Community Bancorp. — 2015 Third-Quarter Form 10-Q Summary
Business context and reporting period
Community Bancorp. is a Vermont bank holding company whose principal subsidiary is Community National Bank. The filing presents unaudited consolidated results for the three and nine months ended September 30, 2015, with comparisons to September 30, 2014, and balance-sheet comparisons to December 31, 2014. The company is classified as a smaller reporting company.
Financial condition and key metrics
| Metric | Q3 2015 / September 30, 2015 | Comparable period or prior year-end |
|---|---|---|
| Total assets | $588.96 million | $586.71 million at December 31, 2014; $572.22 million at September 30, 2014 |
| Loans | $455.42 million; net loans $450.71 million | Loans increased 1.7% from December 31, 2014 and 2.6% year over year |
| Total deposits | $479.01 million | Down 2.8% year to date; up 1.0% year over year |
| Cash and cash equivalents | $14.74 million | Down from $24.96 million at December 31, 2014 |
| Shareholders’ equity | $50.96 million | $49.00 million at December 31, 2014 |
| Q3 net income | $1.44 million; diluted earnings per common share $0.29 | $1.38 million; $0.28 per share in Q3 2014 |
| Nine-month net income | $3.63 million; $0.72 per share | $3.73 million; $0.75 per share in 2014 |
| Net interest income | $5.31 million in Q3; $15.53 million year to date | Q3 up 4.7%; nine months up 4.7% |
| Net interest margin | 4.00% in Q3; 3.98% year to date | 3.88% and 3.86%, respectively, in 2014 |
| Provision for loan losses | $75,000 in Q3; $375,000 year to date | Q3 down 44.4%; nine months down 7.4% |
| Non-interest income | $1.30 million in Q3; $3.82 million year to date | Q3 up 4.4%; nine months down 2.0% |
| Non-interest expense | $4.53 million in Q3; $14.01 million year to date | Q3 up 5.4%; nine months up 5.5% |
| Operating cash flow | $3.78 million for the first nine months | $6.65 million in the comparable 2014 period |
| Net change in cash | Decrease of $10.22 million year to date | Decrease of $7.48 million in 2014 |
Borrowings at September 30, 2015 included $20.00 million of short-term FHLBB advances, $21.98 million of repurchase agreements and $12.89 million of junior subordinated debentures. The allowance for loan losses was $5.02 million, or approximately 1.10% of average loans. Non-performing assets totaled $7.08 million, including $5.60 million of non-accrual loans and $1.06 million of other real estate owned.
The Bank was considered well capitalized under the prompt corrective action framework. At September 30, 2015, the Bank reported common equity tier 1, tier 1, total capital and tier 1 leverage ratios of 12.15%, 12.15%, 13.35% and 8.92%, respectively.
Material changes versus comparable periods
- Commercial and commercial real estate lending continued to expand. Those categories represented 52.8% of loans at September 30, 2015, compared with 51.0% a year earlier, while residential mortgage loans declined as a percentage of the portfolio.
- Net interest income benefited from loan growth, a shift toward higher-yielding commercial loans, lower deposit costs and a greater proportion of agency mortgage-backed securities. The year-to-date net interest margin improved 12 basis points to 3.98%.
- Third-quarter net income increased 4.6%, but nine-month net income declined 2.8%, primarily because higher operating expenses and lower non-interest income offset improved net interest income.
- Non-interest expense included approximately $146,000 related to closing two branches, a $87,278 loss on the sale of a closed branch, costs associated with replacing debit cards with chip-enabled cards, and a $45,320 OREO write-down during the first nine months.
- Total deposits declined from year-end because of seasonal municipal deposit runoff. Time deposits continued to migrate toward lower-cost demand and savings products.
- Non-performing assets increased 8.6% from December 31, 2014. Non-accrual loans increased to $5.60 million from $4.15 million, although loans 90 days or more past due and still accruing declined to $417,955 from $1.12 million.
- The allowance methodology was revised in the second quarter to use the highest annual loss rates from the most recent one- to five-year lookback periods rather than older 1999–2001 loss data. Management reported a $529,234 reduction in required reserves from the methodology change, partly offset by higher commercial-loan qualitative factors.
Outlook, management commentary, risks and unusual items
No formal earnings or revenue guidance was provided. Management expects the prolonged low-interest-rate environment to continue pressuring asset yields, although funding costs may decline as higher-cost time deposits mature. Modeling indicated estimated 12-month net interest income changes of negative 0.70% under a 100-basis-point rate decline and positive 6.10% under a 200-basis-point increase; management stated these estimates were within policy limits and were not forecasts.
Management’s strategy is to grow commercial and commercial real estate lending, particularly in Central Vermont, while maintaining a substantial residential portfolio. This strategy may increase credit risk because commercial loans are generally more sensitive to economic conditions, borrower cash flow, collateral values, vacancy rates and local market conditions.
Key risks include economic deterioration, higher non-performing assets and charge-offs, reserve-estimation changes, interest-rate and liquidity risk, deposit runoff, competitive and regulatory pressures, Basel III capital requirements, changes in tax policy, and adverse developments in U.S. government debt markets. The company maintains unused borrowing capacity, including approximately $76.7 million under a Federal Reserve borrower-in-custody arrangement and approximately $76.7 million of additional FHLBB capacity secured by qualifying loans.
Off-balance-sheet commitments included $24.93 million of unused home-equity lines, $68.81 million of other commitments to extend credit, $18.83 million of construction lines, $1.83 million of standby and commercial letters of credit, and a $1.03 million MPF credit-enhancement obligation, net of recorded liability. The company also had a $450,000 commitment to one debtor with an impaired SBA-guaranteed line of credit.
On September 21, 2015, the board declared a $0.16 per common-share dividend payable November 1, 2015. Management stated that ordinary-course litigation was not expected to be material, and disclosure controls were considered effective.
Important facts for investors to verify
- Whether the increase in non-accrual loans and criticized commercial credits results in higher provisions or charge-offs.
- Whether commercial-loan growth can continue without materially reducing asset quality or increasing reserve requirements.
- The sustainability of the improved net interest margin if interest rates remain low or deposit costs rise.
- The company’s ability to replace seasonal and maturing deposits without increasing reliance on short-term borrowings.
- The recurring versus non-recurring nature of branch-closure, debit-card replacement, OREO and other elevated operating expenses.
- Whether mortgage originations, loan-sale margins and related fee income recover after year-to-date declines in sold-loan income.
- The effect of Basel III capital conservation buffer requirements on future dividends and capital deployment.
- Changes in the fair value of available-for-sale securities, mortgage servicing rights, OREO and other assets subject to management estimates.