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4811 US
Rt. 5
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Newport,
VT 05855
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Tel.
802 334-7915
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Fax 802
334-3484
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www.communitynationalbank.com
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July
25, 2019
United
States Securities and Exchange Commission
Division
of Corporation Finance
Office
of Financial Services
100 F.
Street, N.E.
Washington,
DC 20549
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Attn:
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William
Schroeder, Staff Accountant
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VIA
EDGAR
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John
Spitz, Staff Accountant
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Re:
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Community Bancorp.
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Form 10-K for Fiscal Year Ended December 31, 2018
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Filed March 15, 2019
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Form 10-Q for Fiscal Quarter Ended March 31, 2019
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Filed May 9, 2019
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File No. 000-16435
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Ladies
and Gentlemen:
This
letter provides the responses of Community Bancorp. (the
“Company”) to
the comment letter dated July 12, 2019 from the staff (the
“Staff”) of the
Division of Corporation Finance of the Securities and Exchange
Commission (the “Commission”) regarding the
Staff’s review of the Company’s Annual Report on Form
10-K for the year ended December 31, 2018 and Quarterly Report on
Form 10-Q for the quarter ended March 31, 2019.
For
your convenience the Staff’s comments have been repeated
below in their entirety, with the Company’s response to a
particular comment set out immediately beneath it. The headings and
paragraph numbering in this letter correspond to those in the
Staff’s comment letter.
Form 10-Q for Fiscal Quarter Ended March 31, 2019
Notes to Consolidated Financial Statements
Note 5. Loans, Allowance for Loan Losses and Credit Quality, page
13
1.
We
note disclosure that you chose to reclassify the entire balance of
your held-to-maturity investment portfolio during 2019 and have
restated all prior periods accordingly. Please tell us the
following:
U.S.
Securities and Exchange Commission
Division
of Corporation Finance
July
25, 2019
Page
2
●
Explain
the reason(s) for reclassifying these municipal notes to the loan
portfolio;
Years
ago when the Company developed a municipal lending program
management at that time chose to treat the municipal loans as held
to maturity securities, given their backing by the full faith and
credit of the local towns and taxpayers as well as their tax exempt
status. Rather than purchase tax-exempt municipal securities on the
secondary market, the Company invested these dollars in the local
market.
Also
contributing to the initial decision to not include municipal notes
in the loan portfolio was the differentiating factors of loan
underwriting requirements and the treatment of these instruments in
the allowance for loan losses. Underwriting guidelines and lending
limits for these notes were defined and approved within the
Company’s investment policy rather than the loan policy.
There has never been any loss experienced nor any impairment
recognized within this portfolio.
In
connection with the reclassification, the loan policy was updated
to include underwriting standards and procedures for the municipal
notes. In addition, the loan policy now defines policy and lending
limits for the municipal program.
As
described in more detail below, upon consultation with the
Company’s external auditor and primary banking regulator,
management concluded that classification of its municipal portfolio
as loans rather than investments was both justified by applicable
accounting principles (in particular, ASC 310 (Receivables)) and
consistent with the accounting treatment accorded such instruments
by the Company’s peer financial institutions.
●
Provide
a detailed description of the terms and features of the municipal
notes reclassified;
The
Company’s municipal loans comprise debt obligations of the
political subdivisions of U.S. states such as counties, cities,
towns, villages, and other municipal entities, such as school
districts and fire departments, that represent general obligations
of the issuer or revenue bonds. As of December 31, 2018, the
municipal portfolio was made up of 124 notes to 79 municipalities.
Interest rates ranged from 1.250% to 7.500% with the following
maturity schedule:
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As of December 31, 2018
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3 Months
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Term
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or less
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1 Year
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3 Years
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5 Years
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10 Years
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15 Years
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All Others
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TOTAL
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Municipals
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3,699,744.42
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19,352,567.94
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2,181,869.85
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3,725,842.69
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6,481,940.79
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6,093,802.37
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5,531,255.24
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47,067,023.30
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U.S.
Securities and Exchange Commission
Division
of Corporation Finance
July
25, 2019
Page
3
Some
of these municipal obligations represent collateralized equipment
loans, while others represent tax anticipation loans and lines of
credit for general operating purposes.
The
above balances were reclassified to the Company’s loan
portfolio as of January 1, 2019.
●
Tell
us the authoritative accounting guidance you relied upon in support
of your accounting and disclosure;
Management had
recently become aware that the Company’s classification of
municipal instruments as investments rather than loans was unique
among its peer financial institutions. This was an important
consideration in management review of the preferred treatment of
its municipal instruments since it affected peer comparisons. It
was in the preparation for calculation of the allowance for loan
loss under the Current Expected Credit Loss (CECL) method that the
current management team began the discussion about a
reclassification of the municipal notes. In evaluating these assets
with regards to implementation of CECL and reviewing the standards
in ASC 310 and ASC 320, the current management team agreed that a
reclassification of the municipal notes from the investment
portfolio to the loan portfolio was appropriate.
Guidance and
concurrence was obtained from Company’s external accounting
firm and primary banking regulator (the Office of the Comptroller
of the Currency) prior to the reclassification.
●
Tell
us how you determined these securities are not in the scope of ASC
320, as previously accounted for and classified in your historical
financial statements; and
The
initial decision to classify the municipal loans as debt securities
in the investment portfolio was supportable under ASC 320 as they
represent a creditor relationship and the Company had the intention
and ability to hold the notes until maturity. However, in recent
years this line of business has become more relationship based,
pricing is now more competitive and the terms and purposes of the
borrowings have changed somewhat over time to include operating
lines of credit and equipment loans. Management believes these
municipal debt instruments are consistent with the definition in
ASC 310-20-20, which indicates a loan is “a contractual right
to receive money on demand or on fixed or determinable dates that
is recognized as an asset in the creditor’s statement of
financial position.”
U.S.
Securities and Exchange Commission
Division
of Corporation Finance
July
25, 2019
Page
4
●
Tell
us how you considered the accounting and disclosure guidance in ASC
250.
ASC
250-10-20 states that a change in accounting principle is a change
from one generally accepted accounting principle to another
generally accepted accounting principle when there are two or more
generally accepted accounting principles that apply or when the
accounting principle formerly used is no longer generally accepted.
In light of the applicability of both ASC 310 and 320 to the
Company’s municipal portfolio, management believes that the
definition of a change in accounting principle is satisfied in
these circumstances. Management believes that restating all prior
periods in our financial statements included in Form 10-Q for
fiscal quarter ended March 31, 2019 was appropriate and sufficient
since the reclassification represents a change in accounting
principle rather than correction of an error. In that regard, we
note that the reclassification did not impact total assets, average
assets or earnings and therefore does not require the restatement
of any key historical statistical-type financial summaries or
ratios.
In
response to the Staff’s comment, the Company will include in
future filings a paragraph titled “Change in Accounting
Principle” in Notes 4 (Investment Securities) and 5 (Loans)
to its consolidated financials describing the reclassification of
the Company’s municipal portfolio and stating that it did not
have a material impact on the Company’s consolidated
financial statements or results of operations.
Please
be advised that we acknowledge and concur with the statement of
management’s responsibility contained in the second to last
paragraph of the Staff’s comment letter.
We
trust the above is responsive to your comments. If you have any
questions or comments regarding these responses or require any
additional information, please do not hesitate to contact me at
kaustin@communitynationalbank.com or Company Treasurer Louise
Bonvechio at lbonvechio@communitynationalbank.com.
/s/Kathryn
M. Austin
Kathryn
M. Austin
President
& CEO (Principal Executive Officer)
cc:
Louise M.
Bonvechio, Treasurer (Principal Financial Officer)
Denise
Deschenes, Esq.
