The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of OREO. In connection with evaluating loans for impairment or assigning the carrying value of OREO, management generally obtains independent evaluations or appraisals for significant properties. While the allowance for loan losses and the carrying value of OREO are determined using management's best estimate of probable loan and OREO losses, respectively, as of the balance sheet date, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of a substantial portion of the fair value of OREO are susceptible to uncertainties and changes in a number of factors, especially local real estate market conditions. The amount of the change that is reasonably possible cannot be estimated.
While management uses available information to recognize losses on loans and OREO, future additions to the allowance or write-downs of OREO may be necessary based on changes in local economic conditions or other relevant factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for losses on loans and the carrying value of OREO. Such agencies may require the Company to recognize additions to the allowance or write-downs of OREO based on their judgment about information available to them at the time of their examination.
Mortgage servicing rights associated with loans originated and sold in the secondary market, where servicing is retained, are capitalized and included in other assets in the consolidated balance sheets. Mortgage servicing rights are amortized against non-interest income in proportion to, and over the period of, estimated future net servicing income of the underlying loans. The value of capitalized servicing rights represents the present estimated value of the future servicing fees arising from the right to service loans for third parties. The carrying value of the mortgage servicing rights is periodically reviewed for impairment based on a determination of estimated fair value as compared to amortized cost, and impairment, if any, is recognized through a valuation allowance and is recorded as a write down. Critical accounting policies for mortgage servicing rights relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of mortgage servicing rights requires the development and use of a number of estimates, including anticipated principal amortization and prepayments. Events that may significantly affect the estimates used are changes in interest rates and the payment performance of the underlying loans. Management uses a third party consultant to assist in analyzing the fair value of the Company’s mortgage servicing rights.
Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to various factors, including the length of time and the extent to which the fair value has been less than cost; the nature of the issuer and its financial condition and near-term prospects; and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The evaluation of these factors is a subjective process and involves estimates and assumptions about matters that are inherently uncertain. Should actual factors and conditions differ materially from those used by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements.
Management utilizes numerous techniques to estimate the carrying value of various other assets held by the Company, including, but not limited to, bank premises and equipment and deferred taxes. The assumptions considered in making these estimates are based on historical experience and on various other factors that are believed by management to be reasonable under the circumstances. Management acknowledges that the use of different estimates or assumptions could produce different estimates of carrying values.
Accounting for a business combination that was completed prior to 2009 requires the application of the purchase method of accounting. Under the purchase method, the Company was required to record the assets and liabilities acquired through the LyndonBank merger in 2007 at fair market value, with the excess of the purchase price over the fair value of the net assets recorded as goodwill and evaluated annually for impairment. Management uses various assumptions in evaluating goodwill for impairment.
Presentation of cash flows
For purposes of presentation in the consolidated statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from banks (including cash items in process of clearing), federal funds sold (generally purchased and sold for one day periods) and overnight deposits.
Investment securities
Securities the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. Debt and equity securities not classified as held-to-maturity are classified as available-for-sale. Investments classified as available-for-sale are carried at fair value, with unrealized gains and losses, net of tax and reclassification adjustments, reflected as a net amount in the shareholders’ equity section of the consolidated balance sheets and in the statements of changes in shareholders’ equity. Investment securities transactions are accounted for on a trade date basis. The specific identification method is used to determine realized gains and losses on sales of securities available-for-sale. Premiums and discounts are recognized in interest income using the interest method over the period to maturity or call date. The Company does not hold any securities purchased for the purpose of selling in the near term and classified as trading.
Declines in the fair value of individual equity securities that are deemed to be other than temporary are reflected in earnings when identified. For individual debt securities where the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary decline in the fair value of the debt security related to (1) credit loss is recognized in earnings and (2) other factors is recognized in other comprehensive income or loss. Credit loss is deemed to exist if the present value of expected future cash flows using the interest rates at acquisition is less than the amortized cost basis of the debt security. For individual debt securities where the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the security’s cost basis and its fair value at the balance sheet date.
Other investments
In December 2011, the Company made an equity investment in a NMTC financing structure (see Note 7). The Company’s investment in the NMTC is amortized using the effective yield method.
From time to time, the Company acquires partnership interests in limited partnerships for low income housing projects. New investments in limited partnerships are amortized using the proportional amortization method. All investments made before January 1, 2015 are amortized using the effective yield method.
The Company has a one-third ownership interest in Community Financial Services Group, LLC (“CFSG”), a non-depository trust company (see Note 7). The Company's investment in CFSG is accounted for under the equity method of accounting.
Restricted equity securities
Restricted equity securities comprise Federal Reserve Bank stock and Federal Home Loan Bank stock. These securities are carried at cost. As a member of the Federal Reserve Bank of Boston (“FRBB”), the Company is required to invest in FRBB stock in an amount equal to 6% of the Bank's capital stock and surplus.
As a member of the Federal Home Loan Bank of Boston (“FHLBB”), the Company is required to invest in $100 par value stock of the FHLBB in an amount that approximates 1% of unpaid principal balances on qualifying loans, plus an additional amount to satisfy an activity based requirement. The stock is nonmarketable and redeemable at par value, subject to the FHLBB’s right to temporarily suspend such redemptions. Members are subject to capital calls in some circumstances to ensure compliance with the FHLBB’s capital plan.
Loans held-for-sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.
Loans
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance, adjusted for any charge-offs, the allowance for loan losses, loan premiums or discounts for acquired loans and any unearned fees or costs on originated loans.
Loan interest income is accrued daily on the outstanding balances. For all loan segments, the accrual of interest is discontinued when a loan is specifically determined to be impaired or when the loan is delinquent 90 days and management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is generally not recognized on specific impaired loans unless the likelihood of further loss is considered by management to be remote. Interest payments received on impaired loans are generally applied as a reduction of the loan principal balance. Loans are returned to accrual status when principal and interest payments are brought current and the customer has demonstrated the intent and ability to make future payments on a timely basis. Loans are written down or charged off when collection of principal is considered doubtful. Past due status is determined on a contractual basis.
Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount is amortized as an adjustment of the related loan's yield. The Company generally amortizes these amounts over the contractual life of the loans.
Loan premiums and discounts on loans acquired in the merger with LyndonBank are amortized as an adjustment to yield over the life of the loans.
Allowance for loan losses
The allowance for loan losses is established through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is probable. Subsequent recoveries, if any, are credited to the allowance.
Unsecured loans, primarily consumer loans, are charged off when they become uncollectible and no later than 120 days past due. Unsecured loans to customers who subsequently file bankruptcy are charged off within 30 days of receipt of the notification of filing or by the end of the month in which the loans become 120 days past due, whichever occurs first. For secured loans, both residential and commercial, the potential loss on impaired loans is carried as a loan loss reserve specific allocation; the loss portion is charged off when collection of the full loan appears unlikely. The unsecured portion of a real estate loan is that portion of the loan exceeding the "fair value" of the collateral less the estimated cost to sell. Value of the collateral is determined in accordance with the Company’s appraisal policy. The unsecured portion of an impaired real estate secured loan is charged off by the end of the month in which the loan becomes 180 days past due.
As described below, the allowance consists of general, specific and unallocated components. However, the entire allowance is available to absorb losses in the loan portfolio, regardless of specific, general and unallocated components considered in determining the amount of the allowance.
General component
The general component of the allowance for loan losses is based on historical loss experience, adjusted for qualitative factors and stratified by the following loan segments: commercial and industrial, commercial real estate, residential real estate first (“1st”) lien, residential real estate junior (“Jr”) lien and consumer loans. The Company does not disaggregate its portfolio segments further into classes. Loss ratios are calculated by loan segment for one year, two year, three year, four year and five year look back periods. The highest loss ratio among these look-back periods is then applied against the respective segment. Management uses an average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: 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 commercial real estate loans. This evaluation is inherently subjective as it requires estimates that are susceptible to revision as more information becomes available.
The reserve methodology was modified during the quarter ended June 30, 2015 to eliminate using the higher of the 1999-2001 losses as compared to current losses, by eliminating the use of the 1999-2001 period. The 1999-2001 information had become dated and the Bank’s credit portfolio management had evolved since that period. The revised methodology now considers the highest annual loss rates for the most recent one to five year look back periods for each segment of the portfolio. This change in methodology resulted in a reduction to required reserves of $529,234 at June 30, 2015. However, that reduction was partially offset by adjustments made to the commercial & industrial and commercial real estate qualitative factors for the impact of the change in methodology, principally in the areas of loan growth, loan policy, and delinquency factors. As a result, the commercial & industrial and commercial real estate factors were each increased a total of 10 basis points, amounting to increases of $171,000 and $70,000, respectively at June 30, 2015.
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.
Note 23. Quarterly Financial Data (Unaudited)
A summary of financial data for the four quarters of 2015 and 2014 is presented below:
| | | Quarters in 2015 ended | |
| | | March 31, | | | June 30, | | | Sept. 30, | | | Dec. 31, | |
| | | | | | | | | | | | | |
| Interest income | | $ | 5,866,800 | | | $ | 5,751,184 | | | $ | 5,939,735 | | | $ | 5,848,970 | |
| Interest expense | | | 727,514 | | | | 672,304 | | | | 632,470 | | | | 613,362 | |
| Provision for loan losses | | | 150,000 | | | | 150,000 | | | | 75,000 | | | | 135,000 | |
| Non-interest income | | | 1,212,787 | | | | 1,304,481 | | | | 1,299,995 | | | | 1,332,892 | |
| Non-interest expense | | | 4,696,729 | | | | 4,779,840 | | | | 4,531,874 | | | | 4,802,530 | |
| Net income | | | 1,109,841 | | | | 1,077,704 | | | | 1,439,822 | | | | 1,198,224 | |
| Earnings per common share | | | 0.22 | | | | 0.21 | | | | 0.29 | | | | 0.24 | |
| | | | | | | | | | | | | | | | | |
| | | Quarters in 2014 ended | |
| | | March 31, | | | June 30, | | | Sept. 30, | | | Dec. 31, | |
| | | | | | | | | | | | | |
| Interest income | | $ | 5,618,276 | | | $ | 5,714,147 | | | $ | 5,829,041 | | | $ | 5,788,813 | |
| Interest expense | | | 793,290 | | | | 777,996 | | | | 761,009 | | | | 723,449 | |
| Provision for loan losses | | | 135,000 | | | | 135,000 | | | | 135,000 | | | | 135,000 | |
| Non-interest income | | | 1,313,501 | | | | 1,337,222 | | | | 1,244,680 | | | | 1,246,348 | |
| Non-interest expense | | | 4,712,196 | | | | 4,488,406 | | | | 4,411,428 | | | | 4,417,782 | |
| Net income | | | 1,071,565 | | | | 1,284,386 | | | | 1,377,189 | | | | 1,391,768 | |
| Earnings per common share | | | 0.22 | | | | 0.26 | | | | 0.28 | | | | 0.28 | |
Note 24. Other Income and Other Expenses
The components of other income and other expenses which are in excess of one percent of total revenues in either of the two years disclosed are as follows:
| | | 2015 | | | 2014 | |
| Income | | | | | | |
| Income from investment in CFSG Partners | | $ | 361,044 | | | $ | 272,820 | |
| | | | | | | | | |
| Expenses | | | | | | | | |
| Outsourcing expense | | $ | 516,197 | | | $ | 420,355 | |
| Service contracts - administration | | | 330,563 | | | | 420,426 | |
| Marketing | | | 307,841 | | | | 275,915 | |
| State deposit tax | | | 562,271 | | | | 544,737 | |
| ATM fees | | | 372,609 | | | | 365,813 | |
| Telephone | | | 312,043 | | | | 326,473 | |
| FDIC Insurance | | | 365,804 | | | | 374,703 | |
Note 25. Subsequent Events
Declaration of Cash Dividend
On December 9, 2015, the Company declared a cash dividend of $0.16 per share payable February 1, 2016 to shareholders of record as of January 15, 2016. On March 09, 2016, the Company declared a cash dividend of $0.16 per share payable May 1, 2016 to shareholders of record as of April 15, 2016. These dividends have been recorded as of each declaration date, including shares issuable under the DRIP.
For purposes of accrual or disclosure in these financial statements, the Company has evaluated subsequent events through the date of issuance of these financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Years Ended December 31, 2015 and 2014
The following discussion analyzes the consolidated financial condition of Community Bancorp. (the “Company”) and its wholly-owned subsidiary, Community National Bank, as of December 31, 2015 and 2014, and its consolidated results of operations for the years then ended. The Company is considered a “smaller reporting company” under applicable regulations of the Securities and Exchange Commission (“SEC”) and is therefore eligible for relief from certain disclosure requirements. In accordance with such provisions, the Company has elected to provide its audited consolidated statements of income, comprehensive income, cash flows and changes in shareholders’ equity for two, rather than three, years.
The following discussion should be read in conjunction with the Company’s audited consolidated financial statements and related notes.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements about the results of operations, financial condition and business of the Company and its subsidiary. Words used in the discussion below such as "believes," "expects," "anticipates," "intends," "estimates," "plans," "predicts," or similar expressions, indicate that management of the Company is making forward-looking statements.
Forward-looking statements are not guarantees of future performance. They necessarily involve risks, uncertainties and assumptions. Future results of the Company may differ materially from those expressed in these forward-looking statements. Examples of forward looking statements included in this discussion include, but are not limited to, estimated contingent liability related to assumptions made within the asset/liability management process, management's expectations as to the future interest rate environment and the Company's related liquidity level, credit risk expectations relating to the Company's loan portfolio and its participation in the Federal Home Loan Bank of Boston (“FHLBB”) Mortgage Partnership Finance (“MPF”) program, and management's general outlook for the future performance of the Company or the local or national economy. Although forward-looking statements are based on management's current expectations and estimates, many of the factors that could influence or determine actual results are unpredictable and not within the Company's control. 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.
Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities: (1) general economic 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; (2) 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; (3) interest rates change in such a way as to reduce the Company's margins; (4) 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; (5) changes in federal or state tax policy; (6) changes in the level of nonperforming assets and charge-offs; (7) changes in estimates of future reserve requirements based upon relevant regulatory and accounting requirements; (8) changes in consumer and business spending, borrowing and savings habits; (9) reductions in deposit levels, which necessitate increased borrowings to fund loans and investments; (10) the effect of changes to the calculation of the Company’s regulatory capital ratios beginning in 2015 under the Basel III capital framework which, among other things, requires additional regulatory capital, and change the framework for risk-weighting of certain assets; (11) the effect of and changes in the United States monetary and fiscal policies, including the interest rate policies of the Federal Reserve Board (“FRB”) and its regulation of the money supply; and (12) adverse changes in the credit rating of U.S. government debt.
NON-GAAP FINANCIAL MEASURES
Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with generally accepted accounting principles in the United States (US GAAP or GAAP) must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, three non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled Interest Income Versus Interest Expense (Net Interest Income)) and core earnings (as defined and discussed in the Results of Operations section), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G.
Management believes that these non-GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.
OVERVIEW
The Company’s consolidated assets at year-end 2015 were $596.1 million compared to $586.7 million at year-end 2014, an increase of 1.6%. Total loans increased 2.3% to $458.1 million, driven by an increase in commercial loans of $12.4 million, to $243.4 million year over year, while residential mortgage loans declined $1.3 million to end the year at $207.5 million. Funding for the increase in loans was provided by a $2.5 million net increase in deposits, a decrease of $5.8 million in the investment portfolio and $10.0 million in short-term borrowings. Capital grew to $51.4 million with a book value of $9.79 per share on December 31, 2015, compared with $49.0 million in capital and a book value of $9.43 per share on December 31, 2014.
The Company’s net income of $4.8 million, or $0.96 per share, for 2015 was down 5.8%, compared with net income of just over $5.1 million, or $1.03 per share in 2014. Interest rates have remained at historically low levels for several years, causing continued erosion of yields on earning assets as they continue to reprice downward to current market rates. Average earning assets increased $9.1 million, or 1.7%, in 2015, and tax-equivalent interest income increased by $474,008, or 2.0%, resulting in a slight increase in average yield on interest-earning assets of one basis point. Management was able to maintain the average yield on interest earning assets for 2015, with an increase of 1 basis point, due to the growth in the higher yielding commercial loan portfolio. Although average interest-bearing liabilities remained virtually unchanged during the year, up just $7,456, the average rate paid on interest-bearing liabilities declined by 10 basis points, resulting in a decrease in interest expense of $410,094. This decrease was largely due to the shift of customer funds out of higher yielding certificates of deposit (CDs) to lower yielding demand and savings accounts, combined with the well managed use of short term funding to meet seasonal cash flow needs. The combined effect of these changes resulted in an increase of $884,102 in tax-equivalent net interest income, and improvement in net interest margin from 3.86% to 3.96% year over year.
Continued improvement in asset quality and lower levels of charge-off activity during 2015 allowed the Company to reduce the provision for loan losses by $30,000 compared to 2014.
Non-interest income increased $8,404, or 0.2%, with increases in fees related to loan activity and trust income, offset by decreases in service fees, mostly overdraft fees.
Non-interest income includes income from the sale of residential loans in the secondary market. Originations of residential mortgages totaled $25.1 million in 2015, a 21.2% increase compared to originations of $20.7 million in 2014, but a decline from originations of $27.7 million in 2013. The Company reported net gains from the sales of these mortgages of $424,240 in 2015, compared with $460,504 in 2014 and $778,203 in 2013. For several years, the Federal Reserve’s efforts to stimulate the real estate market by keeping mortgage interest rates low provided for several refinancing cycles. Residential mortgage lending activity slowed during 2014, resulting in decreases in the Company’s fee income from the sale of residential loans in the secondary market. In 2015, this trend turned and the pace of refinancing activity has remained steady with continued low mortgage rates; however the volume has been considerably lower than during the preceding period of falling rates.
All components of non-interest expense increased, year over year, for an aggregate increase of $1.2 million, or 7.0%. Salary and benefits increased $732,770 or 8.4% compared to the prior year, due in part to an increase in health insurance premiums of 19.6% and to the effect of an extra bi-weekly pay period in 2015. Investments in new security technology related to the new chip enhanced debit cards and the cost associated with the closing of two branches in July also contributed to the increase in non-interest expenses year over year. Please refer to the non-interest income and non-interest expense section of this report for more detail.
More locally, according to the State of Vermont Department of Labor, Vermont’s unemployment rate for December, 2015 was 3.6%, compared to 4.2% in December, 2014, and remains well below the national average of 5.0%. However, certain industries, most notably construction, have yet to recover. In addition, regions outside the Northwestern part of the state have not mirrored the robust growth seen in and around the Burlington area. Of the Company’s primary market areas, Orleans, Caledonia, and Essex Counties continue to have the highest unemployment rates in the state, while Washington and Franklin Counties are at or near the state average.
The regulatory environment continues to increase operating costs and place extensive burdens on personnel resources to comply with myriad legal requirements, including those under the Dodd-Frank Act of 2010, and the numerous rulemakings it has spawned, the Sarbanes-Oxley Act of 2002, the USA Patriot Act, the Bank Secrecy Act, the Real Estate Settlement Procedures Act and the Truth in Lending Act, as well as the new Basel III capital framework. It is unlikely that these administrative costs and burdens will moderate in the future.
The Company declared dividends of $0.64 per common share in 2015 and 2014. As of December 31, 2015, the Company reported retained earnings of $8.5 million compared to $6.9 million as of December 31, 2014 and total shareholders’ equity of $51.4 million compared to $49.0 million at year end 2014. The Company is committed to remaining a well-capitalized community bank, working to meet the needs of our customers while providing a fair return to our shareholders.
CRITICAL ACCOUNTING POLICIES
The Company’s consolidated financial statements are prepared according to US GAAP. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities in the consolidated financial statements and related notes. The SEC has defined a company’s critical accounting policies as those that are most important to the portrayal of the Company’s financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Because of the significance of these estimates and assumptions, there is a high likelihood that materially different amounts would be reported for the Company under different conditions or using different assumptions or estimates. Management evaluates on an ongoing basis its judgment as to which policies are considered to be critical.
Allowance for Loan Losses - Management believes that the calculation of the allowance for loan losses (“ALL”) is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. In estimating the ALL, management considers historical experience as well as other qualitative factors, including the effect of current economic indicators and their probable impact on borrowers and collateral, trends in delinquent and non-performing loans, trends in criticized and classified assets, levels of exceptions, the impact of competition in the market, concentrations of credit risk in a variety of areas, including portfolio product mix, the level of loans to individual borrowers and their related interests, loans to industry segments and the geographic distribution of commercial real estate loans. Management’s estimates used in calculating the ALL may increase or decrease based on changes in these factors, which in turn will affect the amount of the Company’s provision for loan losses charged against current period income. This evaluation is inherently subjective and actual results could differ significantly from these estimates under different assumptions, judgments or conditions.
Other Real Estate Owned (“OREO”) – Real estate properties acquired through or in lieu of foreclosure or properties no longer used for bank operations, are initially recorded at fair value less estimated selling cost at the date of acquisition, foreclosure or transfer. Such properties are carried at fair value, which is the market value less estimated cost of disposition, i.e. sales commissions and costs associated with the sale. Fair value is determined, as appropriate, either by obtaining a current appraisal or evaluation prepared by an independent, qualified appraiser, by obtaining a broker’s market value analysis, and finally, if the Company has limited exposure and limited risk of loss, by the opinion of management as supported by an inspection of the property and its most recent tax valuation. During periods of declining market values, the Company will generally obtain a new appraisal or evaluation. The amount, if any, by which the recorded amount of the loan exceeds the fair value, less estimated cost to sell, is a loss which is charged to the allowance for loan losses at the time of foreclosure or repossession. The recorded amount of the loan is the loan balance adjusted for any unamortized premium or discount and unamortized loan fees or costs, less any amount previously charged off, plus recorded accrued interest. After acquisition through or in lieu of foreclosure, these assets are carried at their new cost basis. Costs of significant property improvements are capitalized, whereas costs relating to holding the property are expensed as incurred. Appraisals by an independent, qualified appraiser are performed periodically on properties that management deems significant, or evaluations may be performed by management or a qualified third party on properties in the portfolio that are deemed less significant or less vulnerable to market conditions. Subsequent write-downs are recorded as a charge to other expense. Gains or losses on the sale of such properties are included in income when the properties are sold.
Investment Securities - Management performs quarterly reviews of individual debt and equity securities in the investment portfolio to determine whether a decline in the fair value of a security is other than temporary. A review of other-than-temporary impairment requires management to make certain judgments regarding the materiality of the decline and the probability, extent and timing of a valuation recovery, the Company’s intent to continue to hold the security and, in the case of debt securities, the likelihood that the Company will not have to sell the security before recovery of its cost basis. Management assesses fair value declines to determine the extent to which such changes are attributable to fundamental factors specific to the issuer, such as financial condition and business prospects, or to market-related or other external factors, such as interest rates, and in the case of debt securities, the extent to which the impairment relates to credit losses of the issuer, as compared to other factors. Declines in the fair value of securities below their cost that are deemed to be other than temporary, and declines in fair value of debt securities below their cost that are related to credit losses, are recorded in earnings as realized losses, net of tax effect. The non-credit loss portion of an other than temporary decline in the fair value of debt securities below their cost basis (generally, the difference between the fair value and the estimated net present value of expected future cash flows from the debt security) is recognized in other comprehensive income as an unrealized loss, provided that the Company does not intend to sell the security and it is more likely than not that the Company will not have to sell the security before recovery of its reduced basis.
Mortgage Servicing Rights - Mortgage servicing rights associated with loans originated and sold, where servicing is retained, are required to be capitalized and initially recorded at fair value on the acquisition date and are subsequently accounted for using the “amortization method”. Mortgage servicing rights are amortized against non-interest income in proportion to, and over the period of, estimated future net servicing income of the underlying financial assets. The value of capitalized servicing rights represents the estimated present value of the future servicing fees arising from the right to service loans for third parties. The carrying value of the mortgage servicing rights is periodically reviewed for impairment based on a determination of estimated fair value compared to amortized cost, and impairment, if any, is recognized through a valuation allowance and is recorded as a reduction of non-interest income. Subsequent improvement (if any) in the estimated fair value of impaired mortgage servicing rights is reflected in a positive valuation adjustment and is recognized in non-interest income up to (but not in excess of) the amount of the prior impairment. Critical accounting policies for mortgage servicing rights relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of mortgage servicing rights requires the development and use of a number of estimates, including anticipated principal amortization and prepayments. Factors that may significantly affect the estimates used are changes in interest rates and the payment performance of the underlying loans. The Company analyzes and accounts for the value of its servicing rights with the assistance of a third party consultant.
Goodwill - Goodwill from an acquisition accounted for under the purchase accounting method, such as the Company’s 2007 acquisition of LyndonBank, is subject to ongoing periodic impairment evaluation, which includes an analysis of the ongoing assets, liabilities and revenues from the acquisition and an estimation of the impact of business conditions. This evaluation is inherently subjective.
Other - Management utilizes numerous techniques to estimate the carrying value of various assets held by the Company, including, but not limited to, bank premises and equipment and deferred taxes. The assumptions considered in making these estimates are based on historical experience and on various other factors that are believed by management to be reasonable under the circumstances. The use of different estimates or assumptions could produce different estimates of carrying values and those differences could be material in some circumstances.
RESULTS OF OPERATIONS
The Company’s net income decreased $299,317, or 5.8% from December 31, 2014 to December 31, 2015, resulting in earnings per common share of $0.96 for 2015 and $1.03 for 2014. Despite the decrease in net income, net interest income (core earnings) increased $866,506, or 4.4%, for 2015 compared to 2014. This substantial increase in core earnings reflected the combined effect of an increase of $456,412, or 2.0% in interest income and a decrease of $410,094, or 13.4%, in interest expense, year over year. Non-interest income increased marginally by $8,404, or 0.2%, while non-interest expense increased by $1.2 million, or 7.0%, more than offsetting the increase in core earnings. Other income from loans, primarily commercial and residential documentation fees, enjoyed an increase of $145,361, or 24.5%, while decreases were noted in service charges and fees, and gains on sale of mortgage loans. Increases were noted in all components of non-interest expense including increases of $109,782, or 4.5%, in occupancy expense, and $732,770, or 8.4%, in salaries and benefits. The closing of two branches during the year impacted both of these categories with expenses incurred for severance costs and other non-recurring expenses associated with the closings. The section below labeled “Non-Interest Income and Non-Interest Expense” provides a more detailed discussion on the significant components of non-interest expense.
Return on average assets (“ROA”), which is net income divided by average total assets, measures how effectively a corporation uses its assets to produce earnings. Return on average equity (“ROE”), which is net income divided by average shareholders' equity, measures how effectively a corporation uses its equity capital to produce earnings.
The following table shows these ratios, as well as other equity ratios, for each of the last three fiscal years:
| | | December 31, | |
| | | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | | |
| Return on Average Assets | | | 0.82 | % | | | 0.89 | % | | | 0.90 | % |
| Return on Average Equity | | | 9.60 | % | | | 10.81 | % | | | 11.43 | % |
| Dividend Payout Ratio (1) | | | 66.67 | % | | | 62.14 | % | | | 54.37 | % |
| Average Equity to Average Assets Ratio | | | 8.57 | % | | | 8.22 | % | | | 7.86 | % |
(1) Dividends declared per common share divided by earnings per common share.
The following table summarizes the earnings performance and certain balance sheet and per share data of the Company during each of the last five fiscal years:
| As of December 31, | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
| | | | | | | | | | | | | | | | |
| Balance Sheet Data | | | | | | | | | | | | | | | |
| Net loans | | $ | 453,424,042 | | | $ | 443,202,475 | | | $ | 435,354,440 | | | $ | 412,232,869 | | | $ | 382,507,221 | |
| Total assets | | | 596,134,709 | | | | 586,711,044 | | | | 573,667,404 | | | | 575,738,245 | | | | 552,905,517 | |
| Total deposits | | | 495,485,562 | | | | 493,019,463 | | | | 481,552,569 | | | | 475,496,859 | | | | 454,393,309 | |
| Borrowed funds | | | 10,000,000 | | | | 0 | | | | 0 | | | | 6,000,000 | | | | 18,010,000 | |
| Total liabilities | | | 544,720,053 | | | | 537,715,842 | | | | 527,531,427 | | | | 532,385,670 | | | | 511,987,108 | |
| Total shareholders' equity | | | 51,414,656 | | | | 48,995,202 | | | | 46,135,977 | | | | 43,352,575 | | | | 40,918,409 | |
| | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating Data | | | | | | | | | | | | | | | | | | | | |
| Total interest income | | $ | 23,406,689 | | | $ | 22,950,277 | | | $ | 22,639,782 | | | $ | 22,821,331 | | | $ | 22,744,363 | |
| Total interest expense | | | 2,645,650 | | | | 3,055,744 | | | | 3,442,134 | | | | 4,882,319 | | | | 5,595,628 | |
| Net interest income | | | 20,761,039 | | | | 19,894,533 | | | | 19,197,648 | | | | 17,939,012 | | | | 17,148,735 | |
| | | | | | | | | | | | | | | | | | | | | |
| Provision for loan losses | | | 510,000 | | | | 540,000 | | | | 670,000 | | | | 1,000,000 | | | | 1,000,000 | |
| Net interest income after | | | | | | | | | | | | | | | | | | | | |
| provision for loan losses | | | 20,251,039 | | | | 19,354,533 | | | | 18,527,648 | | | | 16,939,012 | | | | 16,148,735 | |
| | | | | | | | | | | | | | | | | | | | | |
| Non-interest income | | | 5,150,155 | | | | 5,141,751 | | | | 5,982,568 | | | | 6,188,960 | | | | 5,202,169 | |
| Non-interest expense | | | 18,810,973 | | | | 17,585,980 | | | | 17,818,632 | | | | 17,691,593 | | | | 16,917,218 | |
| Income before income taxes | | | 6,590,221 | | | | 6,910,304 | | | | 6,691,584 | | | | 5,436,379 | | | | 4,433,686 | |
| | | | | | | | | | | | | | | | | | | | | |
| Applicable income tax expense (1) | | | 1,764,630 | | | | 1,785,396 | | | | 1,604,929 | | | | 1,035,689 | | | | 850,140 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 4,825,591 | | | $ | 5,124,908 | | | $ | 5,086,655 | | | $ | 4,400,690 | | | $ | 3,583,546 | |
| | | | | | | | | | | | | | | | | | | | | |
| Per Share Data | | | | | | | | | | | | | | | | | | | | |
| Earnings per common share (2) | | $ | 0.96 | | | $ | 1.03 | | | $ | 1.01 | | | $ | 0.88 | | | $ | 0.73 | |
Dividends declared per common share | | $ | 0.64 | | | $ | 0.64 | | | $ | 0.56 | | | $ | 0.56 | | | $ | 0.56 | |
Book value per common share outstanding | | $ | 9.79 | | | $ | 9.43 | | | $ | 8.96 | | | $ | 8.49 | | | $ | 8.13 | |
Weighted average number of common shares outstanding | | | 4,961,972 | | | | 4,897,281 | | | | 4,838,185 | | | | 4,769,645 | | | | 4,674,806 | |
Number of common shares outstanding, period end | | | 4,994,416 | | | | 4,932,374 | | | | 4,868,606 | | | | 4,812,925 | | | | 4,728,161 | |
| (1) Applicable income tax expense assumes a 34% tax rate. |
| (2) Computed based on the weighted average number of common shares outstanding during the periods presented. |
INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST INCOME)
The largest component of the Company’s operating income is net interest income, which is the difference between interest earned on loans and investments versus the interest paid on deposits and other sources of funds (i.e. other borrowings). The Company’s level of net interest income can fluctuate over time due to changes in the level and mix of earning assets, and sources of funds (volume) and from changes in the yield earned and costs of funds (rate paid). A portion of the Company’s income from municipal investments is not subject to income taxes. Because the proportion of tax-exempt items in the Company's portfolio varies from year-to-year, to improve comparability of information across years, the non-taxable income shown in the tables below has been converted to a tax equivalent basis. Because the Company’s corporate tax rate is 34%, to equalize tax-free and taxable income in the comparison, we divide the tax-free income by 66%, with the result that every tax-free dollar is equivalent to $1.52 in taxable income.
Tax-exempt income is derived from municipal investments, which comprised the entire held-to-maturity portfolio of $43.4 million, $41.8 million and $37.9 million, at December 31, 2015, 2014 and 2013, respectively.
The following table provides the reconciliation between net interest income presented in the consolidated statements of income and the non-GAAP tax equivalent net interest income presented in the table immediately following for each of the last three years.
| Years Ended December 31, | | 2015 | | | 2014 | | | 2013 | |
| | | (Dollars in Thousands) | |
| | | | | | | | | | |
| Net interest income as presented | | $ | 20,761 | | | $ | 19,895 | | | $ | 19,198 | |
| Effect of tax-exempt income | | | 573 | | | | 555 | | | | 529 | |
| Net interest income, tax equivalent | | $ | 21,334 | | | $ | 20,450 | | | $ | 19,727 | |
The following table presents average earning assets and average interest-bearing liabilities supporting earning assets for each of the last three fiscal years. Interest income (excluding interest on non-accrual loans) and interest expense are both expressed on a tax equivalent basis, both in dollars and as a rate/yield.
| | | Years Ended December 31, | |
| | | 2015 | | | 2014 | | 2013 | |
| | | | | | | | | Average | | | | | | | | | Average | | | | | | | | | Average | |
| | | Average | | | Income/ | | | Rate/ | | | Average | | | Income/ | | | Rate/ | | | Average | | | Income/ | | | Rate/ | |
| | | Balance | | | Expense | | | Yield | | | Balance | | | Expense | | | Yield | | | Balance | | | Expense | | | Yield | |
| | | (Dollars in Thousands) | |
| Interest-Earning Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | �� | | | | | | | | | | | | | | | | | | |
| Loans (1) | | $ | 454,793 | | | $ | 21,717 | | | | 4.78 | % | | $ | 447,133 | | | $ | 21,423 | | | | 4.79 | % | | $ | 425,482 | | | $ | 21,226 | | | | 4.99 | % |
| Taxable investment securities | | | 30,725 | | | | 442 | | | | 1.44 | % | | | 30,990 | | | | 344 | | | | 1.11 | % | | | 41,363 | | | | 314 | | | | 0.76 | % |
| Tax-exempt investment securities | | | 44,516 | | | | 1,687 | | | | 3.79 | % | | | 42,654 | | | | 1,635 | | | | 3.83 | % | | | 40,043 | | | | 1,556 | | | | 3.89 | % |
| Sweep and interest-earning accounts | | | 6,337 | | | | 17 | | | | 0.27 | % | | | 5,079 | | | | 13 | | | | 0.26 | % | | | 4,457 | | | | 13 | | | | 0.29 | % |
| Other investments (2) | | | 3,495 | | | | 117 | | | | 3.35 | % | | | 3,819 | | | | 91 | | | | 2.38 | % | | | 4,093 | | | | 60 | | | | 1.47 | % |
| Total | | $ | 539,866 | | | $ | 23,980 | | | | 4.44 | % | | $ | 529,676 | | | $ | 23,506 | | | | 4.44 | % | | $ | 515,439 | | | $ | 23,169 | | | | 4.50 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing transaction accounts | | $ | 117,867 | | | $ | 229 | | | | 0.19 | % | | $ | 115,209 | | | $ | 241 | | | | 0.21 | % | | $ | 117,395 | | | $ | 289 | | | | 0.25 | % |
| Money market accounts | | | 87,390 | | | | 826 | | | | 0.95 | % | | | 83,168 | | | | 821 | | | | 0.99 | % | | | 87,983 | | | | 898 | | | | 1.02 | % |
| Savings deposits | | | 80,530 | | | | 98 | | | | 0.12 | % | | | 75,042 | | | | 94 | | | | 0.13 | % | | | 69,063 | | | | 97 | | | | 0.14 | % |
| Time deposits | | | 107,100 | | | | 925 | | | | 0.86 | % | | | 123,209 | | | | 1,360 | | | | 1.10 | % | | | 123,431 | | | | 1,555 | | | | 1.26 | % |
| Federal funds purchased and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| other borrowed funds | | | 14,217 | | | | 40 | | | | 0.28 | % | | | 9,440 | | | | 21 | | | | 0.22 | % | | | 5,084 | | | | 22 | | | | 0.43 | % |
| Repurchase agreements | | | 24,314 | | | | 70 | | | | 0.29 | % | | | 25,263 | | | | 62 | | | | 0.25 | % | | | 28,538 | | | | 111 | | | | 0.39 | % |
| Capital lease obligations | | | 596 | | | | 49 | | | | 8.22 | % | | | 674 | | | | 55 | | | | 8.17 | % | | | 741 | | | | 60 | | | | 8.10 | % |
| Junior subordinated debentures | | | 12,887 | | | | 409 | | | | 3.17 | % | | | 12,887 | | | | 402 | | | | 3.12 | % | | | 12,887 | | | | 410 | | | | 3.18 | % |
| Total | | $ | 444,901 | | | $ | 2,646 | | | | 0.59 | % | | $ | 444,893 | | | $ | 3,056 | | | | 0.69 | % | | $ | 445,121 | | | $ | 3,442 | | | | 0.77 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | | | | $ | 21,334 | | | | | | | | | | | $ | 20,450 | | | | | | | | | | | $ | 19,727 | | | | | |
| Net interest spread (3) | | | | | | | | | | | 3.85 | % | | | | | | | | | | | 3.75 | % | | | | | | | | | | | 3.73 | % |
| Net interest margin (4) | | | | | | | | | | | 3.95 | % | | | | | | | | | | | 3.86 | % | | | | | | | | | | | 3.83 | % |
(1) Included in gross loans are non-accrual loans with an average balance of $5.2 million, $4.9 million and $4.4 million for the years ended December 31, 2015, 2014 and 2013, respectively. Loans are stated before deduction of unearned discount and allowance for loan losses. |
(2) Included in other investments is the Company’s FHLBB Stock with an average balance of $2.5 million, $2.8 million and $3.1 million, respectively, for 2015, 2014 and 2013 and a payout rate of approximately 2.75%, 1.53% and 0.39%, respectively. |
| (3) Net interest spread is the difference between the average yield on average earning assets and the average rate paid on average interest-bearing liabilities. |
| (4) Net interest margin is net interest income divided by average earning assets. |
Interest income from loans of $21.7 million accounts for 90.6% of total tax-equivalent interest income for 2015 compared to $21.4 million or 91.1% for 2014 and $21.2 million, or 91.6% for 2013, with average yields of 4.78%, 4.79% and 4.99%, respectively. The average volume of loans increased $7.7 million, or 1.7% from 2014 to 2015 and $21.7 million, or 5.1% from 2013 to 2014, while the average rate earned on these assets decreased one basis point from 2014 to 2015 and 20 basis points from 2013 to 2014, reflecting the prevailing low interest rate environment throughout the comparison periods. The average volume of taxable investments decreased $264,982, or 0.9% from 2014 to 2015 and $10.4 million, or 25.1% from 2013 to 2014. Increases of 33 basis points and 35 basis points are noted for 2015 and 2014, respectively, in the average yield on these investments. As loan demand increases, the Company funds a portion of this increase through sales and maturities from its taxable investments. During the second quarter of 2014, the Company began purchasing Agency mortgage-backed securities (Agency MBS) to hold in its available-for-sale (AFS) portfolio. These investments typically carry a higher average yield than the rest of the investments in the AFS portfolio, accounting for the increase in the average yield in 2014 and 2015. FDIC insured brokered CDs were also added to the portfolio in 2015 based on the favorable yields compared to like term agency and treasury securities.
Interest expense on time deposits represents 35.0% of total interest expense for 2015, down from 44.5% for 2014, and 45.2% for 2013, with interest expense for those periods totaling $925,447, $1.4 million and $1.6 million, respectively, and average rates paid of 0.86%, 1.10% and 1.26%, respectively. This decrease in interest paid on time deposits during 2015 was due to a combination of a decrease in average volume totaling $16.1 million, or 13.1% and a decrease of 24 basis points in the rate paid on these accounts, while the decrease in interest expense during 2014 was mainly due to rate. Savings accounts represented the largest increase in average volume during 2015 totaling $5.5 million, or 7.3% followed by federal funds purchased and other borrowed funds with an increase in average volume of $4.8 million, or 50.6% and money market accounts with an increase of $4.2 million, or 5.1% in average volume. Time deposits experienced the largest decrease in average volume in 2015 totaling $16.1 million, or 13.1%. From 2013 to 2014, an increase of $6.0 million, or 8.7% was noted in the average volume of savings deposits followed by federal funds purchased and other borrowed funds with an increase of $4.4 million in the average volume, while money market accounts noted the largest decrease in average volume totaling $4.8 million, or 5.5%.
Overall, during 2015, the average rate earned on interest-earning assets remained the same while the average rate paid on interest-bearing liabilities decreased 10 basis points, resulting in a net interest spread of 3.85% for 2015 compared to 3.75% for 2014. For the period from 2013 to 2014 a decrease of six basis points is noted in the average rate earned on interest-earning assets compared to an eight basis points decrease in the average rate paid on interest-bearing liabilities, resulting in a two basis point increase in the spread for 2014 from 3.73% for 2013.
The following table summarizes the variances in income for the years 2015, 2014 and 2013 resulting from volume changes in assets and liabilities and fluctuations in rates earned and paid compared to the prior year.
Changes in Interest Income and Interest Expense
| | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
| | | Variance | | | Variance | | | | | | Variance | | | Variance | | | | |
| | | Due to | | | Due to | | | Total | | | Due to | | | Due to | | | Total | |
| | | Rate (1) | | | Volume (1) | | | Variance | | | Rate (1) | | | Volume (1) | | | Variance | |
| | | (Dollars in Thousands) | |
| Average Interest-Earning Assets | | | | | | | | | | | | | | | | | | |
| Loans | | $ | (73 | ) | | $ | 367 | | | $ | 294 | | | $ | (883 | ) | | $ | 1,080 | | | $ | 197 | |
| Taxable investment securities | | | 102 | | | | (4 | ) | | | 98 | | | | 145 | | | | (115 | ) | | | 30 | |
| Tax-exempt investment securities | | | (19 | ) | | | 71 | | | | 52 | | | | (23 | ) | | | 102 | | | | 79 | |
| Sweep and interest-earning accounts | | | 1 | | | | 3 | | | | 4 | | | | (2 | ) | | | 2 | | | | 0 | |
| Other investments | | | 37 | | | | (11 | ) | | | 26 | | | | 38 | | | | (7 | ) | | | 31 | |
| Total | | $ | 48 | | | $ | 426 | | | $ | 474 | | | $ | (725 | ) | | $ | 1,062 | | | $ | 337 | |
| Average Interest-Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing transaction accounts | | $ | (18 | ) | | $ | 6 | | | $ | (12 | ) | | $ | (43 | ) | | $ | (5 | ) | | $ | (48 | ) |
| Money market accounts | | | (37 | ) | | | 42 | | | | 5 | | | | (29 | ) | | | (48 | ) | | | (77 | ) |
| Savings deposits | | | (3 | ) | | | 7 | | | | 4 | | | | (11 | ) | | | 8 | | | | (3 | ) |
| Time deposits | | | (296 | ) | | | (139 | ) | | | (435 | ) | | | (193 | ) | | | (2 | ) | | | (195 | ) |
| Federal funds purchased and | | | | | | | | | | | | | | | | | | | | | | | | |
| other borrowed funds | | | 8 | | | | 11 | | | | 19 | | | | (20 | ) | | | 19 | | | | (1 | ) |
| Repurchase agreements | | | 11 | | | | (3 | ) | | | 8 | | | | (41 | ) | | | (8 | ) | | | (49 | ) |
| Capital lease obligations | | | 0 | | | | (6 | ) | | | (6 | ) | | | 0 | | | | (5 | ) | | | (5 | ) |
| Junior subordinated debentures | | | 7 | | | | 0 | | | | 7 | | | | (8 | ) | | | 0 | | | | (8 | ) |
| Total | | $ | (328 | ) | | $ | (82 | ) | | $ | (410 | ) | | $ | (345 | ) | | $ | (41 | ) | | $ | (386 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Changes in net interest income | | $ | 376 | | | $ | 508 | | | $ | 884 | | | $ | (380 | ) | | $ | 1,103 | | | $ | 723 | |
| (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 |
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Non-interest Income
The components of non-interest income for the annual periods presented are as follows:
| | | Years Ended | | | | | | | |
| | | December 31, | | | Change | |
| | | 2015 | | | 2014 | | | $ | | | % | |
| | | | | | | | | | | | | |
| Service fees | | $ | 2,565,079 | | | $ | 2,624,792 | | | $ | (59,713 | ) | | | -2.27 | % |
| Income from sold loans | | | 947,325 | | | | 977,702 | | | | (30,377 | ) | | | -3.11 | % |
| Other income from loans | | | 738,454 | | | | 593,093 | | | | 145,361 | | | | 24.51 | % |
| Net realized gain on sale of securities available-for-sale | | | 17,502 | | | | 27,838 | | | | (10,336 | ) | | | -37.13 | % |
| Income from CFSG Partners | | | 361,044 | | | | 272,820 | | | | 88,224 | | | | 32.34 | % |
| Rental income on OREO properties | | | 44,800 | | | | 56,198 | | | | (11,398 | ) | | | -20.28 | % |
| Currency exchange income | | | 88,000 | | | | 130,000 | | | | (42,000 | ) | | | -32.31 | % |
| SERP fair value adjustment | | | (16,177 | ) | | | 52,423 | | | | (68,600 | ) | | | -130.86 | % |
| Other income | | | 404,128 | | | | 406,885 | | | | (2,757 | ) | | | -0.68 | % |
| Total non-interest income | | $ | 5,150,155 | | | $ | 5,141,751 | | | $ | 8,404 | | | | 0.16 | % |
Total non-interest income increased slightly, by $8,404 for the year ended December 31, 2015 compared to the same period 2014, with significant changes noted in the following:
| ● | Service fees decreased $59,713 year over year, due primarily to decreased overdraft fees of $80,155, or 10.9%, compared with the prior year. Paper statement fees also declined by $46,568, or 17.1%, as more customers choose electronic delivery. |
| ● | Other income from loans increased $145,361, or 24.5% year over year due primarily to an increase in both residential and commercial loan documentation fees. Residential mortgage loan activity increased slightly in 2015, generating more income from the document fee process, resulting in an increase of $92,055, or 66.7%, year over year in this category. Commercial loan documentation fee income increased $31,289, or 10.7%, year over year consistent with the growth in the commercial loan portfolio compared with the prior year. |
| ● | Income from the Company’s trust and investment management affiliate, Community Financial Services Partners, LLC (CFSG Partners), increased $88,224, or 32.3% for the year due primarily to the increase in the client base and assets under management during the year. CFSG Partners is compensated chiefly through fees based on the assets under management from its clients. |
| ● | The Supplemental Employee Retirement Program (SERP) fair value adjustment for the year ended December 31, 2015 resulted in a decrease in value of $16,177, compared with an increase of $52,423 for 2014. This decline in value reflects the weaker overall performance of the equity markets in 2015 as compared with 2014, which saw stronger market performance. |
Non-interest Expense
The components of non-interest expense for the annual periods presented are as follows:
| | | Years Ended | | | | | | | |
| | | December 31, | | | Change | |
| | | 2015 | | | 2014 | | | $ | | | % | |
| | | | | | | | | | | | | |
| Salaries and wages | | $ | 6,888,352 | | | $ | 6,475,000 | | | $ | 413,352 | | | | 6.38 | % |
| Employee benefits | | | 2,576,772 | | | | 2,257,354 | | | | 319,418 | | | | 14.15 | % |
| Occupancy expenses, net | | | 2,576,496 | | | | 2,466,714 | | | | 109,782 | | | | 4.45 | % |
| Other expenses | | | | | | | | | | | | | | | | |
| Computer outsourcing | | | 516,197 | | | | 420,355 | | | | 95,842 | | | | 22.80 | % |
| Service contracts - administrative | | | 330,563 | | | | 420,426 | | | | (89,863 | ) | | | -21.37 | % |
| Telephone expense | | | 312,043 | | | | 326,473 | | | | (14,430 | ) | | | -4.42 | % |
| Collection & non-accruing loan expense | | | 74,716 | | | | 98,389 | | | | (23,673 | ) | | | -24.06 | % |
| OREO expense | | | 188,584 | | | | 97,984 | | | | 90,600 | | | | 92.46 | % |
| ATM fees | | | 372,609 | | | | 365,813 | | | | 6,796 | | | | 1.86 | % |
| State deposit tax | | | 562,271 | | | | 544,737 | | | | 17,534 | | | | 3.22 | % |
| Other miscellaneous expenses | | | 4,412,370 | | | | 4,112,735 | | | | 299,635 | | | | 7.29 | % |
| Total non-interest expense | | $ | 18,810,973 | | | $ | 17,585,980 | | | $ | 1,224,993 | | | | 6.97 | % |
Total non-interest expense increased $1,224,993 for the full year 2015 compared to the same period in 2014, with significant changes noted in the following:
| ● | Salaries and wages and employee benefits increased by $732,770, or 8.3%. The increase in salaries is due in part to the timing of an additional bi-weekly pay period in 2015 in the amount of $250,000 as well as normal annual salary increases. The increase in employee benefits reflects a 19.6% increase in health insurance premiums. |
| ● | Occupancy expenses increased $109,782, or 4.5% year over year due in part to losses recognized through the closure of two branches in the Bank’s Caledonia County servicing area and the sale of one of those branches. Capital loss on premises and equipment amounted to $130,603 for 2015 compared to $6,610 for 2014, an increase of $123,993. |
| ● | Computer outsourcing increased $95,842, or 22.8%, year over year. Outsourcing of the core processing function has provided the opportunity for the existing information technology staff to take on additional duties and roles in response to regulatory and industry changes. |
| ● | Service contracts – administrative decreased $89,863, or 21.4%, year over year. Payments under our service contract with our core processor decreased upon implementation of the computer outsourcing accounting for the decreases in the comparison period. |
| ● | Collections & non-accruing loan expense decreased $23,673, or 24.1% year over year due to recoveries of prior year expenses from the settlement of an insurance claim on a property in foreclosure in the amount of $33,000. |
| ● | OREO expense for the year 2015 increased $90,600, or 92.5%, compared with the same period in 2014, due primarily to write-downs on two OREO properties totaling $75,820 in 2015 compared to a write-down on one property in 2014 totaling $10,000. One of these properties was sold during the last quarter of 2015. |
| ● | Other miscellaneous expenses increased $299,635, or 7.3% year over year. Costs totaling $74,000 were associated with the distribution of new chip-enhanced debit cards to Bank customers during 2015 as well as charged off checks totaling $57,841 in 2015 compared to $6,814 in 2014. Marketing and contribution expenses increased in total $57,298, or 12.0% year over year and reflect the Company’s response to an increase in requests for support from the community organizations in our market areas. Consultant services increased $45,978, or 40.0% in 2015 compared to 2014 due to a combination of hiring specialized consultants to assist in a telephone conversion project as well as a marketing firm to assist in some marketing initiatives. |
APPLICABLE INCOME TAXES
The provision for income taxes decreased $20,766, or 1.2%, from $1,785,396 in 2014 to $1,764,630 in 2015. Income before taxes decreased $320,083, or 4.6% for 2015 compared to 2014. Tax credits from affordable housing investments decreased $80,811, or 15.8% from $512,526 in 2014 to $431,715 in 2015, while New Market Tax Credits (NMTC) of $135,234 were the same for both 2014 and 2015. This decrease in income, partially offset by the overall decrease in tax credits, accounts for the decrease in income tax expense in 2015.
Pursuant to Accounting Standards Update (ASU) No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, amortization expense related to limited partnership investments, is included as a component of tax expense and amounted to $403,445 and $443,832 for 2015 and 2014, respectively. These investments provide tax benefits, including tax credits, and are designed to provide an effective yield between 8% and 10%.
Amortization expense relating to the Company’s NMTC investment are recorded as a separate component of tax expense and for 2015 and 2014 amounted to $161,890 and $147,290, respectively. The Company amortizes these investments under the effective yield method.
CHANGES IN FINANCIAL CONDITION
The following discussion refers to the volume of average assets, liabilities and shareholders’ equity in the table labeled “Distribution of Assets, Liabilities and Shareholders’ Equity” on the following page.
Average assets increased $10.8 million, or 1.9%, from the year ended December 31, 2013 to the year ended December 31, 2014, and $9.5 million, or 1.7%, from 2014 to 2015. The average volume of loans increased $21.2 million, or 5.0%, from 2013 to 2014 and $7.9 million, or 1.8%, from 2014 to 2015, due in part to strong commercial loan demand. The Company used maturities, sales and calls within the taxable investment portfolio and short-term borrowings to help fund loan growth during 2014 and 2015, accounting for the decrease of $10.4 million, or 25.1%, in the average volume of that portfolio from 2013 to 2014. The average volume of the tax-exempt portfolio increased $2.6 million, or 6.5%, from 2013 to 2014 and $1.9 million, or 4.4% from 2014 to 2015 and is made up of local municipal obligations.
Average liabilities increased $7.9 million or 1.5% from the year ended December 31, 2013 to the year ended December 31, 2014 and $9.5 million, or 1.7%, from 2014 to 2015. The average volume of demand deposits increased $8.1 million, or 10.9%, from 2013 to 2014 and $6.4 million, or 7.8%, from 2014 to 2015. The increase was due primarily to a $6.2 million increase in business checking accounts from 2013 to 2014, and increases in both business and consumer accounts during 2015. The average volume of interest-bearing transaction accounts decreased $2.2 million, or 1.9%, from 2013 to 2014 and increased $2.7 million, or 2.3% from 2014 to 2015. The average volume of money market accounts followed a similar pattern as the interest-bearing transaction accounts, decreasing $4.8 million, or 5.5% from 2013 to 2014 and then increased $4.2 million, or 5.1% from 2014 to 2015. The insured cash sweep account (“ICS”) offered through Promontory Interfinancial Network, has worked very well as a means of attracting new customers and retaining current customers who are looking for alternatives to time deposits and to maximize FDIC insurance coverage. In 2015, the Company began offering an ICS interest-bearing demand deposit product which was well received with an average volume as of year-end 2015 of $4.6 million. The average volume of the ICS money market accounts increased from $15.9 million in 2013 to $17.7 million in 2014 and then decreased to $13.4 million in 2015. The average volume of savings accounts increased $6.0 million, or 8.7%, from 2013 to 2014 and $5.5 million, or 7.3%, from 2014 to 2015 due in part to a shift from time deposits. The average volume of total time deposits remained stable at $123 million from 2013 to 2014 due to the use of one-way brokered time deposits as a supplemental source of funding during the year, but then a dramatic decrease of $16.1 million, or 13.1%, is noted in the average volume from 2014 to 2015. Average retail time deposits decreased by $3.7 million, or 3.1%, from 2013 to 2014 and $11.3 million, or 10.1% from 2014 to 2015, which largely reflects a continued shift to savings or money market accounts, or customer rate shopping at other financial institutions. The Company strives to keep its core deposit customers but is not placing much emphasis on attracting rate shoppers as it has sufficient liquidity to meet reasonably foreseeable loan demand and other requirements. The average volume of federal funds purchased and other borrowed funds increased $4.3 million, or 85.7%, from 2013 to 2014 and $4.8 million, or 50.6% from 2014 to 2015, which was mostly attributable to the growth in loans outpacing deposit growth. The Company continues to utilize overnight funds and other short term borrowings to meet cash needs during the seasonal outflows of municipal deposits.
The following table provides a visual comparison of the breakdown of average assets and average liabilities as well as average shareholders' equity for the comparison periods.
Distribution of Assets, Liabilities and Shareholders' Equity
| | | Years Ended December 31, | |
| | | 2015 | | | 2014 | | | 2013 | |
| | | Balance | | | % | | | Balance | | | % | | | Balance | | | % | |
| | | (Dollars in Thousands) | |
| Average Assets | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | | | | | | | | | | | | | | | | | |
| Non-interest bearing | | $ | 9,868 | | | | 1.68 | % | | $ | 9,934 | | | | 1.72 | % | | $ | 9,747 | | | | 1.72 | % |
| Federal funds sold and overnight deposits | | | 6,337 | | | | 1.08 | % | | | 5,079 | | | | 0.88 | % | | | 4,457 | | | | 0.79 | % |
| Taxable investment securities | | | 30,725 | | | | 5.24 | % | | | 30,990 | | | | 5.37 | % | | | 41,363 | | | | 7.31 | % |
| Tax-exempt investment securities | | | 44,516 | | | | 7.59 | % | | | 42,654 | | | | 7.40 | % | | | 40,043 | | | | 7.08 | % |
| Other securities | | | 3,108 | | | | 0.53 | % | | | 3,432 | | | | 0.60 | % | | | 3,706 | | | | 0.65 | % |
| Total investment securities | | | 78,349 | | | | 13.36 | % | | | 77,076 | | | | 13.37 | % | | | 85,112 | | | | 15.04 | % |
| Gross loans | | | 455,571 | | | | 77.71 | % | | | 447,716 | | | | 77.63 | % | | | 426,482 | | | | 75.36 | % |
| Reserve for loan losses and accrued fees | | | (4,737 | ) | | | -0.81 | % | | | (4,609 | ) | | | -0.80 | % | | | (4,375 | ) | | | -0.77 | % |
| Premises and equipment | | | 11,622 | | | | 1.98 | % | | | 11,635 | | | | 2.02 | % | | | 12,067 | | | | 2.13 | % |
| Other real estate owned | | | 1,127 | | | | 0.19 | % | | | 979 | | | | 0.17 | % | | | 1,258 | | | | 0.22 | % |
| Investment in Capital Trust | | | 387 | | | | 0.07 | % | | | 387 | | | | 0.07 | % | | | 387 | | | | 0.07 | % |
| Bank owned life insurance | | | 4,463 | | | | 0.76 | % | | | 4,354 | | | | 0.75 | % | | | 4,241 | | | | 0.75 | % |
| Core deposit intangible | | | 675 | | | | 0.12 | % | | | 948 | | | | 0.16 | % | | | 1,220 | | | | 0.22 | % |
| Goodwill | | | 11,574 | | | | 1.98 | % | | | 11,574 | | | | 2.01 | % | | | 11,574 | | | | 2.04 | % |
| Other assets | | | 11,013 | | | | 1.88 | % | | | 11,664 | | | | 2.02 | % | | | 13,733 | | | | 2.43 | % |
| Total average assets | | $ | 586,249 | | | | 100 | % | | $ | 576,737 | | | | 100 | % | | $ | 565,903 | | | | 100 | % |
| | |
| Average Liabilities | |
| Demand deposits | | $ | 88,225 | | | | 15.05 | % | | $ | 81,847 | | | | 14.19 | % | | $ | 73,765 | | | | 13.04 | % |
| Interest-bearing transaction accounts | | | 117,867 | | | | 20.11 | % | | | 115,209 | | | | 19.98 | % | | | 117,395 | | | | 20.74 | % |
| Money market accounts | | | 87,390 | | | | 14.91 | % | | | 83,168 | | | | 14.42 | % | | | 87,983 | | | | 15.55 | % |
| Savings accounts | | | 80,530 | | | | 13.73 | % | | | 75,042 | | | | 13.01 | % | | | 69,063 | | | | 12.20 | % |
| Time deposits | | | 107,100 | | | | 18.27 | % | | | 123,209 | | | | 21.36 | % | | | 123,431 | | | | 21.81 | % |
| Total average deposits | | | 481,112 | | | | 82.07 | % | | | 478,475 | | | | 82.96 | % | | | 471,637 | | | | 83.34 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal funds purchased and other borrowed funds | | | 14,217 | | | | 2.42 | % | | | 9,440 | | | | 1.64 | % | | | 5,084 | | | | 0.90 | % |
| Repurchase agreements | | | 24,314 | | | | 4.15 | % | | | 25,263 | | | | 4.38 | % | | | 28,538 | | | | 5.04 | % |
| Junior subordinated debentures | | | 12,887 | | | | 2.20 | % | | | 12,887 | | | | 2.23 | % | | | 12,887 | | | | 2.28 | % |
| Other liabilities | | | 3,449 | | | | 0.59 | % | | | 3,273 | | | | 0.57 | % | | | 3,272 | | | | 0.58 | % |
| Total average liabilities | | | 535,979 | | | | 91.43 | % | | | 529,338 | | | | 91.78 | % | | | 521,418 | | | | 92.14 | % |
| | |
| Average Shareholders' Equity | |
| Preferred stock | | | 2,500 | | | | 0.42 | % | | | 2,500 | | | | 0.43 | % | | | 2,500 | | | | 0.44 | % |
| Common stock | | | 12,943 | | | | 2.21 | % | | | 12,715 | | | | 2.21 | % | | | 12,596 | | | | 2.23 | % |
| Additional paid-in capital | | | 29,608 | | | | 5.05 | % | | | 28,853 | | | | 5.00 | % | | | 28,252 | | | | 4.99 | % |
| Retained earnings | | | 7,787 | | | | 1.33 | % | | | 5,963 | | | | 1.03 | % | | | 3,685 | | | | 0.65 | % |
| Less: Treasury stock | | | (2,623 | ) | | | -0.45 | % | | | (2,623 | ) | | | -0.45 | % | | | (2,623 | ) | | | -0.46 | % |
| Accumulated other comprehensive income | | | 55 | | | | 0.01 | % | | | (9 | ) | | | 0.00 | % | | | 75 | | | | 0.01 | % |
| Total average shareholders' equity | | | 50,270 | | | | 8.57 | % | | | 47,399 | | | | 8.22 | % | | | 44,485 | | | | 7.86 | % |
| Total average liabilities and shareholders' equity | | $ | 586,249 | | | | 100 | % | | $ | 576,737 | | | | 100 | % | | $ | 565,903 | | | | 100 | % |
CERTAIN TIME DEPOSITS
Increments of maturity of time certificates of deposit of $100,000 or more outstanding on December 31, 2015 are summarized as follows:
| 3 months or less | | $ | 8,331,947 | |
| Over 3 through 6 months | | | 8,854,943 | |
| Over 6 through 12 months | | | 12,603,474 | |
| Over 12 months | | | 18,035,467 | |
| Total | | $ | 47,825,831 | |
RISK MANAGEMENT
Interest Rate Risk and Asset and Liability Management - Management actively monitors and manages the Company’s interest rate risk exposure and attempts to structure the balance sheet to maximize net interest income while controlling its exposure to interest rate risk. The Company's Asset/Liability Management Committee (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 net interest income (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 basis point (bp) shift upward and a 100 bp shift downward in interest rates.
Under the Company’s rate sensitivity modeling, in the current flat rate environment, NII levels are projected to be flat as the downward pressure on asset yields is projected to slow down as cash flow is replaced at equal yields. Funding costs are expected to provide slight relief as longer-term funding is retired and replaced at current rates. In a rising rate environment, NII is expected to trend upward as the short-term asset base (cash and adjustable rate loans) quickly cycle upward while the retail funding base (deposits) lags the market. If rates paid on deposits have to be increased more and/or more quickly than projected, the expected benefit to rising rates would be reduced. In a falling rate environment, NII is expected to trend in-line with the current rate environment scenario for the first year of the simulation as asset yield erosion is offset by decreasing funding costs. Thereafter, net interest income is projected to experience sustained downward pressure as funding costs reach their assumed floors and asset yields continue to reprice into the lower rate environment. The recent increase in the federal funds rate has had a minimal impact to the Company’s NII, partly due to the fact that the long-term rates have not increased, creating compression in NII.
The following table summarizes the estimated impact on the Company's NII over a twelve month period, assuming a gradual parallel shift of the yield curve beginning December 31, 2015:
| One Year Horizon | | Two Year Horizon |
| Rate Change | | Percent Change in NII | | Rate Change | | Percent Change in NII |
| | | | | | | |
| Down 100 basis points | | -1.70% | | Down 100 basis points | | -5.00% |
| Up 200 basis points | | 6.90% | | Up 200 basis points | | 18.40% |
The amounts shown in the table are well within the ALCO Policy limits. However, those amounts do not represent a forecast and should not be relied upon as indicative of future results. While assumptions used in the ALCO process, including the interest rate simulation analyses, are developed based upon current economic and local market conditions, and expected future conditions, the Company cannot provide any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.
Credit Risk - As a financial institution, one of the primary risks the Company manages is credit risk, the risk of loss stemming from borrowers’ failure to repay loans or inability to meet other contractual obligations. The Company’s Board of Directors prescribes policies for managing credit risk, including Loan, Appraisal and Environmental policies. These policies are supplemented by comprehensive underwriting standards and procedures. The Company maintains a Credit Administration department whose function includes credit analysis and monitoring of and reporting on the status of the loan portfolio, including delinquent and non-performing loan trends. The Company also monitors concentration of credit risk in a variety of areas, including portfolio mix, the level of loans to individual borrowers and their related interest, loans to industry segments, and the geographic distribution of commercial real estate loans. Loans are reviewed periodically by an independent loan review firm to help ensure accuracy of the Company's internal risk ratings and compliance with various internal policies, procedures and regulatory guidance.
Residential mortgages represent approximately half of the Company’s loan balances; that level has been on a gradual decline in recent years, with a strategic shift in management emphasis to commercial lending. The severity and depth of the last recession and slow economic recovery saw the greatest degree of collection and foreclosure activity and losses in this segment of the portfolio. Delinquencies and losses, however, were not experienced to the extent of national peers as the Company maintains a mortgage loan portfolio of traditional mortgage products and has not engaged 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. While real estate values also declined in the Company’s market area, the sound underwriting standards historically employed by the Company mitigated the trends in defaults and property surrenders experienced elsewhere. Residential mortgages with loan-to-values exceeding 80% are generally covered by private mortgage insurance (“PMI”). A 90% loan-to-value residential mortgage product without PMI is only available to borrowers with excellent credit and low debt-to-income ratios and has not been widely originated. Junior lien home equity products make up approximately 21% of the residential mortgage portfolio with maximum loan-to-value ratios (including prior liens) of 80%.
Risk in the Company’s commercial and commercial real estate loan portfolios is mitigated in part by government guarantees issued by federal agencies such as the U.S. Small Business Administration and USDA Rural Development. At December 31, 2015, the Company had $21.8 million in guaranteed loans with guaranteed balances of $16.9 million, compared to $27.4 million in guaranteed loans with guaranteed balances of $21.6 million at December 31, 2014.
The Company’s strategy is to continue growing the commercial and commercial real estate portfolios. Consistent with the strategic focus on commercial lending, during 2015 the commercial real estate portfolio saw solid growth while solid commercial loan demand was tempered by several sizeable loan payoffs. Growth slowed in the residential mortgage first lien portfolio, including originations of mortgage loans held-for-sale, with interest rates increasing late in 2013 and the previously brisk refinancing activity falling off sharply during 2014. In 2015, residential mortgage demand picked up with more purchase activity in our market area and the portfolio’s sharp decline tapered off.
The following table reflects the composition of the Company's loan portfolio as of December 31,
| Composition of Loan Portfolio | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
| | | Total | | | % of | | | Total | | | % of | | | Total | | | % of | | | Total | | | % of | | | Total | | | % of | |
| | | Loans | | | Total | | | Loans | | | Total | | | Loans | | | Total | | | Loans | | | Total | | | Loans | | | Total | |
| | | (Dollars in Thousands) | |
| Real estate loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction & land development | | $ | 21,445 | | | | 4.68 | % | | $ | 12,574 | | | | 2.81 | % | | $ | 19,098 | | | | 4.34 | % | | $ | 12,751 | | | | 3.06 | % | | $ | 12,589 | | | | 3.26 | % |
| Farm land | | | 12,570 | | | | 2.74 | % | | | 13,105 | | | | 2.93 | % | | | 10,453 | | | | 2.38 | % | | | 9,321 | | | | 2.24 | % | | | 10,223 | | | | 2.65 | % |
| 1-4 Family residential - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1st lien | | | 162,760 | | | | 35.53 | % | | | 163,966 | | | | 36.62 | % | | | 172,847 | | | | 39.29 | % | | | 169,613 | | | | 40.74 | % | | | 157,251 | | | | 40.69 | % |
| Jr lien | | | 44,720 | | | | 9.76 | % | | | 44,801 | | | | 10.00 | % | | | 45,687 | | | | 10.39 | % | | | 47,029 | | | | 11.29 | % | | | 45,887 | | | | 11.88 | % |
| Commercial real estate | | | 144,192 | | | | 31.48 | % | | | 140,934 | | | | 31.47 | % | | | 127,385 | | | | 28.96 | % | | | 117,736 | | | | 28.28 | % | | | 109,458 | | | | 28.33 | % |
Loans to finance agricultural production | | | 2,508 | | | | 0.55 | % | | | 2,017 | | | | 0.45 | % | | | 1,720 | | | | 0.39 | % | | | 2,590 | | | | 0.62 | % | | | 1,282 | | | | 0.33 | % |
| Commercial & industrial | | | 62,683 | | | | 13.68 | % | | | 62,373 | | | | 13.93 | % | | | 53,900 | | | | 12.25 | % | | | 46,694 | | | | 11.21 | % | | | 38,232 | | | | 9.89 | % |
| Consumer | | | 7,241 | | | | 1.58 | % | | | 8,035 | | | | 1.79 | % | | | 8,819 | | | | 2.00 | % | | | 10,642 | | | | 2.56 | % | | | 11,465 | | | | 2.97 | % |
| Gross loans | | | 458,119 | | | | 100 | % | | | 447,805 | | | | 100 | % | | | 439,909 | | | | 100 | % | | | 416,376 | | | | 100 | % | | | 386,387 | | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| and deferred net loan costs | | | (4,695 | ) | | | | | | | (4,602 | ) | | | | | | | (4,554 | ) | | | | | | | (4,143 | ) | | | | | | | (3,880 | ) | | | | |
| Net loans | | $ | 453,424 | | | | | | | $ | 443,203 | | | | | | | $ | 435,355 | | | | | | | $ | 412,233 | | | | | | | $ | 382,507 | | | | | |
The following table shows the estimated maturity of the Company's commercial loan portfolio as of December 31, 2015.
| | | Fixed Rate Loans | | | Variable Rate Loans | |
| | | Within | | | | 2 - 5 | | | After | | | | | | Within | | | 2 - 5 | | | After | | | | |
| | | 1 Year | | | Years | | | 5 Years | | | Total | | | 1 Year | | | Years | | | 5 Years | | | Total | |
| | | (Dollars in Thousands) | |
| Real estate | |
| Construction & land development | | $ | 12 | | | $ | 44 | | | $ | 3,309 | | | $ | 3,365 | | | $ | 3,169 | | | $ | 81 | | | $ | 14,830 | | | $ | 18,080 | |
| Secured by farm land | | | 0 | | | | 14 | | | | 405 | | | | 419 | | | | 1,155 | | | | 247 | | | | 10,749 | | | | 12,151 | |
| Commercial real estate | | | 270 | | | | 1,795 | | | | 7,240 | | | | 9,305 | | | | 6,013 | | | | 2,691 | | | | 126,183 | | | | 134,887 | |
| Loans to finance agricultural production | | | 15 | | | | 458 | | | | 0 | | | | 473 | | | | 1,215 | | | | 341 | | | | 479 | | | | 2,035 | |
| Commercial & industrial | | | 787 | | | | 10,926 | | | | 2,084 | | | | 13,797 | | | | 30,042 | | | | 5,757 | | | | 13,087 | | | | 48,886 | |
| Total | | $ | 1,084 | | | $ | 13,237 | | | $ | 13,038 | | | $ | 27,359 | | | $ | 41,594 | | | $ | 9,117 | | | $ | 165,328 | | | $ | 216,039 | |
The Company works actively with customers early in the delinquency process to help them to avoid default and foreclosure. Commercial and commercial real estate 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 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's policy is to reverse the accrued interest against current period income and to discontinue 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 principal balance. Prior to 2015, deferred taxes were calculated monthly, based on interest amounts that would have accrued through the normal accrual process. For prior years this interest amounted to $40,384 for 2014, $95,580 for 2013, $214,897 for 2012, $294,034 for 2011, and $235,602 for 2010.
The Company’s non-performing assets decreased $94,536, or 1.5% for 2015 compared to 2014, decreased $223,759, or 3.3% for 2014 compared to 2013, increased $532,333, or 8.6% for 2013 compared to 2012, and decreased $3.1 million, or 33.1% for 2012 compared to 2011. The large decrease from 2011 to 2012 was attributable to both improvement in economic conditions and the resolution of numerous problem loans. Those resolutions included completion of the foreclosure process, recognition of government loan guarantee claims receivable, borrower repayment, or in limited circumstances, the transition of loans to performing accrual status. The level of non-performing assets remained comparatively stable from 2012 through 2015.
Non-performing assets at the end of each of the last five fiscal years consisted of the following:
| December 31, | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
| | | (Dollars in Thousands) | |
| Accruing loans past due 90 days or more: | | | | | | | | | | | | | | | |
| Commercial & industrial | | $ | 14 | | | $ | 24 | | | $ | 22 | | | $ | 0 | | | $ | 60 | |
| Commercial real estate | | | 45 | | | | 5 | | | | 5 | | | | 54 | | | | 99 | |
| Residential real estate - 1st lien | | | 801 | | | | 980 | | | | 817 | | | | 282 | | | | 969 | |
| Residential real estate - Jr lien | | | 63 | | | | 116 | | | | 56 | | | | 42 | | | | 111 | |
| Consumer | | | 0 | | | | 0 | | | | 8 | | | | 1 | | | | 1 | |
| Total past due 90 days or more | | | 923 | | | | 1,125 | | | | 908 | | | | 379 | | | | 1,240 | |
| | |
| Non-accrual loans: | | | | | | | | | | | | | | | | | | | | |
| Commercial & industrial | | | 441 | | | | 553 | | | | 527 | | | | 597 | | | | 1,067 | |
| Commercial real estate | | | 2,401 | | | | 1,934 | | | | 1,404 | | | | 1,892 | | | | 3,714 | |
| Residential real estate - 1st lien | | | 2,009 | | | | 1,263 | | | | 2,203 | | | | 1,928 | | | | 2,704 | |
| Residential real estate - Jr lien | | | 386 | | | | 404 | | | | 593 | | | | 338 | | | | 464 | |
| Total non-accrual loans | | | 5,237 | | | | 4,154 | | | | 4,727 | | | | 4,755 | | | | 7,949 | |
| | |
| Total non-accrual and past due loans | | | 6,160 | | | | 5,279 | | | | 5,635 | | | | 5,134 | | | | 9,189 | |
| Other real estate owned | | | 262 | | | | 1,238 | | | | 1,106 | | | | 1,075 | | | | 90 | |
| Total non-performing assets | | $ | 6,422 | | | $ | 6,517 | | | $ | 6,741 | | | $ | 6,209 | | | $ | 9,279 | |
| | |
| Percent of gross loans | | | 1.40 | % | | | 1.46 | % | | | 1.53 | % | | | 1.49 | % | | | 2.40 | % |
| Reserve coverage of non-performing assets | | | 78.04 | % | | | 75.28 | % | | | 72.03 | % | | | 69.45 | % | | | 41.89 | % |
Non-performing loans as of December 31, 2015 consisted of, by dollar volume, approximately 38% residential first mortgages, 7% junior lien home equity loans, 46% commercial real estate and 9% in commercial loans not secured by real estate, compared to 30%, 10%, 47%, and 13%, respectively, at December 31, 2014.
The Company’s troubled debt restructurings (“TDR”) principally result from 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 rates. The Company has not forgiven principal or reduced accrued interest within the terms of original restructurings. The Company evaluates each TDR situation on its own merits and does not foreclose the granting of any particular type of concession. The Non-Performing Assets table above includes 21 TDRs totaling $2.7 million that were past due 90 days or more or in non-accrual status as of December 31, 2015, compared to 12 TDRs totaling $1.8 million as of December 31, 2014. The remainder of the Company’s TDRs consisted of 22 residential mortgage loans and two commercial real estate loans totaling $2.5 million at December 31, 2015 compared to 18 residential mortgage loans and one commercial real estate loan totaling $1.7 million at December 31, 2014.
As of December 31, 2015, the Company is contractually committed to lend up to $450,000 in additional funds to one debtor with an impaired SBA 75%-guaranteed cap line of credit. This debtor’s loan relationship is expected to strengthen as a result of a prior troubled debt restructuring. With this exception, as of the balance sheet dates, the Company was not contractually committed to lend additional funds to debtors with impaired, non-accrual or modified loans.
The Company’s OREO portfolio at December 31, 2014 consisted of seven properties acquired through the normal foreclosure process. During 2015, the Company moved one additional property into OREO totaling $70,500, and sold that property and five of the properties held at December 31, 2014. With total sales, net of closing costs, of $966,615 during 2015, and subsequent write-downs totaling $75,820 on two properties, 2015 ended with an OREO balance of $262,000, representing one commercial and one residential property.
Allowance for loan losses and provisions - The Company maintains an allowance for loan losses (allowance) at a level that management believes is appropriate to absorb losses inherent in the loan portfolio as of the measurement date(See Critical Accounting Policies). Although the Company, in establishing the allowance, considers the inherent losses in individual loans and pools of loans, the allowance is a general reserve available to absorb all credit losses in the loan portfolio. No part of the allowance is segregated to absorb losses from any particular loan or segment of loans.
When establishing the allowance each quarter the Company applies a combination of historical loss factors and qualitative factors to loan segments, including residential first and junior lien mortgages, commercial real estate, commercial & industrial, and consumer loan portfolios. The Company will shorten or lengthen its look back period for determining average portfolio historical loss rates as the economy either contracts or expands; during a period of economic contraction, a shortening of the look back period may more conservatively reflect the current economic climate. The highest loss rates experienced for the look back period are applied to the various segments in establishing the allowance.
The reserve methodology was modified during the quarter ended June 30, 2015 to eliminate using the higher of the 1999-2001 losses as compared to current losses, by eliminating use of the 1999-2001 period. The 1999-2001 information had become dated and the Bank’s credit portfolio management had evolved since that period. The revised methodology now considers the highest annual loss rates for the most recent one to five year look back periods for each segment of the portfolio. This change resulted in a gross reduction to required reserves of $529,234 at June 30, 2015, the effect of which was partially offset by increases due to adjustments in certain qualitative factors relating to commercial and commercial real estate loans, as described in the next paragraph.
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. During the second quarter of 2015, adjustments were made to the commercial and commercial real estate qualitative factors to adjust for the impact of the change in methodology, principally in the area of loan growth, loan policy, and delinquency factors. The commercial and commercial real estate factors were each increased a total of 10 basis points, amounting to increases in the allowance for loan losses of $171,000 and $70,000, respectively at June 30, 2015. While unallocated reserves have increased, they are considered by management to be appropriate in light of the Company’s continued growth strategy and shift in the portfolio from residential loans to commercial and commercial real estate loans and the risk associated with the relatively new, unseasoned loans in those portfolios.
The adequacy of the allowance is reviewed quarterly by the risk management committee of the Board of Directors and then presented to the full Board of Directors for approval.
The following table summarizes the Company's loan loss experience for each of the last five years.
| As of or Years Ended December 31, | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
| | | (Dollars in Thousands) | |
| | |
| Loans outstanding, end of year | | $ | 458,119 | | | $ | 447,805 | | | $ | 439,909 | | | $ | 416,376 | | | $ | 386,387 | |
| Average loans outstanding during year | | $ | 454,793 | | | $ | 447,133 | | | $ | 425,482 | | | $ | 402,023 | | | $ | 389,611 | |
| Non-accruing loans, end of year | | $ | 5,237 | | | $ | 4,154 | | | $ | 4,727 | | | $ | 4,755 | | | $ | 7,949 | |
| Non-accruing loans, net of government guarantees | | $ | 4,551 | | | $ | 3,378 | | | $ | 4,368 | | | $ | 3,537 | | | $ | 5,385 | |
| | |
| Allowance, beginning of year | | $ | 4,906 | | | $ | 4,855 | | | $ | 4,312 | | | $ | 3,887 | | | $ | 3,728 | |
| Loans charged off: | |
| Commercial & industrial | | | (201 | ) | | | (153 | ) | | | (83 | ) | | | (159 | ) | | | (22 | ) |
| Commercial real estate | | | (15 | ) | | | (168 | ) | | | (125 | ) | | | (58 | ) | | | (197 | ) |
| Residential real estate - 1st lien | | | (151 | ) | | | (59 | ) | | | (56 | ) | | | (246 | ) | | | (522 | ) |
| Residential real estate - Jr lien | | | (66 | ) | | | (52 | ) | | | (57 | ) | | | (136 | ) | | | (97 | ) |
| Consumer | | | (69 | ) | | | (112 | ) | | | (67 | ) | | | (97 | ) | | | (103 | ) |
| Total | | | (502 | ) | | | (544 | ) | | | (388 | ) | | | (696 | ) | | | (941 | ) |
| Recoveries: | |
| Commercial & industrial | | | 59 | | | | 6 | | | | 3 | | | | 29 | | | | 13 | |
| Commercial real estate | | | 0 | | | | 0 | | | | 186 | | | | 52 | | | | 8 | |
| Residential real estate - 1st lien | | | 6 | | | | 15 | | | | 16 | | | | 6 | | | | 43 | |
| Residential real estate - Jr lien | | | 0 | | | | 0 | | | | 21 | | | | 2 | | | | 0 | |
| Consumer | | | 33 | | | | 34 | | | | 35 | | | | 32 | | | | 36 | |
| Total | | | 98 | | | | 55 | | | | 261 | | | | 121 | | | | 100 | |
| | |
| Net loans charged off | | | (404 | ) | | | (489 | ) | | | (127 | ) | | | (575 | ) | | | (841 | ) |
| Provision charged to income | | | 510 | | | | 540 | | | | 670 | | | | 1,000 | | | | 1,000 | |
| Allowance, end of year | | $ | 5,012 | | | $ | 4,906 | | | $ | 4,855 | | | $ | 4,312 | | | $ | 3,887 | |
| | |
| Net charge offs to average loans outstanding | | | 0.09 | % | | | 0.11 | % | | | 0.03 | % | | | 0.14 | % | | | 0.21 | % |
Provision charged to income as a percent of average loans | | | 0.11 | % | | | 0.12 | % | | | 0.16 | % | | | 0.25 | % | | | 0.26 | % |
| Allowance to average loans outstanding | | | 1.10 | % | | | 1.10 | % | | | 1.14 | % | | | 1.07 | % | | | 1.00 | % |
| Allowance to non-accruing loans | | | 95.70 | % | | | 118.10 | % | | | 102.71 | % | | | 90.68 | % | | | 48.90 | % |
| Allowance to non-accruing loans net of | | | | | | | | | | | | | | | | | | | | |
| government guarantees | | | 110.13 | % | | | 145.23 | % | | | 111.15 | % | | | 121.91 | % | | | 72.18 | % |
The level of the provision charged to income for 2011 and 2012 was directionally consistent with the trends nd risk in the loan portfolio and with the growth of the loan portfolio. Improving loan portfolio trends throughout 2012 and 2013, and several recoveries resulted in a $330,000 or 33.0% decrease to the provision for 2013; with a total 2013 provision of $670,000, compared to a provision of $1,000,000 in each of the two previous years. While the Company’s allowance coverage of non-accruing loans increased during 2013, the coverage of non-accruing loans net of government guarantees decreased. The decrease was the result of new non-accruing loans that were not guaranteed, replacing one large government guaranteed loan that was fully liquidated during the second quarter of 2013. Both the increase in the reserve balance and lower levels of non-accruing loans during 2014 led to the strengthened reserve coverage of non-accruing loans at year-end 2014, including the coverage of non-accruing loans net of government guarantees. Despite lower net losses in 2015 than in 2014, the 2015 provision was maintained at a level consistent with portfolio growth and higher levels of non-performing loans. The Company has an experienced collections department that continues to work actively with borrowers to resolve problem loans and manage the OREO portfolio, and management continues to monitor the loan portfolio closely.
Specific allocations to the allowance are made for certain impaired loans. Impaired loans are loans to a borrower that in aggregate are greater than $100,000 and that are in non-accrual status. A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due, including interest and principal, according to the contractual terms of the loan agreement. The Company will review all the facts and circumstances surrounding non-accrual loans and on a case-by-case basis may consider loans below the threshold as impaired when such treatment is material to the financial statements. See Note 3 to the accompanying audited consolidated financial statements for information on the recorded investment in impaired loans and their related allocations.
The portion of the allowance termed "unallocated" is established to absorb inherent losses that exist as of the valuation date although not specifically identified through management's process for estimating credit losses. While the allowance is described as consisting of separate allocated portions, the entire allowance is available to support loan losses, regardless of category.
The following table shows the allocation of the allowance for loan losses, as well as the percent of each loan category to the total loan portfolio for each of the last five years:
Allocation of Allowance for Loan Losses
| December 31, | | 2015 | | | % | | | 2014 | | | % | | | 2013 | | | % | | | 2012 | | | | % | | | | 2011 | | | % | |
| | | (Dollars in Thousands) | |
| Domestic | |
| Commercial & industrial | | $ | 713 | | | | 14 | % | | $ | 647 | | | | 14 | % | | $ | 516 | | | | 12 | % | | $ | 428 | | | | 12 | % | | $ | 342 | | | | 10 | % |
| Commercial real estate | | | 2,152 | | | �� | 39 | % | | | 2,312 | | | | 37 | % | | | 2,144 | | | | 36 | % | | | 1,537 | | | | 33 | % | | | 1,386 | | | | 34 | % |
| Residential real estate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1st lien | | | 1,368 | | | | 35 | % | | | 1,271 | | | | 37 | % | | | 1,453 | | | | 39 | % | | | 1,563 | | | | 41 | % | | | 1,578 | | | | 41 | % |
| Jr lien | | | 423 | | | | 10 | % | | | 321 | | | | 10 | % | | | 366 | | | | 11 | % | | | 333 | | | | 11 | % | | | 332 | | | | 12 | % |
| Consumer | | | 76 | | | | 2 | % | | | 119 | | | | 2 | % | | | 105 | | | | 2 | % | | | 139 | | | | 3 | % | | | 125 | | | | 3 | % |
| Unallocated | | | 280 | | | | 0 | % | | | 236 | | | | 0 | % | | | 271 | | | | 0 | % | | | 312 | | | | 0 | % | | | 124 | | | | 0 | % |
| Total | | $ | 5,012 | | | | 100 | % | | $ | 4,906 | | | | 100 | % | | $ | 4,855 | | | | 100 | % | | $ | 4,312 | | | | 100 | % | | $ | 3,887 | | | | 100 | % |
Market Risk - In addition to credit risk in the Company’s loan portfolio and liquidity risk in its loan and deposit-taking operations, the Company’s business activities also generate market risk. Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Declining capital markets can result in fair value adjustments necessary to record decreases in the value of the investment portfolio for other-than-temporary-impairment. The Company does not have any market risk sensitive instruments acquired for trading purposes. The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. During recessionary periods, a declining housing market can result in an increase in loan loss reserves or ultimately an increase in foreclosures. Interest rate risk is directly related to the different maturities and repricing characteristics of interest-bearing assets and liabilities, as well as to loan prepayment risks, early withdrawal of time deposits, and the fact that the speed and magnitude of responses to interest rate changes vary by product. The prolonged weak economy and disruption in the financial markets in recent years may heighten the Company’s market risk. As discussed above under "Interest Rate Risk and Asset and Liability Management", the Company actively monitors and manages its interest rate risk through the ALCO process.
INVESTMENT SECURITIES
The Company maintains an investment portfolio of various securities to diversify its revenue sources, as well as to provide interest rate risk and credit risk diversification and to provide for its liquidity and funding needs. The Company’s portfolio of available-for-sale securities decreased $6.5 million, or 6.4%, in 2015, from $33.0 million at December 31, 2014 to $26.5 million at December 31, 2015, as maturities were used to supplement short-term borrowings and deposits to fund loan growth. The Company’s held-to-maturity portfolio consisted entirely of tax-exempt obligations of state and political subdivisions with a book value of $43.4 million as of December 31, 2015 as compared to $41.8 million at December 31, 2014. The increase in the held-to-maturity investment portfolio is due to a $4.9 million increase in municipal term obligations compared with the prior year, while non-arbitrage and tax anticipation lending declined $2.2 million, or 9.5%, and $1.2 million, or 32.7%, respectively, from December 31, 2014. The non-arbitrage and tax anticipation loans to municipalities are issued annually on a competitive bid basis; as a result the portfolio can fluctuate considerably from year to year based on changes in competitive pressures.
Accounting standards require banks to recognize all appreciation or depreciation of investments classified as either trading securities or available-for-sale, either through the income statement or on the balance sheet even though a gain or loss has not been realized. Securities classified as trading securities are marked to market with any gain or loss net of tax effect, charged to income. The Company's investment policy does not permit the holding of trading securities. Securities classified as held-to-maturity are recorded at book value, subject to adjustment for other-than-temporary impairment. Securities classified as available-for-sale are marked to market with any gain or loss after taxes charged to shareholders’ equity in the consolidated balance sheets. These adjustments in the available-for-sale portfolio resulted in an accumulated unrealized loss net of taxes of $45,394 at December 31, 2015, compared to an unrealized loss net of taxes of $7,443 at December 31, 2014. The fluctuation in unrealized gains and losses are due primarily to market interest rate changes, and are not based on any deterioration in credit quality of the underlying issuers. The Company added FNMA and FHLMC issued mortgage-backed securities (Agency MBS) as an approved asset class in 2014 in order to realize a more favorable yield in the portfolio and diversify the holdings. This strategy has performed well with the continued flattening of the yield curve. Although classified as available-for-sale, these securities are short term and we anticipate keeping them until maturity. The unrealized loss positions within the investment portfolio as of the balance sheet dates presented are considered by management to be temporary.
The restricted equity securities comprise the Company’s membership stock in the Federal Reserve Bank of Boston (FRBB) and FHLBB. On December 31, 2015 and 2014, the Company held $588,150 in FRBB stock and $1.9 million and $2.7 million, respectively, in FHLBB stock. Membership in the FRBB and FHLBB requires the purchase of their stock in specified amounts. The stock is typically held for an extended period of time and can only be sold back to the issuer, or in the case of FHLBB, a member institution. Restricted equity stock is sold and redeemed at par. Due to the unique nature of the restricted equity stock, including the non-investment purpose for owning it, the ownership structure and restrictions and the absence of a trading market for the stock, these securities are not marked to market, but carried at par.
Some of the Company’s investment securities have a call feature, meaning that the issuer may call in the investment before maturity, at predetermined call dates and prices. In 2015, there were no call features exercised by the issuers, compared to four calls during 2014.
The Company's investment portfolios as of December 31 in each of the last three fiscal years were as follows:
| | | | | | Gross | | | Gross | | | | |
| | | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
| | | Cost | | | Gains | | | Losses | | | Value(1) | |
| December 31, 2015 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Available-for-Sale | | | | | | | | | | | | |
| U.S. GSE debt securities | | $ | 12,832,059 | | | $ | 22,523 | | | $ | 22,139 | | | $ | 12,832,443 | |
| Agency MBS | | | 10,734,121 | | | | 0 | | | | 69,637 | | | | 10,664,484 | |
| Other investments | | | 2,973,000 | | | | 5,046 | | | | 4,573 | | | | 2,973,473 | |
| | | $ | 26,539,180 | | | $ | 27,569 | | | $ | 96,349 | | | $ | 26,470,400 | |
| | | | | | | | | | | | | | | | | |
| Held-to-Maturity | | | | | | | | | | | | | | | | |
| States and political subdivisions | | $ | 43,354,419 | | | $ | 788,581 | | | $ | 0 | | | $ | 44,143,000 | |
| | | | | | | | | | | | | | | | | |
| Restricted Equity Securities (2) | | $ | 2,441,650 | | | $ | 0 | | | $ | 0 | | | $ | 2,441,650 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 72,335,249 | | | $ | 816,150 | | | $ | 96,349 | | | $ | 73,055,050 | |
| | | | | | Gross | | | Gross | | | | |
| | | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
| | | Cost | | | Gains | | | Losses | | | Value(1) | |
| December 31, 2014 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Available-for-Sale | | | | | | | | | | | | |
| U.S. GSE debt securities | | $ | 19,929,061 | | | $ | 50,378 | | | $ | 72,289 | | | $ | 19,907,150 | |
| U.S. Government securities | | | 3,997,451 | | | | 3,486 | | | | 0 | | | | 4,000,937 | |
| Agency MBS | | | 9,031,661 | | | | 19,472 | | | | 12,326 | | | | 9,038,807 | |
| | | $ | 32,958,173 | | | $ | 73,336 | | | $ | 84,615 | | | $ | 32,946,894 | |
| | | | | | | | | | | | | | | | | |
| Held-to-Maturity | | | | | | | | | | | | | | | | |
| States and political subdivisions | | $ | 41,810,945 | | | $ | 423,055 | | | $ | 0 | | | $ | 42,234,000 | |
| | | | | | | | | | | | | | | | | |
| Restricted Equity Securities (2) | | $ | 3,332,450 | | | $ | 0 | | | $ | 0 | | | $ | 3,332,450 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 78,101,568 | | | $ | 496,391 | | | $ | 84,615 | | | $ | 78,513,344 | |
| | | | | | Gross | | | Gross | | | | |
| | | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
| | | Cost | | | Gains | | | Losses | | | Value(1) | |
| December 31, 2013 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Available-for-Sale | | | | | | | | | | | | |
| U.S. GSE debt securities | | $ | 29,220,333 | | | $ | 114,102 | | | $ | 195,521 | | | $ | 29,138,914 | |
| U.S. Government securities | | | 6,040,188 | | | | 10,955 | | | | 1,455 | | | | 6,049,688 | |
| | | $ | 35,260,521 | | | $ | 125,057 | | | $ | 196,976 | | | $ | 35,188,602 | |
| | | | | | | | | | | | | | | | | |
| Held-to-Maturity | | | | | | | | | | | | | | | | |
| States and political subdivisions | | $ | 37,936,911 | | | $ | 433,089 | | | $ | 0 | | | $ | 38,370,000 | |
| | | | | | | | | | | | | | | | | |
| Restricted Equity Securities (2) | | $ | 3,632,850 | | | $ | 0 | | | $ | 0 | | | $ | 3,632,850 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 76,830,282 | | | $ | 558,146 | | | $ | 196,976 | | | $ | 77,191,452 | |
(1) Method used to determine fair value of held-to-maturity securities rounds values to the nearest thousand.
(2) Required equity purchases for membership in the Federal Reserve System and Federal Home Loan Bank System.
The Company does not have investments totaling more than 10% of Shareholders’ Equity to any one issuer in the periods presented.
In 2015, there were realized gains of $14,779 from the sale of investments in U.S. Government securities and realized gains of $8,023 and realized losses of $5,300 from the sale of investments in U.S. GSE debt securities, compared to realized gains of $27,838 from the sale of investments in U.S. GSE debt securities in 2014.
The following is an analysis of the maturities and yields of the debt securities in the Company's investment portfolio for each of the last three fiscal years:
Maturities and Yields of Investment Portfolio
| | |
| December 31, | | 2015 | | | 2014 | | | 2013 | |
| | | | | | Weighted | | | | | | Weighted | | | | | | Weighted | |
| | | Fair | | | Average | | | Fair | | | Average | | | Fair | | | Average | |
| | | Value(1) | | | Yield(2) | | | Value(1) | | | Yield(2) | | | Value(1) | | | Yield(2) | |
| | | | |
| Available-for-Sale | |
| U.S. Treasury & Agency Obligations | |
| | | | | | | | | | | | | | | | | | | |
| Due in one year or less | | $ | 3,086,317 | | | | 1.19 | % | | $ | 5,034,248 | | | | 0.59 | % | | $ | 4,510,923 | | | | 0.48 | % |
| Due from one to five years | | | 12,474,599 | | | | 1.09 | % | | | 18,873,839 | | | | 1.09 | % | | | 30,677,679 | | | | 0.87 | % |
| Due from five to ten years | | | 245,000 | | | | 2.50 | % | | | 0 | | | | 0.00 | % | | | 0 | | | | 0.00 | % |
| Total | | $ | 15,805,916 | | | | 1.13 | % | | $ | 23,908,087 | | | | 0.99 | % | | $ | 35,188,602 | | | | 0.75 | % |
| | |
| Agency MBS(3) | | $ | 10,664,484 | | | | 1.69 | % | | $ | 9,038,807 | | | | 2.13 | % | | $ | 0 | | | | 0.00 | % |
| | |
| FRBB Stock (4) | | $ | 588,150 | | | | 6.00 | % | | $ | 588,150 | | | | 6.00 | % | | $ | 588,150 | | | | 6.00 | % |
| | |
| FHLBB Stock (4) | | $ | 1,853,500 | | | | 3.74 | % | | $ | 2,744,300 | | | | 1.58 | % | | $ | 3,044,700 | | | | 0.40 | % |
| | |
| Held-to-Maturity | |
| Obligations of State & Political Subdivisions | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Due in one year or less | | $ | 27,731,133 | | | | 3.41 | % | | $ | 28,158,718 | | | | 3.70 | % | | $ | 27,615,731 | | | | 3.55 | % |
| Due from one to five years | | | 4,015,553 | | | | 2.81 | % | | | 4,637,913 | | | | 2.98 | % | | | 3,939,950 | | | | 3.40 | % |
| Due from five to ten years | | | 3,022,188 | | | | 4.34 | % | | | 2,305,353 | | | | 4.83 | % | | | 2,592,045 | | | | 5.02 | % |
| Due after ten years | | | 8,585,545 | | | | 4.57 | % | | | 6,708,961 | | | | 4.14 | % | | | 3,789,185 | | | | 5.52 | % |
| Total | | $ | 43,354,419 | | | | 3.65 | % | | $ | 41,810,945 | | | | 3.75 | % | | $ | 37,936,911 | | | | 3.83 | % |
(1) Investments classified as available-for-sale are presented at fair value, and investments classified as held-to-maturity are presented at book value. |
(2) The yield on obligations of state and political subdivisions is calculated on a tax equivalent basis assuming a 34 percent tax rate. |
(3) Because the actual maturities of Agency MBS usually differ from their contractual maturities due to the right of borrowers to prepay the underlying mortgage loans, usually without penalty, those securities are not presented by contractual maturity date. |
| (4) Required equity purchases for membership in the Federal Reserve System and Federal Home Loan Bank System. |
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 2015, the Company did not engage in any activity that created any additional types of off-balance-sheet risk.
The Company generally requires collateral or other security to support financial instruments with credit risk. The Company's financial instruments whose contract amount represents credit risk are disclosed in Note 15 to the consolidated financial statements.
EFFECTS OF INFLATION
Rates of inflation affect the reported financial condition and results of operations of all industries, including the banking industry. The effect of monetary inflation is generally magnified in bank financial and operating statements because most of a bank's assets and liabilities are monetary in nature and, as costs and prices rise, cash and credit demands of individuals and businesses increase, while the purchasing power of net monetary assets declines. During the economic downturn that began in 2008, the capital and credit markets experienced significant volatility and disruption, with the federal government taking unprecedented steps to deal with the economic situation. These measures have included significant deficit spending as well as quantitative easing of the money supply by the FRB, which could result in inflation in future periods.
The impact of inflation on the Company's financial results is affected by management's ability to react to changes in interest rates in order to reduce inflationary effect on performance. Interest rates do not necessarily move in conjunction with changes in the prices of other goods and services. As discussed above, management seeks to manage the relationship between interest-sensitive assets and liabilities in order to protect against significant interest rate fluctuations, including those resulting from inflation. Inflation remains below the Federal Reserve’s implied target of 2% and is not believed to present any challenge in the near term. Possible deflation is now a concern given the recent severe decline in oil prices that is expected to impact the price of goods worldwide.
LIQUIDITY AND CAPITAL RESOURCES
Managing liquidity risk is essential to maintaining both depositor confidence and stability in earnings. Liquidity management refers to the ability of the Company to adequately cover fluctuations in assets and liabilities. Meeting loan demand (assets) and covering the withdrawal of deposit funds (liabilities) are two key components of the liquidity management process. The Company’s principal sources of funds are deposits, amortization and prepayment of loans and securities, maturities of investment securities, sales of loans available-for-sale, and earnings and funds provided from operations. Maintaining a relatively stable funding base, which is achieved by diversifying funding sources, competitively pricing deposit products, and extending the contractual maturity of liabilities, reduces the Company’s exposure to roll over risk on deposits and limits reliance on volatile short-term borrowed funds. Short-term funding needs arise from declines in deposits or other funding sources and funding requirements for loan commitments. The Company’s strategy is to fund assets to the maximum extent possible with core deposits that provide a sizable source of relatively stable and low-cost funds.
The Company recognizes that, at times, when loan demand exceeds deposit growth it may be desirable to utilize alternative sources of deposit funding to augment retail deposits and borrowings. One-way deposits purchased through the Certificate of Deposit Account Registry Service (“CDARS”), maintained by the Promontory Interfinancial Network provide an alternative funding source when needed. Such deposits are generally considered a form of brokered deposits. The Company had $4.2 million in one-way deposits at December 31, 2015, compared to no one-way deposits at December 31, 2014. In addition, two-way CDARS deposits allow the Company to provide FDIC deposit insurance to its customers in excess of account coverage limits by exchanging deposits with other CDARS members. At December 31, 2015 and 2014, the Company reported $2.8 million and $1.1 million, respectively, in CDARS deposits representing exchanged deposits with other CDARS participating banks.
At December 31, 2015 and 2014, gross borrowing capacity of approximately $72.1 million and $67.1 million, respectively, was available through the FHLBB secured by the Company's qualifying loan portfolio (generally, residential mortgages), reduced by outstanding advances and collateral pledges. The Company also has an unsecured Federal Funds line with the FHLBB with an available balance of $500,000 and no advances against it at December 31, 2015 and 2014. Interest is chargeable at a rate determined daily approximately 25 basis points higher than the rate paid on federal funds sold.
Under a separate agreement with the FHLBB, the Company has the authority to collateralize public unit deposits up to its FHLBB borrowing capacity ($72.1 million and $67.1 million at December 31, 2015 and 2014, respectively, less outstanding advances and collateral pledges) with letters of credit issued by the FHLBB. The Company offers a Government Agency Account to its municipal customers collateralized with these FHLBB letters of credit. At December 31, 2015 and 2014, approximately $14.9 million and $34.5 million, respectively, of qualifying residential real estate loans were pledged as collateral to the FHLBB for these collateralized governmental unit deposits, which reduced dollar-for-dollar the available borrowing capacity under the FHLBB line of credit. Total fees paid by the Company to the FHLBB in connection with these letters of credit were $29,535 for 2015 and $35,863 for 2014.
The Company has a Borrower-in-Custody arrangement with the FRBB secured by eligible commercial loans, commercial real estate loans and home equity loans, resulting in an available line of $72.3 million and $78.6 million, respectively, at December 31, 2015 and 2014. Credit advances in the FRBB lending program are overnight advances with interest chargeable at the primary credit rate (generally referred to as the discount rate), which was 100 basis points at December 31, 2015. At December 31, 2015 and 2014, the Company had no outstanding advances against this line.
The Company has an unsecured line with two correspondent banks with available lines totaling $7.5 million at December 31, 2015 and 2014. The Company had no outstanding advances against these lines for the periods presented.
Securities sold under agreements to repurchase amounted to $22.1 million, $28.5 million and $29.6 million as of December 31, 2015, 2014 and 2013, respectively, with weighted average interest rates of 0.30%, 0.27% and 0.24% at December 31, 2015, 2014 and 2013, respectively. The average daily balance of these repurchase agreements was $24.3 million, $25.3 million and $28.5 million during 2015, 2014, and 2013, respectively. The maximum borrowings outstanding on these agreements at any month-end reporting period of the Company were $28.2 million, $28.5 million and $34.5 million during 2015, 2014 and 2013, respectively. These repurchase agreements mature daily and carried a weighted average interest rate of 0.29% during 2015, 0.25% during 2014 and 0.39% during 2013.
The following table illustrates the changes in shareholders' equity from December 31, 2014 to December 31, 2015:
| Balance at December 31, 2014 (book value $9.43 per common share) | | $ | 48,995,202 | |
| Net income | | | 4,825,591 | |
| Issuance of stock through the Dividend Reinvestment Plan | | | 885,243 | |
| Dividends declared on common stock | | | (3,172,179 | ) |
| Dividends declared on preferred stock | | | (81,250 | ) |
| Change in unrealized loss on available-for-sale securities, net of tax | | | (37,951 | ) |
| Balance at December 31, 2015 (book value $9.79 per common share) | | $ | 51,414,656 | |
In December, 2015, the Company declared a $0.16 per common share cash dividend, payable February 1, 2016 to shareholders of record as of January 15, 2016, requiring the Company to accrue a liability of $796,713 for this dividend in the fourth quarter of 2015.
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action capital requirements are applicable to banks, but not bank holding companies.
During 2013, the Federal Reserve Board adopted final rules implementing the Basel III capital standards, which significantly revised the regulatory capital requirements for U.S. financial institutions, including community banks. Among other things, the new capital rules revised the definition of various regulatory capital components and related calculation methods, added a new regulatory capital component (common equity tier 1 capital), increased the minimum required tier 1 capital, implemented a new capital conservation buffer and adopted restrictions on payment of dividends and certain discretionary bonuses when the buffer is not maintained. The final rules contain certain regulatory relief provisions for community banks and also permitted certain banking organizations to retain, through a one-time election, the regulatory treatment for accumulated other comprehensive income in effect prior to adoption of the Basel III capital rules. The Company and the Bank made the election, the effect of which is to continue to exclude unrealized gains and losses on AFS debt securities from the calculation of regulatory capital. The Basel III capital rules took effect for the Company and the Bank on January 1, 2015, subject to a transition period for certain parts of the rules.
On December 31, 2015, the Company’s tier 1 leverage was 9.01%, common equity tier 1 and tier 1 risk-based capital ratios were both 12.38%, and total risk-based capital ratio was 13.57%. The Company’s capital ratios exceeded all applicable regulatory requirements at December 31, 2015. On December 31, 2015, the Bank’s tier 1 leverage was 8.93%, common equity tier 1 and tier 1 risk-based capital ratios were both 12.27%, and total risk-based capital ratio was 13.46%. Each of these ratios exceeds the current regulatory guidelines for a well-capitalized institution, the highest regulatory capital category. (See Note 20 to the consolidated financial statements.)
As of December 31, 2015, the Bank was considered well capitalized under the regulatory capital framework for Prompt Corrective Action.
Common Stock Performance by Quarter*
| | | 2015 | | | 2014 | |
| Trade Price | | First | | | Second | | | Third | | | Fourth | | | First | | | Second | | | Third | | | Fourth | |
| High | | $ | 14.50 | | | $ | 14.50 | | | $ | 14.75 | | | $ | 14.75 | | | $ | 14.25 | | | $ | 14.50 | | | $ | 14.50 | | | $ | 14.75 | |
| Low | | $ | 14.00 | | | $ | 14.00 | | | $ | 14.15 | | | $ | 13.60 | | | $ | 13.01 | | | $ | 13.75 | | | $ | 14.00 | | | $ | 13.84 | |
| Bid Price | | First | | | Second | | | Third | | | Fourth | | | First | | | Second | | | Third | | | Fourth | |
| High | | $ | 14.40 | | | $ | 14.40 | | | $ | 14.50 | | | $ | 14.25 | | | $ | 12.25 | | | $ | 13.90 | | | $ | 12.80 | | | $ | 13.65 | |
| Low | | $ | 14.00 | | | $ | 14.00 | | | $ | 14.15 | | | $ | 14.00 | | | $ | 10.50 | | | $ | 11.12 | | | $ | 12.60 | | | $ | 12.85 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash Dividends Declared | | $ | 0.16 | | | $ | 0.16 | | | $ | 0.16 | | | $ | 0.16 | | | $ | 0.16 | | | $ | 0.16 | | | $ | 0.16 | | | $ | 0.16 | |
*The Company's common stock is not traded on any exchange. However, the Company is included in the OTCQX® marketplace tier maintained by the OTC Markets Group Inc. Trade and bid information for the stock appears in the OTC’s interdealer quotation system, OTC Link ATS®. The trade price and bid information in the table above is based on information reported by participating FINRA-registered brokers in the OTC Link ATS® system and may not represent all trades or high and low bids during the relevant periods. Such price quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and bid prices do not necessarily represent actual transactions. The OTC trading symbol for the Company’s common stock is CMTV.
As of February 1, 2016, there were 4,994,888 shares of the Corporation's common stock ($2.50 par value) outstanding, owned by 872 shareholders of record.
Form 10-K
A copy of the Form 10-K Report filed with the Securities and Exchange Commission may be obtained without charge upon written request to:
Stephen P. Marsh, CEO and Board Chair
Community Bancorp.
4811 US Route 5
Newport, Vermont 05855
Shareholder Services
For shareholder services or information contact:
Chris Bumps, Corporate Secretary
Community Bancorp.
4811 US Route 5
Newport, Vermont 05855
(802) 334-7915
Transfer Agent:
Computershare Investor Services
PO Box 43078
Providence, RI 02940-3078
www.computershare.com
Annual Shareholders' Meeting
The 2016 Annual Shareholders' Meeting will be held at 5:30 p.m., May 17, 2016, at the Elks Club in Derby. We hope to see many of our shareholders there.
