10-Q 1 mbvt-20120930x10q.htm 10-Q 4c535cc197c6438

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

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

 

 

 

For the quarterly period ended September 30, 2012

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

 

For the transition period from

 

 

to

 

 

Commission File Number:

0-11595

 

Merchants Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware 

 

03-0287342

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

275 Kennedy Drive, South Burlington, VT

 

 

05403

(Address of principal executive offices)

 

(Zip Code)

 

802-658-3400

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    [ X ] Yes     [  ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  [X] Yes            [  ] No

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

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

 

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

[  ] Yes                                       [ X ] No

 

As of October 31, 2012, there were 6,276,372 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

 


 

MERCHANTS BANCSHARES, INC.

FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets (Unaudited)

 

 

As of September 30, 2012 and December 31, 2011

3

 

 

 

 

Consolidated Statements of Income (Unaudited)

 

 

Three and nine months ended September 30, 2012 and 2011

4

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

Three and nine months ended September 30, 2012 and 2011

5

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited)

 

 

Three and nine months ended September 30, 2012 and 2011

6

 

 

 

 

Notes to Interim Unaudited Consolidated Financial Statements

8

 

 

 

Item 2.

Management's Discussion and Analysis of Financial

 

 

Condition and Results of Operations

30

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

41

Item 4.

Controls and Procedures

43

 

 

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

44

Item 1A.

Risk Factors

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

Item 3.

Defaults upon Senior Securities

44

Item 4.

Mine Safety Disclosure

44

Item 5.

Other Information

44

Item 6.

Exhibits

44

 

Signatures

45

 

Exhibits

 

 

 

 

 

 

 


 

 

ITEM 1. Financial Statements

 

Merchants Bancshares, Inc.

Consolidated Balance Sheets

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

December 31,

(In thousands except share and per share data)

2012

2011

ASSETS

 

 

 

 

Cash and due from banks

$

30,097 

$

10,392 

Interest earning deposits with banks and other short-term investments

 

22,935 

 

27,420 

Total cash and cash equivalents

 

53,032 

 

37,812 

Investments:

 

 

 

 

Securities available for sale, at fair value

 

526,257 

 

511,751 

Securities held to maturity (fair value of $498 and $624)

 

443 

 

558 

Total investments

 

526,700 

 

512,309 

Loans

 

1,072,879 

 

1,027,626 

Less: Allowance for loan losses

 

11,444 

 

10,619 

Net loans

 

1,061,435 

 

1,017,007 

Federal Home Loan Bank stock

 

8,145 

 

8,630 

Bank premises and equipment, net

 

15,221 

 

14,232 

Investment in real estate limited partnerships

 

5,338 

 

5,189 

Other assets

 

15,965 

 

16,690 

Total assets

$

1,685,836 

$

1,611,869 

LIABILITIES

 

 

 

 

Deposits:

 

 

 

 

Demand (noninterest bearing)

$

227,879 

$

197,522 

Savings, interest bearing checking and money market accounts

 

687,267 

 

632,110 

Time deposits $100 thousand and greater

 

126,095 

 

127,303 

Other time deposits

 

211,722 

 

220,945 

Total deposits

 

1,252,963 

 

1,177,880 

Short-term borrowings

 

55,600 

 

Securities sold under agreements to repurchase

 

227,996 

 

262,527 

Other long-term debt

 

2,503 

 

22,562 

Junior subordinated debentures issued to unconsolidated subsidiary trust

 

20,619 

 

20,619 

Other liabilities

 

8,126 

 

18,744 

Total liabilities

 

1,567,807 

 

1,502,332 

Commitments and contingencies (Note 8)

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

Preferred stock

 

 

 

 

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

 

 

Class B voting shares authorized - 1,500,000, none outstanding

 

 

Common stock, $.01 par value

 

67 

 

67 

Authorized 10,000,000 shares; issued 6,651,760 at September 30, 2012 and December 31, 2011

 

 

 

 

Outstanding: 5,955,111 at September 30, 2012 and 5,907,080 at December 31, 2011

 

 

 

 

Capital in excess of par value

 

36,700 

 

36,544 

Retained earnings

 

85,497 

 

79,393 

Treasury stock, at cost: 696,649 shares at September 30, 2012 and 744,680 shares
at December 31, 2011

 

(14,837)

 

(15,817)

Deferred compensation arrangements

 

6,232 

 

6,248 

Accumulated other comprehensive income

 

4,370 

 

3,102 

Total shareholders' equity

 

118,029 

 

109,537 

Total liabilities and shareholders' equity

$

1,685,836 

$

1,611,869 

 

 

 

 

 

See accompanying notes to interim unaudited consolidated financial statements

 

3

 


 

Merchants Bancshares, Inc.

Consolidated Statements of Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

Nine Months Ended

 

September 30,

September 30,

(In thousands except per share data)

2012

2011

2012

2011

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

Interest and fees on loans

$

11,278 

$

11,641 

$

33,860 

$

33,830 

Investment income:

 

 

 

 

 

 

 

 

Interest and dividends on investment securities

 

2,942 

 

3,187 

 

9,005 

 

9,717 

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

 

 

37 

 

29 

 

81 

Total interest and dividend income

 

14,229 

 

14,865 

 

42,894 

 

43,628 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Savings, interest bearing checking and money market accounts

 

176 

 

298 

 

603 

 

914 

Time deposits $100 thousand and greater

 

271 

 

288 

 

852 

 

896 

Other time deposits

 

413 

 

525 

 

1,293 

 

1,634 

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

 

341 

 

518 

 

1,454 

 

1,682 

Long-term debt

 

364 

 

492 

 

1,253 

 

1,513 

Total interest expense

 

1,565 

 

2,121 

 

5,455 

 

6,639 

Net interest income

 

12,664 

 

12,744 

 

37,439 

 

36,989 

Provision for credit losses

 

250 

 

250 

 

700 

 

500 

Net interest income after provision for credit losses

 

12,414 

 

12,494 

 

36,739 

 

36,489 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

Changes in fair value on impaired securities

 

 

(10)

 

 

(20)

Non-credit related (gain) losses on securities not expected to be sold (recognized in other comprehensive income)

 

 

10 

 

 

20 

Net impairment losses

 

 

 

 

Net (losses) gains on investment securities

 

(26)

 

920 

 

422 

 

1,047 

Trust division income

 

670 

 

639 

 

2,000 

 

1,894 

Service charges on deposits

 

1,033 

 

1,161 

 

3,001 

 

3,195 

Equity in losses of real estate limited partnerships

 

(370)

 

(441)

 

(1,189)

 

(1,324)

Gain on sale of other assets

 

749 

 

 

1,083 

 

Other

 

1,143 

 

1,133 

 

3,406 

 

3,253 

Total noninterest income

 

3,199 

 

3,412 

 

8,723 

 

8,065 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

Compensation and benefits

 

4,809 

 

5,251 

 

14,756 

 

15,544 

Occupancy expense

 

946 

 

935 

 

2,843 

 

2,927 

Equipment expense

 

891 

 

848 

 

2,684 

 

2,450 

Legal and professional fees

 

677 

 

721 

 

1,954 

 

2,098 

Marketing

 

360 

 

475 

 

1,264 

 

1,259 

State franchise  taxes

 

321 

 

321 

 

965 

 

951 

FDIC insurance

 

217 

 

194 

 

644 

 

740 

Prepayment penalty on long-term debt

 

677 

 

861 

 

1,363 

 

861 

Other Real Estate Owned ("OREO") expenses

 

65 

 

47 

 

129 

 

128 

Other

 

1,486 

 

1,392 

 

4,595 

 

4,404 

Total noninterest expense

 

10,449 

 

11,045 

 

31,197 

 

31,362 

Income before provision for income taxes

 

5,164 

 

4,861 

 

14,265 

 

13,192 

Provision for income taxes

 

1,159 

 

680 

 

2,911 

 

2,281 

NET INCOME

$

4,005 

$

4,181 

$

11,354 

$

10,911 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

$

0.64 

$

0.67 

$

1.82 

$

1.76 

Diluted earnings per common share

$

0.64 

$

0.67 

$

1.81 

$

1.76 

 

 

 

 

 

 

 

 

 

See accompanying notes to interim unaudited consolidated financial statements

4

 


 

 

 

 

 

Merchants Bancshares, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

Nine Months Ended

 

September 30, 

September 30, 

(In thousands)

2012

2011

2012

2011

Net income

$

4,005 

$

4,181 

$

11,354 

$

10,911 

Other comprehensive (loss) income,  net of tax:

 

 

 

 

 

 

 

 

Change in net unrealized (loss) gain on securities available for sale, net of taxes of $564, $674, $682 and $1,543

 

1,047 

 

1,251 

 

1,266 

 

2,865 

Reclassification adjustments for net securities gain included in net income, net of taxes of $9, $(322), $(148) and $(367)

 

17 

 

(598)

 

(274)

 

(681)

Change in net unrealized loss on interest rate swaps, net of taxes of $19, $(113), $63 and $(110)

 

35 

 

(209)

 

117 

 

(204)

Pension liability adjustment, net of taxes of $29, $25, $86 and $74

 

53 

 

46 

 

159 

 

137 

Other comprehensive income

 

1,152 

 

490 

 

1,268 

 

2,117 

Comprehensive income

$

5,157 

$

4,671 

$

12,622 

$

13,028 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited interim consolidated financial statements

 

 

 

5

 


 

 

 

 

 

 

Merchants Bancshares, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended Sept 30,

(In thousands)

2012

2011

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net income

$

11,354 

$

10,911 

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

 

 

 

 

Provision for loan losses

 

700 

 

500 

Depreciation and amortization

 

1,464 

 

1,396 

Amortization of investment security premiums and accretion of discounts, net

 

1,794 

 

3,185 

Stock option expense

 

127 

 

128 

Net gains on sales of investment securities

 

(422)

 

(1,047)

Net gains on sale of loans

 

 

(28)

Net (gains) losses on sale of premises, equipment and other assets

 

(1,083)

 

16 

Gains on sale of other real estate owned

 

(7)

 

(33)

Equity in losses of real estate limited partnerships, net

 

1,189 

 

1,324 

Changes in assets and liabilities:

 

 

 

 

Increase in interest receivable

 

545 

 

274 

Increase in other assets

 

(870)

 

(2,794)

Increase (decrease) in interest payable

 

2,345 

 

(91)

(Decrease) increase in other liabilities

 

(12,440)

 

9,636 

Net cash provided by operating activities

 

4,696 

 

23,377 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Proceeds from sales of investment securities available for sale

 

64,336 

 

132,025 

Proceeds from maturities of investment securities available for sale

 

146,762 

 

146,328 

Proceeds from maturities of investment securities held to maturity

 

115 

 

192 

Proceeds from redemption of Federal Home Loan Bank stock

 

485 

 

Purchases of investment securities available for sale

 

(225,450)

 

(229,110)

Loan originations in excess of principal payments

 

(45,366)

 

(97,839)

Proceeds from sales of loans, net

 

 

80 

Proceeds from sale of other assets

 

334 

 

Proceeds from sale of premises and equipment

 

788 

 

51 

Proceeds from sales of other real estate owned

 

505 

 

224 

Real estate limited partnership investments

 

(1,299)

 

(1,310)

Purchases of bank premises and equipment

 

(2,522)

 

(1,173)

Net cash used in investing activities

 

(61,312)

 

(50,532)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

Net increase in deposits

 

75,083 

 

73,363 

Net increase in short-term borrowings

 

55,600 

 

49 

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

 

(34,531)

 

(9,855)

Principal payments on long-term debt

 

(20,059)

 

(8,558)

Cash dividends paid

 

(4,730)

 

(4,652)

Sale of treasury stock

 

15 

 

12 

Increase in deferred compensation arrangements

 

160 

 

153 

Proceeds from exercise of stock options, net of withholding taxes                               

 

278 

 

Tax benefit from exercise of stock options

 

20 

 

Net cash provided by financing activities

 

71,836 

 

50,512 

Increase in cash and cash equivalents

 

15,220 

 

23,357 

Cash and cash equivalents beginning of period

 

37,812 

 

74,026 

Cash and cash equivalents end of period

$

53,032 

$

97,383 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

Total interest payments

$

3,110 

$

6,730 

Total income tax payments

 

4,350 

 

850 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

Distribution of stock under deferred compensation arrangements

$

391 

$

432 

Distribution of treasury stock in lieu of cash dividend

 

518 

 

517 

Transfer of loans to other real estate owned

 

140 

 

340 

(Decrease) increase in payable for investments purchased

 

(9,461)

 

10,056 

 

 

 

 

 

See accompanying notes to unaudited interim consolidated financial statements

6

 


 

 

7

 


 

 

Notes To Interim Unaudited Consolidated Financial Statements

For additional information, see the Merchants Bancshares, Inc. (“Merchants, “we,” “us,” “our”) Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission (the “SEC”) on March 8, 2012.

Note 1: Financial Statement Presentation

Principles of Consolidation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. All adjustments necessary for a fair presentation of our interim consolidated financial statements as of September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and 2011 have been included. The information was prepared from our unaudited financial statements and the unaudited financial statements of our subsidiaries, Merchants Bank and MBVT Statutory Trust I.  Amounts reported for prior periods are reclassified, where necessary, to be consistent with the current period presentation.

Management’s Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting periods. The most significant estimates include those used in determining the allowance for loan losses, income taxes, interest income recognition on loans and investments and analysis of other-than-temporary impairment of investment securities. Operating results in the future may vary from the amounts derived from our estimates and assumptions.

 

 

Note 2: Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendments in this ASU affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. We do not expect that this update will have a material impact on our financial condition or results of operations.

In August 2012, the FASB issued ASU 2012-03,  “Technical Amendments and Corrections to SEC Sections   Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22. The amendments in ASU 2012-03 that have no transition guidance are effective immediately for public and private entities. Amendments that are subject to transition guidance will be effective for public companies for fiscal periods beginning after December 15, 2012, and for nonpublic entities for fiscal periods beginning after December 15, 2013.   We do not expect that this update will have a material impact on our financial condition or results of operations.  

8

 


 

 

Note 3: Investment Securities

Investments in securities are classified as available for sale or held to maturity as of September 30, 2012.  The amortized cost and fair values of the securities classified as available for sale and held to maturity as of September 30, 2012 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

Gross

 

 

 

Amortized

Unrealized

Unrealized

Fair

(In thousands)

Cost

Gains

Losses

Value

Available for Sale:

 

 

 

 

 

 

 

 

U.S. Treasury Obligations

$

100 

$

$

$

100 

U.S. Agency Obligations

 

53,392 

 

841 

 

 

54,233 

Federal Home Loan Bank ("FHLB") Obligations

 

4,563 

 

55 

 

 

4,618 

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

 

175,353 

 

8,351 

 

 

183,704 

Collateralized Mortgage Backed Securities ("Agency CMBSs")

 

5,090 

 

 

66 

 

5,024 

Agency Collateralized Mortgage Obligations ("Agency CMOs")

 

270,792 

 

2,825 

 

198 

 

273,419 

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

 

4,749 

 

 

20 

 

4,738 

Asset Backed Securities ("ABSs")

 

357 

 

64 

 

 

421 

Total Available for Sale

$

514,396 

$

12,145 

$

284 

$

526,257 

Held to Maturity:

 

 

 

 

 

 

 

 

Agency MBSs

$

443 

$

55 

$

$

498 

Total Held to Maturity

$

443 

$

55 

$

$

498 

 

 

The amortized cost and fair values of the securities classified as available for sale and held to maturity as of December 31, 2011 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

Gross

 

 

 

Amortized

Unrealized

Unrealized

Fair

(In thousands)

Cost

Gains

Losses

Value

Available for Sale:

 

 

 

 

 

 

 

 

U.S. Treasury Obligations

$

250 

$

$

$

250 

U.S. Agency Obligations

 

89,597 

 

828 

 

 

90,419 

FHLB Obligations

 

16,545 

 

134 

 

 

16,676 

Agency MBSs

 

176,756 

 

7,100 

 

18 

 

183,838 

Agency CMOs

 

211,749 

 

2,976 

 

245 

 

214,480 

Non-agency CMOs

 

5,346 

 

 

493 

 

4,855 

ABSs

 

1,172 

 

61 

 

 

1,233 

Total Available for Sale

$

501,415 

$

11,101 

$

765 

$

511,751 

Held to Maturity:

 

 

 

 

 

 

 

 

Agency MBSs

$

558 

$

66 

$

$

624 

Total Held to Maturity

$

558 

$

66 

$

$

624 

 

 

 

9

 


 

 

The contractual final maturity distribution of the debt securities classified as available for sale and held to maturity as of September 30, 2012 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After One

After Five

 

 

 

 

 

Within

But Within

But Within

After Ten

 

 

(In thousands)

One Year

Five Years

Ten Years

Years

Total

Available for Sale (at fair value):

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Obligations

$

$

100 

$

$

$

100 

U.S. Agency Obligations

 

 

10,056 

 

44,177 

 

 

54,233 

FHLB Obligations

 

 

 

4,618 

 

 

4,618 

Agency MBSs

 

398 

 

3,573 

 

28,335 

 

151,398 

 

183,704 

Agency CMBs

 

 

 

5,024 

 

 

5,024 

Agency CMOs

 

 

11 

 

5,752 

 

267,656 

 

273,419 

Non-agency CMOs

 

 

 

 

4,738 

 

4,738 

ABSs

 

 

 

 

421 

 

421 

Total Available for Sale

$

398 

$

13,740 

$

87,906 

$

424,213 

$

526,257 

Held to Maturity (at amortized cost):

 

 

 

 

 

 

 

 

 

 

Agency MBSs

$

16 

$

84 

$

$

343 

$

443 

Total Held to Maturity

$

16 

$

84 

$

$

343 

$

443 

 

 

The contractual final maturity distribution of the debt securities classified as available for sale and held to maturity as of December 31, 2011, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After One

After Five

 

 

 

 

 

Within

But Within

But Within

After Ten

 

 

(In thousands)

One Year

Five Years

Ten Years

Years

Total

Available for Sale (at fair value):

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Obligations

$

250 

$

$

$

$

250 

U.S. Agency Obligations

 

3,023 

 

12,567 

 

69,823 

 

5,006 

 

90,419 

FHLB Obligations

 

3,389 

 

 

13,287 

 

 

16,676 

Agency MBSs

 

20 

 

6,118 

 

32,897 

 

144,803 

 

183,838 

Agency CMOs

 

 

 

3,056 

 

211,424 

 

214,480 

Non-agency CMOs

 

 

 

50 

 

4,805 

 

4,855 

ABSs

 

 

 

 

1,233 

 

1,233 

Total Available for Sale

$

6,682 

$

18,685 

$

119,113 

$

367,271 

$

511,751 

Held to Maturity (at amortized cost):

 

 

 

 

 

 

 

 

 

 

Agency MBSs

$

$

158 

$

$

400 

$

558 

Total Held to Maturity

$

$

158 

$

$

400 

$

558 

 

 

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

 

Proceeds from sales of available for sale debt securities were $22.67 million and $64.34 million for the three and nine months ended September 30, 2012, respectively.  Gross gains of $36 thousand and $530 thousand and gross losses of $62 thousand and $108 thousand were realized from these sales for the three and nine months ended September 30, 2012. Proceeds from sales of available for sale debt securities were $54.99 million and $132.02 million during the three and nine months ended September 30, 2011, respectively. Gross gains of $970 thousand and $1.19 million and gross losses of $50 thousand and $141 thousand were realized from these sales during the three and nine months ended September 30, 2011, respectively.

10

 


 

 

Gross unrealized losses on investment securities available for sale and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a  continuous unrealized loss position, at September 30, 2012 and December 31, 2011, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

12 months or more

Total

(In thousands)

Fair Value

Loss

Fair Value

Loss

 

Fair Value

Loss

As of September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

Agency CMBSs

$

5,024 

$

66 

$

$

$

5,024 

$

66 

Agency CMOs

 

34,511 

 

198 

 

 

 

34,511 

 

198 

Non-agency CMOs

 

 

 

3,126 

 

20 

 

3,126 

 

20 

 

$

39,535 

$

264 

$

3,126 

$

20 

$

42,661 

$

284 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

12 months or more

Total

(In thousands)

Fair Value

Loss

Fair Value

Loss

Fair Value

Loss

As of December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency Obligations

$

2,536 

$

$

$

$

2,536 

$

FHLB Obligations

 

5,047 

 

 

 

 

5,047 

 

Agency MBSs

 

10,452 

 

18 

 

 

 

10,452 

 

18 

Agency CMOs

 

43,708 

 

205 

 

2,861 

 

40 

 

46,569 

 

245 

Non-agency CMOs

 

 

 

4,805 

 

493 

 

4,805 

 

493 

 

$

61,743 

$

232 

$

7,666 

$

533 

$

69,409 

$

765 

 

 

 

 

There were no securities held to maturity with unrealized losses as of September 30, 2012 and December 31, 2011.

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

Agency MBSs and Agency CMOs consist of pools of residential mortgages which are guaranteed by the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), or the Government National Mortgage Association (“GNMA”) with various origination dates and maturities.  Non-Agency CMOs are tracked individually and their performance is tracked at least quarterly. 

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

Our investment portfolio consists almost entirely of U.S. Treasury and Agency obligations, or Agency-guaranteed mortgage securities.  We have two non-agency CMOs with a current cost basis of $4.75 million.  Management, with the help of outside experts, has performed impairment analyses on these bonds.

One of the non-Agency CMOs, with a cost basis of $3.15 million and a fair value of $3.13 million at September 30, 2012, is rated BBB by Fitch and Ba3 by Moody’s.  Delinquencies have been fairly low and prepayments on the bond have led to increased credit support.  We own a senior tranche in this bond. Although losses are expected in the bond overall, our position in the structure of the bond is expected to protect us from realizing losses. The second bond has a cost basis of $1.60 million and a fair value of $1.61 million.  This bond is rated CCC by Fitch and S&P. We own a super senior tranche in this bond. Although losses are expected in the bond overall, our super senior position in the structure is expected to protect us from realizing a material loss. 

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

As a member of the FHLB system, we are required to invest in stock of the FHLB of Boston (the “FHLBB”) in an amount determined based on our borrowings from the FHLBB.  At September 30, 2012, our investment in FHLBB stock totaled $8.15 million, a decrease of $485 thousand from our year end balance of $8.63 million.  We received dividend income totaling $11 thousand and $36 thousand during the three and nine months ended September 30, 2012, respectively. We received $6 thousand and $19 thousand for the three

11

 


 

and nine months ended September 30, 2011, respectively. 

 

 

Note 4: Loans and the Allowance for Credit Losses

Loans

We primarily originate residential real estate, commercial, commercial real estate, municipal obligations and installment loans to customers throughout the state of Vermont. There are no significant industry concentrations in the loan portfolio. Loans totaled $1.07 billion at September 30, 2012 and $1.03 billion at December 31, 2011.  At September 30, 2012 and December 31, 2011, total loans included $(192) thousand and $11 thousand, respectively, of net deferred loan origination fees (costs). The aggregate amount of overdrawn deposit balances classified as loan balances was $334 thousand and $399 thousand at September 30, 2012 and December 31, 2011, respectively.

 

Allowance for Credit Losses

We have divided the loan portfolio into portfolio segments, each with different risk characteristics and methodologies for assessing risk.  Each portfolio segment is broken down into class segments where appropriate.  Class segments contain unique measurement attributes, risk characteristics and methods for monitoring and assessing risk that are necessary to develop the allowance for loan and lease losses.  Unique characteristics such as borrower type, loan type, collateral type, and risk characteristics define each class segment.  A description of the segments follows:

Commercial, financial and agricultural: We offer a variety of loan options to meet the specific needs of commercial customers including term loans and lines of credit.  Such loans are made available to businesses to finance inventory and receivables, business expansion and equipment purchases. Generally, a collateral lien is placed on equipment, receivables, inventory or other assets owned by the borrower.  These loans require different monitoring than commercial real estate loans because of the nature of the underlying collateral, and the fact that collateral values may change daily.  Management generally employs enhanced monitoring requirements, obtains personal guarantees and, where appropriate, may also attempt to secure real estate as collateral.

Municipal: Municipal loans consist of short and long term loans issued on a taxable and tax-exempt basis which are general obligations of the municipality. These loans are generally viewed as lower risk as municipalities have taxing power to meet their financial obligations.  Included in municipal loans are longer term loans under the federal Qualified School Construction Bond program. Proceeds are used for the construction, rehabilitation or repair of public school properties and we receive a federal tax credit in lieu of interest income on these loans.

Real Estate – Residential: Residential real estate loans consist primarily of loans secured by first or second mortgages on primary residences.  We originate adjustable-rate and fixed-rate, one- to four-family residential real estate loans for the construction, purchase or refinancing of a mortgage.  These loans are collateralized by owner-occupied properties located in our market area.  Loans on one- to four-family residential real estate are generally originated in amounts of no more than 80 percent of the purchase price or appraised value (whichever is lower).  Mortgage title insurance and hazard insurance are required.

Real Estate – Commercial: We offer commercial real estate loans to finance real estate purchases and refinancing of existing commercial properties.   These commercial real estate loans are secured by first liens on the real estate, which may include both owner occupied and non owner occupied facilities.  The types of facilities financed include apartments, hotels, warehouses, retail facilities, manufacturing facilities and office buildings.

Real Estate – Construction: We offer construction loans for the construction, expansion and improvement of residential and commercial properties which are secured by the real estate being developed. A review of all plans and budgets is performed prior to approval, third party progress documents are usually required during construction, and an independent approval process for all draw and release requests is maintained  to ensure that funding is prudently administered and that funds are sufficient to complete the project.

Installment - We offer traditional direct consumer installment loans for various personal needs, including vehicle financing. The vast majority of these loans are secured by a lien on the purchased vehicle and are underwritten using credit scores and income verification. We do not provide any indirect consumer lending activities.

For purposes of evaluating the adequacy of the allowance for credit losses, we consider a number of significant factors that affect the collectability of the portfolio. For individually evaluated loans, these include estimates of loss exposure, which reflect the facts and circumstances that affect the likelihood of repayment of such loans as of the evaluation date. For homogeneous pools of loans and leases, estimates of our exposure to credit loss reflect a current assessment of a number of factors, which could affect collectability.  These factors include:  past loss experience; size, trend, composition, and nature of loans; changes in lending policies and procedures, including underwriting standards and collection, charge-offs and recoveries; trends experienced in nonperforming and delinquent loans; current economic conditions in our market; the effect of external factors such as competition, legal and regulatory requirements; and the experience, ability, and depth of lending management and staff. Qualitative factors used in the evaluation of the adequacy of the allowance are reviewed and updated on a quarterly basis, these factors directly impact the allocation of the allowance.

12

 


 

Past loss experience is based on net loan losses as a percentage of portfolio balances, using a five year weighted average.  An external loan review firm and various regulatory agencies periodically review our allowance for credit losses.  

After a thorough consideration of the factors discussed above, any required additions to the allowance for credit losses are made periodically by charges to the provision for credit losses. These charges are necessary to maintain the allowance for credit losses at a level which Management believes is reasonable for the overall inherent risk of probable loss in the portfolio. While Management uses available information to recognize losses on loans, additions may fluctuate from one reporting period to another.  These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in Management’s assessment of any or all of the determining factors discussed above. 

The following table reflects our loan loss experience and activity in the allowance for credit losses for the three months ended September 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Commercial, financial and agricultural

Municipal

Real estate- residential

Real estate- commercial

Real estate-construction

Installment

All other

Totals

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

3,102 

$

410 

$

3,476 

$

4,557 

$

233 

$

21 

$

18 

$

11,817 

Charge-offs

 

 

 

 

 

 

 

 

Recoveries

 

 

 

 

 

 

 

 

13 

Provision (credit)

 

136 

 

31 

 

85 

 

 

(10)

 

(2)

 

 

250 

Ending balance

$

3,241 

$

441 

$

3,562 

$

4,561 

$

231 

$

19 

$

25 

$

12,080 

 

The following table reflects our loan loss experience and activity in the allowance for credit losses for the nine months ended September 30, 2012, and our loan portfolio as of September 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Commercial, financial and agricultural

Municipal

Real estate- residential

Real estate- commercial

Real estate-construction

Installment

All other

Totals

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

2,905 

$

309 

$

3,138 

$

4,484 

$

477 

$

23 

$

17 

$

11,353 

Charge-offs

 

(9)

 

 

(20)

 

 

 

 

 

(29)

Recoveries

 

21 

 

 

13 

 

 

21 

 

 

 

56 

Provision (credit)

 

324 

 

132 

 

431 

 

76 

 

(267)

 

(4)

 

 

700 

Ending balance

$

3,241 

$

441 

$

3,562 

$

4,561 

$

231 

$

19 

$

25 

$

12,080 

Ending balance individually

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

evaluated for impairment

$

$

$

270 

$

60 

$

$

$

$

334 

Ending balance collectively

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

evaluated for impairment

 

3,237 

 

441 

 

3,292 

 

4,501 

 

231 

 

19 

 

25 

 

11,746 

Totals

$

3,241 

$

441 

$

3,562 

$

4,561 

$

231 

$

19 

$

25 

$

12,080 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance individually

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

evaluated for impairment

$

20 

$

$

2,132 

$

581 

$

$

$

$

2,740 

Ending balance collectively

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

evaluated for impairment

 

169,430 

 

82,048 

 

475,189 

 

326,601 

 

11,285 

 

5,252 

 

334 

 

1,070,139 

Totals

$

169,450 

$

82,048 

$

477,321 

$

327,182 

$

11,285 

$

5,259 

$

334 

$

1,072,879 

Components:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

$

2,795 

$

435 

$

3,472 

$

4,502 

$

196 

$

19 

$

25 

$

11,444 

Reserve for undisbursed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

lines of credit

 

446 

 

 

90 

 

59 

 

35 

 

 

 

636 

Total allowance for credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses

$

3,241 

$

441 

$

3,562 

$

4,561 

$

231 

$

19 

$

25 

$

12,080 

 

 

 

13

 


 

The following table reflects our loan loss experience and activity in the allowance for credit losses for the three months ended September 30, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Commercial, financial and agricultural

Municipal

Real estate- residential

Real estate- commercial

Real estate-construction

Installment

All other

Totals

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

3,122 

$

115 

$

2,563 

$

4,856 

$

193 

$

25 

$

27 

$

10,901 

Charge-offs

 

(2)

 

 

(14)

 

 

(85)

 

(2)

 

 

(103)

Recoveries

 

32 

 

 

 

 

 

 

 

41 

Provision (credit)

 

(274)

 

182 

 

678 

 

(507)

 

175 

 

 

(4)

 

250 

Ending balance

$

2,878 

$

297 

$

3,229 

$

4,349 

$

290 

$

23 

$

23 

$

11,089 

 

 

 

The following table reflects our loan loss experience and activity in the allowance for credit losses for the nine months ended September 30, 2011, and our loan portfolio as of September 30, 2011: