Community Bancorp. — 2014 First-Quarter 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. The unaudited report covers the quarter ended March 31, 2014, with comparisons to March 31, 2013 and December 31, 2013. The Company is a smaller reporting company.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total interest income | $5.618 million | $5.562 million | +1.0% |
| Net interest income | $4.825 million | $4.627 million | +4.3% |
| Provision for loan losses | $135,000 | $206,250 | -34.6% |
| Non-interest income | $1.314 million | $1.368 million | -4.0% |
| Non-interest expense | $4.712 million | $4.589 million | +2.7% |
| Net income | $1.072 million | $1.042 million | +2.9% |
| Earnings per common share | $0.22 | $0.21 | Increase |
| Return on average assets | 0.76% | 0.75% | +1 basis point |
| Return on average equity | 9.37% | 9.71% | Decrease |
| Tax-equivalent net interest margin | 3.85% | 3.74% | +11 basis points |
At March 31, 2014, total assets were $583.1 million, up 1.7% from year-end 2013 and 4.1% year over year. Gross loans were $452.2 million, up 2.8% from year-end and 8.3% year over year, driven primarily by commercial lending. Net loans were $447.7 million, and the allowance for loan losses was $4.8 million, or 1.09% of average loans.
Total deposits were $482.6 million, essentially unchanged from year-end and up 4.0% year over year. Cash and cash equivalents were $19.1 million. Shareholders’ equity was $46.6 million, and book value per common share was $9.04, compared with $8.57 a year earlier.
Cash provided by operating activities was $1.398 million, compared with $1.286 million in Q1 2013. Investing activities used $9.357 million, principally because net loan growth used $12.490 million. Financing activities provided $8.756 million, including $12.0 million of new borrowings. Cash and cash equivalents increased $797,000 to $19.1 million.
Borrowed funds at March 31, 2014 included $6.0 million of short-term FHLBB advances due May 2, 2014 and $6.0 million of long-term FHLBB advances due August 29, 2014. The Company also had substantial unused borrowing capacity through the Federal Reserve, FHLBB and correspondent-bank lines.
Material changes versus comparable periods
- Loan growth continued to outpace overall asset growth, with commercial and industrial and commercial real estate loans increasing to 50.4% of total loans from 45.5% a year earlier.
- The investment portfolio declined year over year as securities sales, maturities and calls helped fund loan growth. Available-for-sale securities fell 32.2% year over year.
- Net interest income benefited from higher average earning-asset volume and lower funding costs. Average loan balances increased 6.8%, while the average yield on loans declined 26 basis points.
- Non-interest income declined because mortgage refinancing activity and loan-sale proceeds weakened. Loan originations for sale were $5.1 million versus $7.7 million in Q1 2013.
- Service fees increased $87,863, partly due to changes in demand-deposit pricing and paper-statement fees.
- Non-interest expense increased $122,906. The Company began recognizing computer outsourcing costs and reclassified certain service-contract costs from occupancy expense to other expense, limiting comparability.
- Non-performing assets declined to $5.794 million from $6.741 million at year-end 2013. Non-accrual loans declined to $4.285 million from $4.727 million, while loans 90 days or more past due and accruing declined to $643,000 from $908,000.
- Net charge-offs increased to $152,337 from $24,946, including a $100,000 partial charge-off of a commercial real estate loan and higher consumer charge-offs. The lower provision reflected management’s view that credit trends were improving.
- Other real estate owned declined to $866,000 from $1.106 million after property sales.
Guidance, outlook, risks and unusual items
The filing provides no formal earnings or revenue guidance. Management expects loan demand to remain supported by commercial activity and construction projects in central Vermont and intends to continue expanding commercial and commercial real estate lending while maintaining the residential portfolio.
Management expects net interest income to remain broadly stable in a flat-rate environment. Its interest-rate simulations estimate a 0.8% decline in twelve-month net interest income if rates fall 100 basis points and a 6.2% increase if rates rise 200 basis points. These simulations are not forecasts and depend on assumptions regarding deposit pricing, customer behavior and balance-sheet composition.
Key risks include prolonged low interest rates, margin compression, deterioration in commercial real estate or residential credit, higher charge-offs or reserve requirements, deposit volatility, reliance on wholesale or brokered funding, competition, regulatory costs, Basel III capital requirements, changes in tax policy and economic weakness in the Company’s northern New England markets.
During the quarter, the Company used $10.0 million of one-way CDARS deposits and drew $12.0 million of FHLBB advances to support loan growth and seasonal deposit outflows. Off-balance-sheet commitments included unused home-equity lines of $22.1 million, other credit commitments of $42.2 million, construction lines of $13.5 million, letters of credit of $1.1 million and an MPF credit-enhancement obligation of $1.5 million.
Management stated that the Bank was well capitalized and that the Company exceeded applicable consolidated regulatory capital guidelines. Reported March 31, 2014 ratios included Bank total risk-based capital of 12.74%, Tier 1 risk-based capital of 11.52% and Tier 1 leverage capital of 8.33%.
Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting. Routine litigation is not expected to be material. The Board declared a $0.16 per common share dividend payable May 1, 2014.
Most important facts for investors to verify
- Whether commercial loan growth and increasing commercial real estate concentration lead to higher delinquencies, non-accrual loans or charge-offs.
- Whether the $12.0 million of FHLBB advances and $10.0 million of one-way CDARS deposits are repaid, renewed or replaced as seasonal deposits fluctuate.
- Future net interest margin performance if rates remain low or rise faster than deposit costs.
- The sustainability of lower loan-loss provisions given higher net charge-offs and management’s qualitative reserve assumptions.
- Mortgage production and loan-sale income as refinancing activity continues to decline.
- The effect of regulatory, Basel III, compliance and technology costs on future operating expenses and capital.
- The Company’s subsequent quarterly filings for updated capital ratios, liquidity capacity, credit quality, OREO balances and allowance coverage.