Loans, Allowance for Loan Losses and Credit Quality

12 Months Ended

Dec. 31, 2020

Loans, Allowance for Loan Losses and Credit Quality

Note 5. Loans, Allowance for Loan Losses and Credit Quality

Note 5. Loans, Allowance for Loan Losses and Credit Quality

The composition of net loans as of the balance sheet dates was as follows:

	December 31,		December 31,
	2020		2019
Commercial & industrial	$	161,067,501	$	98,930,831
Commercial real estate		280,544,550		246,282,726
Municipal		54,807,367		55,817,206
Residential real estate - 1st lien		170,507,263		158,337,296
Residential real estate - Jr lien		38,147,659		43,230,873
Consumer		4,280,990		4,390,005
Total loans		709,355,330		606,988,937
Deduct (add):
ALL		7,208,485		5,926,491
Deferred net loan fees (costs)		1,195,741		(362,415	)
Net loans	$	700,951,104	$	601,424,861

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

			90 Days		Total						Non-Accrual		90 Days or More and
December 31, 2020	30-89 Days		or More		Past Due		Current		Total Loans		Loans		Accruing
Commercial & industrial	$	119,413	$	0	$	119,413	$	160,948,088	$	161,067,501	$	434,196	$	0
Commercial real estate		127,343		567,957		695,300		279,849,250		280,544,550		1,875,942		0
Municipal		0		0		0		54,807,367		54,807,367		0		0
Residential real estate
1st lien		1,872,439		828,344		2,700,783		167,806,480		170,507,263		2,173,315		390,288
Jr lien		18,322		180,711		199,033		37,948,626		38,147,659		191,311		98,889
Consumer		14,388		0		14,388		4,266,602		4,280,990		0		0
Totals	$	2,151,905	$	1,577,012	$	3,728,917	$	705,626,413	$	709,355,330	$	4,674,764	$	489,177

			90 Days		Total						Non-Accrual		90 Days or More and
December 31, 2019	30-89 Days		or More		Past Due		Current		Total Loans		Loans		Accruing
Commercial & industrial	$	68,532	$	44,503	$	113,035	$	98,817,796	$	98,930,831	$	480,083	$	0
Commercial real estate		1,690,307		151,723		1,842,030		244,440,696		246,282,726		1,600,827		0
Municipal		0		0		0		55,817,206		55,817,206		0		0
Residential real estate
1st lien		3,871,045		1,217,098		5,088,143		153,249,153		158,337,296		2,112,267		530,046
Jr lien		331,416		147,976		479,392		42,751,481		43,230,873		240,753		112,386
Consumer		49,607		0		49,607		4,340,398		4,390,005		0		0
Totals	$	6,010,907	$	1,561,300	$	7,572,207	$	599,416,730	$	606,988,937	$	4,433,930	$	642,432

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

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

	Number of loans		Balance
December 31, 2020		6	$	312,807
December 31, 2019		9		495,943

As of December 31, 2020, a foreclosure moratorium first decreed in April, 2020 by the State of Vermont due to the COVID-19 emergency remained in effect.

The following summarizes changes in the ALL and select loan information, by portfolio segment:

As of or for the year ended December 31, 2020

									Residential			Residential
	Commercial			Commercial					Real Estate			Real Estate
	& Industrial			Real Estate			Municipal		1st Lien			Jr Lien			Consumer			Unallocated		Total
ALL beginning balance	$	836,766		$	3,181,646		$	0	$	1,388,564		$	289,684		$	51,793		$	178,038	$	5,926,491
Charge-offs		(39,148	)		(34,200	)		0		(203,623	)		(28,673	)		(74,327	)		0		(379,971	)
Recoveries		1,087			20,000			0		12,856			5,809			33,213			0		72,965
Provision (credit)		43,842			686,707			82,211		537,507			(31,924	)		49,782			220,875		1,589,000
ALL ending balance	$	842,547		$	3,854,153		$	82,211	$	1,735,304		$	234,896		$	60,461		$	398,913	$	7,208,485
ALL evaluated for impairment
Individually	$	0		$	0		$	0	$	108,474		$	307		$	0		$	0	$	108,781
Collectively		842,547			3,854,153			82,211		1,626,830			234,589			60,461			398,913		7,099,704
Total	$	842,547		$	3,854,153		$	82,211	$	1,735,304		$	234,896		$	60,461		$	398,913	$	7,208,485
Loans evaluated for impairment
Individually	$	414,266		$	1,943,723		$	0	$	4,657,050		$	135,053		$	0				$	7,150,092
Collectively		160,653,235			278,600,827			54,807,367		165,850,213			38,012,606			4,280,990					702,205,238
Total	$	161,067,501		$	280,544,550		$	54,807,367	$	170,507,263		$	38,147,659		$	4,280,990				$	709,355,330

As of or for the year ended December 31, 2019

									Residential			Residential
	Commercial			Commercial					Real Estate			Real Estate
	& Industrial			Real Estate			Municipal		1st Lien			Jr Lien			Consumer			Unallocated		Total
ALL beginning balance	$	697,469		$	3,019,868		$	0	$	1,421,494		$	273,445		$	56,787		$	133,478	$	5,602,541
Charge-offs		(175,815	)		(116,186	)		0		(242,244	)		(222,999	)		(102,815	)		0		860,059	)
Recoveries		10,768			50,388			0		15,776			2,200			38,710			0		117,842
Provision		304,344			227,576			0		193,538			237,038			59,111			44,560		1,066,167
ALL ending balance	$	836,766		$	3,181,646		$	0	$	1,388,564		$	289,684		$	51,793		$	178,038	$	5,926,491
ALL evaluated for impairment
Individually	$	0		$	0		$	0	$	103,836		$	712		$	0		$	0	$	104,548
Collectively		836,766			3,181,646			0		1,284,728			288,972			51,793			178,038		5,821,943
Total	$	836,766		$	3,181,646		$	0	$	1,388,564		$	289,684		$	51,793		$	178,038	$	5,926,491
Loans evaluated for impairment
Individually	$	420,933		$	1,699,238		$	0	$	4,471,902		$	156,073		$	0				$	6,748,146
Collectively		98,509,898			244,583,488			55,817,206		153,865,394			43,074,800			4,390,005					600,240,791
Total	$	98,930,831		$	246,282,726		$	55,817,206	$	158,337,296		$	43,230,873		$	4,390,005				$	606,988,937

Impaired loans as of the balance sheet dates, by portfolio segment were as follows:

	As of December 31, 2020
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment(1)		Balance		Allowance		Investment(1)(2)		Recognized(2)
Related allowance recorded
Residential real estate
1st lien	$	900,581	$	950,063	$	108,474	$	889,262	$	72,713
Jr lien		4,777		4,775		307		5,416		541
Total with related allowance		905,358		954,838		108,781		894,678		73,254
No related allowance recorded
Commercial & industrial		414,266		471,405				397,136		6,396
Commercial real estate		1,944,013		2,394,284				1,746,430		14,139
Residential real estate
1st lien		3,788,965		4,607,848				3,878,829		230,838
Jr lien		130,279		169,720				163,750		4,524
Total with no related allowance		6,277,523		7,643,257				6,186,145		255,897
Total impaired loans	$	7,182,881	$	8,598,095	$	108,781	$	7,080,823	$	329,151

1)	Recorded investment in impaired loans in the table above includes accrued interest receivable and deferred net loan costs of $32,789.
2)	For the year ended December 31, 2020.

	As of December 31, 2019
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment(1)		Balance		Allowance		Investment(1)(2)		Recognized(2)
Related allowance recorded
Commercial & industrial	$	0	$	0	$	0	$	32,466	$	0
Commercial real estate		0		0		0		97,720		0
Residential real estate
1st lien		878,439		902,000		103,836		982,158		86,039
Jr lien		6,121		6,101		712		6,869		648
Total with related allowance		884,560		908,101		104,548		1,119,213		86,687
No related allowance recorded
Commercial & industrial		420,933		445,509				307,208		6,396
Commercial real estate		1,699,772		2,031,764				1,812,836		21,591
Residential real estate
1st lien		3,614,960		4,273,884				3,778,822		212,883
Jr lien		149,972		157,754				224,938		4,524
Total with no related allowance		5,885,637		6,908,911				6,123,804		245,394
Total impaired loans	$	6,770,197	$	7,817,012	$	104,548	$	7,243,017	$	332,081

1)	Recorded investment in impaired loans in the table above includes accrued interest receivable and deferred net loan costs of $22,051.
2)	For the year ended December 31, 2019.

Credit Quality Grouping

In developing the ALL, management uses credit quality groupings to help evaluate trends in credit quality. The Company groups credit risk into Groups A, B and C. The manner the Company utilizes to assign risk grouping is driven by loan purpose. Commercial purpose loans are individually risk graded while the retail portion of the portfolio is generally grouped by delinquency pool.

Group A loans - Acceptable Risk - are loans that are expected to perform as agreed under their respective terms. Such loans carry a normal level of risk that does not require management attention beyond that warranted by the loan or loan relationship characteristics, such as loan size or relationship size. Group A loans include commercial purpose loans that are individually risk rated and retail loans that are rated by pool. Group A retail loans include performing consumer and residential real estate loans. Residential real estate loans are loans to individuals secured by 1-4 family homes, including first mortgages, home equity and home improvement loans. Loan balances fully secured by deposit accounts or that are fully guaranteed by the federal government are considered acceptable risk.

Group B loans - Management Involved - are loans that require greater attention than the acceptable risk loans in Group A. Characteristics of such loans may include, but are not limited to, borrowers that are experiencing negative operating trends such as reduced sales or margins, borrowers that have exposure to adverse market conditions such as increased competition or regulatory burden, or borrowers that have had unexpected or adverse changes in management. These loans have a greater likelihood of migrating to an unacceptable risk level if these characteristics are left unchecked. Group B is limited to commercial purpose loans that are individually risk rated.

Group C loans - Unacceptable Risk - are loans that have distinct shortcomings that require a greater degree of management attention. Examples of these shortcomings include a borrower’s inadequate capacity to service debt, poor operating performance, or insolvency. These loans are more likely to result in repayment through collateral liquidation. Group C loans range from those that are likely to sustain some loss if the shortcomings are not corrected, to those for which loss is imminent and non-accrual treatment is warranted. Group C loans include individually rated commercial purpose loans and retail loans adversely rated in accordance with the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification Policy. Group C retail loans include 1-4 family residential real estate loans and home equity loans past due 90 days or more with loan-to-value ratios greater than 60%, home equity loans 90 days or more past due where the Bank does not hold first mortgage, irrespective of loan-to-value, loans in bankruptcy where repayment is likely but not yet established, and lastly consumer loans that are 90 days or more past due.

Commercial purpose loan ratings are assigned by the commercial account officer; for larger and more complex commercial loans, the credit rating is a collaborative assignment by the lender and the credit analyst. The credit risk rating is based on the borrower’s expected performance, i.e., the likelihood that the borrower will be able to service its obligations in accordance with the loan terms. Credit risk ratings are meant to measure risk versus simply record history. Assessment of expected future payment performance requires consideration of numerous factors. While past performance is part of the overall evaluation, expected performance is based on an analysis of the borrower’s financial strength, and historical and projected factors such as size and financing alternatives, capacity and cash flow, balance sheet and income statement trends, the quality and timeliness of financial reporting, and the quality of the borrower’s management. Other factors influencing the credit risk rating to a lesser degree include collateral coverage and control, guarantor strength and commitment, documentation, structure and covenants and industry conditions. There are uncertainties inherent in this process.

Credit risk ratings are dynamic and require updating whenever relevant information is received. Risk ratings are assessed on an ongoing basis and at various points, including at delinquency or at the time of other adverse events. For larger, more complex or adversely rated loans, risk ratings are also assessed at the time of annual or periodic review. Lenders are required to make immediate disclosure to the Senior Credit Officer of any known increase in loan risk, even if considered temporary in nature.

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

As of December 31, 2020

							Residential		Residential
	Commercial		Commercial				Real Estate		Real Estate
	& Industrial		Real Estate		Municipal		1st Lien		Jr Lien		Consumer		Total
Group A	$	156,748,590	$	261,932,833	$	54,807,367	$	167,478,918	$	37,850,056	$	4,280,990	$	683,098,754
Group B		998,641		12,784,078		0		0		0		0		13,782,719
Group C		3,320,270		5,827,639		0		3,028,345		297,603		0		12,473,857
Total	$	161,067,501	$	280,544,550	$	54,807,367	$	170,507,263	$	38,147,659	$	4,280,990	$	709,355,330

As of December 31, 2019

							Residential		Residential
	Commercial		Commercial				Real Estate		Real Estate
	& Industrial		Real Estate		Municipal		1st Lien		Jr Lien		Consumer		Total
Group A	$	93,774,871	$	233,702,063	$	55,817,206	$	154,770,678	$	42,725,543	$	4,390,005	$	585,180,366
Group B		3,295,223		4,517,811		0		0		0		0		7,813,034
Group C		1,860,737		8,062,852		0		3,566,618		505,330		0		13,995,537
Total	$	98,930,831	$	246,282,726	$	55,817,206	$	158,337,296	$	43,230,873	$	4,390,005	$	606,988,937

Modifications of Loans and TDRs

A loan is classified as a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider.

The Company is deemed to have granted such a concession if it has modified a troubled loan in any of the following ways:

· Reduced accrued interest;

· Reduced the original contractual interest rate to a rate that is below the current market rate for the borrower;

· Converted a variable-rate loan to a fixed-rate loan;

· Extended the term of the loan beyond an insignificant delay;

· Deferred or forgiven principal in an amount greater than three months of payments; or

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

· Capitalized protective advance to pay delinquent real estate taxes.

· Capitalized delinquent accrued interest.

An insignificant delay or insignificant shortfall in the amount of payments typically would not require the loan to be accounted for as a TDR. However, pursuant to regulatory guidance, any payment delay longer than three months is generally not considered insignificant. Management’s assessment of whether a concession has been granted also takes into account payments expected to be received from third parties, including third-party guarantors, provided that the third party has the ability to perform on the guarantee.

The Company’s TDRs are principally a result of extending loan repayment terms to relieve cash flow difficulties. The Company has only, on a limited basis, reduced interest rates for borrowers below the current market rate for the borrower. The Company has not forgiven principal or reduced accrued interest within the terms of original restructurings, nor has it converted variable rate terms to fixed rate terms. However, the Company evaluates each TDR situation on its own merits and does not foreclose the granting of any particular type of concession.

The Company has adopted the TDR guidance issued by the federal banking agencies in March and April 2020 regarding the treatment of certain short-term loan modifications relating to the COVID-19 pandemic (See Note 3). Under this guidance, qualifying concessions and modifications are not considered TDRs. As of December 31, 2020, the Company had granted short term loan concessions and/or modifications within the terms of this guidance to 514 borrowers, with respect to loans having an aggregate principal amount of $119.8 million. These loans may bear a higher risk of default in future periods.

New TDRs, by portfolio segment, for the periods presented were as follows:

Year ended December 31, 2020

			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Residential real estate
1st lien		6	$	591,826	$	687,751

Year ended December 31, 2019

			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Commercial & industrial		6	$	371,358	$	372,259
Commercial real estate		1		19,266		21,628
Residential real estate
1st lien		6		755,476		798,800
Jr lien		1		55,557		57,415
		14	$	1,201,657	$	1,250,102

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

Year ended December 31, 2020

	Number of		Recorded
	Contracts		Investment
Residential real estate - 1st lien		1	$	165,168

Year ended December 31, 2019

	Number of		Recorded
	Contracts		Investment
Commercial & industrial		2	$	27,818
Residential real estate - 1st lien		1		227,907
Residential real estate - Jr lien		1		55,010
		4	$	310,735

TDRs are treated as other impaired loans and carry individual specific reserves with respect to the calculation of the ALL. These loans are categorized as non-performing, may be past due, and are generally adversely risk rated. The TDRs that have defaulted under their restructured terms are generally in collection status and their reserve is typically calculated using the fair value of collateral method.

The specific allowances related to TDRs as of the balance sheet dates presented were as follows:

	2020		2019
Specific allowance	$	108,781	$	104,548

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