COMMUNITY BANCORP annual report, FY2017

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Community Bancorp. — FY 2017 Form 10-K Summary

Business context and reporting period

Community Bancorp. is a Vermont bank holding company whose principal operations are conducted through Community National Bank. The Bank operates 12 banking offices, including its main office in Derby and 11 branches across northeastern and central Vermont, plus a Burlington loan production office opened in the first quarter of 2017. It provides commercial, commercial real estate, residential mortgage, consumer, municipal and retail banking services, with trust and investment management services provided through affiliated Community Financial Services Group, LLC.

The filing covers the fiscal year ended December 31, 2017. The filing text provided does not include the incorporated 2017 Annual Report financial statements or the full Management’s Discussion and Analysis; therefore, many annual and fourth-quarter financial metrics are not available in the source text.

Financial metrics, liquidity and capitalization

  • Revenue and profit: The source text does not provide clear values for total revenue, net interest income, net income, earnings per share or the effective tax rate.
  • Cash flow and margins: The source text does not provide clear values for operating cash flow, net cash change, net interest margin or other profitability margins.
  • Loans, deposits and asset quality: Clear period-end balances for total assets, loans, deposits, nonperforming assets, charge-offs and the allowance for loan losses are not provided in the supplied text.
  • Debt and funding: In 2007, the Company issued $12.5 million of trust preferred securities through CMTV Statutory Trust I; the related debentures bear interest tied to LIBOR. The filing does not provide a clear December 31, 2017 carrying balance for this debt. The Company also uses Federal Home Loan Bank borrowings, purchased wholesale deposits and CDARS funding.
  • Liquidity: At December 31, 2017, CDARS deposits totaled $2.8 million in exchanged funds and $12.3 million in one-way funds. Purchased wholesale deposits totaled $8.8 million. Company policy limits brokered deposits to 5% of total assets.
  • Capital: The Company and Bank exceeded applicable Basel III regulatory capital requirements at December 31, 2017. Management stated that the entities would also satisfy the fully phased capital conservation buffer requirement based on its modeling. Exact capital ratios are not included in the supplied text.
  • Regulatory status: Community National Bank was considered “well capitalized” under FDICIA prompt corrective action requirements at year-end 2017.
  • Other reported amounts: The Bank’s 2017 FDIC insurance assessment was $288,388, and its investment in Federal Home Loan Bank of Boston stock was approximately $1.1 million.

Material changes versus the prior comparable period

  • The Company opened a Burlington loan production office during the first quarter of 2017 to expand in Central Vermont and Chittenden County.
  • Its public float was approximately $84.4 million as of June 30, 2017, causing it to cease qualifying as a smaller reporting company and become an accelerated filer effective December 31, 2017. This increased filing timeliness and internal-control reporting requirements, including external auditor attestation of internal controls.
  • The Tax Cuts and Jobs Act was enacted in 2017, reducing the federal corporate tax rate from 35% to 21%. The Company recognized certain tax-law effects in 2017, including the revaluation of deferred tax assets; the source text does not provide the related charge or benefit.
  • The Bank received an “Outstanding” rating in its 2017 Community Reinvestment Act examination.
  • The filing states that goodwill of approximately $11.6 million was not impaired as of December 31, 2017. Other acquired-deposit intangible assets were fully amortized.
  • The filing reports no material changes in internal control over financial reporting during the fourth quarter of 2017, and management concluded that disclosure controls and internal controls were effective as of year-end.
  • During the three months ended December 31, 2017, 1,919 shares were purchased at an average price of $18.25 per share for the Company Stock Fund under the retirement savings plan; there was no publicly announced repurchase program.

Guidance, outlook, management commentary, risks and unusual items

Management identifies Central Vermont and Chittenden County as the primary growth markets because of stronger economic activity than in Orleans and Caledonia Counties. The Company emphasizes relationship banking, small-to-medium-sized businesses and community-based lending. No quantitative earnings, revenue, balance-sheet or margin guidance is provided.

  • Interest-rate risk: Results depend heavily on the spread between yields on loans and investments and funding costs. Rising rates could increase deposit, preferred-stock and debt costs faster than asset yields and could reduce mortgage loan-sale activity.
  • Credit and geographic concentration: Loans, deposits and fee income are concentrated in northeastern and central Vermont. A local economic downturn could increase defaults, reduce collateral values and impair growth.
  • Liquidity: The Company relies primarily on core deposits. Greater use of purchased deposits or borrowings could increase funding costs and adversely affect earnings, liquidity and capital.
  • Regulation and compliance: The Company and Bank remain subject to extensive Federal Reserve, OCC, FDIC and consumer-finance regulation. New beneficial-ownership customer-due-diligence requirements were scheduled to take effect May 11, 2018, and expanded HMDA data requirements began January 1, 2018.
  • Expected credit losses: The future adoption of the CECL accounting model could increase the allowance for loan losses and adversely affect earnings and regulatory capital. The filing does not provide a quantified adoption impact.
  • Technology and competition: Competition from larger banks, credit unions, nonbank lenders and digital providers, together with cybersecurity, systems-failure and vendor risks, could affect revenue, deposits and operating costs.
  • Dividends: The holding company depends primarily on dividends from the Bank. Dividend payments may be limited by regulatory capital, retained earnings, safety-and-soundness considerations and debt-service requirements.
  • Legal matters: No material pending legal proceedings were reported other than routine litigation incidental to banking operations.

Important facts investors should verify

  • Obtain the incorporated 2017 Annual Report and verify net income, earnings per share, revenue, net interest margin, provision expense and tax effects from the Tax Cuts and Jobs Act.
  • Verify year-end total assets, loans, deposits, shareholders’ equity, liquidity sources, nonperforming assets, charge-offs and allowance coverage.
  • Review Note 20 for the Company’s and Bank’s exact Basel III and FDICIA capital ratios and confirm the margin above regulatory minimums.
  • Review debt and preferred-stock terms, including the outstanding trust-preferred debentures, LIBOR exposure, Series A preferred dividends and maturity or redemption provisions.
  • Assess the effect of the Burlington expansion on loan growth, deposits, operating expenses and market share.
  • Evaluate the potential capital and earnings effects of CECL adoption, interest-rate changes, local Vermont economic conditions and increased funding costs.
  • Confirm dividend history and the holding company’s capacity to continue common-stock dividends under applicable regulatory and contractual restrictions.