Community Bancorp. — Form 10-Q Summary
Reporting period: Quarterly period ended June 30, 2014. The unaudited consolidated financial statements cover Community Bancorp. and its wholly owned subsidiary, Community National Bank. Comparisons are primarily with June 30, 2013 and December 31, 2013.
Business Context and Financial Position
The Company is a Vermont-based community bank focused on commercial, commercial real estate, residential real estate and consumer lending. Management continued shifting the balance sheet toward commercial lending, using investment-security maturities and sales to support loan growth. Municipal financing activity caused significant seasonal fluctuations in securities and deposits during the second quarter.
| Metric | June 30, 2014 | Comparison |
|---|---|---|
| Total assets | $562.2 million | Down 2.0% from Dec. 31, 2013; up 1.4% year over year |
| Total loans | $450.6 million | Up 2.4% from year-end; up 6.1% year over year |
| Net loans | $446.0 million | Up from $435.4 million at Dec. 31, 2013 |
| Total deposits | $455.1 million | Down 5.5% from year-end; up 2.4% year over year |
| Shareholders’ equity | $47.4 million | Up from $46.1 million at Dec. 31, 2013 |
Revenue, Profitability, Cash Flow and Margins
- Second-quarter net income: $1.284 million, versus $1.238 million in the prior-year quarter; earnings per common share were $0.26 versus $0.25.
- Six-month net income: $2.356 million, versus $2.280 million; earnings per common share were $0.47 versus $0.46.
- Net interest income: $4.936 million for the quarter and $9.761 million for six months, up 0.5% and 2.3%, respectively.
- Tax-equivalent net interest margin: 3.84% for both six-month periods; quarterly margin declined to 3.84% from 3.92%.
- Non-interest income: $1.337 million for the quarter and $2.651 million for six months, down 12.1% and 8.3%, respectively, primarily because of lower residential mortgage loan sales.
- Non-interest expense: $4.488 million for the quarter and $9.201 million for six months, down 6.9% and 2.2%, respectively.
- Provision for loan losses: $135,000 for the quarter and $270,000 for six months, compared with $120,000 and $326,250 in the prior-year periods.
- Cash flow: Six-month operating cash flow was $3.7 million, investing cash flow was $8.1 million, and financing cash flow was negative $13.8 million. Cash and cash equivalents declined $2.0 million to $16.3 million.
- Capital: The Bank remained well capitalized. At June 30, 2014, Bank total capital to risk-weighted assets was 13.01%, Tier 1 risk-based capital was 11.77%, and Tier 1 leverage was 8.36%.
Material Changes Versus Comparable Periods
- Commercial and commercial real estate loans increased to 50.7% of total loans, compared with 46.2% one year earlier. Residential mortgage balances declined.
- Average loan balances grew 6.7% year over year for the first six months, but average loan yields declined to 4.79% from 5.12%.
- Lower deposit and borrowing costs more than offset lower asset yields, reducing total interest expense 14.0% for the first six months.
- Mortgage-related income weakened as refinancing activity slowed. Income from sold loans fell 39.3% year over year for the first six months.
- Operating expense reductions reflected lower collection, debit-card fraud, postage, statement-processing and certain administrative costs, partly offset by higher computer outsourcing costs.
- Deposits declined seasonally as municipal operating accounts were spent down. The Company used $19.9 million of Federal Home Loan Bank advances and overnight borrowings and obtained $8.7 million of one-way CDARS deposits to support liquidity.
- Other real estate owned declined to $916,820 from $1.1 million at year-end and $2.2 million one year earlier.
Credit Quality, Risks and Unusual Items
- Non-accrual loans were $5.4 million, up from $4.7 million at year-end and $3.7 million one year earlier. Total non-performing assets were $6.7 million, approximately unchanged from year-end and up from $6.5 million one year earlier.
- The allowance for loan losses was $4.9 million, or 1.09% of average loans, and covered 90.2% of non-accrual loans. Net charge-offs were $248,099 for the first six months.
- At June 30, 2014, 15 troubled debt restructurings totaling $2.0 million were non-performing; additional TDRs totaled $1.2 million. The allowance related to TDRs was $88,300.
- Management identified commercial lending growth, commercial real estate exposure, economic conditions, interest-rate movements, deposit competition, regulatory requirements and potential changes in credit quality as principal risks.
- Interest-rate modeling estimated a 0.60% decline in 12-month net interest income under a 100-basis-point decline in rates and a 4.67% increase under a 200-basis-point rise. These estimates are not forecasts.
- Off-balance-sheet commitments included $66.9 million of unused credit commitments, $1.2 million of standby and commercial letters of credit, and a $1.5 million net MPF credit-enhancement obligation. Management stated that many commitments may expire undrawn.
- Management does not expect routine litigation to materially affect financial condition or results. No material changes in internal control over financial reporting were reported.
Guidance and Management Commentary
The filing does not provide formal earnings or revenue guidance. Management expects short-term interest rates to remain low for a period, while a steeper yield curve could support future earnings. Management intends to continue commercial and commercial real estate loan growth, prudently manage credit and operating expenses, and maintain well-capitalized status. The filing cautions that forward-looking statements are subject to economic, competitive, regulatory, interest-rate, liquidity and credit risks.
Investor Verification Checklist
- Verify subsequent performance of the growing commercial and commercial real estate portfolios, including non-accrual loans and criticized assets.
- Monitor deposit trends after the seasonal municipal runoff and determine whether reliance on CDARS, FHLB advances and overnight borrowings persists.
- Assess whether declining mortgage activity continues to reduce loan-sale and documentation-fee income.
- Track net interest margin sensitivity as asset yields remain under pressure and deposit rates approach practical floors.
- Review allowance coverage, charge-offs, TDR defaults and government-guarantee recoveries.
- Confirm repayment or refinancing of the $19.9 million of FHLB advances and overnight borrowings, including advances scheduled to mature in July, August and September 2014.
- Reconcile the filing’s reported profitability percentages and confirm that subsequent filings do not revise the comparative presentation.