
instruments whose contract amount represents credit risk are
disclosed in Note 16 to the accompanying audited consolidated
financial statements.
68
EFFECTS OF INFLATION
Rates
of inflation affect the reported financial condition and results of
operations of all industries, including the banking industry. The
effect of monetary inflation is generally magnified in bank
financial and operating statements because most of a bank's assets
and liabilities are monetary in nature and, as costs and prices
rise, cash and credit demands of individuals and businesses
increase, while the purchasing power of net monetary assets
declines. During the economic downturn that began in 2008, the
capital and credit markets experienced significant volatility and
disruption, with the federal government taking unprecedented steps
to deal with the economic situation. These measures included
significant deficit spending as well as quantitative easing of the
money supply by the FRB. With the improvement in the economy during
the last three years, the FOMC took steps to increase interest
rates in 2018 but the second half of 2019 brought a decrease in
interest rates as the economy showed signs of slowing.
The
impact of inflation on the Company's financial results is affected
by management's ability to react to changes in interest rates in
order to reduce inflationary effect on performance. Interest rates
do not necessarily move in conjunction with changes in the prices
of other goods and services. As discussed above, management seeks
to manage the relationship between interest-sensitive assets and
liabilities in order to protect against significant interest rate
fluctuations, including those resulting from inflation. With
inflation holding under or near the 2% target despite the
unemployment rate remaining at cycle lows, the Fed has recently
softened its intentions to further tighten policy during 2020, in
an effort to avoid possibly creating a recession, which has
typically been the case in past cycles.
LIQUIDITY AND CAPITAL RESOURCES
Managing
liquidity risk is essential to maintaining both depositor
confidence and stability in earnings. Liquidity management refers
to the ability of the Company to adequately cover fluctuations in
assets and liabilities. Meeting loan demand (assets) and covering
the withdrawal of deposit funds (liabilities) are two key
components of the liquidity management process. The Company’s
principal sources of funds are deposits, amortization and
prepayment of loans and securities, maturities of investment
securities, sales of loans available-for-sale, and earnings and
funds provided from operations. Maintaining a relatively stable
funding base, which is achieved by diversifying funding sources,
competitively pricing deposit products, and extending the
contractual maturity of liabilities, reduces the Company’s
exposure to roll over risk on deposits and limits reliance on
volatile short-term borrowed funds. Short-term funding needs arise
from declines in deposits or other funding sources and funding
requirements for loan commitments. The Company’s strategy is
to fund assets to the maximum extent possible with core deposits
that provide a sizable source of relatively stable and low-cost
funds.
The
Company recognizes that, at times, when loan demand exceeds deposit
growth or the Company has other liquidity demands, it may be
desirable to utilize alternative sources of deposit funding to
augment retail deposits and borrowings. One-way deposits acquired
through the CDARS program provide an alternative funding source
when needed. The Company had one-way CDARS outstanding totaling
$4.0 million and $723,774 at December 31, 2019 and 2018,
respectively. In addition, two-way (that is, reciprocal) CDARS
deposits, as well as reciprocal ICS money market and demand
deposits, allow the Company to provide FDIC deposit insurance to
its customers in excess of account coverage limits by exchanging
deposits with other participating FDIC-insured financial
institutions. Until 2018, these reciprocal deposits were considered
a form of brokered deposits, which are treated less favorably than
other deposits for certain purposes; however, a provision of the
2018 Regulatory Relief Act provides that reciprocal deposits held
by a well-capitalized and well managed bank are no longer
classified as brokered deposits. At December 31, 2019 and 2018, the
Company reported $6.8 million and $3.5 million, respectively, in
reciprocal CDARS deposits. The balance in ICS reciprocal money
market deposits was $22.6 million and $23.9 million at December 31,
2019 and 2018, respectively, and the balance in ICS reciprocal
demand deposits as of those dates was $39.7 million and $45.7
million, respectively.
During
2019 and 2018, the Company continued its use of brokered deposits
outside of the CDARS program to satisfy a portion of its short-term
funding needs. These are typically short term certificates of
deposit with maturity less than one year purchased through a
prominent broker of public and institutional funds from across the
country, along with the addition of DTC Brokered CD issuance during
2018. During the third quarter of 2018, the Company issued two
blocks of DTC Brokered CDs totaling $30 million, with maturities in
January 2019 and August 2019. During the first quarter of 2019, the
Company partially replaced the $20.0 million block that matured in
January with purchases of two blocks of DTC Brokered CDs totaling
$15.0 million and having maturities in July, 2019 and January,
2020. The Company did not replace the blocks that matured in July
and August of 2019, leaving $6.2 million outstanding as of December
31, 2019. Additionally, the Company had brokered deposits from
another source totaling approximately $1.0 million and $4.6 million
at December 31, 2019 and 2018, respectively. These relationships
have provided increased access to short term funding that is easily
accessible without any detrimental effect on the pricing of the
core deposit base. In total, the Company had $11.1 million and
$35.3 million of brokered CDs outstanding at December 31, 2019 and
December 31, 2018, respectively.
69
At
December 31, 2019 and 2018, gross borrowing capacity of
approximately $97.4 million and $108.7 million, respectively, was
available through the FHLBB, secured by the Company's qualifying
loan portfolio (generally, residential mortgage and commercial
loans), reduced by outstanding advances and collateral pledges. The
Company also has an unsecured Federal Funds line with the FHLBB
with an available balance of $500,000, with no advances against it
at December 31, 2019 or 2018. Interest is chargeable at a rate
determined daily approximately 25 basis points higher than the rate
paid on federal funds sold.
Under a
separate agreement with the FHLBB, the Company has the authority to
collateralize public unit deposits up to its FHLBB borrowing
capacity ($97.4 million and $108.7 million at December 31, 2019 and
2018, respectively, less outstanding advances and collateral
pledges) with letters of credit issued by the FHLBB. The Company
offers a Government Agency Account to its municipal customers
collateralized with these FHLBB letters of credit. At December 31,
2019 and 2018, approximately $14.4 million and $2.6 million,
respectively, of qualifying residential real estate loans were
pledged as collateral to the FHLBB for these collateralized
governmental unit deposits, which reduced dollar-for-dollar the
available borrowing capacity under the FHLBB line of credit. Total
fees paid by the Company to the FHLBB in connection with these
letters of credit were $41,069 for 2019 and $46,620 for
2018.
The
Company has a BIC arrangement with the FRBB secured by eligible
commercial loans, CRE loans and home equity loans, resulting in an
available line of $56.9 million and $50.9 million, respectively, at
December 31, 2019 and 2018. Credit advances in the FRBB lending
program are overnight advances with interest chargeable at the
primary credit rate (generally referred to as the discount rate),
which was 225 basis points at December 31, 2019. At December 31,
2019 and 2018, the Company had no outstanding advances against this
line.
The
Company has unsecured lines of credit with three correspondent
banks with aggregate available borrowing capacity of $12.5 million
at December 31, 2019 and 2018. The Company had no outstanding
advances against these lines for the periods
presented.
Securities
sold under agreements to repurchase amounted to $33.2 million,
$30.5 million and $28.6 million as of December 31, 2019, 2018 and
2017, respectively. The average daily balance of these repurchase
agreements was $33.5 million, $30.6 million and $28.9
million during 2019, 2018, and 2017, respectively. The maximum
borrowings outstanding on these agreements at any month-end
reporting period of the Company were $38.9 million, $32.9 million
and $31.7 million during 2019, 2018 and 2017, respectively. These
repurchase agreements mature daily and carried a weighted average
interest rate of 0.89% during 2019, 0.63% during 2018 and 0.33%
during 2017.
The
following table illustrates the changes in shareholders' equity
from December 31, 2018 to December 31, 2019:
Balance at December
31, 2018 (book value $11.72 per common share)
|
$62,603,711
|
Net
income
|
8,824,446
|
Issuance
of stock through the DRIP
|
1,097,234
|
Redemption
of preferred stock
|
(500,000)
|
Dividends
declared on common stock
|
(3,951,279)
|
Dividends
declared on preferred stock
|
(87,500)
|
Change
in AOCI on AFS securities, net of tax
|
908,067
|
Balance at December
31, 2019 (book value $12.86 per common share)
|
$68,894,679
|
In
December, 2019, the Board of the Company declared a $0.19 per
common share cash dividend, payable February 1, 2020 to
shareholders of record as of January 15, 2020, requiring the
Company to accrue a liability of $727,526 for this dividend in the
fourth quarter of 2019. In March, 2020, the Board of the Company
approved a cash dividend of $0.19 per common share, payable on May
1, 2020 to shareholders of record as of April 15, 2020. The
declaration of this dividend required the Company to accrue a
liability of $995,538 in the first quarter of
2020.
The
Company (on a consolidated basis) and the Bank are subject to
various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary
- actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines, the Company and the
Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain
off-balance-sheet items, as calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors. Additional Prompt Corrective Action
capital requirements are applicable to banks, but not bank holding
companies. (See Note 21 to the accompanying audited consolidated
financial statements.)
70
Common Stock Performance by Quarter*
|
2019
|
2018
|
||||||
Trade
Price
|
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
High
|
$17.20
|
$17.95
|
$17.00
|
$17.90
|
$18.50
|
$18.25
|
$18.90
|
$19.39
|
Low
|
$15.94
|
$16.34
|
$15.07
|
$15.15
|
$16.55
|
$16.50
|
$16.91
|
$16.00
|
|
2019
|
2018
|
||||||
Bid
Price
|
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
High
|
$17.20
|
$17.40
|
$16.88
|
$17.00
|
$18.10
|
$17.55
|
$18.80
|
$18.25
|
Low
|
$16.12
|
$16.34
|
$15.14
|
$15.40
|
$16.55
|
$16.60
|
$16.95
|
$16.00
|
|
|
|
|
|
|
|
|
|
Cash Dividends
Declared
|
$0.19
|
$0.19
|
$0.19
|
$0.19
|
$0.17
|
$0.19
|
$0.19
|
$0.19
|
*The
Company's common stock is not traded on any exchange. However, the
Company’s common stock is included in the OTCQX®
marketplace tier maintained by the OTC Markets Group Inc. Trade and
bid information for the stock appears in the OTC’s
interdealer quotation system, OTC Link ATS®. The trade price
and bid information in the table above is based on information
reported by participating FINRA-registered brokers in the OTC Link
ATS® system and may not represent all trades or high and low
bids during the relevant periods. Such price quotations reflect
inter-dealer prices without retail mark-up, mark-down or commission
and bid prices do not necessarily represent actual transactions.
The OTC trading symbol for the Company’s common stock is
CMTV.
As of
February 1, 2020, there were 5,239,675 shares of the Corporation's
common stock ($2.50 par value) outstanding, owned by 832
shareholders of record.
Form 10-K
A copy
of the Form 10-K Report filed with the Securities and Exchange
Commission may be obtained without charge upon written request
to:
Kathryn
M. Austin, President & CEO
Community
Bancorp.
4811 US
Route 5
Newport, Vermont
05855
Shareholder Services
For
shareholder services or information contact:
Melissa
Tinker, Assistant Corporate Secretary
Community
Bancorp.
4811 US
Route 5
Newport, Vermont
05855
(802)
334-7915
Transfer Agent:
Computershare
Investor Services
PO Box
43078
Providence, RI
02940-3078
www.computershare.com
Annual Shareholders' Meeting
The
2020 Annual Shareholders' Meeting will be held at 5:30 p.m., May
19, 2020, at the Elks Club in Derby. We hope to see many of our
shareholders there.
71