Community Bancorp. Form 10-Q Summary
Business context and reporting period
Community Bancorp. and its wholly owned subsidiary, Community National Bank, filed an unaudited quarterly report for the period ended June 30, 2011. The company is a Vermont-based community bank focused on commercial, commercial real estate, residential real estate, consumer lending, deposits, municipal finance and related financial services. It qualifies as a smaller reporting company.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Change |
|---|---|---|---|
| Total interest income | $5.741 million | $5.899 million | Down 2.7% |
| Net interest income | $4.319 million | $4.219 million | Up 2.4% |
| Provision for loan losses | $237,500 | $299,999 | Down 20.8% |
| Non-interest income | $1.279 million | $1.186 million | Up 7.8% |
| Non-interest expense | $4.387 million | $4.360 million | Up 0.6% |
| Net income | $871,318 | $732,533 | Up 19.0% |
| EPS | $0.18 | $0.15 | Up $0.03 |
| Dividend per common share | $0.14 | $0.12 | Up $0.02 |
| Metric | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|
| Net interest income | $8.485 million | $8.462 million |
| Net income | $1.816 million | $1.671 million |
| EPS | $0.37 | $0.35 |
| Operating cash flow | $3.437 million | $2.438 million |
| Net cash change | $(25.044) million | $4.280 million increase |
| Net interest margin, tax-equivalent | 3.61% | 3.89% |
| Return on average assets | 0.67% | 0.67% |
| Return on average equity | 9.18% | 8.96% |
At June 30, 2011, total assets were $513.3 million, net loans were approximately $388.1 million, deposits were $416.9 million, total liabilities were $473.1 million and shareholders’ equity was $40.2 million. Cash and cash equivalents were $26.4 million. Borrowed funds were $18.0 million, repurchase agreements were $20.9 million and junior subordinated debentures were $12.9 million.
The allowance for loan losses was $3.85 million, or approximately 0.98% of average loans. Six-month net charge-offs were $301,566, compared with $436,281 in the prior-year period. Non-accrual loans were $4.84 million, and loans past due 90 days or more and still accruing were $1.18 million.
Material changes versus comparable periods
- Net income increased primarily because lower funding costs more than offset lower asset yields and interest income.
- The six-month tax-equivalent net interest margin declined 28 basis points to 3.61%, reflecting a 54-basis-point decline in earning-asset yields versus a 25-basis-point decline in interest-bearing liability costs.
- Gross loans increased 0.5% from December 31, 2010 and 2.0% from June 30, 2010, with commercial lending growth partially offsetting declines in residential and consumer loans.
- Deposits declined $21.3 million from year-end, primarily because of seasonal municipal deposit activity and lower time deposits. Savings deposits increased $5.6 million.
- Borrowings declined $15.0 million from year-end after repayment of a Federal Home Loan Bank advance. The decline in cash largely reflected this repayment and seasonal municipal activity.
- Available-for-sale securities increased $6.1 million from year-end, while held-to-maturity municipal securities declined $15.5 million. Management stated that approximately $11.0 million of municipal securities were renewed or originated in July 2011.
- Non-interest income increased 13.3% for the first six months, aided by mortgage servicing rights valuation changes, trust and investment management income and improved results from supplemental executive retirement plan investments.
- Non-performing assets declined from $6.99 million at year-end to approximately $6.15 million based on the detailed table, primarily because of OREO sales. Non-accrual loans nevertheless increased $415,413 to $4.84 million, including $3.79 million of troubled debt restructurings.
Guidance, outlook, risks and unusual items
- No formal earnings or financial guidance was provided. Management expects to focus on profitability, expense efficiency, prudent credit management and maintaining a well-capitalized bank.
- Management described the Vermont economy as recovering slowly, with improvement in employment, tourism and real estate activity, but continued concerns regarding unemployment, fuel prices, construction activity and the lagging effect of the recession on credit performance.
- The prolonged low-interest-rate environment is compressing asset yields and limiting the company’s ability to reduce deposit costs further. Interest-rate changes could materially affect net interest income, liquidity and securities valuations.
- Regulatory changes under Dodd-Frank may reduce debit-card interchange income, increase deposit pricing pressure following repeal of Regulation Q, and increase compliance costs.
- Credit risks include residential and commercial real estate exposure, troubled debt restructurings, economic weakness, collateral values, construction and development risks, and changes in reserve requirements. Management stated that delinquency levels remained manageable and that the bank was well capitalized.
- At June 30, 2011, the bank had $67.2 million available under a Federal Reserve Borrower-in-Custody line, approximately $79.2 million of additional secured FHLBB borrowing capacity and a $0.5 million unsecured FHLBB federal funds line; no advances were outstanding under the Federal Reserve line.
- Off-balance-sheet credit exposures included $19.8 million of unused home-equity lines, $35.4 million of other commitments, $12.1 million of commercial real estate and construction lines, $1.9 million of standby letters of credit and $1.9 million of MPF credit-enhancement obligations.
- Management reported no material litigation, no material changes in internal controls and no goodwill impairment as of the most recent annual evaluation.
Most important facts for investors to verify
- Reconcile the filing’s differing non-performing-asset totals: the narrative cites $6.21 million, while the detailed table reports $6.15 million at June 30, 2011.
- Monitor whether the increase in troubled debt restructurings and non-accrual loans leads to higher charge-offs or provisions.
- Assess the sustainability of earnings as the low-rate environment continues to pressure the 3.61% net interest margin.
- Verify the timing and amount of post-quarter municipal loan renewals and their effect on assets, deposits, liquidity and investment yields.
- Review capital ratios, including company total capital to risk-weighted assets of 12.48%, bank total capital of 12.30%, and bank Tier 1 leverage of 7.83%, against future regulatory or credit deterioration.
- Evaluate exposure to residential and commercial real estate, construction lending, loan commitments, MPF credit enhancement and other off-balance-sheet obligations.