Community Bancorp. — Form 10-Q Summary
Business context and reporting period
Community Bancorp. is a Vermont bank holding company whose wholly owned subsidiary is Community National Bank. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014, with comparisons to September 30, 2013 and December 31, 2013. The Company was a smaller reporting company and reported approximately 4.9 million common shares outstanding at period end.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total interest income | $5.83 million | $5.61 million | $17.16 million | $16.97 million |
| Net interest income | $5.07 million | $4.79 million | $14.83 million | $14.33 million |
| Provision for loan losses | $135,000 | $137,500 | $405,000 | $463,750 |
| Non-interest income | $1.24 million | $1.54 million | $3.90 million | $4.43 million |
| Non-interest expense | $4.41 million | $4.47 million | $13.61 million | $13.88 million |
| Net income | $1.38 million | $1.35 million | $3.73 million | $3.64 million |
| EPS | $0.28 | $0.28 | $0.75 | $0.74 |
- Tax-equivalent net interest margin was 3.88% in the third quarter and 3.86% for the first nine months, compared with 3.81% and 3.83%, respectively, in the prior-year periods.
- Return on average assets was 0.96% for the quarter and 0.87% year to date; return on average equity was 11.43% and 10.59%, respectively.
- At September 30, 2014, total assets were $572.2 million, net loans were $439.4 million, deposits were $474.4 million and shareholders’ equity was $48.1 million.
- Gross loans increased 1.0% from year-end 2013 and 2.8% year over year, led by commercial and commercial real estate lending. Commercial loans represented 51.0% of total loans at September 30, 2014, compared with 46.9% a year earlier.
- The allowance for loan losses was $4.89 million, equal to 1.09% of average loans and 98.2% of non-accrual loans. Net charge-offs were $374,124 for the first nine months, compared with net recoveries of $23,601 in the prior-year period.
- Cash and cash equivalents totaled $10.85 million at September 30, 2014, compared with $18.33 million at December 31, 2013 and $13.38 million a year earlier.
- Nine-month cash provided by operating activities was $6.65 million; cash used in investing activities was $9.12 million and cash used in financing activities was $5.01 million, resulting in a $7.48 million net decrease in cash.
- Total borrowings included $10.18 million of federal funds purchased and other advances, $23.36 million of repurchase agreements, and $12.89 million of junior subordinated debentures.
- The Bank remained well capitalized. At September 30, 2014, the Bank’s total risk-based capital ratio was 13.31%, Tier 1 risk-based capital ratio was 12.07%, and Tier 1 leverage ratio was 8.46%.
Material changes versus prior comparable periods
- Third-quarter net income increased 1.6%, while nine-month net income increased 2.7%. Net interest income increased 5.9% for the quarter and 3.5% year to date.
- Interest income benefited from loan growth and a shift toward higher-yielding loans and agency mortgage-backed securities. Interest expense declined 7.1% for the quarter and 11.9% year to date as deposit and borrowing costs fell.
- Non-interest income declined 19.2% for the quarter and 12.1% year to date, primarily because residential mortgage refinancing and secondary-market loan sales slowed. Income from sold loans fell 43.0% for the quarter and 40.5% year to date.
- Non-interest expense decreased 1.4% for the quarter and 1.9% year to date, despite higher computer outsourcing costs and continuing regulatory expenses.
- Total deposits decreased 1.5% from year-end 2013 but increased 0.8% year over year. The year-to-date decline primarily reflected seasonal municipal deposit runoff; customers continued shifting from time deposits to savings and demand accounts.
- Available-for-sale securities decreased 17.1% from year-end, while held-to-maturity municipal securities increased 26.7%, partly reflecting the use of securities maturities and sales to fund loan growth.
- Non-performing assets decreased slightly to $6.70 million from $6.74 million at year-end, but exceeded the $6.49 million reported a year earlier. Non-accrual loans increased to $4.97 million from $4.73 million at year-end.
Guidance, outlook, risks and unusual items
- No formal earnings or revenue guidance was provided. Management stated that it is focused on increasing balance-sheet profitability, controlling expenses and managing credit risk.
- Management expects the prolonged low-interest-rate environment to continue pressuring asset yields and limiting further reductions in deposit costs. Internal modeling indicated a 0.60% decline in net interest income under a 100-basis-point rate decrease and a 5.50% increase under a 200-basis-point increase over 12 months; these are sensitivity estimates, not forecasts.
- The Company is pursuing commercial and commercial real estate growth, particularly in central Vermont and Chittenden County. This strategy increases exposure to commercial credit, economic conditions, property values, vacancy rates and business cash flows.
- Key disclosed risks include deterioration in local or national economic conditions, higher non-performing assets and charge-offs, interest-rate changes, deposit competition, regulatory and compliance costs, Basel III capital requirements, changes in tax policy, consumer and business borrowing behavior, and adverse changes in U.S. government debt markets.
- Off-balance-sheet commitments at September 30, 2014 included $23.81 million of unused home-equity lines, $49.43 million of other credit commitments, $11.93 million of residential and commercial construction commitments, $1.67 million of standby and commercial letters of credit, and a $1.00 million net MPF credit-enhancement obligation.
- Management reported no material expected impact from pending accounting updates reviewed in the filing. Litigation was described as incidental and not expected to materially affect financial condition or results.
- The Board declared a $0.16 per common share quarterly dividend payable November 1, 2014. The Company also reported a $0.16 dividend declared per common share for the third quarter, compared with $0.14 in the prior-year quarter.
- Available-for-sale securities had $177,155 of unrealized losses at September 30, 2014; management concluded that none represented other-than-temporary impairment.
Important facts for investors to verify
- Whether commercial loan growth is maintained without further deterioration in non-accrual loans, criticized loans, TDRs or charge-offs.
- Whether the allowance remains adequate as the portfolio shifts toward commercial and commercial real estate lending.
- The sustainability of net interest margin improvement if interest rates remain low or begin to rise rapidly.
- Whether declining mortgage originations and loan-sale income create continuing pressure on non-interest revenue.
- The Company’s reliance on short-term FHLBB advances and other wholesale funding as deposits fluctuate.
- Future effects of Basel III implementation, regulatory compliance costs and changes in capital requirements.
- The capacity to maintain dividends while funding loan growth, preserving liquidity and remaining well capitalized.