UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
[ x ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2019
 
OR
 
[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                to                 
 
Commission File Number 000-16435
 
 
 
 
Vermont
03-0284070
(State of Incorporation)
(IRS Employer Identification Number)
 
4811 US Route 5, Derby, Vermont
05829
(Address of Principal Executive Offices)
(zip code)
 
 
Registrant's Telephone Number: (802) 334-7915
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file for such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ( X )  No (  )
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ( X ) NO ( )
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer (  )
Accelerated filer ( X )
Non-accelerated filer (  )
Smaller reporting company ( X )
 
Emerging growth company (  )
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (  )
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES (  )     NO(X)
 
At May 6, 2019, there were 5,191,412 shares outstanding of the Corporation's common stock.
 
1
 
 
 
 
 
FORM 10-Q
Index
 
 
 
 
Page  
PART I
FINANCIAL INFORMATION
 
 
 
 
3  
30  
49  
49  
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
49  
49  
50  
50  
 
51  
 
52  
 
 
 
PART I. FINANCIAL INFORMATION
 
ITEM 1. Financial Statements (Unaudited)
 
The following are the unaudited consolidated financial statements for the Company.
 
2
 
 
Community Bancorp. and Subsidiary
 
March 31,
 
 
December 31,
 
 
March 31,
 
Consolidated Balance Sheets
 
2019
 
 
2018
 
 
2018
 
 
 
(Unaudited)
 
 
 
 
 
(Unaudited)
 
Assets
 
 
 
 
 
 
 
 
 
  Cash and due from banks
 $10,555,183 
 $14,906,529 
 $12,172,705 
  Federal funds sold and overnight deposits
  41,366,899 
  53,028,286 
  29,297,476 
     Total cash and cash equivalents
  51,922,082 
  67,934,815 
  41,470,181 
  Securities available-for-sale
  40,703,322 
  39,366,831 
  38,694,065 
  Restricted equity securities, at cost
  1,365,950 
  1,749,450 
  1,793,650 
  Loans held-for-sale
  0 
  0 
  358,500 
  Loans
  578,907,055 
  578,450,517 
  551,933,415 
    Allowance for loan losses
  (5,727,842)
  (5,602,541)
  (5,341,220)
    Deferred net loan costs
  365,151 
  363,614 
  329,244 
        Net loans
  573,544,364 
  573,211,590 
  546,921,439 
  Bank premises and equipment, net
  11,148,494 
  9,713,455 
  10,196,450 
  Accrued interest receivable
  2,558,441 
  2,300,841 
  2,212,131 
  Bank owned life insurance
  4,835,734 
  4,814,099 
  4,744,512 
  Goodwill
  11,574,269 
  11,574,269 
  11,574,269 
  Other real estate owned
  201,386 
  201,386 
  284,235 
  Other assets
  8,879,071 
  9,480,762 
  7,722,318 
        Total assets
 $706,733,113 
 $720,347,498 
 $665,971,750 
 
    
    
    
Liabilities and Shareholders' Equity
    
    
    
 Liabilities
    
    
    
  Deposits:
    
    
    
    Demand, non-interest bearing
 $113,090,261 
 $122,430,805 
 $109,656,422 
    Interest-bearing transaction accounts
  160,975,875 
  177,815,417 
  131,469,439 
    Money market funds
  96,208,647 
  85,261,685 
  106,878,746 
    Savings
  95,633,389 
  93,129,875 
  99,528,104 
    Time deposits, $250,000 and over
  15,307,706 
  14,395,291 
  16,577,061 
    Other time deposits
  109,712,004 
  115,783,492 
  94,119,774 
        Total deposits
  590,927,882 
  608,816,565 
  558,229,546 
  Borrowed funds
  1,550,000 
  1,550,000 
  3,550,000 
  Repurchase agreements
  32,834,869 
  30,521,565 
  30,246,926 
  Junior subordinated debentures
  12,887,000 
  12,887,000 
  12,887,000 
  Accrued interest and other liabilities
  4,903,652 
  3,968,657 
  2,749,457 
        Total liabilities
  643,103,403 
  657,743,787 
  607,662,929 
 
    
    
    
 Shareholders' Equity
    
    
    
  Preferred stock, 1,000,000 shares authorized, 15 and 20 shares
    
    
    
    issued and outstanding in 2019 and 2018, respectively
    
    
    
    ($100,000 liquidation value)
  1,500,000 
  2,000,000 
  2,000,000 
  Common stock - $2.50 par value; 15,000,000 shares authorized,
    
    
    
    5,401,869 shares issued at 03/31/19, 5,382,103 shares issued
    
    
    
    at 12/31/18 and 5,335,658 shares issued at 03/31/18
  13,504,673 
  13,455,258 
  13,339,145 
  Additional paid-in capital
  32,800,143 
  32,536,532 
  31,846,397 
  Retained earnings
  18,643,565 
  17,882,282 
  14,473,029 
  Accumulated other comprehensive loss
  (195,894)
  (647,584)
  (726,973)
  Less: treasury stock, at cost; 210,101 shares at 03/31/19,
    
    
    
   12/31/18 and 03/31/18
  (2,622,777)
  (2,622,777)
  (2,622,777)
        Total shareholders' equity
  63,629,710 
  62,603,711 
  58,308,821 
        Total liabilities and shareholders' equity
 $706,733,113 
 $720,347,498 
 $665,971,750 
 
    
    
    
Book value per common share outstanding
 $11.97 
 $11.72 
 $10.99 
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
3
 
 
Community Bancorp. and Subsidiary
 
Three Months Ended March 31,
 
Consolidated Statements of Income
 
2019
 
 
2018
 
(Unaudited)
 
 
 
 
 
 
Interest income
 
 
 
 
 
 
   Interest and fees on loans
 $7,210,810 
 $6,450,700 
   Interest on debt securities
    
    
     Taxable
  248,108 
  202,885 
   Dividends
  25,959 
  28,852 
   Interest on federal funds sold and overnight deposits
  213,491 
  94,401 
        Total interest income
  7,698,368 
  6,776,838 
 
    
    
Interest expense
    
    
   Interest on deposits
  1,282,960 
  687,063 
   Interest on borrowed funds
  5,137 
  7,483 
   Interest on repurchase agreements
  72,831 
  31,206 
   Interest on junior subordinated debentures
  177,612 
  142,997 
        Total interest expense
  1,538,540 
  868,749 
 
    
    
     Net interest income
  6,159,828 
  5,908,089 
 Provision for loan losses
  212,503 
  180,000 
     Net interest income after provision for loan losses
  5,947,325 
  5,728,089 
 
    
    
Non-interest income
    
    
   Service fees
  790,366 
  770,082 
   Income from sold loans
  103,087 
  183,619 
   Other income from loans
  138,744 
  212,270 
   Net realized loss on sale of securities AFS
  0 
  (3,860)
   Other income
  286,503 
  233,559 
        Total non-interest income
  1,318,700 
  1,395,670 
 
    
    
Non-interest expense
    
    
   Salaries and wages
  1,842,930 
  1,615,386 
   Employee benefits
  776,340 
  674,002 
   Occupancy expenses, net
  690,829 
  674,873 
   Other expenses
  1,845,825 
  1,766,855 
        Total non-interest expense
  5,155,924 
  4,731,116 
 
    
    
    Income before income taxes
  2,110,101 
  2,392,643 
 Income tax expense
  338,196 
  410,100 
        Net income
 $1,771,905 
 $1,982,543 
 
    
    
 Earnings per common share
 $0.34 
 $0.38 
 Weighted average number of common shares
    
    
  used in computing earnings per share
  5,180,334 
  5,117,009 
 Dividends declared per common share
 $0.19 
 $0.17 
 
 
The accompanying notes are an integral part of these consolidated financial statements
 
4
 
 
 
Community Bancorp. and Subsidiary
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income
 
 
 
 
 
 
(Unaudited)
 
Three Months Ended March 31,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Net income
 $1,771,905 
 $1,982,543 
 
    
    
Other comprehensive income (loss), net of tax:
    
    
  Unrealized holding gain (loss) on securities AFS arising during the period
  571,759 
  (577,124)
  Reclassification adjustment for loss realized in income
  0 
  3,860 
     Unrealized gain (loss) during the period
  571,759 
  (573,264)
  Tax effect
  (120,069)
  120,388 
  Other comprehensive income (loss), net of tax
  451,690 
  (452,876)
          Total comprehensive income
 $2,223,595 
 $1,529,667 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
5
 
 
 
 
Community Bancorp. and Subsidiary

 
Consolidated Statements of Changes in Shareholders' Equity

 
(Unaudited)

 
 
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
Common
 
 
Preferred
 
 
paid-in
 
 
Retained
 
 
 
 
 
Treasury
 
 
shareholders'
 
 
 
Stock
 
 
Stock
 
 
capital
 
 
earnings
 
 
AOCI*
 
 
stock
 
 
equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 1, 2019
 $13,455,258 
 $2,000,000 
 $32,536,532 
 $17,882,282 
 $(647,584)
 $(2,622,777)
 $62,603,711 
 
    
    
    
    
    
    
    
Issuance of common stock
  49,415 
    
  263,611 
    
    
    
  313,026 
Cash dividends declared
    
    
    
    
    
    
    
  Common stock
    
    
    
  (983,122)
    
    
  (983,122)
  Preferred stock
    
    
    
  (27,500)
    
    
  (27,500)
Redemption of preferred stock
    
  (500,000)
    
    
    
    
  (500,000)
Comprehensive income
    
    
    
    
    
    
    
  Net income
    
    
    
  1,771,905 
    
    
  1,771,905 
  Other comprehensive income
    
    
    
    
  451,690 
    
  451,690 
 
    
    
    
    
    
    
    
March 31, 2019
 $13,504,673 
 $1,500,000 
 $32,800,143 
 $18,643,565 
 $(195,894)
 $(2,622,777)
 $63,629,710 
 
 
 
 
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
Common
 
 
Preferred
 
 
paid-in
 
 
Retained
 
 
 
 
 
Treasury
 
 
shareholders'
 
 
 
Stock
 
 
Stock
 
 
capital
 
 
earnings
 
 
AOCI*
 
 
stock
 
 
equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 1, 2018
 $13,305,800 
 $2,500,000 
 $31,639,189 
 $13,387,739 
 $(274,097)
 $(2,622,777)
 $57,935,854 
 
    
    
    
    
    
    
    
Issuance of common stock
  33,345 
    
  207,208 
    
    
    
  240,553 
Cash dividends declared
    
    
    
    
    
    
    
  Common stock
    
    
    
  (869,128)
    
    
  (869,128)
  Preferred stock
    
    
    
  (28,125)
    
    
  (28,125)
Redemption of preferred stock
    
  (500,000)
    
    
    
    
  (500,000)
Comprehensive income
    
    
    
    
    
    
    
  Net income
    
    
    
  1,982,543 
    
    
  1,982,543 
  Other comprehensive loss
    
    
    
    
  (452,876)
    
  (452,876)
 
    
    
    
    
    
    
    
March 31, 2018
 $13,339,145 
 $2,000,000 
 $31,846,397 
 $14,473,029 
 $(726,973)
 $(2,622,777)
 $58,308,821 
 
*Accumulated other comprehensive (loss) income
 
 
6
 
 
 
Community Bancorp. and Subsidiary
 
 
 
 
 
 
Consolidated Statements of Cash Flows
 
 
 
 
 
 
(Unaudited)
 
Three Months Ended March 31,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Cash Flows from Operating Activities:
 
 
 
 
 
 
  Net income
 $1,771,905 
 $1,982,543 
  Adjustments to reconcile net income to net cash provided by
    
    
   operating activities:
    
    
    Depreciation and amortization, bank premises and equipment
  293,654 
  246,582 
    Provision for loan losses
  212,503 
  180,000 
    Deferred income tax (credit) provision
  (3,995)
  6,667 
    Net realized loss on sale of securities AFS
  0 
  3,860 
    Gain on sale of loans
  (22,602)
  (77,698)
    Loss on sale of bank premises and equipment
  0 
  631 
    Income from CFS Partners
  (177,420)
  (128,183)
    Amortization of bond premium, net
  31,611 
  33,969 
    Proceeds from sales of loans held for sale
  769,622 
  2,153,059 
    Originations of loans held for sale
  (747,020)
  (1,396,574)
    Increase in taxes payable
  264,164 
  309,062 
    Increase in interest receivable
  (257,600)
  (160,213)
    Decrease in mortgage servicing rights
  38,554 
  27,446 
    Decrease in right-of-use assets
  57,216 
  0 
    Decrease in operating lease liabilities
  (55,014)
  0 
    Decrease (increase) in other assets
  282,292 
  (257,338)
    Increase in cash surrender value of BOLI
  (21,635)
  (22,730)
    Amortization of limited partnerships
  78,027 
  94,371 
    Increase in unamortized loan costs
  (1,537)
  (10,593)
    Increase in interest payable
  35,102 
  9,073 
    Decrease in accrued expenses
  (444,039)
  (616,259)
    Decrease in other liabilities
  (8,027)
  (5,532)
       Net cash provided by operating activities
  2,038,545 
  2,372,143 
 
    
    
Cash Flows from Investing Activities:
    
    
  Investments - AFS
    
    
    Maturities, calls, pay downs and sales
  701,657 
  2,190,856 
    Purchases
  (1,498,000)
  (3,045,361)
  Proceeds from redemption of restricted equity securities
  383,500 
  0 
  Purchases of restricted equity securities
  0 
  (90,000)
  Increase in loans, net
  (564,060)
  (544,395)
  Capital expenditures net of proceeds from sales of bank
    
    
   premises and equipment
  (272,864)
  (99,486)
  Recoveries of loans charged off
  20,320 
  23,717 
       Net cash used in investing activities
  (1,229,447)
  (1,564,669)
 
 
 
7
 
 
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
 
 
 
  Net decrease in demand and interest-bearing transaction accounts
  (26,180,086)
  (8,753,237)
  Net increase in money market and savings accounts
  13,450,476 
  15,498,561 
  Net decrease in time deposits
  (5,159,073)
  (9,150,758)
  Net increase in repurchase agreements
  2,313,304 
  1,599,078 
  Decrease in finance lease obligations
  (30,251)
  (27,898)
  Redemption of preferred stock
  (500,000)
  (500,000)
  Dividends paid on preferred stock
  (27,500)
  (28,125)
  Dividends paid on common stock
  (688,701)
  (628,415)
       Net cash used in financing activities
  (16,821,831)
  (1,990,794)
 
    
    
       Net decrease in cash and cash equivalents
  (16,012,733)
  (1,183,320)
  Cash and cash equivalents:
    
    
          Beginning
  67,934,815 
  42,653,501 
          Ending
 $51,922,082 
 $41,470,181 
 
    
    
Supplemental Schedule of Cash Paid During the Period:
    
    
  Interest
 $1,503,438 
 $859,676 
 
    
    
Supplemental Schedule of Noncash Investing and Financing Activities:
    
    
  Change in unrealized gain (loss) on securities AFS
 $571,759 
 $(573,264)
 
    
    
Common Shares Dividends Paid:
    
    
  Dividends declared
 $983,122 
 $869,128 
  Decrease (increase) in dividends payable attributable to dividends declared
  18,605 
  (160)
  Dividends reinvested
  (313,026)
  (240,553)
 
 $688,701 
 $628,415 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
8
 
 
Notes to Consolidated Financial Statements
 
Note 1. Basis of Presentation and Consolidation
 
The interim consolidated financial statements of Community Bancorp. and Subsidiary are unaudited. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments necessary for the fair presentation of the consolidated financial condition and results of operations of the Company and its subsidiary, Community National Bank (the Bank), contained herein have been made. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2018 contained in the Company's Annual Report on Form 10-K. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full annual period ending December 31, 2019, or for any other interim period.
 
Certain amounts in the 2018 consolidated financial statements have been reclassified to conform to the 2019 presentation. Reclassifications had no effect on prior period net income or shareholders’ equity.
 
In addition to the definitions provided elsewhere in this quarterly report, the definitions, acronyms and abbreviations identified below are used throughout this report, including in Part I. “Financial Information” and Part II. “Other Information”, and are intended to aid the reader and provide a reference page when reviewing this report.
 
ABS and OAS:
Asset backed or other amortizing security
FHLMC:
Federal Home Loan Mortgage Corporation
AFS:
Available-for-sale
FOMC:
Federal Open Market Committee
Agency MBS:
MBS issued by a US government agency
FRB:
Federal Reserve Board
 
or GSE
FRBB:
Federal Reserve Bank of Boston
ALCO:
Asset Liability Committee
GAAP:
Generally Accepted Accounting Principles
ALL:
Allowance for loan losses
 
in the United States
AOCI:
Accumulated other comprehensive income
GSE:
Government sponsored enterprise
ASC:
Accounting Standards Codification
HTM:
Held-to-maturity
ASU:
Accounting Standards Update
ICS:
Insured Cash Sweeps of the Promontory
Bancorp:
Community Bancorp.
 
Interfinancial Network
Bank:
Community National Bank
IRS:
Internal Revenue Service
BIC:
Borrower-in-Custody
JNE:
Jobs for New England
Board:
Board of Directors
Jr:
Junior
BOLI:
Bank owned life insurance
LIBOR:
London Interbank Offered Rate
bp or bps:
Basis point(s)
MBS:
Mortgage-backed security
CBLR:
Community Bank Leverage Ratio
MPF:
Mortgage Partnership Finance
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
OREO:
Other real estate owned
CECL:
Current Expected Credit Loss
OTTI:
Other-than-temporary impairment
CFSG:
Community Financial Services Group, LLC
PMI:
Private mortgage insurance
CFS Partners:
Community Financial Services Partners,
RD:
USDA Rural Development
 
LLC
SBA:
U.S. Small Business Administration
Company:
Community Bancorp. and Subsidiary
SEC:
U.S. Securities and Exchange Commission
CRE:
Commercial Real Estate
SERP:
Supplemental Employee Retirement Plan
DDA or DDAs:
Demand Deposit Account(s)
TDR:
Troubled-debt restructuring
DTC:
Depository Trust Company
USDA:
U.S. Department of Agriculture
DRIP:
Dividend Reinvestment Plan
VA:
U.S. Veterans Administration
Exchange Act:
Securities Exchange Act of 1934
2017 Tax Act:
Tax Cut and Jobs Act of 2017
FASB:
Financial Accounting Standards Board
2018
Economic Growth, Regulatory Relief and
FDIC:
Federal Deposit Insurance Corporation
Regulatory
Consumer Protection Act of 2018
FHLBB:
Federal Home Loan Bank of Boston
Relief Act:
 
 
 
 
 
9
 
 
Note 2. Recent Accounting Developments
 
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 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 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within such years. The Company is evaluating the impact of the adoption of the ASU on its consolidated financial statements. The ASU may have a material impact on the Company's consolidated financial statements upon adoption as it will require a change in the Company's methodology for calculating its ALL and allowance on unused commitments. The Company will transition from an incurred loss model to an expected loss model, which will likely result in an increase in the ALL upon adoption and may negatively impact the Company’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.
 
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU was issued to reduce the cost and complexity of the goodwill impairment test. To simplify the subsequent measurement of goodwill, step two of the goodwill impairment test was eliminated. Instead, a company will recognize an impairment of goodwill should the carrying value of a reporting unit exceed its fair value (i.e., step one). The ASU will be effective for the Company on January 1, 2020 and will be applied prospectively.
 
The Company has goodwill from its acquisition of LyndonBank in 2007 and performs an impairment test annually or more frequently if circumstances warrant (see Note 6). The Company is currently evaluating the impact of the adoption of the ASU on its consolidated financial statements, but does not anticipate any material impact at this time.
 
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 Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements, but does not anticipate any material impact at this time.
 
Note 3.  Earnings per Common Share
 
Earnings per common share amounts are computed based on the weighted average number of shares of common stock issued during the period (retroactively adjusted for stock splits and stock dividends, if any), including Dividend Reinvestment Plan shares issuable upon reinvestment of dividends declared, and reduced for shares held in treasury.
 
 
 
10
 
 
The following tables illustrate the calculation of earnings per common share for the periods presented, as adjusted for the cash dividends declared on the preferred stock:
 
Three Months Ended March 31,
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Net income, as reported
 $1,771,905 
 $1,982,543 
Less: dividends to preferred shareholders
  27,500 
  28,125 
Net income available to common shareholders
 $1,744,405 
 $1,954,418 
Weighted average number of common shares
    
    
   used in calculating earnings per share
  5,180,334 
  5,117,009 
Earnings per common share
 $0.34 
 $0.38 
 
 
Note 4.  Investment Securities
 
Prior to 2019, the entire balance of the Company’s HTM investment portfolio consisted of Municipal notes. Beginning in 2019, the Company chose to reclassify these notes from the investment portfolio into the loan portfolio. 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.
 
Debt securities as of the balance sheet dates consisted of the following:
 
 
 
 
 
 
Gross
 
 
Gross
 
 
 
 
 
 
Amortized
 
 
Unrealized
 
 
Unrealized
 
 
Fair
 
 
 
Cost
 
 
Gains
 
 
Losses
 
 
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
U.S. GSE debt securities
 $15,005,240 
 $21,774 
 $104,785 
 $14,922,229 
Agency MBS
  15,376,793 
  20,821 
  232,386 
  15,165,228 
ABS and OAS
  1,904,256 
  27,150 
  0 
  1,931,406 
Other investments
  8,665,000 
  58,525 
  39,066 
  8,684,459 
 
 $40,951,289 
 $128,270 
 $376,237 
 $40,703,322 
 
    
    
    
    
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 
 
 $40,186,557 
 $15,373 
 $835,099 
 $39,366,831 
 
    
    
    
    
March 31, 2018
    
    
    
    
U.S. GSE debt securities
 $17,272,170 
 $0 
 $386,980 
 $16,885,190 
Agency MBS
  17,139,115 
  3,327 
  460,499 
  16,681,943 
Other investments
  5,203,000 
  0 
  76,068 
  5,126,932 
 
 $39,614,285 
 $3,327 
 $923,547 
 $38,694,065 
 
 
Investments pledged as collateral for repurchase agreements 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
 
 
 
 
 
 
 
 
March 31, 2019
 $40,951,289 
 $40,703,322 
December 31, 2018
  40,186,557 
  39,366,831 
March 31, 2018
  39,614,285 
  38,694,065 
 
 
 
11
 
 
 
The scheduled maturities of debt securities as of the balance sheet dates were as follows:
 
 
 
Amortized
 
 
Fair
 
 
 
Cost
 
 
Value
 
March 31, 2019
 
 
 
 
 
 
Due in one year or less
 $248,000 
 $246,822 
Due from one to five years
  12,958,597 
  12,927,456 
Due from five to ten years
  12,367,899 
  12,363,816 
Agency MBS
  15,376,793 
  15,165,228 
 
 $40,951,289 
 $40,703,322 
 
    
    
December 31, 2018
    
    
Due from one to five years
 $12,714,642 
 $12,519,008 
Due from five to ten years
  11,451,023 
  11,273,298 
Agency MBS
  16,020,892 
  15,574,525 
 
 $40,186,557 
 $39,366,831 
 
    
    
March 31, 2018
    
    
Due in one year or less
 $2,250,000 
 $2,242,195 
Due from one to five years
  11,766,268 
  11,548,006 
Due from five to ten years
  8,458,902 
  8,221,921 
Agency MBS
  17,139,115 
  16,681,943 
 
 $39,614,285 
 $38,694,065 
 
 
Agency MBS are not due at a single maturity date and have not been allocated to maturity groupings for purposes of the maturity table.
 
Debt securities with unrealized losses as of the balance sheet dates are presented in the table below.
 
 
 
Less than 12 months
 
 
12 months or more
 
 
Total
 
 
 
Fair
 
 
Unrealized
 
 
Fair
 
 
Unrealized
 
 
Number of
 
 
Fair
 
 
Unrealized
 
 
 
Value
 
 
Loss
 
 
Value
 
 
Loss
 
 
Securities
 
 
Value
 
 
Loss
 
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. GSE debt securities
 $0 
 $0 
 $11,426,647 
 $104,785 
  10 
 $11,426,647 
 $104,785 
Agency MBS
  1,358,591 
  14,467 
  11,872,305 
  217,919 
  23 
  13,230,896 
  232,386 
Other investments
  0 
  0 
  4,670,934 
  39,066 
  19 
  4,670,934 
  39,066 
 
 $1,358,591 
 $14,467 
 $27,969,886 
 $361,770 
  52 
 $29,328,477 
 $376,237 
 
    
    
    
    
    
    
    
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 
 
 $6,716,925 
 $55,109 
 $27,621,835 
 $779,990 
  61 
 $34,338,760 
 $835,099 
 
    
    
    
    
    
    
    
March 31, 2018
    
    
    
    
    
    
    
U.S. GSE debt securities
 $12,997,087 
 $275,084 
 $3,888,103 
 $111,896 
  15 
 $16,885,190 
 $386,980 
Agency MBS
  10,987,068 
  298,918 
  4,237,057 
  161,581 
  21 
  15,224,125 
  460,499 
Other investments
  4,146,288 
  67,711 
  487,644 
  8,357 
  16 
  4,633,932 
  76,068 
 
 $28,130,443 
 $641,713 
 $8,612,804 
 $281,834 
  52 
 $36,743,247 
 $923,547 
 
 
 
12
 
 
The unrealized losses for all periods presented were principally attributable to changes in prevailing interest rates for similar types of securities and not deterioration in the creditworthiness of the issuer.
 
Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions, or adverse developments relating to the issuer, warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than the carrying value, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies or other adverse developments in the status of the securities have occurred, and the results of reviews of the issuer's financial condition. As of March 31, 2019, there were no declines in the fair value of any of the securities reflected in the table above that were deemed by management to be OTTI.
 
Note 5. Loans, Allowance for Loan Losses and Credit Quality
 
The composition of net loans as of the balance sheet dates was as follows:
 
 
 
March 31,
 
 
December 31,
 
 
March 31,
 
 
 
2019
 
 
2018
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
Commercial & industrial
 $79,045,761 
 $80,766,693 
 $76,968,888 
Commercial real estate
  242,154,345 
  235,318,148 
  210,135,736 
Municipal*
  46,290,224 
  47,067,023 
  47,899,857 
Residential real estate - 1st lien
  163,521,677 
  165,665,175 
  166,435,383 
Residential real estate - Jr lien
  43,300,663 
  44,544,987 
  45,459,718 
Consumer
  4,594,385 
  5,088,491 
  5,033,833 
    Total loans
  578,907,055 
  578,450,517 
  551,933,415 
Deduct (add):
    
    
    
ALL
  5,727,842 
  5,602,541 
  5,341,220 
Deferred net loan costs
  (365,151)
  (363,614)
  (329,244)
     Net loans
 $573,544,364 
 $573,211,590 
 $546,921,439 
 
*Prior to 2019, all loans in this category were reported as HTM securities as a component of Investment Securities (see Note 4). All periods presented have been restated to conform to the reclassification.
 
The following is an age analysis of loans (including non-accrual) as of the balance sheet dates, by portfolio segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
90 Days or
 
 
 
 
 
 
90 Days
 
 
Total
 
 
 
 
 
 
 
 
Non-Accrual
 
 
More and
 
March 31, 2019
 
30-89 Days
 
 
or More
 
 
Past Due
 
 
Current
 
 
Total Loans
 
 
Loans
 
 
Accruing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial & industrial
 $326,665 
 $0 
 $326,665 
 $78,719,096 
 $79,045,761 
 $47,782 
 $0 
Commercial real estate
  1,825,920 
  433,290 
  2,259,210 
  239,895,135 
  242,154,345 
  2,091,218 
  0 
Municipal
  0 
  0 
  0 
  46,290,224 
  46,290,224 
  0 
  0 
Residential real estate
    
    
    
    
    
    
    
 - 1st lien
  4,064,284 
  1,386,929 
  5,451,213 
  158,070,464 
  163,521,677 
  2,105,605 
  350,197 
 - Jr lien
  285,705 
  340,603 
  626,308 
  42,674,355 
  43,300,663 
  391,801 
  106,648 
Consumer
  36,614 
  4,633 
  41,247 
  4,553,138 
  4,594,385 
  0 
  4,633 
 
 $6,539,188 
 $2,165,455 
 $8,704,643 
 $570,202,412 
 $578,907,055 
 $4,636,406 
 $461,478 
 
 
 
13
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 
 
 $6,363,675 
 $1,917,425 
 $8,281,100 
 $570,169,417 
 $578,450,517 
 $4,263,286 
 $729,106 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
90 Days or
 
 
 
 
 
 
90 Days
 
 
Total
 
 
 
 
 
 
 
 
Non-Accrual
 
 
More and
 
March 31, 2018
 
30-89 Days
 
 
or More
 
 
Past Due
 
 
Current
 
 
Total Loans
 
 
Loans
 
 
Accruing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial & industrial
 $873,514 
 $44,813 
 $918,327 
 $76,050,561 
 $76,968,888 
 $185,012 
 $8,207 
Commercial real estate
  1,205,289 
  451,104 
  1,656,393 
  208,479,343 
  210,135,736 
  1,588,084 
  0 
Municipal
  0 
  0 
  0 
  47,899,857 
  47,899,857 
  0 
  0 
Residential real estate
    
    
    
    
    
    
    
 - 1st lien
  3,837,705 
  961,601 
  4,799,306 
  161,636,077 
  166,435,383 
  1,518,759 
  466,704 
 - Jr lien
  181,062 
  250,399 
  431,461 
  45,028,257 
  45,459,718 
  345,214 
  113,578 
Consumer
  35,090 
  0 
  35,090 
  4,998,743 
  5,033,833 
  0 
  0 
 
 $6,132,660 
 $1,707,917 
 $7,840,577 
 $544,092,838 
 $551,933,415 
 $3,637,069 
 $588,489 
 
 
For all loan segments, loans over 30 days past due are considered delinquent.
 
As of the balance sheet dates presented, residential mortgage loans in process of foreclosure consisted of the following:
 
 
 
Number of loans
 
 
Balance
 
 
 
 
 
 
 
 
March 31, 2019
  13 
 $886,102 
December 31, 2018
  12 
  961,709 
March 31, 2018
  10 
  694,509 
 
 
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.
 
 
14
 
 
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, municipal, 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:
 
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, with no historical losses recognized by the Company.
 
Residential Real Estate - 1st Lien – 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 – 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.
 
 
 
15
 
 
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 fair value or net present value of future cash flows 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.
 
Impaired loans also include troubled loans that are restructured. A TDR occurs when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that would otherwise not be granted. TDRs may include the transfer of assets to the Company in partial satisfaction of a troubled loan, a modification of a loan’s terms, or a combination of the two.
 
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment evaluation, unless such loans are subject to a restructuring agreement.
 
Unallocated component
 
An unallocated component of the ALL is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component reflects management’s estimate of the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
 
The tables below summarize changes in the ALL and select loan information, by portfolio segment, for the periods indicated.
 
As of or for the three months ended March 31, 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
  0 
  0 
  0 
  (74,731)
  0 
  (32,791)
  0 
  (107,522)
  Recoveries
  9,077 
  0 
  0 
  2,497 
  485 
  8,261 
  0 
  20,320 
  Provision (credit)
  (29,782)
  133,288 
  0 
  57,872 
  (8,927)
  17,458 
  42,594