Community Bancorp. — Q1 2016 Form 10-Q Summary
Business context and reporting period
Community Bancorp. is the parent of Community National Bank, serving northern and central Vermont. This unaudited Form 10-Q covers the three months ended March 31, 2016, with comparisons to March 31, 2015 and December 31, 2015. The company was a smaller reporting company and reported 5,010,839 common shares outstanding at May 6, 2016.
Financial condition and performance
| Metric | Q1 2016 / March 31, 2016 | Comparable period or date |
|---|---|---|
| Total assets | $593.4 million | $596.1 million at December 31, 2015; $585.6 million at March 31, 2015 |
| Net loans | $450.3 million | $453.4 million at December 31, 2015; $447.9 million at March 31, 2015 |
| Total deposits | $488.9 million | $495.5 million at December 31, 2015; $477.1 million at March 31, 2015 |
| Net interest income | $5.15 million | $5.14 million in Q1 2015 |
| Net interest margin | 3.95% tax-equivalent | 4.01% in Q1 2015 |
| Net income | $1.17 million | $1.11 million in Q1 2015 |
| Earnings per common share | $0.23 | $0.22 in Q1 2015 |
| Return on average assets | 0.80% | 0.78% in Q1 2015 |
| Return on average equity | 9.04% | 9.08% in Q1 2015 |
| Shareholders’ equity | $52.2 million | $51.4 million at December 31, 2015; $49.7 million at March 31, 2015 |
- Total interest income declined 0.8% to $5.82 million, while interest expense declined 8.8% to $663,262.
- Net interest income after the loan-loss provision increased 1.3% to $5.05 million. The provision was $100,000, down from $150,000 in Q1 2015.
- Non-interest income increased 2.1% to $1.24 million, led by higher income from sold loans and commercial loan documentation fees.
- Non-interest expense declined 0.3% to $4.68 million. Higher salaries and employee benefits were offset by lower occupancy and other expenses.
- Income before taxes was $1.61 million, and income tax expense was $441,058. The effective tax rate was approximately 27.4% based on reported amounts.
- Cash and cash equivalents totaled $25.5 million at March 31, 2016, compared with $28.9 million at year-end 2015 and $17.3 million a year earlier.
- Net cash provided by operating activities was $2.0 million, compared with cash used of $670,784 in Q1 2015. Investing activities used $1.6 million and financing activities used $3.8 million, resulting in a $3.4 million decrease in cash.
- Outstanding borrowings included $10.35 million of FHLBB advances and $25.15 million of repurchase agreements. Junior subordinated debentures were $12.89 million.
- The allowance for loan losses was $5.11 million, equal to approximately 1.12% of average loans and 166.6% of non-accruing loans.
- Non-performing assets decreased to $4.44 million from $6.42 million at December 31, 2015 and $6.50 million at March 31, 2015. Non-accrual loans were $3.07 million.
- The Bank was considered well capitalized. At March 31, 2016, the Bank reported common equity tier 1, total capital and Tier 1 leverage ratios of 12.52%, 13.74% and 9.18%, respectively.
Material changes versus prior comparable periods
- Net income increased $59,653, or 5.4%, year over year, despite continued pressure on asset yields and net interest margin.
- The net interest margin declined six basis points to 3.95%. Management attributed the pressure to the prolonged low-rate environment and a flattening yield curve.
- Interest income was affected by approximately $170,000 of one-time interest recognition in Q1 2015 related to payoff or restoration to accrual status of certain non-accruing loans.
- Average loans increased 0.9% year over year, but the average loan yield declined 17 basis points to 4.75%. Management continued shifting the portfolio toward higher-yielding commercial and commercial real estate loans.
- Deposits increased 2.5% year over year but declined 1.3% from year-end, primarily because of seasonal municipal deposit runoff. The deposit mix continued shifting from time deposits toward lower-cost non-maturity deposits.
- Loans increased 0.5% year over year, while commercial and commercial real estate loans represented 53.1% of total loans, compared with 52.8% a year earlier.
- Non-accrual loans declined 41.4% from year-end, principally because of loans transferred to OREO and several relationships returning to accrual status.
- OREO increased to $465,000 from $262,000 at year-end because of a new residential property acquisition, partly offset by the sale of a commercial property.
- Six new troubled debt restructurings were completed during the quarter with post-modification recorded investment of $423,263, compared with seven new TDRs totaling $482,578 in Q1 2015.
Guidance, outlook, risks and unusual items
- No formal earnings or financial guidance was provided. Management expects to continue focusing on commercial lending growth, prudent expense management and credit-risk control, and planned to open a loan production office in Chittenden County during 2016.
- Management expects the low-rate, flat-yield-curve environment to continue pressuring margins. Internal modeling estimated a 1.50% decline in net interest income under a 100-basis-point rate decrease and a 5.90% increase under a 200-basis-point increase over a twelve-month period; these estimates are not forecasts.
- Key risks include economic deterioration, commercial real estate and commercial lending exposure, changes in interest rates, deposit competition, regulatory and compliance costs, changes in loan-loss estimates, consumer and business borrowing behavior, tax policy and Basel III capital requirements.
- Off-balance-sheet commitments included unused credit lines and other commitments to extend credit; the filing states that many are expected to expire undrawn and therefore do not necessarily represent future cash requirements.
- The company had approximately $70.3 million of available FHLBB borrowing capacity, plus additional Federal Reserve and correspondent-bank lines. No advances were outstanding under the Federal Reserve or correspondent-bank lines.
- Management did not expect routine litigation to materially affect consolidated financial condition or results of operations.
- Two accounting standards issued in 2016, concerning financial instruments and leases, were not yet effective; the company was evaluating their potential impact.
- The Board declared a quarterly common dividend of $0.16 per share, totaling $799,182, payable May 1, 2016. Management stated that the company and Bank were compliant with the fully phased-in capital conservation buffer on a pro forma basis.
Important facts for investors to verify
- Whether commercial and commercial real estate loan growth continues without a corresponding deterioration in delinquency, non-accrual and criticized-asset trends.
- Whether the 3.95% net interest margin stabilizes or declines further as rates, deposit costs and the yield curve change.
- The sustainability of lower loan-loss provisions and the adequacy of the $5.11 million allowance as the portfolio shifts toward commercial lending.
- Seasonal and ongoing deposit trends, reliance on FHLBB advances and repurchase agreements, and the availability of contingent liquidity.
- The composition and performance of the $4.44 million of non-performing assets, including OREO and TDRs.
- The effect of future regulatory requirements and adoption of the new financial-instrument and lease accounting standards.
- The filing’s statement that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.