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COMMUNITY BANCORP /VT - Quarter Report: 2022 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

 

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2022

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

cmtv_10qimg1.jpg

 

COMMUNITY BANCORP /VT

(Exact name of Registrant as Specified in its Charter)

  

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

 

Securities registered pursuant to Section 12(b) of the Act: NONE

 

Title of Each Class

Trading Symbol(s)

Name of each exchange on which registered

 

(Not Applicable)

 

 

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 ☒ 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 ☒ NO ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated Filer

Smaller reporting company

 

 

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. ☐

 

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 ☒

 

At November 3, 2022, there were 5,421,386 shares outstanding of the Corporation's common stock. 

 

 

 

 

FORM 10-Q

Index

 

 

 

 

Page

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements

3

Item 2

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

30

Item 3

Quantitative and Qualitative Disclosures About Market Risk

50

Item 4

Controls and Procedures

50

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

51

Item 1A

Risk Factors

51

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 6

Exhibits

52

 

Signatures

53

 

Exhibit Index

54

 

 
2

Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  Financial Statements (Unaudited)

 

The following are the unaudited consolidated financial statements for the Company.

 

Community Bancorp. and Subsidiary

 

September 30,

 

 

December 31,

 

Consolidated Balance Sheets

 

2022

 

 

2021

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$13,796,288

 

 

$17,839,374

 

Federal funds sold and overnight deposits

 

 

60,105,975

 

 

 

92,519,552

 

Total cash and cash equivalents

 

 

73,902,263

 

 

 

110,358,926

 

Securities available-for-sale

 

 

187,227,320

 

 

 

182,342,459

 

Restricted equity securities, at cost

 

 

1,390,950

 

 

 

1,434,450

 

Loans held-for-sale

 

 

130,000

 

 

 

339,000

 

Loans

 

 

724,194,001

 

 

 

689,988,533

 

Allowance for loan losses

 

 

(8,432,086)

 

 

(7,710,256)

Deferred net loan costs (fees)

 

 

466,602

 

 

 

(37,972)

Net loans

 

 

716,228,517

 

 

 

682,240,305

 

Bank premises and equipment, net

 

 

13,163,010

 

 

 

13,767,328

 

Accrued interest receivable

 

 

2,709,745

 

 

 

2,400,560

 

Bank owned life insurance

 

 

5,133,661

 

 

 

5,073,228

 

Goodwill

 

 

11,574,269

 

 

 

11,574,269

 

Other assets

 

 

15,425,215

 

 

 

9,575,274

 

Total assets

 

$1,026,884,950

 

 

$1,019,105,799

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Demand, non-interest bearing

 

$210,463,414

 

 

$209,465,151

 

Interest-bearing transaction accounts

 

 

269,907,036

 

 

 

265,513,937

 

Money market funds

 

 

137,639,793

 

 

 

129,728,954

 

Savings

 

 

179,853,917

 

 

 

168,390,905

 

Time deposits, $250,000 and over

 

 

15,433,461

 

 

 

17,463,871

 

Other time deposits

 

 

89,743,528

 

 

 

88,837,135

 

Total deposits

 

 

903,041,149

 

 

 

879,399,953

 

Borrowed funds

 

 

1,300,000

 

 

 

1,300,000

 

Repurchase agreements

 

 

32,254,924

 

 

 

32,609,875

 

Junior subordinated debentures

 

 

12,887,000

 

 

 

12,887,000

 

Accrued interest and other liabilities

 

 

7,862,052

 

 

 

8,148,703

 

Total liabilities

 

 

957,345,125

 

 

 

934,345,531

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

Preferred stock, 1,000,000 shares authorized, 15 shares issued and outstanding at 09/30/22 and 12/31/21 (100,000 liquidation value, per share)

 

 

1,500,000

 

 

 

1,500,000

 

Common stock - $2.50 par value; 15,000,000 shares authorized, 5,628,909 shares issued at 09/30/22 and 5,587,939 shares issued at 12/31/21

 

 

14,072,273

 

 

 

13,969,848

 

Additional paid-in capital

 

 

36,117,612

 

 

 

35,322,063

 

Retained earnings

 

 

43,032,064

 

 

 

37,758,105

 

Accumulated other comprehensive loss

 

 

(22,559,347)

 

 

(1,166,971)

Less: treasury stock, at cost; 210,101 shares at 09/30/22 and 12/31/21

 

 

(2,622,777)

 

 

(2,622,777)

Total shareholders' equity

 

 

69,539,825

 

 

 

84,760,268

 

Total liabilities and shareholders' equity

 

$1,026,884,950

 

 

$1,019,105,799

 

 

 

 

 

 

 

 

 

 

Book value per common share outstanding

 

$12.56

 

 

$15.48

 

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

 
3

Table of Contents

 

Community Bancorp. and Subsidiary

 

Three Months Ended September 30,

 

Consolidated Statements of Income

 

2022

 

 

2021

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

Interest and fees on loans

 

$8,182,209

 

 

$8,778,173

 

Interest on taxable debt securities

 

 

799,856

 

 

 

325,002

 

Interest on tax-exempt debt securities

 

 

68,155

 

 

 

0

 

Dividends

 

 

23,029

 

 

 

14,666

 

Interest on federal funds sold and overnight deposits

 

 

358,907

 

 

 

92,923

 

Total interest income

 

 

9,432,156

 

 

 

9,210,764

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

Interest on deposits

 

 

837,983

 

 

 

594,327

 

Interest on borrowed funds

 

 

21,363

 

 

 

19,721

 

Interest on repurchase agreements

 

 

45,153

 

 

 

16,871

 

Interest on junior subordinated debentures

 

 

154,091

 

 

 

97,776

 

Total interest expense

 

 

1,058,590

 

 

 

728,695

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

8,373,566

 

 

 

8,482,069

 

Provision for loan losses

 

 

125,000

 

 

 

89,167

 

Net interest income after provision for loan losses

 

 

8,248,566

 

 

 

8,392,902

 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Service fees

 

 

939,807

 

 

 

882,688

 

Income from sold loans

 

 

109,411

 

 

 

242,560

 

Other income from loans

 

 

301,710

 

 

 

223,388

 

Other income

 

 

180,675

 

 

 

351,950

 

Total non-interest income

 

 

1,531,603

 

 

 

1,700,586

 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and wages

 

 

1,984,000

 

 

 

2,002,999

 

Employee benefits

 

 

629,681

 

 

 

811,817

 

Occupancy expenses, net

 

 

677,805

 

 

 

743,219

 

Other expenses

 

 

2,049,423

 

 

 

1,973,822

 

Total non-interest expense

 

 

5,340,909

 

 

 

5,531,857

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

4,439,260

 

 

 

4,561,631

 

Income tax expense

 

 

828,754

 

 

 

862,429

 

Net income

 

$3,610,506

 

 

$3,699,202

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

$0.66

 

 

$0.69

 

Weighted average number of common shares used in computing earnings per share

 

 

5,409,612

 

 

 

5,354,187

 

Dividends declared per common share

 

$0.23

 

 

$0.22

 

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

 
4

Table of Contents

 

Community Bancorp. and Subsidiary

 

Nine Months Ended September 30,

 

Consolidated Statements of Income

 

2022

 

 

2021

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

Interest and fees on loans

 

$23,300,119

 

 

$24,919,892

 

Interest on taxable debt securities

 

 

2,192,540

 

 

 

883,846

 

Interest on tax-exempt debt securities

 

 

112,890

 

 

 

0

 

Dividends

 

 

56,121

 

 

 

40,265

 

Interest on federal funds sold and overnight deposits

 

 

609,532

 

 

 

260,811

 

Total interest income

 

 

26,271,202

 

 

 

26,104,814

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

Interest on deposits

 

 

1,975,401

 

 

 

1,930,664

 

Interest on borrowed funds

 

 

64,993

 

 

 

49,111

 

Interest on repurchase agreements

 

 

88,322

 

 

 

72,822

 

Interest on junior subordinated debentures

 

 

373,506

 

 

 

296,486

 

Total interest expense

 

 

2,502,222

 

 

 

2,349,083

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

23,768,980

 

 

 

23,755,731

 

Provision for loan losses

 

 

1,325,000

 

 

 

624,165

 

Net interest income after provision for loan losses

 

 

22,443,980

 

 

 

23,131,566

 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Service fees

 

 

2,739,076

 

 

 

2,527,943

 

Income from sold loans

 

 

508,795

 

 

 

704,627

 

Other income from loans

 

 

895,884

 

 

 

653,377

 

Other income

 

 

708,574

 

 

 

1,155,405

 

Total non-interest income

 

 

4,852,329

 

 

 

5,041,352

 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and wages

 

 

6,058,000

 

 

 

5,923,001

 

Employee benefits

 

 

2,106,356

 

 

 

2,467,237

 

Occupancy expenses, net

 

 

2,104,346

 

 

 

2,140,141

 

Other expenses

 

 

5,960,259

 

 

 

5,635,925

 

Total non-interest expense

 

 

16,228,961

 

 

 

16,166,304

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

11,067,348

 

 

 

12,006,614

 

Income tax expense

 

 

2,030,148

 

 

 

2,235,305

 

Net income

 

$9,037,200

 

 

$9,771,309

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

$1.67

 

 

$1.82

 

Weighted average number of common shares used in computing earnings per share

 

 

5,396,215

 

 

 

5,338,481

 

Dividends declared per common share

 

$0.69

 

 

$0.66

 

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

 
5

Table of Contents

 

Community Bancorp. and Subsidiary

 

 

 

 

 

 

Consolidated Statements of Comprehensive (Loss) Income

 

 

 

 

 

 

(Unaudited)

 

Three Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Net income

 

$3,610,506

 

 

$3,699,202

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

Unrealized holding loss on securities AFS arising during the period

 

 

(8,978,128)

 

 

(475,176)

Tax effect

 

 

1,885,407

 

 

 

99,786

 

Other comprehensive loss, net of tax

 

 

(7,092,721)

 

 

(375,390)

Total comprehensive (loss) income

 

$

(3,482,215

)

 

$3,323,812

 

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Net income

 

$9,037,200

 

 

$9,771,309

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

Unrealized holding loss on securities AFS arising during the period

 

 

(27,078,956)

 

 

(1,515,004)

Tax effect

 

 

5,686,580

 

 

 

318,151

 

Other comprehensive loss, net of tax

 

 

(21,392,376)

 

 

(1,196,853)

Total comprehensive (loss) income

 

$

(12,355,176

)

 

$8,574,456

 

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

 
6

Table of Contents

 

Community Bancorp. and Subsidiary

Consolidated Statements of Changes in Shareholders' Equity

(Unaudited)

 

 

 

Nine Months Ended September 30, 2022

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common

 

 

Preferred

 

 

paid-in

 

 

Retained

 

 

 

 

 

Treasury

 

 

shareholders'

 

 

 

Stock

 

 

Stock

 

 

capital

 

 

earnings

 

 

AOCI*

 

 

stock

 

 

equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2022

 

$13,969,848

 

 

$1,500,000

 

 

$35,322,063

 

 

$37,758,105

 

 

$(1,166,971)

 

$(2,622,777)

 

$84,760,268

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

35,597

 

 

 

 

 

 

 

237,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

272,683

 

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,236,880)

 

 

 

 

 

 

 

 

 

 

(1,236,880)

Preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,188)

 

 

 

 

 

 

 

 

 

 

(12,188)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,405,542

 

 

 

 

 

 

 

 

 

 

 

2,405,542

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,744,637)

 

 

 

 

 

 

(8,744,637)

March 31, 2022

 

$14,005,445

 

 

$1,500,000

 

 

$35,559,149

 

 

$38,914,579

 

 

$(9,911,608)

 

$(2,622,777)

 

$77,444,788

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

33,048

 

 

 

 

 

 

 

287,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

320,930

 

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,240,049)

 

 

 

 

 

 

 

 

 

 

(1,240,049)

Preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,124)

 

 

 

 

 

 

 

 

 

 

(13,124)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,021,152

 

 

 

 

 

 

 

 

 

 

 

3,021,152

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,555,018)

 

 

 

 

 

 

(5,555,018)

June 30, 2022

 

$14,038,493

 

 

$1,500,000

 

 

$35,847,031

 

 

$40,682,558

 

 

$(15,466,626)

 

$(2,622,777)

 

$73,978,679

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

33,780

 

 

 

 

 

 

 

270,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

304,361

 

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,243,187)

 

 

 

 

 

 

 

 

 

 

(1,243,187)

Preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,813)

 

 

 

 

 

 

 

 

 

 

(17,813)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,610,506

 

 

 

 

 

 

 

 

 

 

 

3,610,506

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,092,721)

 

 

 

 

 

 

(7,092,721)

September 30, 2022

 

$14,072,273

 

 

$1,500,000

 

 

$36,117,612

 

 

$43,032,064

 

 

$(22,559,347)

 

$(2,622,777)

 

$69,539,825

 

 

*Accumulated other comprehensive loss

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

 
7

Table of Contents

 

Community Bancorp. and Subsidiary

Consolidated Statements of Changes in Shareholders' Equity

(Unaudited)

 

 

 

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

Total

 

 

 

Common

 

 

Preferred

 

 

paid-in

 

 

Retained

 

 

 

 

Treasury

 

 

shareholders'

 

 

 

Stock

 

 

Stock

 

 

capital

 

 

earnings

 

 

AOCI*

 

 

stock

 

 

equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2021

 

$13,818,450

 

 

$1,500,000

 

 

$34,309,646

 

 

$29,368,046

 

 

$915,348

 

$

(2,622,777)

 

 

$77,288,713

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

42,523

 

 

 

 

 

 

 

222,256

 

 

 

 

 

 

 

 

 

 

 

 

 

 

264,779

 

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,169,555)

 

 

 

 

 

 

 

 

 

(1,169,555)

Preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,188)

 

 

 

 

 

 

 

 

 

(12,188)

Redemption of preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,025,701

 

 

 

 

 

 

 

 

 

 

3,025,701

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,311,905)

 

 

 

 

 

(1,311,905)

March 31, 2021

 

$13,860,973

 

 

$1,500,000

 

 

$34,531,902

 

 

$31,212,004

 

 

$(396,557)

 

$(2,622,777)

 

$78,085,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

38,695

 

 

 

 

 

 

 

251,441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

290,136

 

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,173,253)

 

 

 

 

 

 

 

 

 

 

(1,173,253)

Preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,187)

 

 

 

 

 

 

 

 

 

 

(12,187)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,046,406

 

 

 

 

 

 

 

 

 

 

 

3,046,406

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

490,442

 

 

 

 

 

 

 

490,442

 

June 30, 2021

 

$13,899,668

 

 

$1,500,000

 

 

$34,783,343

 

 

$33,072,970

 

 

$93,885

 

 

$(2,622,777)

 

$80,727,089

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

38,017

 

 

 

 

 

 

 

314,743

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

352,760

 

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,176,771)

 

 

 

 

 

 

 

 

 

 

(1,176,771)

Preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,188)

 

 

 

 

 

 

 

 

 

 

(12,188)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,699,202

 

 

 

 

 

 

 

 

 

 

 

3,699,202

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(375,390)

 

 

 

 

 

 

(375,390)

September 30, 2021

 

$13,937,685

 

 

$1,500,000

 

 

$35,098,086

 

 

$35,583,213

 

 

$(281,505)

 

$(2,622,777)

 

$83,214,702

 

 

*Accumulated other comprehensive income (loss)

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

 
8

Table of Contents

 

Community Bancorp. and Subsidiary

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

 

(Unaudited)

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income

 

$9,037,200

 

 

$9,771,309

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization, bank premises and equipment

 

 

853,685

 

 

 

815,454

 

Provision for loan losses

 

 

1,325,000

 

 

 

624,165

 

Deferred income tax

 

 

(38,020)

 

 

(75,779)

Gain on sale of loans

 

 

(218,501)

 

 

(404,428)

Gain on sale of bank premises and equipment

 

 

0

 

 

 

(7,559)

Capital loss on leases

 

 

0

 

 

 

63,125

 

Income from CFS Partners

 

 

(386,217)

 

 

(834,781)

Amortization of bond premium, net

 

 

518,833

 

 

 

355,461

 

Proceeds from sales of loans held for sale

 

 

10,456,242

 

 

 

6,487,773

 

Originations of loans held for sale

 

 

(10,028,741)

 

 

(6,002,945)

Increase (decrease) in taxes payable

 

 

251,872

 

 

 

(376,202)

(Increase) decrease in interest receivable

 

 

(309,185)

 

 

257,562

 

Decrease in mortgage servicing rights

 

 

17,084

 

 

 

23,797

 

Decrease in right-of-use assets

 

 

149,011

 

 

 

147,125

 

Decrease in operating lease liabilities

 

 

(153,871)

 

 

(147,616)

Increase in other assets

 

 

(209,618)

 

 

(141,037)

Increase in cash surrender value of BOLI

 

 

(60,433)

 

 

(63,961)

Amortization of limited partnerships

 

 

201,537

 

 

 

272,286

 

Change in net deferred loan fees and costs

 

 

(504,574)

 

 

(46,463)

Decrease in interest payable

 

 

(25,558)

 

 

(29,252)

Decrease in accrued expenses

 

 

(4,198)

 

 

(126,996)

Increase (decrease) in other liabilities

 

 

12,439

 

 

 

(40,317)

Net cash provided by operating activities

 

 

10,883,987

 

 

 

10,520,722

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Investments - AFS

 

 

 

 

 

 

 

 

Maturities, calls, pay downs and sales

 

 

14,994,113

 

 

 

14,130,683

 

Purchases

 

 

(47,476,763)

 

 

(65,972,109)

Proceeds from redemption of restricted equity securities

 

 

43,500

 

 

 

0

 

Purchases of restricted equity securities

 

 

0

 

 

 

(600)

Decrease in limited partnership contributions payable

 

 

0

 

 

 

(150,000)

Proceeds from distribution from CFS Partners

 

 

0

 

 

 

2,000,000

 

(Increase) decrease in loans, net

 

 

(34,956,148)

 

 

16,630,097

 

Capital expenditures net of proceeds from sales of bank premises and equipment

 

 

(398,378)

 

 

(782,522)

Recoveries of loans charged off

 

 

147,510

 

 

 

73,515

 

Net cash used in investing activities

 

 

(67,646,166)

 

 

(34,070,936)

 

 
9

Table of Contents

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

Net increase in demand and interest-bearing transaction accounts

 

 

5,391,362

 

 

 

24,030,973

 

Net increase in money market and savings accounts

 

 

19,373,851

 

 

 

39,467,248

 

Net decrease in time deposits

 

 

(1,124,017)

 

 

(5,694,301)

Net decrease in repurchase agreements

 

 

(354,951)

 

 

(16,375,099)

Repayments on long-term borrowings

 

 

0

 

 

 

(500,000)

Decrease in finance lease obligations

 

 

(159,333)

 

 

(144,774)

Dividends paid on preferred stock

 

 

(43,125)

 

 

(36,563)

Dividends paid on common stock

 

 

(2,778,271)

 

 

(2,495,153)

Net cash provided by financing activities

 

 

20,242,277

 

 

 

38,252,331

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(36,456,663)

 

 

14,702,116

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Beginning

 

 

110,358,926

 

 

 

115,049,920

 

Ending

 

$73,902,263

 

 

$129,752,036

 

 

 

 

 

 

 

 

 

 

Supplemental Schedule of Cash Paid During the Period:

 

 

 

 

 

 

 

 

Interest

 

$2,527,780

 

 

$2,378,335

 

 

 

 

 

 

 

 

 

 

Income taxes, net of refunds

 

$1,614,759

 

 

$2,415,000

 

 

 

 

 

 

 

 

 

 

Supplemental Schedule of Noncash Investing and Financing Activities:

 

 

 

 

 

 

 

 

Change in unrealized loss on securities AFS

 

$

(27,078,956

 

$

(1,515,004

 

 

 

 

 

 

 

 

 

Additions to finance lease obligations

 

$0

 

 

$3,955,252

 

 

 

 

 

 

 

 

 

 

Common Shares Dividends Paid:

 

 

 

 

 

 

 

 

Dividends declared

 

$3,720,116

 

 

$3,519,579

 

Increase in dividends payable attributable to dividends declared

 

 

(43,871)

 

 

(116,751)

Dividends reinvested

 

 

(897,974)

 

 

(907,675)

Total dividends paid

 

$2,778,271

 

 

$2,495,153

 

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

 
10

Table of Contents

 

Notes to Consolidated Financial Statements

 

Note 1.  Basis of Presentation and Consolidation and Certain Definitions

 

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, 2021 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 any other interim period or the full annual period ending December 31, 2022.

 

Certain amounts disclosed in the Notes below for the 2021 annual and three- and nine-month periods of 2021 have been reclassified to conform to the current year presentation.

 

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 provides smaller reporting company scaled disclosures where management deems it appropriate.

 

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:

Asset backed security

FDIC:

Federal Deposit Insurance Corporation

AFS:

Available-for-sale

FHLBB:

Federal Home Loan Bank of Boston

Agency MBS:

MBS issued by a US government agency

FHLMC:

Federal Home Loan Mortgage Corporation

or GSE

FOMC:

Federal Open Market Committee

ALCO:

Asset Liability Committee

FRB:

Federal Reserve Board

ALL:

Allowance for loan losses

FRBB:

Federal Reserve Bank of Boston

AOCI:

Accumulated other comprehensive income

GAAP:

Generally Accepted Accounting Principles

ASC:

Accounting Standards Codification

in the United States

ASU:

Accounting Standards Update

GSE:

Government sponsored enterprise

Bancorp:

Community Bancorp.

HTM:

Held-to-maturity

Bank:

Community National Bank

ICS:

Insured Cash Sweeps of the InterFi Network

BIC:

Borrower-in-Custody

IRS:

Internal Revenue Service

Board:

Board of Directors

JNE:

Jobs for New England

BOLI:

Bank owned life insurance

Jr:

Junior

bp or bps:

Basis point(s)

LIBOR

London Interbank Offered Rate

CDARS:

Certificate of Deposit Accounts Registry

MBS:

Mortgage-backed security

Service of the InterFi Network

MSRs:

Mortgage servicing rights

CDs:

Certificates of deposit

NII:

Net interest income

CDI:

Core deposit intangible

OAS:

Other amortizing security

CECL:

Current Expected Credit Loss

OCI:

Other comprehensive income (loss)

CFSG:

Community Financial Services Group, LLC

OREO:

Other real estate owned

CFS Partners:

Community Financial Services Partners,

OTTI:

Other-than-temporary impairment

LLC

PMI:

Private mortgage insurance

CMO

Collateralized Mortgage Obligations

PPP:

Paycheck Protection Program

Company:

Community Bancorp. and Subsidiary

RD:

USDA Rural Development

COVID-19:

Coronavirus Disease 2019

SBA:

U.S. Small Business Administration

CRE:

Commercial Real Estate

SEC:

U.S. Securities and Exchange Commission

DDA or DDAs:

Demand Deposit Account(s)

SOFR:

Secured Overnight Financing Rate

DTC:

Depository Trust Company

TDR:

Troubled-debt restructuring

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

 

 
11

Table of Contents

 

Note 2.  Recent Accounting Developments

 

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 over the life of a loan. 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 over the life of the loans. 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 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 may result in an increase in the ALL upon adoption and may negatively impact the Company’s and the Bank's retained earnings and 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 anticipated impact of the adoption of the ASU on its consolidated financial statements. The ASU will become effective for the Company beginning with the 2023 fiscal year including interim periods. Parallel calculations under the existing ALL methodology and the CECL model are being run throughout 2022 in preparation for the transition to CECL.  Based on the September 30, 2022 parallel calculation, the required adjustment would not have a material impact to retained earnings and regulatory capital.

 

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.  The guidance amends Topic 326 (CECL) to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty.  Specifically, rather than applying TDR recognition and measurement guidance, under the CECL model creditors will determine whether a modification results in a new loan or continuation of existing loan.  These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.  Additionally, the amendments to Topic 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination.  The guidance will become effective for the Company beginning with the fiscal year 2023, including interim periods.  The Company is assessing the impact of ASU No. 2022-02 but does not expect that its adoption will have a material impact on the consolidated financial statements.

 

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and has issued subsequent amendments thereto, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is assessing ASU No. 2020-04 and its impact on the transition away from LIBOR for its Junior Subordinated Debentures due December 15, 2037, the Company’s only financial instruments that utilize LIBOR as a reference rate.

 

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.

 

 
12

Table of Contents

 

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 September 30,

2022

2021

Net income, as reported

$3,610,506$3,699,202

Less: dividends to preferred shareholders

17,81312,188

Net income available to common shareholders

$3,592,693$3,687,014

Weighted average number of common shares

used in calculating earnings per share

5,409,6125,354,187

Earnings per common share

$0.66$0.69

 

Nine Months Ended September 30,

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Net income, as reported

 

$9,037,200

 

 

$9,771,309

 

Less: dividends to preferred shareholders

 

 

43,125

 

 

 

36,563

 

Net income available to common shareholders

 

$8,994,075

 

 

$9,734,746

 

Weighted average number of common shares

 

 

 

 

 

 

 

 

used in calculating earnings per share

 

 

5,396,215

 

 

 

5,338,481

 

Earnings per common share

 

$1.67

 

 

$1.82

 

 

Note 4.  Investment Securities

 

Debt securities AFS as of the balance sheet dates consisted of the following:

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

U.S. GSE debt securities

 

$12,000,000

 

 

$0

 

 

$1,642,690

 

 

$10,357,310

 

U.S. Government securities

 

 

41,409,349

 

 

 

0

 

 

 

3,405,554

 

 

 

38,003,795

 

Taxable Municipal securities

 

 

300,000

 

 

 

0

 

 

 

62,749

 

 

 

237,251

 

Tax-Exempt Municipal securities

 

 

11,695,449

 

 

 

0

 

 

 

1,358,635

 

 

 

10,336,814

 

Agency MBS

 

 

135,295,287

 

 

 

13,719

 

 

 

21,423,964

 

 

 

113,885,042

 

ABS and OAS

 

 

2,929,176

 

 

 

0

 

 

 

245,888

 

 

 

2,683,288

 

CMO

 

 

8,690,193

 

 

 

0

 

 

 

359,280

 

 

 

8,330,913

 

Other investments

 

 

3,464,000

 

 

 

0

 

 

 

71,093

 

 

 

3,392,907

 

Total

 

$215,783,454

 

 

$13,719

 

 

$28,569,853

 

 

$187,227,320

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

U.S. GSE debt securities

 

$12,001,978

 

 

$36,024

 

 

$209,504

 

 

$11,828,498

 

U.S. Government securities

 

 

32,374,935

 

 

 

0

 

 

 

333,894

 

 

 

32,041,041

 

Taxable Municipal securities

 

 

300,000

 

 

 

0

 

 

 

1,267

 

 

 

298,733

 

Tax-Exempt Municipal securities

 

 

830,279

 

 

 

1,167

 

 

 

67

 

 

 

831,379

 

Agency MBS

 

 

128,291,487

 

 

 

184,002

 

 

 

1,342,968

 

 

 

127,132,521

 

ABS and OAS

 

 

2,131,610

 

 

 

82,414

 

 

 

0

 

 

 

2,214,024

 

CMO

 

 

1,451,349

 

 

 

0

 

 

 

30,891

 

 

 

1,420,458

 

Other investments

 

 

6,438,000

 

 

 

142,199

 

 

 

4,394

 

 

 

6,575,805

 

Total

 

$183,819,638

 

 

$445,806

 

 

$1,922,985

 

 

$182,342,459

 

 

 
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Table of Contents

 

Investments pledged as collateral for repurchase agreements consisted of U.S. GSE debt securities, Agency MBS, ABS and OAS, and CMO.  These repurchase agreements mature daily.  These pledged investments as of the balance sheet dates were as follows:

 

 

 

Amortized

 

 

Fair

 

 

 

Cost

 

 

Value

 

 

 

 

 

 

 

 

September 30, 2022

 

$57,108,669

 

 

$47,466,870

 

December 31, 2021

 

 

63,045,599

 

 

 

62,256,702

 

 

There were no sales of debt securities during the first nine months of 2022 or 2021.

 

The scheduled maturities of debt securities as of the balance sheet dates were as follows:

 

 

 

Amortized

 

 

Fair

 

 

 

Cost

 

 

Value

 

September 30, 2022

 

 

 

 

 

 

Due in one year or less

 

$1,730,000

 

 

$1,725,887

 

Due from one to five years

 

 

53,992,787

 

 

 

49,890,108

 

Due from five to ten years

 

 

10,409,071

 

 

 

9,091,245

 

Due after ten years

 

 

14,356,309

 

 

 

12,635,038

 

Agency MBS

 

 

135,295,287

 

 

 

113,885,042

 

Total

 

$215,783,454

 

 

$187,227,320

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

Due in one year or less

 

$3,470,000

 

 

$3,508,582

 

Due from one to five years

 

 

36,860,731

 

 

 

36,619,130

 

Due from five to ten years

 

 

13,065,163

 

 

 

12,942,726

 

Due after ten years

 

 

2,132,257

 

 

 

2,139,500

 

Agency MBS

 

 

128,291,487

 

 

 

127,132,521

 

Total

 

$183,819,638

 

 

$182,342,459

 

 

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

 

 

Totals

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Number of

 

 

Fair

 

 

Unrealized

 

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

Securities

 

 

Value

 

 

Loss

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. GSE debt securities

 

$5,304,930

 

 

$695,070

 

 

$5,052,380

 

 

$947,620

 

 

 

11

 

 

$10,357,310

 

 

$1,642,690

 

U.S. Government securities

 

 

25,893,729

 

 

 

1,886,208

 

 

 

12,110,066

 

 

 

1,519,346

 

 

 

54

 

 

 

38,003,795

 

 

 

3,405,554

 

Taxable Municipal securities

 

 

237,251

 

 

 

62,749

 

 

 

0

 

 

 

0

 

 

 

1

 

 

 

237,251

 

 

 

62,749

 

Tax-Exempt Municipal securities

 

 

10,336,814

 

 

 

1,358,635

 

 

 

0

 

 

 

0

 

 

 

22

 

 

 

10,336,814

 

 

 

1,358,635

 

Agency MBS

 

 

53,405,680

 

 

 

8,835,995

 

 

 

58,983,039

 

 

 

12,587,969

 

 

 

119

 

 

 

112,388,719

 

 

 

21,423,964

 

ABS and OAS

 

 

2,683,288

 

 

 

245,888

 

 

 

0

 

 

 

0

 

 

 

4

 

 

 

2,683,288

 

 

 

245,888

 

CMO

 

 

7,572,585

 

 

 

276,853

 

 

 

758,328

 

 

 

82,427

 

 

 

8

 

 

 

8,330,913

 

 

 

359,280

 

Other investments

 

 

3,173,963

 

 

 

42,037

 

 

 

218,944

 

 

 

29,056

 

 

 

14

 

 

 

3,392,907

 

 

 

71,093

 

Total

 

$108,608,240

 

 

$13,403,435

 

 

$77,122,757

 

 

$15,166,418

 

 

 

233

 

 

$185,730,997

 

 

$28,569,853

 

 

 
14

Table of Contents

 

 

 

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, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. GSE debt securities

 

$5,869,117

 

 

$130,883

 

 

$1,921,379

 

 

$78,621

 

 

 

7

 

 

$7,790,496

 

 

$209,504

 

U.S. Government securities

 

 

32,041,041

 

 

 

333,894

 

 

 

0

 

 

 

0

 

 

 

46

 

 

 

32,041,041

 

 

 

333,894

 

Taxable Municipal securities

 

 

298,733

 

 

 

1,267

 

 

 

0

 

 

 

0

 

 

 

1

 

 

 

298,733

 

 

 

1,267

 

Tax-Exempt Municipal securities

 

 

330,212

 

 

 

67

 

 

 

0

 

 

 

0

 

 

 

1

 

 

 

330,212

 

 

 

67

 

Agency MBS

 

 

107,061,452

 

 

 

1,128,587

 

 

 

8,809,493

 

 

 

214,381

 

 

 

84

 

 

 

115,870,945

 

 

 

1,342,968

 

CMO

 

 

1,420,458

 

 

 

30,891

 

 

 

0

 

 

 

0

 

 

 

3

 

 

 

1,420,458

 

 

 

30,891

 

Other investments

 

 

491,606

 

 

 

4,394

 

 

 

0

 

 

 

0

 

 

 

2

 

 

 

491,606

 

 

 

4,394

 

Total

 

$147,512,619

 

 

$1,629,983

 

 

$10,730,872

 

 

$293,002

 

 

 

144

 

 

$158,243,491

 

 

$1,922,985

 

 

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 its debt 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 September 30, 2022 and December 31, 2021, 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:

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Commercial & industrial

 

$121,224,062

 

 

$111,125,622

 

Purchased loans

 

 

8,078,281

 

 

 

9,807,848

 

Commercial real estate

 

 

324,327,160

 

 

 

300,958,931

 

Municipal

 

 

40,164,698

 

 

 

47,955,231

 

Residential real estate - 1st lien

 

 

192,566,579

 

 

 

181,316,345

 

Residential real estate - Jr lien

 

 

33,773,471

 

 

 

34,359,864

 

Consumer

 

 

4,059,750

 

 

 

4,464,692

 

Total loans

 

 

724,194,001

 

 

 

689,988,533

 

 

 

 

 

 

 

 

 

 

ALL

 

 

(8,432,086)

 

 

(7,710,256)

Deferred net loan costs (fees)

 

 

466,602

 

 

 

(37,972)

Net loans

 

$716,228,517

 

 

$682,240,305

 

 

 
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Table of Contents

 

The following is an age analysis of past due loans (including non-accrual) as of the balance sheet dates, by portfolio segment: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

90 Days or

 

 

 

 

 

 

90 Days

 

 

Total

 

 

 

 

 

 

 

 

Accrual

 

 

More and

 

September 30, 2022

 

30-89 Days

 

 

or More

 

 

Past Due

 

 

Current

 

 

Total Loans

 

 

Loans

 

 

Accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

$1,335,118

 

 

$29,375

 

 

$1,364,493

 

 

$119,859,569

 

 

$121,224,062

 

 

$3,422,395

 

 

$0

 

Purchased loans

 

 

0

 

 

 

0

 

 

 

0

 

 

 

8,078,281

 

 

 

8,078,281

 

 

 

0

 

 

 

0

 

Commercial real estate

 

 

653,091

 

 

 

1,834,037

 

 

 

2,487,128

 

 

 

321,840,032

 

 

 

324,327,160

 

 

 

3,814,958

 

 

 

222,998

 

Municipal

 

 

0

 

 

 

0

 

 

 

0

 

 

 

40,164,698

 

 

 

40,164,698

 

 

 

0

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 1st lien

 

 

452,927

 

 

 

655,316

 

 

 

1,108,243

 

 

 

191,458,336

 

 

 

192,566,579

 

 

 

1,231,602

 

 

 

369,172

 

- Jr lien

 

 

291,722

 

 

 

152,160

 

 

 

443,882

 

 

 

33,329,589

 

 

 

33,773,471

 

 

 

133,776

 

 

 

152,160

 

Consumer

 

 

10,364

 

 

 

0

 

 

 

10,364

 

 

 

4,049,386

 

 

 

4,059,750

 

 

 

0

 

 

 

0

 

Totals

 

$2,743,222

 

 

$2,670,888

 

 

$5,414,110

 

 

$718,779,891

 

 

$724,194,001

 

 

$8,602,731

 

 

$744,330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

90 Days or

 

 

 

 

 

 

90 Days

 

 

Total

 

 

 

 

 

 

 

 

Accrual

 

 

More and

 

December 31, 2021

 

30-89 Days

 

 

or More

 

 

Past Due

 

 

Current

 

 

Total Loans

 

 

Loans

 

 

Accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

$833,875

 

 

$0

 

 

$833,875

 

 

$110,291,747

 

 

$111,125,622

 

 

$98,661

 

 

$0

 

Purchased loans

 

 

0

 

 

 

0

 

 

 

0

 

 

 

9,807,848

 

 

 

9,807,848

 

 

 

0

 

 

 

0

 

Commercial real estate

 

 

49,450

 

 

 

2,400,514

 

 

 

2,449,964

 

 

 

298,508,967

 

 

 

300,958,931

 

 

 

4,517,839

 

 

 

0

 

Municipal

 

 

0

 

 

 

0

 

 

 

0

 

 

 

47,955,231

 

 

 

47,955,231

 

 

 

0

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 1st lien

 

 

1,190,300

 

 

 

608,775

 

 

 

1,799,075

 

 

 

179,517,270

 

 

 

181,316,345

 

 

 

1,180,563

 

 

 

506,827

 

- Jr lien

 

 

51,837

 

 

 

86,476

 

 

 

138,313

 

 

 

34,221,551

 

 

 

34,359,864

 

 

 

143,566

 

 

 

86,476

 

Consumer

 

 

9,741

 

 

 

0

 

 

 

9,741

 

 

 

4,454,951

 

 

 

4,464,692

 

 

 

0

 

 

 

0

 

Totals

 

$2,135,203

 

 

$3,095,765

 

 

$5,230,968

 

 

$684,757,565

 

 

$689,988,533

 

 

$5,940,629

 

 

$593,303

 

 

For all loan segments, loans over 30 days past due are considered delinquent.

 

As of the balance sheet dates presented, loans in process of foreclosure consisted of the following residential mortgage loans:

 

 

 

Number of loans

 

 

Balance

 

 

 

 

 

 

 

 

September 30, 2022

 

 

2

 

 

$151,645

 

December 31, 2021

 

 

5

 

 

 

195,082

 

 

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 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.

 

 
16

Table of Contents

 

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, purchased loans, 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 using appropriate 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.  Due primarily to the effects of COVID-19, during 2020 the Company shortened its look back period to one year, however, as of March 31, 2022, the look back period was changed to two 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.

 

Purchased Loans – Loans in this segment are loans purchased through a loan purchasing program with Bankers Healthcare Group (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.

 

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 – 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.

 

 
17

Table of Contents

 

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.

 

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 loans 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.  Under March 2020 guidance from the federal banking agencies and concurrence by the FASB, certain short-term loan accommodations made in good faith prior to January 1, 2022 for borrowers experiencing financial difficulties due to the COVID-19 health emergency are not considered TDRs.

 

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. 

 

 
18

Table of Contents

 

As of or for the three months ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

Purchased

 

 

Commercial

 

 

 

 

 

Real Estate

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

& Industrial

 

 

Loans

 

 

Real Estate

 

 

Municipal

 

 

1st Lien

 

 

Jr Lien

 

 

Consumer

 

 

Unallocated

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL beginning balance

 

$1,107,248

 

 

$59,822

 

 

$4,808,324

 

 

$58,319

 

 

$1,845,508

 

 

$181,214

 

 

$41,556

 

 

$130,782

 

 

$8,232,773

 

Charge-offs

 

 

(26,922)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(14,915)

 

 

0

 

 

 

(41,837)

Recoveries

 

 

10,407

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

98,600

 

 

 

1,298

 

 

 

5,845

 

 

 

0

 

 

 

116,150

 

Provision (credit)

 

 

794

 

 

 

(3,274)

 

 

95,775

 

 

 

13,977

 

 

 

(130,711)

 

 

232

 

 

 

20,434

 

 

 

127,773

 

 

 

125,000

 

ALL ending balance

 

$1,091,527

 

 

$56,548

 

 

$4,904,099

 

 

$72,296

 

 

$1,813,397

 

 

$182,744

 

 

$52,920

 

 

$258,555

 

 

$8,432,086

 

 

As of or for the nine months ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

Purchased

 

 

Commercial

 

 

 

 

 

Real Estate

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

& Industrial

 

 

Loans

 

 

Real Estate

 

 

Municipal

 

 

1st Lien

 

 

Jr Lien

 

 

Consumer

 

 

Unallocated

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL beginning balance

 

$870,392

 

 

$68,655

 

 

$4,151,760

 

 

$76,728

 

 

$1,765,892

 

 

$182,014

 

 

$55,698

 

 

$539,117

 

 

$7,710,256

 

Charge-offs

 

 

(47,500)

 

 

0

 

 

 

(667,474)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(35,706)

 

 

0

 

 

 

(750,680)

Recoveries

 

 

12,862

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

111,163

 

 

 

3,728

 

 

 

19,757

 

 

 

0

 

 

 

147,510

 

Provision (credit)

 

 

255,773

 

 

 

(12,107)

 

 

1,419,813

 

 

 

(4,432)

 

 

(63,658)

 

 

(2,998)

 

 

13,171

 

 

 

(280,562)

 

 

1,325,000

 

ALL ending balance

 

$1,091,527

 

 

$56,548

 

 

$4,904,099

 

 

$72,296

 

 

$1,813,397

 

 

$182,744

 

 

$52,920

 

 

$258,555

 

 

$8,432,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL evaluated for impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$4,259

 

 

$0

 

 

$8,867

 

 

$0

 

 

$96,784

 

 

$4

 

 

$0

 

 

$0

 

 

$109,914

 

Collectively

 

 

1,087,268

 

 

 

56,548

 

 

 

4,895,232

 

 

 

72,296

 

 

 

1,716,613

 

 

 

182,740

 

 

 

52,920

 

 

 

258,555

 

 

 

8,322,172

 

Total

 

$1,091,527

 

 

$56,548

 

 

$4,904,099

 

 

$72,296

 

 

$1,813,397

 

 

$182,744

 

 

$52,920

 

 

$258,555

 

 

$8,432,086

 

 

Loans evaluated for impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$3,408,207

 

 

$0

 

 

$3,812,657

 

 

$0

 

 

$3,670,995

 

 

$79,742

 

 

$0

 

 

 

 

 

 

$10,971,601

 

Collectively

 

 

117,815,855

 

 

 

8,078,281

 

 

 

320,514,503

 

 

 

40,164,698

 

 

 

188,895,584

 

 

 

33,693,729

 

 

 

4,059,750

 

 

 

 

 

 

 

713,222,400

 

Total

 

$121,224,062

 

 

$8,078,281

 

 

$324,327,160

 

 

$40,164,698

 

 

$192,566,579

 

 

$33,773,471

 

 

$4,059,750

 

 

 

 

 

 

$724,194,001

 

 

As of or for the year ended December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

Purchased

 

 

Commercial

 

 

 

 

 

Real Estate

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

& Industrial

 

 

Loans

 

 

Real Estate

 

 

Municipal

 

 

1st Lien

 

 

Jr Lien

 

 

Consumer

 

 

Unallocated

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL beginning balance

 

$778,287

 

 

$64,260

 

 

$3,854,153

 

 

$82,211

 

 

$1,735,304

 

 

$234,896

 

 

$60,461

 

 

$398,913

 

 

$7,208,485

 

Charge-offs

 

 

(18,847)

 

 

0

 

 

 

(22,000)

 

 

0

 

 

 

(98,704)

 

 

0

 

 

 

(87,651)

 

 

0

 

 

 

(227,202)

Recoveries

 

 

4,761

 

 

 

0

 

 

 

27,160

 

 

 

0

 

 

 

7,636

 

 

 

10,821

 

 

 

54,430

 

 

 

0

 

 

 

104,808

 

Provision (credit)

 

 

106,191

 

 

 

4,395

 

 

 

292,447

 

 

 

(5,483)

 

 

121,656

 

 

 

(63,703)

 

 

28,458

 

 

 

140,204

 

 

 

624,165

 

ALL ending balance

 

$870,392

 

 

$68,655

 

 

$4,151,760

 

 

$76,728

 

 

$1,765,892

 

 

$182,014

 

 

$55,698

 

 

$539,117

 

 

$7,710,256

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL evaluated for impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$0

 

 

$0

 

 

$0

 

 

$0

 

 

$79,978

 

 

$0

 

 

$0

 

 

$0

 

 

$79,978

 

Collectively

 

 

870,392

 

 

 

68,655

 

 

 

4,151,760

 

 

 

76,728

 

 

 

1,685,914

 

 

 

182,014

 

 

 

55,698

 

 

 

539,117

 

 

 

7,630,278

 

Total

 

$870,392

 

 

$68,655

 

 

$4,151,760

 

 

$76,728

 

 

$1,765,892

 

 

$182,014

 

 

$55,698

 

 

$539,117

 

 

$7,710,256

 

 

Loans evaluated for impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$93,362

 

 

$0

 

 

$4,553,734

 

 

$0

 

 

$3,720,503

 

 

$88,563

 

 

$0

 

 

 

 

 

 

$8,456,162

 

Collectively

 

 

111,032,260

 

 

 

9,807,848

 

 

 

296,405,197

 

 

 

47,955,231

 

 

 

177,595,842

 

 

 

34,271,301

 

 

 

4,464,692

 

 

 

 

 

 

 

681,532,371

 

Total

 

$111,125,622

 

 

$9,807,848

 

 

$300,958,931

 

 

$47,955,231

 

 

$181,316,345

 

 

$34,359,864

 

 

$4,464,692

 

 

 

 

 

 

$689,988,533

 

 

 
19

Table of Contents

 

As of or for the three months ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

Purchased

 

 

Commercial

 

 

 

 

 

Real Estate

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

& Industrial

 

 

Loans

 

 

Real Estate

 

 

Municipal

 

 

1st Lien

 

 

Jr Lien

 

 

Consumer

 

 

Unallocated

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL beginning balance

 

$823,737

 

 

$75,426

 

 

$3,932,846

 

 

$57,292

 

 

$1,655,042

 

 

$201,269

 

 

$61,224

 

 

$912,420

 

 

$7,719,256

 

Charge-offs

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(30,638)

 

 

0

 

 

 

(30,638)

Recoveries

 

 

0

 

 

 

0

 

 

 

20,162

 

 

 

0

 

 

 

2,275

 

 

 

8,641

 

 

 

10,444

 

 

 

0

 

 

 

41,522

 

Provision (credit)

 

 

6,485

 

 

 

(3,284)

 

 

(56,471)

 

 

28,748

 

 

 

(10,532)

 

 

(20,684)

 

 

37,843

 

 

 

107,062

 

 

 

89,167

 

ALL ending balance

 

$830,222

 

 

$72,142

 

 

$3,896,537

 

 

$86,040

 

 

$1,646,785

 

 

$189,226

 

 

$78,873

 

 

$1,019,482

 

 

$7,819,307

 

 

As of or for the nine months ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

Purchased

 

 

Commercial

 

 

 

 

 

Real Estate

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

& Industrial

 

 

Loans

 

 

Real Estate

 

 

Municipal

 

 

1st Lien

 

 

Jr Lien

 

 

Consumer

 

 

Unallocated

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL beginning balance

 

$778,287

 

 

$64,260

 

 

$3,854,153

 

 

$82,211

 

 

$1,735,304

 

 

$234,896

 

 

$60,461

 

 

$398,913

 

 

$7,208,485

 

Charge-offs

 

 

(18,847)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(68,011)

 

 

0

 

 

 

(86,858)

Recoveries

 

 

4,761

 

 

 

0

 

 

 

27,160

 

 

 

0

 

 

 

4,602

 

 

 

9,601

 

 

 

27,391

 

 

 

0

 

 

 

73,515

 

Provision (credit)

 

 

66,021

 

 

 

7,882

 

 

 

15,224

 

 

 

3,829

 

 

 

(93,121)

 

 

(55,271)

 

 

59,032

 

 

 

620,569

 

 

 

624,165

 

ALL ending balance

 

$830,222

 

 

$72,142

 

 

$3,896,537

 

 

$86,040

 

 

$1,646,785

 

 

$189,226

 

 

$78,873

 

 

$1,019,482

 

 

$7,819,307

 

 

Impaired loans, by portfolio segment, were as follows:

 

 

 

As of September 30, 2022

 

 

 

 

 

 

Unpaid

 

 

 

 

 

 

Recorded

 

 

Principal

 

 

Related

 

 

 

Investment(1)

 

 

Balance

 

 

Allowance

 

 

 

 

 

 

 

 

 

 

 

Related allowance recorded

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

$954,098

 

 

$965,266

 

 

$4,259

 

Commercial real estate

 

 

249,709

 

 

 

252,806

 

 

 

8,867

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1st lien

 

 

1,172,194

 

 

 

1,192,445

 

 

 

96,784

 

Jr lien

 

 

2,532

 

 

 

2,529

 

 

 

4

 

Total with related allowance

 

 

2,378,533

 

 

 

2,413,046

 

 

 

109,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

2,454,109

 

 

 

2,525,175

 

 

 

 

 

Commercial real estate

 

 

3,563,089

 

 

 

4,751,499

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1st lien

 

 

2,511,284

 

 

 

3,515,246

 

 

 

 

 

Jr lien

 

 

77,213

 

 

 

124,795

 

 

 

 

 

Total with no related allowance

 

 

8,605,695

 

 

 

10,916,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans

 

$10,984,228

 

 

$13,329,761

 

 

$109,914

 

 

(1)

Recorded investment in impaired loans as of September 30, 2022 includes accrued interest receivable of $12,627.

 

 
20

Table of Contents

 

 

 

As of September 30, 2022

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

Average

 

 

Interest

 

 

Average

 

 

Interest

 

 

 

Recorded

 

 

Income

 

 

Recorded

 

 

Income

 

 

 

Investment

 

 

Recognized

 

 

Investment

 

 

Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

$477,049

 

 

$0

 

 

$238,525

 

 

$0

 

Commercial real estate

 

 

124,854

 

 

 

0

 

 

 

62,427

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1st lien

 

 

1,031,145

 

 

 

31,349

 

 

 

969,497

 

 

 

58,306

 

Jr lien

 

 

1,266

 

 

 

147

 

 

 

633

 

 

 

247

 

Total with related allowance

 

 

1,634,314

 

 

 

31,496

 

 

 

1,271,082

 

 

 

58,553

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

1,299,959

 

 

 

0

 

 

 

728,879

 

 

 

204

 

Commercial real estate

 

 

3,479,786

 

 

 

72,754

 

 

 

3,806,739

 

 

 

74,245

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1st lien

 

 

2,686,280

 

 

 

27,154

 

 

 

2,814,818

 

 

 

119,663

 

Jr lien

 

 

79,809

 

 

 

0

 

 

 

83,471

 

 

 

0

 

Total with no related allowance

 

 

7,545,834

 

 

 

99,908

 

 

 

7,433,907

 

 

 

194,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans

 

$9,180,148

 

 

$131,404

 

 

$8,704,989

 

 

$252,665

 

 

 

 

As of December 31, 2021

 

 

 

 

 

 

Unpaid

 

 

 

 

 

 

Recorded

 

 

Principal

 

 

Related

 

 

 

Investment(1)

 

 

Balance

 

 

Allowance

 

 

 

 

 

 

 

 

 

 

 

Related allowance recorded

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

1st lien

 

$702,586

 

 

$716,118

 

 

$79,978

 

Jr lien

 

 

0

 

 

 

0

 

 

 

0

 

Total with related allowance

 

 

702,586

 

 

 

716,118

 

 

 

79,978

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

93,362

 

 

 

115,414

 

 

 

 

 

Commercial real estate

 

 

4,554,074

 

 

 

5,108,557

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1st lien

 

 

3,050,647

 

 

 

4,076,352

 

 

 

 

 

Jr lien

 

 

88,570

 

 

 

132,802

 

 

 

 

 

Total with no related allowance

 

 

7,786,653

 

 

 

9,433,125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans

 

$8,489,239

 

 

$10,149,243

 

 

$79,978

 

 

(1)

Recorded investment in impaired loans as of December 31, 2021 includes accrued interest receivable and deferred net loan costs of $33,077.

 

 
21

Table of Contents

 

 

 

As of September 30, 2021

 

 

 

 

 

Unpaid

 

 

 

 

 

Recorded

 

 

Principal

 

 

Related

 

 

 

Investment(1)

 

 

Balance

 

 

Allowance

 

 

 

 

 

 

 

 

 

 

 

Related allowance recorded

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

1st lien

 

$793,401

 

 

$804,655

 

 

$88,874

 

Jr lien

 

 

3,836

 

 

 

3,833

 

 

 

159

 

Total with related allowance

 

 

797,237

 

 

 

808,488

 

 

 

89,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

140,098

 

 

 

161,331

 

 

 

 

 

Commercial real estate

 

 

3,711,470

 

 

 

4,210,006

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1st lien

 

 

3,094,255

 

 

 

3,991,516

 

 

 

 

 

Jr lien

 

 

130,551

 

 

 

176,460

 

 

 

 

 

Total with no related allowance

 

 

7,076,374

 

 

 

8,539,313

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Total impaired loans

 

$7,873,611

 

 

$9,347,801

 

 

$89,033

 

 

(1)

Recorded investment in impaired loans as of September 30, 2021 includes accrued interest receivable and deferred net loan costs of $34,179.

 

 

 

As of September 30, 2021

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

Average

 

 

Interest

 

 

Average

 

 

Interest

 

 

 

Recorded

 

 

Income

 

 

Recorded

 

 

Income

 

 

 

Investment

 

 

Recognized

 

 

Investment

 

 

Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1st lien

 

$785,752

 

 

$15,682

 

 

$897,008

 

 

$48,200

 

Jr lien

 

 

4,008

 

 

 

104

 

 

 

4,315

 

 

 

332

 

Total with related allowance

 

 

789,760

 

 

 

15,786

 

 

 

901,323

 

 

 

48,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

261,153

 

 

 

0

 

 

 

339,386

 

 

 

204

 

Commercial real estate

 

 

2,795,979

 

 

 

74,162

 

 

 

2,295,473

 

 

 

78,462

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1st lien

 

 

3,253,698

 

 

 

43,926

 

 

 

3,402,302

 

 

 

155,005

 

Jr lien

 

 

133,148

 

 

 

0

 

 

 

133,861

 

 

 

0

 

Total with no related allowance

 

 

6,443,978

 

 

 

118,088

 

 

 

6,171,022

 

 

 

233,671

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans

 

$7,233,738

 

 

$133,874

 

 

$7,072,345

 

 

$282,203

 

 

For all loan segments, the accrual of interest is discontinued when a loan is specifically determined to be impaired or when the loan is delinquent 90 days and management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is considered by management to be doubtful.  Any unpaid interest previously accrued on those loans is reversed from income.  Interest income is generally not recognized on specific impaired loans unless the likelihood of further loss is considered by management to be remote.  Interest payments received on impaired loans are generally applied as a reduction of the loan principal balance.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and a satisfactory payment performance of six or more months has occurred.

 

 
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Table of Contents

 

Credit Quality Grouping

 

In developing the ALL, management uses credit quality groupings 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, including purchased loans, 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.

 

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.

 

 
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Table of Contents

 

The risk ratings within the loan portfolio, by segment, as of the balance sheet dates were as follows:

 

As of September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

Residential

 

 

 

 

 

 

 

 

 

Commercial

 

 

Purchased

 

 

Commercial

 

 

 

 

 

Real Estate

 

 

Real Estate

 

 

 

 

 

 

 

 

 

& Industrial

 

 

Loans

 

 

Real Estate

 

 

Municipal

 

 

1st Lien

 

 

Jr Lien

 

 

Consumer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Group A

 

$112,114,846

 

 

$8,078,281

 

 

$313,323,279

 

 

$40,164,698

 

 

$189,037,878

 

 

$33,534,308

 

 

$4,059,750

 

 

$700,313,040

 

Group B

 

 

6,156,202

 

 

 

0

 

 

 

2,896,559

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

9,052,761

 

Group C

 

 

2,953,014

 

 

 

0

 

 

 

8,107,322

 

 

 

0

 

 

 

3,528,701

 

 

 

239,163

 

 

 

0

 

 

 

14,828,200

 

Total

 

$121,224,062

 

 

$8,078,281

 

 

$324,327,160

 

 

$40,164,698

 

 

$192,566,579

 

 

$33,773,471

 

 

$4,059,750

 

 

$724,194,001

 

 

As of December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

Residential

 

 

 

 

 

 

 

 

 

Commercial

 

 

Purchased

 

 

Commercial

 

 

 

 

 

Real Estate

 

 

Real Estate

 

 

 

 

 

 

 

 

 

& Industrial

 

 

Loans

 

 

Real Estate

 

 

Municipal

 

 

1st Lien

 

 

Jr Lien

 

 

Consumer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Group A

 

$107,799,925

 

 

$9,807,848

 

 

$285,732,365

 

 

$47,955,231

 

 

$177,456,149

 

 

$34,166,076

 

 

$4,464,692

 

 

$667,382,286

 

Group B

 

 

693,084

 

 

 

0

 

 

 

6,550,335

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

7,243,419

 

Group C

 

 

2,632,613

 

 

 

0

 

 

 

8,676,231

 

 

 

0

 

 

 

3,860,196

 

 

 

193,788

 

 

 

0

 

 

 

15,362,828

 

Total

 

$111,125,622

 

 

$9,807,848

 

 

$300,958,931

 

 

$47,955,231

 

 

$181,316,345

 

 

$34,359,864

 

 

$4,464,692

 

 

$689,988,533

 

 

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;

 

·

Performed a refinancing and deferred or forgiven principal on the original loan;

 

·

Capitalized protective advance to pay delinquent real estate taxes; or

 

·

Capitalized delinquent accrued interest.

 

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.

 

The Company has adopted the TDR guidance issued by the federal banking agencies in March and April 2020 regarding the treatment of certain short-term loan modifications relating to the COVID-19 pandemic. Under this guidance, qualifying concessions and modifications are not considered TDRs.  In total, throughout the pandemic, the Company granted short term loan concessions and/or modifications within the terms of this guidance to 595 borrowers. Of those loans, 322 remained on the books with an aggregate principal balance of $89.6 million as of September 30, 2022.  None of these loans were in a deferral status as of September 30, 2022; however these loans may bear a higher risk of default in future periods.

 

 
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Table of Contents

 

There were no new TDRs for the three months ended September 30, 2022.  New TDRs, by portfolio segment, during the periods presented below were as follows:

 

 

 

Nine months ended September 30, 2022

 

 

 

 

 

 

Pre-

 

 

Post-

 

 

 

 

 

 

Modification

 

 

Modification

 

 

 

 

 

 

Outstanding

 

 

Outstanding

 

 

 

Number of

 

 

Recorded

 

 

Recorded

 

 

 

Contracts

 

 

Investment

 

 

Investment

 

 

 

 

 

 

 

 

 

 

 

Residential real estate - 1st lien

 

 

1

 

 

$292,592

 

 

$292,592

 

 

 

 

Year ended December 31, 2021

 

 

 

 

 

 

Pre-

 

 

Post-

 

 

 

 

 

 

Modification

 

 

Modification

 

 

 

 

 

 

Outstanding

 

 

Outstanding

 

 

 

Number of

 

 

Recorded

 

 

Recorded

 

 

 

Contracts

 

 

Investment

 

 

Investment

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

1

 

 

$41,751

 

 

$41,751

 

Commercial real estate

 

 

2

 

 

 

3,153,402

 

 

 

3,153,402

 

Residential real estate – 1st lien

 

 

1

 

 

 

67,007

 

 

 

67,007

 

 

 

 

4

 

 

$3,262,160

 

 

$3,262,160

 

 

 

 

Three months ended September 30, 2021

 

 

Nine months ended September 30, 2021

 

 

 

 

 

 

Pre-

 

 

Post-

 

 

 

 

 

Pre-

 

 

Post-

 

 

 

 

 

 

Modification

 

 

Modification

 

 

 

 

 

Modification

 

 

Modification

 

 

 

 

 

 

Outstanding

 

 

Outstanding

 

 

 

 

 

Outstanding

 

 

Outstanding

 

 

 

Number of

 

 

Recorded

 

 

Recorded

 

 

Number of

 

 

Recorded

 

 

Recorded

 

 

 

Contracts

 

 

Investment

 

 

Investment

 

 

Contracts

 

 

Investment

 

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

0

 

 

$0

 

 

$0

 

 

 

1

 

 

$41,751

 

 

$41,751

 

Commercial real estate

 

 

1

 

 

 

2,250,000

 

 

 

2,250,000

 

 

 

1

 

 

 

2,250,000

 

 

 

2,250,000

 

 

 

 

1

 

 

$2,250,000

 

 

$2,250,000

 

 

 

2

 

 

$2,291,751

 

 

$2,291,751

 

 

The TDRs for which there was a payment default during the twelve month periods presented below were as follows:

 

For the twelve months ended September 30, 2022

 

 

 

Number of

 

 

Recorded

 

 

 

Contracts

 

 

Investment

 

 

 

 

 

 

 

 

Commercial real estate

 

 

1

 

 

$818,570

 

 

For the twelve months ended December 31, 2021

 

 

Number of

 

 

Recorded

 

 

 

Contracts

 

 

Investment

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

1

 

 

$38,001

 

Commercial real estate

 

 

2

 

 

 

3,081,810

 

 

 

 

3

 

 

$3,119,811

 

 

 
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Table of Contents

 

For the twelve months ended September 30, 2021

 

 

 

Number of

 

 

Recorded

 

 

 

Contracts

 

 

Investment

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

1

 

 

$38,751

 

 

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 within the ALL related to TDRs as of the balance sheet dates are presented in the table below.

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Specific Allocation

 

$96,788

 

 

$79,978

 

 

As of the balance sheet dates, the Company evaluates whether it is contractually committed to lend additional funds to debtors with impaired, non-accrual or modified loans.  The Company is contractually committed to lend on one SBA guaranteed line of credit to a borrower whose lending relationship was previously restructured.

 

Note 6.  Goodwill and Other Intangible Assets

 

As a result of a merger with LyndonBank on December 31, 2007, the Company recorded goodwill amounting to $11,574,269.  The goodwill is not amortizable and is not deductible for tax purposes.

 

As of December 31, 2021, the most recent evaluation, management concluded that no impairment existed.  Management evaluates its goodwill intangible for impairment at least annually, or more frequently as circumstances warrant.

 

Note 7.  Fair Value

 

Certain assets and liabilities are recorded at fair value to provide additional insight into the Company’s quality of earnings and comprehensive income. 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 and 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.

 

 

 
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Table of Contents

 

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, municipal securities and other asset-backed 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.

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

 

Assets measured at fair value on a recurring basis and reflected in the consolidated balance sheets at the dates presented, segregated by fair value hierarchy, are summarized below.  There were no 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 2022 or 2021.

 

 

 

September 30,

 

 

December 31,

 

Assets: (market approach)

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Level 1

 

 

 

 

 

 

U.S. Government securities

 

$38,003,795

 

 

$32,041,041

 

 

 

 

 

 

 

 

 

 

Level 2

 

 

 

 

 

 

 

 

U.S. GSE debt securities

 

$10,357,310

 

 

$11,828,498

 

Taxable Municipal securities

 

 

237,251

 

 

 

298,733

 

Tax-Exempt Municipal securities

 

 

10,336,814

 

 

 

831,379

 

Agency MBS

 

 

113,885,042

 

 

 

127,132,521

 

ABS and OAS

 

 

2,683,288

 

 

 

2,214,024

 

CMO

 

 

8,330,913

 

 

 

1,420,458

 

Other investments

 

 

3,392,907

 

 

 

6,575,805

 

Level 2 Total

 

$149,223,525

 

 

$150,301,418

 

 

 

 

 

 

 

 

 

 

Grand Total

 

$187,227,320

 

 

$182,342,459

 

 

 
27

Table of Contents

 

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

 

The following table includes assets measured at fair value on a non-recurring basis that have had a fair value adjustment since their initial recognition.  Impaired loans measured at fair value only include impaired loans with a partial write-down or with a related specific ALL and are presented net of the specific allowances as disclosed in Note 5.  Assets measured at fair value on a non-recurring basis and reflected in the consolidated balance sheets at the dates presented, segregated by fair value hierarchy level, are summarized below.  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 2022 or 2021.

 

 

 

September 30,

 

 

December 31,

 

Level 2

 

2022

 

 

2021

 

Assets: (market approach)

 

 

 

 

 

 

Impaired loans, net of related allowance

 

$1,706,713

 

 

$177,523

 

Loans held-for-sale

 

 

130,000

 

 

 

339,000

 

MSRs (1)

 

 

880,636

 

 

 

897,720

 

 

(1)

Represents MSRs at lower of cost or fair value.

 

 

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.

 

The estimated fair values of commitments to extend credit and letters of credit were immaterial as of the dates presented in the tables below.  The estimated fair values of the Company's financial instruments as of the balance sheet dates were as follows:

 

September 30, 2022

 

 

 

 

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

 

$73,902

 

 

$73,902

 

 

$0

 

 

$0

 

 

$73,902

 

Debt securities AFS

 

 

187,227

 

 

 

38,004

 

 

 

149,224

 

 

 

0

 

 

 

187,228

 

Restricted equity securities

 

 

1,391

 

 

 

0

 

 

 

1,391

 

 

 

0

 

 

 

1,391

 

Loans and loans held-for-sale, net of ALL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

120,042

 

 

 

0

 

 

 

30

 

 

 

118,839

 

 

 

118,869

 

Purchased loans

 

 

8,019

 

 

 

0

 

 

 

0

 

 

 

7,793

 

 

 

7,793

 

Commercial real estate

 

 

319,267

 

 

 

0

 

 

 

1,611

 

 

 

309,336

 

 

 

310,947

 

Municipal

 

 

40,078

 

 

 

0

 

 

 

0

 

 

 

40,847

 

 

 

40,847

 

Residential real estate - 1st lien

 

 

191,369

 

 

 

0

 

 

 

66

 

 

 

177,558

 

 

 

177,624

 

Residential real estate - Jr lien

 

 

33,578

 

 

 

0

 

 

 

0

 

 

 

33,348

 

 

 

33,348

 

Consumer

 

 

4,006

 

 

 

0

 

 

 

0

 

 

 

4,005

 

 

 

4,005

 

MSRs (1)

 

 

881

 

 

 

0

 

 

 

1,295

 

 

 

0

 

 

 

1,295

 

Accrued interest receivable

 

 

2,710

 

 

 

0

 

 

 

2,710

 

 

 

0

 

 

 

2,710

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other deposits

 

 

902,792

 

 

 

0

 

 

 

898,813

 

 

 

0

 

 

 

898,813

 

Brokered deposits

 

 

249

 

 

 

0

 

 

 

224

 

 

 

0

 

 

 

224

 

Long-term borrowings

 

 

1,300

 

 

 

0

 

 

 

1,031

 

 

 

0

 

 

 

1,031

 

Repurchase agreements

 

 

32,255

 

 

 

0

 

 

 

32,255

 

 

 

0

 

 

 

32,255

 

Operating lease obligations

 

 

710

 

 

 

0

 

 

 

710

 

 

 

0

 

 

 

710

 

Finance lease obligations

 

 

3,699

 

 

 

0

 

 

 

3,699

 

 

 

0

 

 

 

3,699

 

Subordinated debentures

 

 

12,887

 

 

 

0

 

 

 

12,757

 

 

 

0

 

 

 

12,757

 

Accrued interest payable

 

 

33

 

 

 

0

 

 

 

33

 

 

 

0

 

 

 

33

 

 

(1)

Reported fair value represents all MSRs for loans serviced by the Company, regardless of carrying amount.

 

 
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December 31, 2021

 

 

 

 

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

 

$110,359

 

 

$110,359

 

 

$0

 

 

$0

 

 

$110,359

 

Debt securities AFS

 

 

182,342

 

 

 

32,041

 

 

 

150,301

 

 

 

0

 

 

 

182,342

 

Restricted equity securities

 

 

1,434

 

 

 

0

 

 

 

1,434

 

 

 

0

 

 

 

1,434

 

Loans and loans held-for-sale, net of ALL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

109,574

 

 

 

0

 

 

 

0

 

 

 

110,284

 

 

 

110,284

 

Purchased loans

 

 

9,808

 

 

 

0

 

 

 

0

 

 

 

9,862

 

 

 

9,862

 

Commercial real estate

 

 

296,528

 

 

 

0

 

 

 

29

 

 

 

297,339

 

 

 

297,368

 

Municipal

 

 

47,841

 

 

 

0

 

 

 

0

 

 

 

49,419

 

 

 

49,419

 

Residential real estate - 1st lien

 

 

180,271

 

 

 

0

 

 

 

149

 

 

 

180,302

 

 

 

180,451

 

Residential real estate - Jr lien

 

 

34,151

 

 

 

0

 

 

 

0

 

 

 

34,189

 

 

 

34,189

 

Consumer

 

 

4,406

 

 

 

0

 

 

 

0

 

 

 

4,436

 

 

 

4,436

 

MSRs (1)

 

 

898

 

 

 

0

 

 

 

995

 

 

 

0

 

 

 

995

 

Accrued interest receivable

 

 

2,401

 

 

 

0

 

 

 

2,401

 

 

 

0

 

 

 

2,401

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other deposits

 

 

879,151

 

 

 

0

 

 

 

879,545

 

 

 

0

 

 

 

879,545

 

Brokered deposits

 

 

249

 

 

 

0

 

 

 

246

 

 

 

0

 

 

 

246

 

Long-term borrowings

 

 

1,300

 

 

 

0

 

 

 

1,179

 

 

 

0

 

 

 

1,179

 

Repurchase agreements

 

 

32,610

 

 

 

0

 

 

 

32,610

 

 

 

0

 

 

 

32,610

 

Operating lease obligations

 

 

864

 

 

 

0

 

 

 

864

 

 

 

0

 

 

 

864

 

Finance lease obligations

 

 

3,858

 

 

 

0

 

 

 

3,858

 

 

 

0

 

 

 

3,858

 

Subordinated debentures

 

 

12,887

 

 

 

0

 

 

 

12,868

 

 

 

0

 

 

 

12,868

 

Accrued interest payable

 

 

59

 

 

 

0

 

 

 

59

 

 

 

0

 

 

 

59

 

 

(1)

Reported fair value represents all MSRs for loans serviced by the Company, regardless of carrying amount.

 

Note 8.  Loan Servicing

 

The following table shows the changes in the carrying amount of the MSRs, included in other assets in the consolidated balance sheets, for the periods indicated:

 

 

 

Nine Months Ended

 

 

Year Ended

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$897,720

 

 

$922,146

 

MSRs capitalized

 

 

99,014

 

 

 

147,328

 

MSRs amortized

 

 

(116,098)

 

 

(225,404)

Change in valuation allowance

 

 

0

 

 

 

53,650

 

Balance at end of period

 

$880,636

 

 

$897,720

 

 

Note 9.  Legal Proceedings

 

In the normal course of business, the Company is involved in litigation that is considered incidental to its business.  Management does not expect that any such litigation will be material to the Company's consolidated financial condition or results of operations.

 

Note 10.  Subsequent Events

 

The Company has evaluated events and transactions through the date that the financial statements were issued for potential recognition or disclosure in these financial statements, as required by GAAP.  On September 7, 2022, the Company’s Board declared a cash dividend of $0.23 per common share, payable November 1, 2022 to shareholders of record as of October 15, 2022.  This dividend has been recorded in the Company’s consolidated financial statements as of the declaration date, including shares issuable under the DRIP.

 

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

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Period Ended September 30, 2022

 

The following discussion analyzes the consolidated financial condition of Community Bancorp. and its wholly-owned subsidiary, Community National Bank, as of September 30, 2022 and December 31, 2021, and its consolidated results of operations for the three- and nine-month interim periods and one year period presented.  The Company is considered a “smaller reporting company” and a “non-accelerated filer” under the disclosure rules of the SEC. 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.

 

The following discussion should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in its 2021 Annual Report on Form 10-K filed with the SEC.  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.

 

Certain amounts presented below pertaining to the 2021 comparison periods have been reclassified to conform to current year presentation.

 

FORWARD-LOOKING STATEMENTS

 

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the results of operations, financial condition and business of the Company and its subsidiary. Words used in the discussion below such as "believes," "expects," "anticipates," "intends," "estimates," “projects”, "plans," “assumes”, "predicts," “may”, “might”, “will”, “could”, “should” and similar expressions, indicate that management of the Company is making forward-looking statements.

 

Forward-looking statements are not guarantees of future performance.  They necessarily involve risks, uncertainties and assumptions.  Examples of forward looking statements included in this discussion include, but are not limited to, statements regarding the potential effects of the COVID-19 pandemic on our business, financial condition, results of operations and prospects; the 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 management's general outlook for the future performance of the Company or the local or national economy. Although forward-looking statements are based on management's expectations and estimates as of the date they are made, many of the factors that could influence or determine actual results are unpredictable and not within the Company's control.

 

Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities:

 

 

·

interest rates change in such a way as to negatively affect loan demand, the local economy or the Company's net income, asset valuations or margins;

 

·

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;

 

·

the impact of inflation on the Company’s customers and on its financial results and performance;

 

·

changes in the United States monetary and fiscal policies, including the interest rate policies of the FRB and its regulation of the money supply;

 

·

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 U.S. GAAP pursuant to the CECL model;

 

·

the geographic concentration of the Company’s loan portfolio and deposit base;

 

·

the planned phase out of three month LIBOR by June 30, 2023, 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 currently bear interest at a variable rate, adjusted quarterly, equal to 3-month LIBOR, plus 2.85%;

 

·

reductions in deposit levels, which necessitate increased borrowings to fund loans and investments;

 

·

changes in the level of nonperforming assets and charge-offs;

 

·

changes in federal or state tax laws or policy;

 

 
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·

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;

 

·

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;

 

·

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 consumer and business spending, borrowing and savings habits;

 

·

the continuing effects of COVID-19 and emerging variants of the virus on our Company, the communities where we have branches and loan production offices, the State of Vermont and the national and global economies and overall stability of the financial markets;

 

·

the continuing effects of government and regulatory responses to the COVID-19 pandemic;

 

·

operational and internal system failures due to changes in normal business practices, including remote working for Company staff;

 

·

increased cybercrime and payment system risk due to increase usage by customers of online and other remote banking channels;

 

·

the ongoing challenges to find qualified workers to maintain a stable workforce;

 

·

losses due to the fraudulent or negligent conduct of third parties, including the Company’s service providers, customers and employees; and

 

·

adverse changes in the credit rating of U.S. government debt.

 

Readers are cautioned not to place undue reliance on such statements as they speak only as of the date they are made.  The Company does not undertake, and disclaims any obligation, to revise or update any forward-looking statements to reflect the occurrence or anticipated occurrence of events or circumstances after the date of this Report, except as required by applicable law.  The Company claims the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995.

 

NON-GAAP FINANCIAL MEASURES

 

Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure.  The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP.  However, three non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled Interest Income Versus Interest Expense (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 on September 30, 2022 were $1,026,884,950 compared to $1,019,105,799 at December 31, 2021, an increase of 0.8%.  Significant changes in the asset base were due to an increase in net loans of $34.0 million, or 5.0%, and an increase in the available-for-sale investment portfolio of $4.9 million, or 2.7%, which was partially offset by a decrease of $36.5 million, or 33.0%, in cash and cash equivalents.  This demonstrates the Company’s efforts to deploy cash into higher earning assets.  The increase in the loan portfolio was primarily attributable to an increase of $20.0 million in commercial & industrial loans and $23.3 million in CRE loans, which was partially offset by an $11.1 million decrease in PPP loans and $7.8 million in municipal loan balances. 

 

 
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Total deposits on September 30, 2022 were $903,041,149 compared to $879,399,953 on December 31, 2021, an increase of $23.6 million, or 2.7%. Savings accounts increased $11.5 million, or 6.8%, followed by money market funds with an increase of $7.9 million, or 6.1%.

 

Consolidated net income for the third quarter of 2022 decreased $88,696, or 2.4% to $3.6 million compared to $3.7 million in the third quarter of 2021.  Income for the first nine months of 2022 decreased $734,109 to $9.0 million compared to $9.7 million in the same period of 2021.  Year over year, a $3.2 million decrease in PPP loan processing fees from the SBA and an increase of $700,835 in provision for loan losses was partially offset by an increase of $1.4 million in interest income from the Company’s debt securities portfolio and an increase in interest income from loans totaling $1.58 million, which includes interest adjustments of approximately $286 thousand for loans coming out of non-accrual status.  Also contributing to the offset was a decrease of $74,979 in interest expense on savings and money market deposits, and a decrease of $226,062 in interest expense on time deposits.  These changes and other significant changes are discussed in the appropriate income sections of this MD&A.

 

Total interest income increased $221,392 or 2.4%, for the third quarter of 2022, compared to the same quarter in 2021, and increased $166,388, or 0.6%, year over year, due to the changes discussed in the previous paragraph related to PPP loan processing fees and investment and loan income.  The investment portfolio has increased considerably year over year, accounting for the increase in investment income.  Negatively impacting interest income for the three- and nine-month comparison periods was the amortization of the SBA PPP fees in the amount of $36,182 for the third quarter of 2022, compared to $1.6 million for the same quarter in 2021, and $469,929 for the first nine months of 2022, compared to $3.7 million for the same period in 2021.

 

Total interest expense increased $329,895, or 45.3%, for the third quarter of 2022, compared to the same quarter in 2021, and increased $153,139, or 6.5%, for the first nine months of 2022 compared to the same period in 2021.  The recent increases in the fed funds rate have put more pressure on deposit pricing, resulting in an increase in the Company’s money market and time deposit rates. 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 the actions of the FRB’s FOMC in regulating interest rates, and changes in the yield curve, could have on net interest income.

 

The provision for loan losses for the third quarter of 2022 was $125,000 compared to $89,167 for the same quarter of 2021, resulting in an increase of $35,833, or 40.2%, between periods.  The provision for loan losses for the first nine months of 2022 was $1.3 million compared to $624,165 for the same period in 2021, resulting in an increase of $700,835, or 112.3%, between periods.  This increase to the provision was driven primarily by a write-down on a non-performing CRE loan totaling $667,474 during March 2022, as well as increases to the reserve due to the increase in the commercial loan portfolios, both secured and unsecured.  Please refer to the ALL and provisions discussion in the Credit Risk section for more information.

 

Equity capital decreased to $69.5 million, with a book value per share of $12.56 as of September 30, 2022, compared to $84.8 million and a book value of $15.48 as of December 31, 2021.  This decrease in equity capital is directly related to the increase of unrealized losses in the investment portfolio, reflecting rising bond rates, which resulted in an increase of $21.4 million, net of tax, in the accumulated other comprehensive loss in the shareholders’ equity portion of the balance sheet.  This position is considered temporary and does not impact the Company’s regulatory capital ratios. 

 

On September 7, 2022, the Company's Board of Directors declared a quarterly cash dividend of $0.23 per common share, payable on November 1, 2022 to shareholders of record on October 15, 2022.

 

As of September 30, 2022, all of the Company’s capital ratios, and those of our subsidiary Bank, were in excess of applicable regulatory requirements.  While we believe that we have sufficient capital to withstand an economic downturn from any headwinds related to inflation or recessionary periods, should one occur, our equity capital and regulatory capital ratios could be adversely impacted, including as a result of credit losses and other adverse impacts of the pandemic, deteriorating economic conditions, or government monetary policy.

 

 
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CRITICAL ACCOUNTING POLICIES

 

The Company’s consolidated financial statements are prepared according to U.S. 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, and communicates all evaluations with the Company’s Audit Committee.

 

The Company’s critical accounting policies govern:

 

·

the ALL;

·

OREO;

·

OTTI of debt securities;

·

valuation of residential MSRs; and

·

the carrying value of goodwill.

 

These policies are described in the Company’s 2021 Annual Report on Form 10-K in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” and in Note 1 (Significant Accounting Policies) to the audited consolidated financial statements.  There were no material changes during the first nine months of 2022 in the Company’s critical accounting policies.

 

RESULTS OF OPERATIONS

 

Net income for the third quarter of 2022 was $3,610,506 or $0.66 per common share compared to $3,699,202 or $0.69 per common share for the same quarter of 2021.  Net income for the first nine months of 2022 was $9,037,200 or $1.67 per common share, compared to $9,771,309 or $1.82 per common share for the same period of 2021.  Core earnings (NII) for the third quarter of 2022 were $8.37 million compared to $8.48 million for the same quarter in 2021 and $23.77 million for the first nine months of 2022 compared to $23.76 million for the same period in 2021.  As noted in the Overview, the moderate changes in NII in both periods primarily reflect the decrease in the amortization of fees from administering PPP loans, which enhanced NII in 2021.  Over the past year, the portfolio of PPP loans has decreased, as these loans are forgiven and paid in full by the SBA.  The PPP loan portfolio balance decreased from $92.6 million at the end of February 2021 to $12.2 million at December 31, 2021 and then to $1.1 million as of September 30, 2022.  As these loans are paid in full, the unamortized fees are taken into income, resulting in a decrease in income year over year.  Interest paid on deposits, which is the major component of total interest expense, increased $243,656, or 41.0% between the third quarter comparison periods and $44,737, or 2.3%, year over year, driven primarily by the increases in the fed funds rate during 2022.

 

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 tables show these ratios annualized, as well as other equity ratios monitored by management, for the comparison periods presented.

 

 

 

Three Months Ended September 30,

 

 

 

2022

 

 

2021

 

Return on average assets

 

 

1.41%

 

 

1.54%

Return on average equity

 

 

19.06%

 

 

17.87%

Dividend payout ratio (1)

 

 

34.85%

 

 

31.88%

Average equity to average assets

 

 

7.38%

 

 

8.64%

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Return on average assets

 

 

1.19%

 

 

1.40%

Return on average equity

 

 

15.55%

 

 

16.39%

Dividend payout ratio (1)

 

 

41.32%

 

 

36.26%

Average equity to average assets

 

 

7.68%

 

 

8.52%

 

(1)

Dividends declared per common share divided by earnings per common share.

 

INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST INCOME)

 

The largest component of the Company’s operating income is NII, which is the difference between interest earned on loans and investments and the interest paid on deposits and other sources of funds (i.e., 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 changes in the yield earned and costs of funds (rate).  A portion of the Company’s income from loans to local municipalities is not subject to income taxes.  Because the proportion of tax-exempt items in the Company's balance sheet varies from year-to-year, to improve comparability of information, the non-taxable income shown in the tables below has been converted to a tax equivalent basis. The Company’s corporate tax rate is 21%; therefore, to equalize tax-free and taxable income in the comparison, we divide the tax-free income by 79%, with the result that every tax-free dollar is equivalent to $1.27 in taxable income for the periods presented.

 

 
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The Company’s tax-exempt interest income of $284,618 and $246,627 for the three months ended September 30, 2022 and 2021, respectively, and $777,314 and $759,855 for the nine months ended September 30, 2022 and 2021, respectively, was derived from loans to local municipalities of $40.2 million and $53.8 million, and tax-exempt municipal investments of $10.3 million and $0, at September 30, 2022 and 2021, respectively.

 

The following tables show the reconciliation between reported NII and tax equivalent NII for the comparison periods presented.

 

 

 

Three Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Net interest income as presented

 

$8,373,566

 

 

$8,482,069

 

Effect of tax-exempt income

 

 

75,658

 

 

 

65,559

 

Net interest income, tax equivalent

 

$8,449,224

 

 

$8,547,628

 

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Net interest income as presented

 

$23,768,980

 

 

$23,755,731

 

Effect of tax-exempt income

 

 

206,628

 

 

 

201,987

 

Net interest income, tax equivalent

 

$23,975,608

 

 

$23,957,718

 

 

 
34

Table of Contents

 

The following tables present the daily average interest-earning assets and the daily average interest-bearing liabilities supporting earning assets for the respective comparison periods. Interest income (excluding interest on non-accrual loans) is expressed on a tax equivalent basis, both in dollars and as a yield/rate for the comparison periods presented.

 

 

 

Three Months Ended September 30,

 

 

 

 2022

 

 

 2021

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

Average

 

 

 

Average

 

 

Income/

 

 

Yield/

 

 

Average

 

 

Income/

 

 

Yield/

 

 

 

Balance

 

 

Expense

 

 

Rate

 

 

Balance

 

 

Expense

 

 

Rate

 

Interest-Earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1)

 

$717,692,703

 

 

$8,239,751

 

 

 

4.55%

 

$705,990,188

 

 

$8,843,732

 

 

 

4.97%

Taxable investment securities

 

 

182,586,203

 

 

 

799,856

 

 

 

1.74%

 

 

91,309,182

 

 

 

325,002

 

 

 

1.41%

Tax-exempt investment securities

 

 

9,135,697

 

 

 

86,271

 

 

 

3.75%

 

 

0

 

 

 

0

 

 

 

0.00%

Sweep and interest-earning accounts

 

 

58,264,306

 

 

 

358,907

 

 

 

2.44%

 

 

80,330,844

 

 

 

92,923

 

 

 

0.46%

Other investments (2)

 

 

1,777,950

 

 

 

23,029

 

 

 

5.14%

 

 

1,834,150

 

 

 

14,666

 

 

 

3.17%

Total

 

$969,456,859

 

 

$9,507,814

 

 

 

3.89%

 

$879,464,364

 

 

$9,276,323

 

 

 

4.18%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing transaction accounts

 

$252,413,763

 

 

$382,833

 

 

 

0.60%

 

$217,633,391

 

 

$134,246

 

 

 

0.24%

Money market funds

 

 

138,497,037

 

 

 

197,849

 

 

 

0.57%

 

 

126,691,975

 

 

 

148,962

 

 

 

0.47%

Savings deposits

 

 

181,818,265

 

 

 

27,930

 

 

 

0.06%

 

 

167,577,792

 

 

 

43,705

 

 

 

0.10%

Time deposits

 

 

105,915,323

 

 

 

229,371

 

 

 

0.86%

 

 

107,239,980

 

 

 

267,414

 

 

 

0.99%

Borrowed funds

 

 

1,301,120

 

 

 

8

 

 

 

0.00%

 

 

2,301,326

 

 

 

12

 

 

 

0.00%

Repurchase agreements

 

 

33,402,748

 

 

 

45,153

 

 

 

0.54%

 

 

23,644,148

 

 

 

16,871

 

 

 

0.28%

Finance lease obligations

 

 

3,716,571

 

 

 

21,355

 

 

 

2.30%

 

 

2,385,977

 

 

 

19,709

 

 

 

3.30%

Junior subordinated debentures

 

 

12,887,000

 

 

 

154,091

 

 

 

4.74%

 

 

12,887,000

 

 

 

97,776

 

 

 

3.01%

Total

 

$729,951,827

 

 

$1,058,590

 

 

 

0.58%

 

$660,361,589

 

 

$728,695

 

 

 

0.44%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$8,449,224

 

 

 

 

 

 

 

 

 

 

$8,547,628

 

 

 

 

 

Net interest spread (3)

 

 

 

 

 

 

 

 

 

 

3.31%

 

 

 

 

 

 

 

 

 

 

3.74%

Net interest margin (4)

 

 

 

 

 

 

 

 

 

 

3.46%

 

 

 

 

 

 

 

 

 

 

3.86%

 

1.

Included in gross loans are non-accrual loans with average balances of $7,337,588 and $3,803,807 for the three months ended September 30, 2022 and 2021, respectively. Loans are stated before deduction of unearned discount and ALL, less loans held-for-sale and include tax-exempt loans to local municipalities with average balances of $39,007,717 and $52,546,634 for the three months ended September 30, 2022 and 2021, respectively.

 

 

2.

Included in other investments is the Company’s FHLBB Stock with average balances of $712,800 and $769,000 for the three months ended September 30, 2022 and 2021, respectively, with a dividend rate of approximately 3.72% and 1.52%, respectively, per quarter.

 

 

3.

Net interest spread is the difference between the average yield on average interest-earning assets and the average rate paid on average interest-bearing liabilities.

 

 

4.

Net interest margin is net interest income divided by average earning assets.

 

 
35

Table of Contents

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

2022

 

 

 

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

Average

 

 

 

 Average

 

 

Income/

 

 

Yield/

 

 

 Average

 

 

Income/

 

 

Yield/

 

 

 

Balance

 

 

Expense

 

 

Rate

 

 

Balance

 

 

Expense

 

 

Rate

 

Interest-Earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1)

 

$704,673,950

 

 

$23,476,738

 

 

 

4.45%

 

$718,366,424

 

 

$25,121,879

 

 

 

4.68%

Taxable investment securities

 

 

183,417,294

 

 

 

2,192,540

 

 

 

1.60%

 

 

86,274,774

 

 

 

883,846

 

 

 

1.37%

Tax-exempt investment securities

 

 

5,628,689

 

 

 

142,899

 

 

 

3.39%

 

 

0

 

 

 

0

 

 

 

0.00%

Sweep and interest-earning accounts

 

 

68,303,360

 

 

 

609,532

 

 

 

1.19%

 

 

74,020,149

 

 

 

260,811

 

 

 

0.47%

Other investments (2)

 

 

1,778,428

 

 

 

56,121

 

 

 

4.22%

 

 

1,833,884

 

 

 

40,265

 

 

 

2.94%

Total

 

$963,801,721

 

 

$26,477,830

 

 

 

3.67%

 

$880,495,231

 

 

$26,306,801

 

 

 

3.99%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing transaction accounts

 

$256,909,959

 

 

$754,189

 

 

 

0.39%

 

$216,136,557

 

 

$408,410

 

 

 

0.25%

Money market funds

 

 

132,391,636

 

 

 

446,751

 

 

 

0.45%

 

 

123,955,268

 

 

 

477,355

 

 

 

0.51%

Savings deposits

 

 

178,709,726

 

 

 

77,373

 

 

 

0.06%

 

 

156,816,309

 

 

 

121,748

 

 

 

0.10%

Time deposits

 

 

106,235,079

 

 

 

697,088

 

 

 

0.88%

 

 

109,049,139

 

 

 

923,151

 

 

 

1.13%

Borrowed funds

 

 

1,301,132

 

 

 

14

 

 

 

0.00%

 

 

2,376,974

 

 

 

36

 

 

 

0.00%

Repurchase agreements

 

 

30,752,887

 

 

 

88,322

 

 

 

0.38%

 

 

29,997,106

 

 

 

72,822

 

 

 

0.32%

Finance lease obligations

 

 

3,769,459

 

 

 

64,979

 

 

 

2.30%

 

 

2,156,173

 

 

 

49,075

 

 

 

3.03%

Junior subordinated debentures

 

 

12,887,000

 

 

 

373,506

 

 

 

3.88%

 

 

12,887,000

 

 

 

296,486

 

 

 

3.08%

Total

 

$722,956,878

 

 

$2,502,222

 

 

 

0.46%

 

$653,374,526

 

 

$2,349,083

 

 

 

0.48%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$23,975,608

 

 

 

 

 

 

 

 

 

 

$23,957,718

 

 

 

 

 

Net interest spread (3)

 

 

 

 

 

 

 

 

 

 

3.21%

 

 

 

 

 

 

 

 

 

 

3.51%

Net interest margin (4)

 

 

 

 

 

 

 

 

 

 

3.33%

 

 

 

 

 

 

 

 

 

 

3.64%

 

1.

Included in gross loans are non-accrual loans with average balances of $5,375,840 and $3,945,577 for the nine months ended September 30, 2022 and 2021, respectively. Loans are stated before deduction of unearned discount and ALL, less loans held-for-sale and include tax-exempt loans to local municipalities with average balances of $45,161,639 and $52,105,647 for the nine months ended September 30, 2022 and 2021, respectively.

 

 

2.

Included in other investments is the Company’s FHLBB Stock with average balances of $713,278 and $768,734, respectively, with a dividend rate of approximately 3.38% and 1.52%, respectively, for the nine months ended September 30, 2022 and 2021, respectively.

 

 

3.

Net interest spread is the difference between the average yield on average interest-earning assets and the average rate paid on average interest-bearing liabilities.

 

 

4.

Net interest margin is net interest income divided by average earning assets.

 

 
36

Table of Contents

 

The average volume of interest-earning assets for the three- and nine-month periods ended September 30, 2022 increased 10.2% and 9.5%, respectively, compared to the same periods last year, while the average yield on interest-earning assets decreased 29 bps and 32 bps, respectively.

 

The average volume of loans increased 1.7% over the three-month comparison period and decreased 1.9% over the nine-month comparison period of 2022 versus 2021, while the average yield on loans decreased 42 bp and 23 bps, respectively.  The $286 thousand in income for loans coming out of non-accrual status, discussed in the Overview, translates to an increase of five bps in the nine-month comparison period for 2022.  Loans accounted for 74.0% and 73.1%, respectively, of the average interest-earning asset portfolio for the three- and nine-month periods ended September 30, 2022 compared to 80.3% and 81.6%, respectively, for the same periods last year.  Interest earned on the loan portfolio as a percentage of total interest income was 86.7% and 88.7%, respectively for the three- and nine-month periods in 2022 compared to 95.3% and 95.5%, respectively for the same periods in 2021.

 

The average volume of the taxable investment portfolio (classified as AFS) increased 100.0% and 112.6% during the three- and nine-month periods ended September 30, 2022, compared to the same periods last year, and the average yield increased 33 bps and 23 bps, respectively, between periods.  The increase in average volume is due primarily to management’s 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 the tax-exempt investment portfolio (classified as AFS) for the three- and nine-month periods ended September 30, 2022 was $9.1 million and $5.6 million, respectively, with a tax equivalent yield of 3.75% and 3.39%, respectively.  The Company began investing in these tax-exempt bonds during December 2021.

 

The average volume of sweep and interest-earning accounts, which consists primarily of an interest-bearing account at the FRBB, decreased 27.5% and 7.7%, respectively, for the three- and nine-month comparison periods ended September 30, 2022 compared to the same period in 2021.  The decrease in average volume is attributable to the funding of investment and loan growth.  The average yield on these funds increased 198 bps and 72 bps for the three- and nine-month periods ended September 30, 2022 versus the same periods in 2021.

 

The average volume of interest-bearing liabilities for the three- and nine-month periods ended September 30, 2022 increased 10.7% in both periods, compared to the same periods in 2021, while the average rate paid on interest-bearing liabilities increased 14 bps and decreased two bps, respectively.  

 

The average volume of interest-bearing transaction accounts increased 16.0% and 18.9%, respectively for the three- and nine-month periods ended September 30, 2022 compared to the same periods of 2021. The average rate paid on these accounts increased 36 bps and 14 bps, respectively, between comparison periods.

 

The average volume of money market accounts increased 9.3% and 6.8%, respectively for the three- and nine-month periods ended September 30, 2022 compared to the same periods of 2021, while the average rate paid on these deposits increased 10 bps and decreased six bps, respectively.

 

The average volume of savings accounts increased 8.5% and 14.0%, respectively, for the three- and nine-month periods ended September 30, 2022 compared to the same periods in 2021, while the average rate paid on these accounts decreased four bps in both comparison periods.

 

The average volume of time deposits decreased 1.2% and 2.6%, respectively, for the three- and nine-month periods ended September 30, 2022 compared to the same periods in 2021, and the average rate paid decreased 13 bps and 25 bps, respectively.  Interest paid on time deposits as a percentage of total interest expense was 21.7% and 27.9%, respectively, for the three and nine-month periods ended September 30, 2022, compared to 36.7% and 39.3%, respectively, for the same comparison periods in 2021.  The decrease in the average volume of time deposits between periods reflects the maturity of brokered deposits in January and April of 2021 that had not been replaced as of September 30, 2022.  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.  Refer to the “Liquidity and Capital Resources” section for more discussion on this topic.

 

The average volume of borrowed funds decreased 43.5% and 45.3% for the three- and nine-month periods ended September 30, 2022 compared to the same periods in 2021 and, for all periods, consisted of only JNE funds at zero percent interest.

 

The average volume of repurchase agreements increased 41.3% and 2.5%, respectively, for the three- and nine-month periods ended September 30, 2022 compared to the same periods in 2021 and the average rate paid increased 26 bps and six bps, respectively, between comparison periods.

 

 
37

Table of Contents

 

In summary, between the three- and nine-month periods ended September 30, 2022 and 2021, the average yield on interest-earning assets decreased 29 bps and 32 bps, respectively, and the average rate paid on interest-bearing liabilities increased 14 bps and decreased two bps, respectively.  Net interest spread decreased 43 bps and 30 bps for the three- and nine-month periods of 2022 versus 2021 and net interest margin decreased 40 and 31 bps, respectively, between periods.

 

The following table summarizes the variances in interest income and interest expense on a fully tax-equivalent basis for the interim periods presented for 2022 and 2021 resulting from volume changes in daily average assets and daily average liabilities and fluctuations in average rates earned and paid.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

Variance

 

 

Variance

 

 

 

 

 

Variance

 

 

Variance

 

 

 

 

 

 

Due to

 

 

Due to

 

 

Total

 

 

Due to

 

 

Due to

 

 

Total

 

 

 

Rate (1)

 

 

Volume (1)

 

 

Variance

 

 

Rate (1)

 

 

Volume (1)

 

 

Variance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Interest-Earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$(750,580)

 

$146,599

 

 

$(603,981)

 

$(1,189,407)

 

$(455,734)

 

$(1,645,141)

Taxable investment securities

 

 

150,458

 

 

 

324,396

 

 

 

474,854

 

 

 

313,289

 

 

 

995,405

 

 

 

1,308,694

 

Tax-exempt investment securities

 

 

86,271

 

 

 

0

 

 

 

86,271

 

 

 

142,899

 

 

 

0

 

 

 

142,899

 

Sweep and interest-earning accounts

 

 

401,696

 

 

 

(135,712)

 

 

265,984

 

 

 

399,604

 

 

 

(50,883)

 

 

348,721

 

Other investments

 

 

9,091

 

 

 

(728)

 

 

8,363

 

 

 

17,606

 

 

 

(1,750)

 

 

15,856

 

Total

 

$(103,064)

 

$334,555

 

 

$231,491

 

 

$(316,009)

 

$487,038

 

 

$171,029

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Interest-Bearing Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing transaction accounts

 

$227,547

 

 

$21,040

 

 

$248,587

 

 

$269,538

 

 

$76,241

 

 

$345,779

 

Money market funds

 

 

34,902

 

 

 

13,985

 

 

 

48,887

 

 

 

(62,785)

 

 

32,181

 

 

 

(30,604)

Savings deposits

 

 

(19,364)

 

 

3,589

 

 

 

(15,775)

 

 

(60,750)

 

 

16,375

 

 

 

(44,375)

Time deposits

 

 

(35,172)

 

 

(2,871)

 

 

(38,043)

 

 

(207,541)

 

 

(18,522)

 

 

(226,063)

Borrowed funds

 

 

(4)

 

 

0

 

 

 

(4)

 

 

(22)

 

 

0

 

 

 

(22)

Repurchase agreements

 

 

21,395

 

 

 

6,887

 

 

 

28,282

 

 

 

13,691

 

 

 

1,809

 

 

 

15,500

 

Finance lease obligations

 

 

(9,422)

 

 

11,068

 

 

 

1,646

 

 

 

(20,657)

 

 

36,561

 

 

 

15,904

 

Junior subordinated debentures

 

 

56,315

 

 

 

0

 

 

 

56,315

 

 

 

77,020

 

 

 

0

 

 

 

77,020

 

Total

 

$276,197

 

 

$53,698

 

 

$329,895

 

 

$8,494

 

 

$144,645

 

 

$153,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in net interest income

 

$(379,261)

 

$280,857

 

 

$(98,404)

 

$(324,503)

 

$342,393

 

 

$17,890

 

 

(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

 

 
38

Table of Contents

 

NON-INTEREST INCOME AND NON-INTEREST EXPENSE

 

Non-interest Income

 

The components of non-interest income for the periods presented were as follows:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

September 30,

 

 

Change

 

 

September 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Income

 

 

Percent

 

 

2022

 

 

2021

 

 

Income

 

 

Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service fees

 

$939,807

 

 

$882,688

 

 

$57,119

 

 

 

6.47%

 

$2,739,076

 

 

$2,527,943

 

 

$211,133

 

 

 

8.35%

Income from sold loans

 

 

109,411

 

 

 

242,560

 

 

 

(133,149)

 

 

-54.89%

 

 

508,795

 

 

 

704,627

 

 

 

(195,832)

 

 

-27.79%

Other income from loans

 

 

301,710

 

 

 

223,388

 

 

 

78,322

 

 

 

35.06%

 

 

895,884

 

 

 

653,377

 

 

 

242,507

 

 

 

37.12%

Other income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from CFS Partners

 

 

87,386

 

 

 

240,723

 

 

 

(153,337)

 

 

-63.70%

 

 

386,217

 

 

 

834,781

 

 

 

(448,564)

 

 

-53.73%

Other miscellaneous income

 

 

93,289

 

 

 

111,227

 

 

 

(17,938)

 

 

-16.13%

 

 

322,357

 

 

 

320,624

 

 

 

1,733

 

 

 

0.54%

Total non-interest income

 

$1,531,603

 

 

$1,700,586

 

 

$(168,983)

 

 

-9.94%

 

$4,852,329

 

 

$5,041,352

 

 

$(189,023)

 

 

-3.75%

 

Total non-interest income decreased $168,983, or 9.9% for the third quarter of 2022 and $189,023, or 3.8%, for the first nine months of 2022 compared to the same periods in 2021, with significant changes noted in the following:

 

 

·

The increase in service fees during the comparison period is mostly due to an increase in overdraft charges of $31,752, or 39.9%, between the third quarter comparison periods and $162,459, or 27.8%, year over year.

 

 

 

 

·

The decrease in income from sold loans is due in part to a lower volume of loans sold into the secondary market during the first nine months of 2022 versus 2021, as well as lower points and premiums on these loans in 2022.

 

 

 

 

·

An increase in CRE loan volume in 2022 resulted in a significant increase in documentation fees collected at origination as well as commercial rate lock fees collected accounting for the increase in other income from loans when comparing both comparison periods.

 

 

 

 

·

Income from CFS Partners decreased between periods due in part to the impact of mark-to-market adjustments to CFS Partners equity portfolio during 2022, reflecting general stock market conditions.

 

 

 

 

·

Included in Other miscellaneous income for 2022 is income totaling $23,400 associated with a renegotiated contract with the Company’s check printing vendor, helping to offset decreases in other components of this category.

 

 
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Non-interest Expense

 

The components of non-interest expense for the periods presented were as follows:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

September 30,

 

 

Change

 

 

September 30,

 

 

Change

 

 

 

2022

 

 

2021

 

 

Expense

 

 

Percent

 

 

2022

 

 

2021

 

 

Expense

 

 

Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and wages

 

$1,984,000

 

 

$2,002,999

 

 

$(18,999)

 

 

-0.95%

 

$6,058,000

 

 

$5,923,001

 

 

$134,999

 

 

 

2.28%

Employee benefits

 

 

629,681

 

 

 

811,817

 

 

 

(182,136)

 

 

-22.44%

 

 

2,106,356

 

 

 

2,467,237

 

 

 

(360,881)

 

 

-14.63%

Occupancy expenses, net

 

 

677,805

 

 

 

743,219

 

 

 

(65,414)

 

 

-8.80%

 

 

2,104,346

 

 

 

2,140,141

 

 

 

(35,795)

 

 

-1.67%

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service contracts - administrative

 

 

142,081

 

 

 

124,252

 

 

 

17,829

 

 

 

14.35%

 

 

428,254

 

 

 

385,792

 

 

 

42,462

 

 

 

11.01%

Directors fees

 

 

144,357

 

 

 

128,604

 

 

 

15,753

 

 

 

12.25%

 

 

432,571

 

 

 

386,312

 

 

 

46,259

 

 

 

11.97%

Audit fees

 

 

122,034

 

 

 

105,200

 

 

 

16,834

 

 

 

16.00%

 

 

337,790

 

 

 

294,614

 

 

 

43,176

 

 

 

14.66%

FDIC insurance

 

 

90,637

 

 

 

111,087

 

 

 

(20,450)

 

 

-18.41%

 

 

277,047

 

 

 

272,652

 

 

 

4,395

 

 

 

1.61%

Collection & non-accruing loan expense

 

 

(14,000)

 

 

19,069

 

 

 

(33,069)

 

 

-173.42%

 

 

33,000

 

 

 

42,269

 

 

 

(9,269)

 

 

-21.93%

ATM fees

 

 

162,032

 

 

 

143,993

 

 

 

18,039

 

 

 

12.53%

 

 

456,223

 

 

 

414,288

 

 

 

41,935

 

 

 

10.12%

Electronic banking expense

 

 

69,623

 

 

 

64,423

 

 

 

5,200

 

 

 

8.07%

 

 

202,682

 

 

 

169,788

 

 

 

32,894

 

 

 

19.37%

State deposit tax

 

 

250,994

 

 

 

225,912

 

 

 

25,082

 

 

 

11.10%

 

 

737,570

 

 

 

651,173

 

 

 

86,397

 

 

 

13.27%

Other miscellaneous expenses

 

 

1,081,665

 

 

 

1,051,282

 

 

 

30,383

 

 

 

2.89%

 

 

3,055,122

 

 

 

3,019,037

 

 

 

36,085

 

 

 

1.20%

Total non-interest expense

 

$5,340,909

 

 

$5,531,857

 

 

$(190,948)

 

 

-3.45%

 

$16,228,961

 

 

$16,166,304

 

 

$62,657

 

 

 

0.39%

 

Total non-interest expense decreased $190,948, or 3.5% for the third quarter of 2022 and increased $62,657, or 0.4%, for the first nine months of 2022 compared to the same periods in 2021, with significant changes noted in the following:

 

 

·

The increase in salaries and wages in the nine month comparison period is due to normal salary increases.

 

 

 

 

·

The decrease in employee benefits was attributable to a decrease in health insurance claims year over year under the Company’s self-funded health insurance plan.

 

 

 

 

·

The decrease in occupancy expenses is primarily attributable to a write down of $63,125 at maturity of a capital lease during the third quarter of 2021.

 

 

 

 

·

The increase in service contracts - administrative is due to a combination of an increase in pricing for contracts that are based on asset size and inflationary adjustment factors that are higher than historical increase adjustments.

 

 

 

 

·

The increase in directors’ fees is attributable to a change to the Director’s fee schedule as well as an additional Director for 2022.

 

 

 

 

·

The increase in audit fees reflects increased audit services due to the Company surpassing the $1.0 billion asset size.

 

 

 

 

·

FDIC insurance decreased for the third quarter due to a decrease in the assessment multiplier, while the modest increase year over year is due primarily to an increase in assets.

 

 

 

 

·

Collection & non-accruing loan expense is lower in both periods due to the recoupment of expenses associated with properties in the Company’s non-accruing loan portfolio.

 

 

 

 

·

ATM fees increased due to the ongoing cost to support the upgraded and enhanced technology utilized for deposit automation. The use of deposit automation replaces a manual process for required monitoring of cash deposits as well as providing fraud detection measures at ATMs.

 

 

 

 

·

The increase in electronic banking expense is attributable to a new mobile banking platform which includes security enhancements and other technical upgrades.

 

 

 

 

·

State deposit tax increased year over year due primarily to the increase in deposits throughout 2021. The calculation is based on an average of month-end deposit totals over a 12 month period.

 

 
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APPLICABLE INCOME TAXES

 

The provision for income taxes decreased $33,675, or 3.9%, for the third quarter of 2022 compared to the same quarter in 2021, and decreased $205,157, or 9.2%, for the first nine months of 2022 compared to the same period in 2021 and is proportional to the decrease in income before income taxes totaling $122,371 for the third quarter of 2022 versus 2021 and $939,266 year over year.  Tax credits related to limited partnership investments amounted to $99,958 and $117,015, respectively, for the third quarter of 2022 and 2021, and $292,437 and $351,045, respectively, for the first nine months of 2022 and 2021.

 

Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $67,353 and $90,762, respectively, for the third quarters of 2022 and 2021, and $201,537 and $272,286, respectively, for the first nine months of 2022 and 2021.  These investments provide tax benefits, including tax credits, and are designed to provide a targeted effective annual yield between 7% and 10%.

 

CHANGES IN FINANCIAL CONDITION

 

The following table reflects the composition of the Company's major categories of assets and liabilities as a percentage of total assets or liabilities and shareholders’ equity, as the case may be, as of the balance sheet dates:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$724,194,001

 

 

 

70.52%

 

$689,988,533

 

 

 

67.71%

AFS securities

 

 

187,227,320

 

 

 

18.23%

 

 

182,342,459

 

 

 

17.89%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

210,463,414

 

 

 

20.50%

 

 

209,465,151

 

 

 

20.55%

Interest-bearing transaction accounts

 

 

269,907,036

 

 

 

26.28%

 

 

265,513,937

 

 

 

26.05%

Money market funds

 

 

137,639,793

 

 

 

13.40%

 

 

129,728,954

 

 

 

12.73%

Savings deposits

 

 

179,853,917

 

 

 

17.51%

 

 

168,390,905

 

 

 

16.52%

Time deposits

 

 

105,176,989

 

 

 

10.24%

 

 

106,301,006

 

 

 

10.43%

Long-term advances

 

 

1,300,000

 

 

 

0.13%

 

 

1,300,000

 

 

 

0.13%

 

The following table reflects the changes in the composition of the Company's major categories of assets and liabilities between the balance sheet dates, as disclosed in the table above:

 

 

 

Change in Volume

 

 

Percentage Change

 

Assets

 

 

 

 

 

 

Loans

 

$34,205,468

 

 

 

4.96%

AFS securities

 

 

4,884,861

 

 

 

2.68%

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Demand deposits

 

 

998,263

 

 

 

0.48%

Interest-bearing transaction accounts

 

 

4,393,099

 

 

 

1.65%

Money market funds

 

 

7,910,839

 

 

 

6.10%

Savings deposits

 

 

11,463,012

 

 

 

6.81%

Time deposits

 

 

(1,124,017)

 

 

-1.06%

 

The increase in the loan portfolio during the first nine months of 2022 was attributable to increases totaling $43.3 million in commercial & industrial and CRE loans, which was partially offset by payoffs of certain PPP loans through SBA’s forgiveness program totaling $11.1 million and maturities of certain municipal loans totaling $7.8 million.  The SBA PPP program ended during the second quarter of 2021, so this portfolio will continue to decrease throughout the remainder of 2022 either through pay downs or payoffs initiated on behalf of SBA’s forgiveness program, or by regular amortization as borrowers begin to make scheduled monthly payments.  The maturities within the municipal loan portfolio are cyclical, generally occurring on June 30.  As a result of competition from area financial institutions, the Company lost the bids on renewal of a portion of the matured municipal loans.

 

The increase in the securities AFS portfolio is attributable to the purchase of $47.5 million in securities AFS during the first nine months of 2022, consisting of $9.1 million in US treasury securities, $10.9 million in tax-exempt municipal bonds, $1.6 million in ABS, $7.4 million in CMO, and $18.5 million in MBS.  These purchases were reduced in part by maturities and calls exercised amounting to $3.0 million, as well as principal payments on various portfolios totaling $12.0 million, and by an increase of $27.1 million in unrealized losses arising during the first nine months of 2022, which is reflected in OCI.  In management’s view, the size of the securities AFS portfolio is appropriate and proportional to the overall asset base, as this portfolio serves an important role in the Company’s liquidity position. 

 

 
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The increase in interest-bearing transaction accounts consists of an increase of $11.7 million, or 9.9%, in consumer interest-bearing transaction accounts, which includes Health Savings Accounts and the deposit account of the Company’s trust and asset management affiliate, CFSG.  This was partially offset by a decrease of $3.2 million, or 7.6%, in municipal deposit accounts and a decrease of $4.1 million, or 5.8% in the ICS deposit accounts.  The increase in savings deposits of $11.5 million, or 6.8%, is likely attributable in part to parked funds as customers await more favorable rates for time deposits, as well as deposits of stimulus payments and tax credits from the U.S. Government. 

 

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 current rising rate environment will have a positive impact to the Company’s NII for the remainder of 2022.

 

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 September 30, 2022:

 

Rate Change

 

Percent Change in NII

 

 

 

 

 

Down 100 bps

 

 

-1.2%

Up 200 bps

 

 

0.1%

 

The estimated amounts shown in the table above 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.  The ALCO model also provides alternate scenarios including a sustained flat, or inverted yield curve. 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-term rates.

 

 
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Table of Contents

 

As of September 30, 2022, 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%.  As previously announced by the Financial Conduct Authority in the United Kingdom, the entity that administers LIBOR, 3-month LIBOR for U.S. dollar denominated deposits will be phased out as of June 30, 2023.  The Indenture governing the terms of the Company’s Debentures contains detailed fallback provisions in the event 3-month LIBOR is not available, empowering the Trustee to obtain substitute quotations from other leading banks.  However, under the federal Adjustable Interest Rate (LIBOR) Act enacted in March 2022 (the “LIBOR Act”), fallback provisions like those in the Company’s Indenture that are based on a “determining person” (such as an indenture trustee) obtaining quotations of interbank lending or deposit rates are deemed “ineffective” and will be replaced as a matter of law, without need to amend contract documents, with a benchmark interest rate that will be identified in final regulations to be promulgated by the Federal Reserve. The Federal Reserve has issued proposed regulations and has indicated that it will issue final regulations prior to the June 30, 2023 LIBOR phase out date.  As required under the LIBOR Act, any Federal Reserve-identified benchmark rate specified in the final regulations will be based on the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York and will include an appropriate “tenor spread adjustment” to reflect historical spreads between LIBOR and SOFR.  The replacement rate for ineffective fallback provisions will take effect on the first London banking day after June 30, 2023. The Indenture Trustee has indicated informally that it views the fallback provisions in the Indenture as ineffective under the LIBOR Act, and that it intends to provide written guidance on the transition from LIBOR prior to June 30, 2023, following the Federal Reserve’s adoption of final regulations.   

 

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, but cannot predict with certainty the magnitude of the impact on the Company’s interest expense at this time.

 

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 interests, loans to industry segments, and the geographic distribution of commercial real estate loans.  Loans are reviewed periodically by an independent loan review firm to help ensure accuracy of the Company's internal risk ratings and compliance with various internal policies, procedures and regulatory guidance.

 

Residential mortgages represented 31.3% of the Company’s loan balances as of September 30, 2022 and December 31, 2021.  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-value ratios 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.  As of September 30, 2022, junior lien home equity products made up 14.9% 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 & industrial and CRE loan portfolios have seen solid growth over recent years.  Commercial & industrial and CRE loans together comprised 67.1% of the Company’s loan portfolio at September 30, 2022, compared to 68.1% at December 31, 2021.  Those percentages included the Company’s portfolio of PPP loans, which has been steadily decreasing, and totaled $1.1 million at September 30, 2022, compared to $12.2 million at December 31, 2021.

 

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 who 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. The Company has 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 $324.3 million CRE portfolio at September 30, 2022 were $102.4 million in owner-occupied CRE and $124.9 million in non-owner occupied CRE.

 

 
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Table of Contents

 

Risk in the Company’s commercial & industrial and CRE loan portfolios is mitigated in part by government guarantees issued by federal agencies such as the SBA and RD.  At September 30, 2022, the Company had $31.9 million in guaranteed loans with guaranteed balances of $23.8 million, compared to $42.9 million in guaranteed loans with guaranteed balances of $35.4 million at December 31, 2021.  PPP loans are included in these totals, all of which carry a 100% guarantee through the SBA, subject to borrower eligibility requirements.

 

The Company works actively with customers early in the delinquency process to help them to avoid default and foreclosure.  Commercial & industrial and CRE loans are generally placed on non-accrual status when there is deterioration in the financial position of the borrower, payment in full of principal and interest is not expected, and/or principal or interest has been in default for 90 days or more.  However, such a loan need not be placed on non-accrual status if it is both well secured and in the process of collection.  Residential mortgages and home equity loans are considered for non-accrual status at 90 days past due and are evaluated on a case-by-case basis.  The Company obtains current property appraisals or market value analyses and considers the cost to carry and sell collateral in order to assess the level of specific allocations required.  Consumer loans are generally not placed in non-accrual but are charged off by the time they reach 120 days past due.  When a loan is placed in non-accrual status, the Company reverses the accrued interest against current period income and discontinues the accrual of interest until the borrower clearly demonstrates the ability and intention to resume normal payments, typically demonstrated by regular timely payments for a period of not less than six months.  Interest payments received on non-accrual or impaired loans are generally applied as a reduction of the loan book balance.

 

The Company’s TDRs are principally a result of extending loan repayment terms to relieve cash flow difficulties.  The Company has only infrequently reduced interest rates below the current market rate.  The Company has not forgiven principal or reduced accrued interest within the terms of original restructurings.  Management evaluates each TDR situation on its own merits and does not foreclose the granting of any particular type of concession.

 

The following table shows the Company’s TDRs that were past due 90 days or more or in non-accrual status as of the balance sheet dates:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

Number of

 

 

Principal

 

 

Number of

 

 

Principal

 

 

 

Loans

 

 

Balance

 

 

Loans

 

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & industrial

 

 

5

 

 

$48,751

 

 

 

6

 

 

$71,128

 

Commercial real estate

 

 

5

 

 

 

2,911,544

 

 

 

5

 

 

 

3,642,073

 

Residential real estate - 1st lien

 

 

9

 

 

 

901,669

 

 

 

12

 

 

 

977,961

 

Residential real estate - Jr lien

 

 

1

 

 

 

36,985

 

 

 

1

 

 

 

41,901

 

Total

 

 

20

 

 

$3,898,949

 

 

 

24

 

 

$4,733,063

 

 

The remaining TDRs were performing in accordance with their modified terms as of the balance sheet dates and consisted of the following:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

Number of

 

 

Principal

 

 

Number of

 

 

Principal

 

 

 

Loans

 

 

Balance

 

 

Loans

 

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

1

 

 

$1,782

 

 

 

2

 

 

$41,228

 

Residential real estate - 1st lien

 

 

31

 

 

 

2,439,393

 

 

 

31

 

 

 

2,473,767

 

Residential real estate - Jr lien

 

 

1

 

 

 

2,529

 

 

 

1

 

 

 

3,537

 

Total

 

 

33

 

 

$2,443,704

 

 

 

34

 

 

$2,518,532

 

 

As of the balance sheet dates, the Company evaluates whether it is contractually committed to lend additional funds to debtors with impaired, non-accrual or modified loans.  The Company is contractually committed to lend on one SBA guaranteed line of credit to a borrower whose lending relationship was previously restructured.

 

 
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Table of Contents

 

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 5 to the accompanying unaudited interim consolidated financial statements).  Although the Company, in establishing the ALL, considers the inherent losses in individual loans and pools of loans, the ALL is a general reserve available to absorb all credit losses in the loan portfolio.  No part of the ALL is segregated to absorb losses from any particular loan or segment of loans.

 

When establishing the ALL each quarter, the Company applies a combination of historical loss factors to most loan segments, including residential first and junior lien mortgages, CRE, commercial & industrial, and consumer loan portfolios, but excluding the municipal loan and purchased loan portfolios as there has never been a loss recorded in either of those loan segments.  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 reviews all the facts and circumstances surrounding non-accrual loans and on a case-by-case basis may consider loans below the threshold as impaired when such treatment is material to the financial statements.  See Note 5 to the accompanying unaudited interim consolidated financial statements for information on the recorded investment in impaired loans and their related allocations. 

 

The following table summarizes the Company’s credit risk ratios for the balance sheet dates presented:

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

ALL to total loans outstanding

 

 

1.16%

 

 

1.12%

ALL

 

$8,432,086

 

 

$7,710,256

 

Loans outstanding

 

$724,194,001

 

 

$689,988,533

 

 

 

 

 

 

 

 

 

 

Non-accruing loans to loans outstanding

 

 

1.19%

 

 

0.86%

Non-accruing loans

 

$8,602,731

 

 

$5,940,629

 

Loans outstanding

 

$724,194,001

 

 

$689,988,533

 

 

 

 

 

 

 

 

 

 

ALL to non-accruing loans

 

 

98.02%

 

 

129.79%

ALL

 

$8,432,086

 

 

$7,710,256

 

Non-accruing loans

 

$8,602,731

 

 

$5,940,629

 

 

The provision for loan losses for the nine months ended September 30, 2022 was $1.3 million, compared to $624,165 for the same period in 2021. The $700,835 year over year increase was driven in part by an increase in the commercial loan volume as well as a write-down totaling $667,474, on a single non-performing loan, currently in foreclosure.  The increase of $2.7 million in non-accruing loans is attributable to one business relationship, which the Company is monitoring closely.

 

The third quarter ALL analysis indicates that the reserve balance of $8.4 million at September 30, 2022 is sufficient to cover losses that are probable and estimable as of the measurement date, with an unallocated reserve of $258,555. Management believes the reserve balance continues 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.  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. 

 

As stated in Note 2 of the accompanying notes to the Company’s unaudited interim consolidated financial statements, effective January 1, 2023, the Company will be required to recognize credit losses under the guidance of ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,  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 over the life of the loans. Any adjustments from the adoption of CECL will be recorded as an adjustment to retained earnings and will affect calculation of regulatory capital ratios.  Based on a parallel calculation as of September 30, 2022 the required adjustment would have an immaterial impact to retained earnings and regulatory capital.  Changes in forecasts used in the model could produce different results, quarter to quarter, including as of the January 1, 2023 effective date for the transition to CECL.

 

 
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Net charge-offs during the periods presented to average loan outstanding were as follows:

 

For the Nine Months Ended September 30,

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Net charge-offs during the period to average loan outstanding:

 

 

 

 

 

 

Commercial & industrial

 

 

-0.03%

 

 

-0.01%

Net charge-offs during the period

 

$(34,638)

 

$(14,086)

Average amount outstanding

 

$115,489,717

 

 

$160,565,446

 

 

 

 

 

 

 

 

 

 

Purchased loans

 

 

0.00%

 

 

0.00%

Net charge-offs during the period

 

$0

 

 

$0

 

Average amount outstanding

 

$8,782,234

 

 

$10,788,989

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

-0.21%

 

 

0.01%

Net (charge-offs) recoveries during the period

 

$(667,474)

 

$27,160

 

Average amount outstanding

 

$313,919,164

 

 

$283,812,722

 

 

 

 

 

 

 

 

 

 

Municipal

 

 

0.00%

 

 

0.00%

Net charge-offs during the period

 

$0

 

 

$0

 

Average amount outstanding

 

$45,161,639

 

 

$52,105,647

 

 

 

 

 

 

 

 

 

 

Residential real estate - 1st lien

 

 

0.06%

 

 

0.00%

Net recoveries during the period

 

$111,163

 

 

$4,602

 

Average amount outstanding

 

$184,548,015

 

 

$170,620,859

 

 

 

 

 

 

 

 

 

 

Residential real estate - Jr lien

 

 

0.01%

 

 

0.03%

Net recoveries during the period

 

$3,728

 

 

$9,601

 

Average amount outstanding

 

$33,260,177

 

 

$36,625,381

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

-0.45%

 

 

-1.06%

Net charge-offs during the period

 

$(15,949)

 

$(40,620)

Average amount outstanding

 

$3,513,004

 

 

$3,847,380

 

 

 

 

 

 

 

 

 

 

Total loans

 

 

-0.09%

 

 

0.00%

Net charge-offs during the period

 

$(603,170)

 

$(13,343)

Average amount outstanding

 

$704,673,950

 

 

$718,366,424

 

 

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.  Rapid changes in prevailing interest rates, particularly after a long period of relative stability, create a challenging interest rate environment. 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. 

 

 
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COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET ARRANGEMENTS

 

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit, standby letters of credit and risk-sharing commitments on certain sold loans.  Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.  The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. During the first nine months of 2022, the Company did not engage in any activity that created any additional types of off-balance sheet risk.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Managing liquidity risk is essential to maintaining both depositor confidence and stability in earnings.  Liquidity management refers to the ability of the Company to adequately cover fluctuations in assets and liabilities.  Meeting loan demand (assets) and covering the withdrawal of deposit funds (liabilities) are two key components of the liquidity management process.  The Company’s principal sources of funds are deposits, amortization and prepayment of loans and securities, maturities of investment securities, sales of loans available-for-sale, and earnings and funds provided from operations.  Maintaining a relatively stable funding base, which is achieved by diversifying funding sources, competitively pricing deposit products, and extending the contractual maturity of liabilities, reduces the Company’s exposure to rollover risk on deposits and limits reliance on volatile short-term borrowed funds.  Short-term funding needs arise from declines in deposits or other funding sources and from funding requirements for loan commitments.  The Company’s strategy is to fund assets to the maximum extent possible with core deposits that provide a sizable source of relatively stable and lower-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.  At September 30, 2022 and December 31, 2021, the Company had no one-way CDARS outstanding.  In addition, two-way (reciprocal) CDARS deposits, as well as reciprocal ICS money market and demand deposits, enhance the Company’s ability to retain larger deposit balances by allowing the Company to provide FDIC deposit insurance to its customers in excess of account coverage limits through the exchange of deposits with other participating FDIC-insured financial institutions.  At September 30, 2022 and December 31, 2021, the Company reported $3.1 million and $3.6 million, respectively, in reciprocal CDARS deposits.  The balance in ICS reciprocal money market deposits was $15.6 million at September 30, 2022, compared to $15.3 million at December 31, 2021, and the balance in ICS reciprocal demand deposits as of those dates was $66.7 million and $70.8 million, respectively.

 

The Company had two blocks of DTC Brokered CDs totaling $2.3 million and $1.4 million with maturities in January, 2021 and April, 2021, respectively. These blocks were not replaced, leaving no DTC Brokered CDs outstanding at the balance sheet dates presented in this quarterly report.  Although wholesale deposit funding through DTC is an important supplemental source of liquidity that has proven efficient, flexible and cost-effective when compared with other borrowing methods, the growth in deposits during 2021 and 2022 has reduced the Company’s need for supplementary funding sources in the near term.

 

At September 30, 2022 and December 31, 2021, borrowing capacity of $112.8 million and $100.2 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 by collateral pledges securing FHLBB letters of credit collateralizing public unit deposits.  The Company also has an unsecured Federal Funds credit line with the FHLBB with an available balance of $500,000 and no outstanding advances during any of the respective comparison periods.  Interest is chargeable at a rate determined daily, approximately 25 bps higher than the rate paid on federal funds sold.

 

The Company has a BIC arrangement with the FRBB secured by eligible commercial & industrial loans, CRE loans and home equity loans, resulting in an available credit line of $62.6 million and $52.3 million, respectively, at September 30, 2022 and December 31, 2021.  Credit advances under this FRBB lending program are overnight advances with interest chargeable at the primary credit rate (generally referred to as the discount rate), currently 400 bps.  The Company had no outstanding advances through this facility at September 30, 2022 or December 31, 2021.

 

 
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The following table reflects the Company’s outstanding FHLBB and FRBB advances against the respective lines as of the dates indicated:

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Long-Term Advances(1)

 

 

 

 

 

 

FHLBB term advance, 0.00%, due September 22, 2023

 

$200,000

 

 

$200,000

 

FHLBB term advance, 0.00%, due November 12, 2025

 

 

300,000

 

 

 

300,000

 

FHLBB term advance, 0.00%, due November 13, 2028

 

 

800,000

 

 

 

800,000

 

 

 

$1,300,000

 

 

$1,300,000

 

 

(1)

All long-term advances are pursuant to the JNE program, through which the FHLBB provides a subsidy, funded by the FHLBB’s earnings, to write down interest rates to zero percent on advances that finance qualifying loans to small businesses. JNE advances must support small business in New England that create and/or retain jobs, or otherwise contribute to overall economic development activities.

 

The Company has unsecured lines of credit with two correspondent banks with aggregate available borrowing capacity totaling $20.5 million as of the balance sheet dates presented in this quarterly report.  The Company had no outstanding advances against these credit lines as of the balance sheet dates presented.

 

The following table illustrates the changes in shareholders' equity from December 31, 2021 to September 30, 2022:

 

Balance at December 31, 2021 (book value $15.48 per common share)

 

$84,760,268

 

Net income

 

 

9,037,200

 

Issuance of common stock through the DRIP

 

 

897,974

 

Dividends declared on common stock

 

 

(3,720,116)

Dividends declared on preferred stock

 

 

(43,125)

Change in AOCI on AFS securities, net of tax

 

 

(21,392,376)

Balance at September 30, 2022 (book value $12.56 per common share)

 

$69,539,825

 

 

The primary objective of the Company’s capital planning process is to balance appropriately the retention of capital to support operations and future growth, with the goal of providing shareholders an attractive return on their investment.  To that end, management monitors capital retention and dividend policies on an ongoing basis.

 

As described in more detail in Note 23 to the audited consolidated financial statements contained in the Company’s 2021 Annual Report on Form 10-K and under the caption “LIQUIDITY AND CAPITAL RESOURCES” in the MD&A section of that report, the Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies pursuant to which they must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items.  Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

 

As of September 30, 2022, the Bank was considered well capitalized under the standard regulatory capital framework for Prompt Corrective Action and the Company exceeded currently applicable consolidated regulatory guidelines for capital adequacy. While we believe that the Company has sufficient capital to withstand an extended economic downturn, our regulatory capital ratios could be adversely impacted by future credit losses and other operational impacts of deteriorating economic conditions and inflation.

 

 
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The following table shows the Company’s actual capital ratios and those of its subsidiary, as well as currently applicable regulatory capital requirements, as of the dates indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum

 

 

Minimum

 

 

 

 

 

 

 

 

 

Minimum

 

 

For Capital

 

 

To Be Well

 

 

 

 

 

 

 

 

 

For Capital

 

 

Adequacy Purposes

 

 

Capitalized Under

 

 

 

 

 

 

 

 

 

Adequacy

 

 

with Conservation

 

 

Prompt Corrective

 

 

 

Actual

 

 

Purposes

 

 

Buffer(1)

 

 

Action Provisions(2)

 

 

 

Amount

 

 

Ratio 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

 

(Dollars in Thousands)

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$79,025

 

 

 

11.75%

 

$30,254

 

 

 

4.50%

 

$47,062

 

 

 

7.00%

 

 

N/A

 

 

 

N/A

 

Bank

 

$92,724

 

 

 

13.80%

 

$30,230

 

 

 

4.50%

 

$47,024

 

 

 

7.00%

 

$43,665

 

 

 

6.50%

Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$93,412

 

 

 

13.89%

 

$40,339

 

 

 

6.00%

 

$57,147

 

 

 

8.50%

 

 

N/A

 

 

 

N/A

 

Bank

 

$92,724

 

 

 

13.80%

 

$40,306

 

 

 

6.00%

 

$57,100

 

 

 

8.50%

 

$53,742

 

 

 

8.00%

Total capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$101,817

 

 

 

15.14%

 

$53,785

 

 

 

8.00%

 

$70,593

 

 

 

10.50%

 

 

N/A

 

 

 

N/A

 

Bank

 

$101,123

 

 

 

15.05%

 

$53,742

 

 

 

8.00%

 

$70,536

 

 

 

10.50%

 

$67,177

 

 

 

10.00%

Tier 1 capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$93,412

 

 

 

9.14%

 

$40,884

 

 

 

4.00%

 

 

N/A

 

 

 

N/A

 

 

 

N/A

 

 

 

N/A

 

Bank

 

$92,724

 

 

 

9.08%

 

$40,865

 

 

 

4.00%

 

 

N/A

 

 

 

N/A

 

 

$51,081

 

 

 

5.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company(3)

 

$72,853

 

 

 

11.90%

 

$27,548

 

 

 

4.50%

 

$42,853

 

 

 

7.00%

 

 

N/A

 

 

 

N/A

 

Bank

 

$86,654

 

 

 

14.17%

 

$27,522

 

 

 

4.50%

 

$42,812

 

 

 

7.00%

 

$39,754

 

 

 

6.50%

Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$87,240

 

 

 

14.25%

 

$36,731

 

 

 

6.00%

 

$52,036

 

 

 

8.50%

 

 

N/A

 

 

 

N/A

 

Bank

 

$86,654

 

 

 

14.17%

 

$36,696

 

 

 

6.00%

 

$51,986

 

 

 

8.50%

 

$48,928

 

 

 

8.00%

Total capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$94,894

 

 

 

15.50%

 

$48,975

 

 

 

8.00%

 

$64,279

 

 

 

10.50%

 

 

N/A

 

 

 

N/A

 

Bank

 

$94,301

 

 

 

15.42%

 

$48,928

 

 

 

8.00%

 

$64,218

 

 

 

10.50%

 

$61,160

 

 

 

10.00%

Tier 1 capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$87,240

 

 

 

8.79%

 

$39,719

 

 

 

4.00%

 

 

N/A

 

 

 

N/A

 

 

 

N/A

 

 

 

N/A

 

Bank

 

$86,654

 

 

 

8.73%

 

$39,698

 

 

 

4.00%

 

 

N/A

 

 

 

N/A

 

 

$49,622

 

 

 

5.00%

 

(1)

Conservation Buffer is calculated based on risk-weighted assets and does not apply to calculations of average assets.

 

 

(2)

Applicable to banks, but not bank holding companies.

 

 

(3)

Reflects recalculation of the Company’s previously reported common equity tier I capital ratio. The previously reported calculation for December 31, 2021 and prior annual and interim periods incorrectly included the Company’s outstanding preferred stock and trust preferred securities in the equity component of the calculation.

 

The Company's ability to pay dividends to its shareholders is largely dependent on the Bank's ability to pay dividends to the Company.  In general, a national bank may not pay dividends that exceed net income for the current and preceding two years.  Regardless of statutory restrictions, as a matter of regulatory policy, banks and bank holding companies should pay dividends only out of current earnings and only if, after paying such dividends, they remain adequately capitalized.

 

 
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Table of Contents

 

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

 

Omitted, in accordance with the regulatory relief available to smaller reporting companies in SEC Release Nos. 33-10513 and 34-83550.

 

ITEM 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act).  As of September 30, 2022, an evaluation was performed under the supervision and with the participation of management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based on that evaluation, management concluded that its disclosure controls and procedures as of September 30, 2022 were effective in ensuring that material information required to be disclosed in the reports it files with the Commission under the Exchange Act was recorded, processed, summarized, and reported on a timely basis.

 

For this purpose, the term “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 
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PART II. OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

In the normal course of business, the Company is involved in litigation that is considered incidental to its business.  Management does not expect that any such litigation will be material to the Company's consolidated financial condition or results of operations.

 

ITEM 1A. Risk Factors

 

In management’s view, the Risk Factors identified in our Annual Report on Form 10-K for the year ended December 31, 2021 represent the most significant risks to the Company's future results of operations and financial condition as of September 30, 2022. 

 

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

 

The following table provides information as to the purchases of the Company’s common stock during the three months ended September 30, 2022, by the Company or by any affiliated purchaser (as defined in SEC Rule 10b-18).  During the monthly periods presented, the Company did not have any publicly announced repurchase plans or programs.

 

 

 

Total Number

 

 

Average

 

 

 

of Shares

 

 

Price Paid

 

For the period:

 

Purchased(1)

 

 

Per Share

 

 

 

 

 

 

 

 

July 1 – July 31

 

 

1,800

 

 

$20.25

 

August 1 - August 31

 

 

0

 

 

 

0.00

 

September 1 - September 30

 

 

0

 

 

 

0.00

 

Total

 

 

1,800

 

 

$20.25

 

 

(1)

All 1,800 shares were purchased for the account of participants invested in the Company Stock Fund under the Company’s Retirement Savings Plan by or on behalf of the Plan Trustee, the Human Resources Committee of the Bank. Such share purchases were facilitated through CFSG, which provides certain investment advisory services to the Plan. Both the Plan Trustee and CFSG may be considered affiliates of the Company under Rule 10b-18.

 

 
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ITEM 6. Exhibits

 

The following exhibits are filed with, or incorporated by reference in, this report:

 

Exhibit 31.1

Certification from the Chief Executive Officer (Principal Executive Officer) of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2

Certification from the Treasurer (Principal Financial Officer) of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1

Certification from the Chief Executive Officer (Principal Executive Officer) of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*

Exhibit 32.2

Certification from the Treasurer (Principal Financial Officer) of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*

 

 

Exhibit 101

The following materials from the Company’s Quarterly Report on Form 10-Q for the nine-months ended September 30, 2022 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three- and nine-month periods ended September 30, 2022 and 2021, (iii) the unaudited consolidated statements of comprehensive income, (iv) the unaudited consolidated statements of cash flows and (v) related notes.

Exhibit 104

Cover page Interactive Data File (formatted in iXBRL and contained in Exhibit 101)

 

*This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act.

 

 
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SIGNATURES

 

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

 

COMMUNITY BANCORP.

 

DATED:  November 14, 2022

/s/Kathryn M. Austin

 

 

Kathryn M. Austin, President

 

 

& Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

DATED: November 14, 2022

/s/Louise M. Bonvechio

 

 

Louise M. Bonvechio, Corporate

 

 

Secretary & Treasurer

 

 

(Principal Financial Officer)

 

 

 
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SECURITIES AND EXCHANGE COMMISSION

 

Washington, DC  20549

 

FORM 10-Q

 

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2022

 

COMMUNITY BANCORP.

 

EXHIBITS

 

EXHIBIT INDEX

 

Exhibit 31.1

Certification from the Chief Executive Officer (Principal Executive Officer) of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002

 

 

Exhibit 31.2

Certification from the Treasurer (Principal Financial Officer) of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002

 

 

Exhibit 32.1

Certification from the Chief Executive Officer (Principal Executive Officer) of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*

 

 

Exhibit 32.2

Certification from the Treasurer (Principal Financial Officer) of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*

 

 

Exhibit 101

The following materials from the Company’s Quarterly Report on Form 10-Q for the nine-months ended September 30, 2022 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three- and nine-month interim periods ended September 30, 2022 and 2021, (iii) the unaudited consolidated statements of comprehensive income, (iv) the unaudited consolidated statements of cash flows and (v) related notes.

Exhibit 104

Cover page Interactive Data File (formatted in iXBRL and contained in Exhibit 101)

 

*  This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act.

 

 
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