Business Context and Reporting Period
Community Bancorp., together with Community National Bank, filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The Company is a Vermont-based community bank focused on northeastern and central Vermont, with commercial, commercial real estate, residential mortgage, consumer lending, deposit-taking, mortgage sales and trust/investment management activities. The Company is a smaller reporting company.
Financial Condition and Results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total interest income | $5.96 million | $5.75 million | $11.78 million | $11.62 million |
| Net interest income | $5.29 million | $5.08 million | $10.44 million | $10.22 million |
| Provision for loan losses | $150,000 | $150,000 | $250,000 | $300,000 |
| Non-interest income | $1.32 million | $1.30 million | $2.56 million | $2.52 million |
| Non-interest expense | $4.68 million | $4.78 million | $9.36 million | $9.48 million |
| Net income | $1.30 million | $1.08 million | $2.46 million | $2.19 million |
| Earnings per common share | $0.25 | $0.21 | $0.48 | $0.43 |
| Net interest margin | 3.99% | 3.90% | 3.96% | 3.96% |
| Return on average assets | 0.87% | 0.74% | 0.84% | 0.76% |
| Return on average equity | 9.87% | 8.60% | 9.46% | 8.84% |
At June 30, 2016, total assets were $596.21 million, net loans were $466.81 million, deposits were $468.98 million, total shareholders’ equity was $52.95 million and book value per common share was $10.04. Cash and cash equivalents were $24.33 million.
The loan portfolio totaled $471.57 million before the allowance for loan losses. Commercial and commercial real estate loans represented approximately 54.9% of total loans. The allowance for loan losses was $5.08 million, or approximately 1.10% of average loans. Non-accrual loans were $3.07 million, while total non-performing assets were $4.67 million.
Six-month net cash provided by operating activities was $4.06 million. Investing activities used $5.94 million, primarily reflecting a $14.07 million increase in loans and net investment-security activity. Financing activities used $2.63 million. Cash and cash equivalents declined $4.52 million during the six months, from $28.85 million to $24.33 million.
Borrowed funds totaled $30.35 million at June 30, 2016, consisting primarily of $30.00 million in short-term Federal Home Loan Bank advances and a $350,000 long-term advance. Repurchase agreements totaled $26.84 million, and junior subordinated debentures totaled $12.89 million. Approximately $71.6 million of borrowing capacity was available through the Federal Home Loan Bank, subject to collateral requirements, and additional unused credit lines were available.
The Bank was considered well capitalized under the Prompt Corrective Action framework. At June 30, 2016, the Bank reported common equity Tier 1 capital of 11.96%, Tier 1 capital of 11.96%, total capital of 13.12% and Tier 1 leverage capital of 9.07%.
Material Changes Versus Comparable Periods
- Second-quarter net income increased 20.2% to $1.30 million; six-month net income increased 12.7% to $2.46 million.
- Net interest income increased 4.1% in the quarter and 2.2% year to date. Management attributed the improvement primarily to loan growth, a shift toward higher-yielding commercial loans and lower-cost non-maturity deposits.
- The quarterly net interest margin improved nine basis points to 3.99%; the six-month margin remained 3.96%.
- Loans increased 2.9% from December 31, 2015 and 2.6% year over year, driven by commercial lending. Held-to-maturity securities declined 21.6% from year-end as maturities helped fund loan growth.
- Deposits declined 5.4% from year-end because of seasonal municipal deposit runoff, but increased 3.1% year over year.
- Six-month non-interest expense declined 1.3%, partly because the prior-year period included approximately $100,000 of debit-card chip issuance costs and approximately $45,000 related to a fraudulent check.
- Non-accrual loans declined 41.4% from year-end, although loans 90 days or more past due and still accruing increased to $1.20 million from $923,000 at December 31, 2015.
- Commercial and commercial real estate exposure increased as a percentage of the loan portfolio, consistent with management’s stated strategy, increasing the portfolio’s exposure to commercial credit and local economic conditions.
Outlook, Risks, Contingencies and Unusual Items
- Management planned to open a loan production office in Chittenden County during 2016 and continued to target growth in Central Vermont and Chittenden County.
- Management stated that historically low rates and a flattening yield curve continue to pressure asset yields and margins. Its interest-rate simulations estimated a 1.10% decline in 12-month net interest income under a 100-basis-point decline in rates and a 4.80% increase under a 200-basis-point increase; these are scenarios, not forecasts.
- Management expects a flat-rate environment to produce relatively stable net interest income. Rising rates could benefit variable-rate assets, while falling rates could create longer-term pressure once funding costs reach floors.
- A related-party lending matter is material. Two commercial enterprises in which a Company director owns a 35% non-controlling interest had aggregate principal and accrued interest of $3.32 million. The borrowers were subsequently declared in default. Management believes collateral exceeds the debt and does not expect a loss, but liquidation could take longer than anticipated. A receivership and forbearance arrangement remained contingent on mutually acceptable terms.
- Off-balance-sheet credit exposures included approximately $121.4 million of unused credit commitments and lines, $1.73 million of standby and commercial letters of credit, $716,519 of MPF credit-enhancement obligations net of recorded liability, and $273,555 of credit-card portfolio recourse. Many commitments may expire unused.
- The Company reported no material expected litigation liability in the ordinary course of business.
- The Company was evaluating ASU 2016-01, ASU 2016-02 on leases and ASU 2016-13 on the current expected credit loss model. The filing did not provide a clear estimate of the eventual adoption impact.
- The Board declared a quarterly common dividend of $0.16 per share, payable August 1, 2016. Dividend capacity depends substantially on dividends from the Bank and applicable regulatory capital restrictions.
- Key stated risks include interest-rate and margin volatility, deposit and liquidity risk, commercial real estate and local-market credit risk, regulatory and compliance costs, cybersecurity and systems disruptions, illiquidity of the OTC-traded common stock, and possible future goodwill or intangible-asset impairment.
Most Important Facts for Investors to Verify
- Whether commercial loan growth continues without deterioration in criticized, non-accrual or past-due loans.
- The resolution, collateral values and potential loss exposure associated with the $3.32 million related-party loans in default.
- Whether seasonal deposit runoff reverses and whether increased reliance on borrowed funds affects funding costs and liquidity.
- Future net interest margin performance as rates, deposit pricing and the yield curve change.
- The adequacy of the $5.08 million allowance for loan losses as the portfolio shifts toward commercial lending and as CECL adoption approaches.
- The sustainability of the $0.16 quarterly common dividend given Bank-level capital, earnings and regulatory limitations.
- The eventual effects of the pending accounting standards, particularly the current expected credit loss model.