Business Context and Reporting Period
Company: Community Bancorp. (Vermont)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2005
Community Bancorp. operates as a bank holding company with its principal subsidiary, Community National Bank, serving the northern New England market. The company reported a 5% stock dividend declared in May 2005, with all prior period per-share data restated accordingly. As of November 10, 2005, there were 4,049,334 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q3 2005 | Q3 2004 | 9 Months 2005 | 9 Months 2004 |
|---|---|---|---|---|
| Net Income | $918,112 | $800,123 | $2,405,297 | $2,383,166 |
| Earnings Per Share (Diluted) | $0.23 | $0.20 | $0.59 | $0.60 |
| Net Interest Income | $3,254,676 | $3,026,798 | $9,534,990 | $8,882,952 |
| Total Assets | $350,246,660 | $324,633,010 | $350,246,660 | $324,633,010 |
| Total Loans (Gross) | $245,579,596 | $218,713,808 | $245,579,596 | $218,713,808 |
| Total Deposits | $284,349,695 | $274,746,516 | $284,349,695 | $274,746,516 |
| Shareholders' Equity | $28,754,093 | $27,979,221 | $28,754,093 | $27,979,221 |
| Book Value Per Share | $7.08 | $6.94 | $7.08 | $6.94 |
| Return on Average Assets (Annualized) | 1.08% | 0.98% | 0.95% | 0.97% |
| Return on Average Equity (Annualized) | 12.78% | 11.46% | 11.38% | 11.44% |
Liquidity and Debt: The company utilized short-term borrowings to fund loan growth, with Federal funds purchased and other borrowed funds increasing to $19.3 million from $5.8 million in the prior year. The company maintains a $4.3 million credit line with the Federal Home Loan Bank (FHLB) with approximately $3 million available, plus an additional $91.6 million borrowing capacity secured by the loan portfolio.
Material Changes vs. Prior Period
- Profitability: Net income for Q3 2005 increased 14.8% year-over-year. For the nine-month period, net income increased slightly by $22,131 (less than 1%), despite a one-time tax benefit in 2004 related to a capital loss on the sale of a bank charter.
- Asset Growth: Total assets grew by $25.6 million compared to September 2004. Gross loans increased by approximately $26.9 million, driven by customers choosing in-house mortgage products over secondary market options.
- Interest Income: Net interest income increased $200,378 in Q3 and $652,038 for the nine months. This was driven by loan portfolio growth replacing lower-yielding assets, despite a flat yield curve.
- Non-Interest Income: Decreased by $33,869 in Q3 and $90,338 for the nine months. This decline was primarily due to lower originations and sales of 30-year fixed-rate mortgages into the secondary market and the absence of gains on the sale of securities in 2005.
- Non-Interest Expense: Increased by $21,779 in Q3 and $409,792 for the nine months. Increases were attributed to higher salaries, outside agency fees, legal and audit costs (Sarbanes-Oxley compliance), and higher losses from fraudulent debit card use ($23,615 in charge-offs for the nine months vs. $6,176 in 2004).
- Capital Position: Retained earnings turned into an accumulated deficit of $(157,396) due to the booking of the 5% stock dividend and cash dividends declared in Q2 and Q3. Management expects this to revert to earnings in future periods.
Guidance, Outlook, and Risks
Management Commentary: Management expects the yield curve to remain relatively flat, creating pressure on net interest income. The company is actively managing interest rate risk through its Asset/Liability Management Committee (ALCO). A new 17,000 square foot addition to the main office in Derby is progressing on schedule and budget, expected to improve customer service and operational capacity.
Risks and Contingencies:
- Interest Rate Risk: The company is slightly asset-sensitive. Rising short-term rates have increased borrowing costs, while long-term loan rates have not repriced as quickly.
- Credit Risk: Non-performing assets totaled $680,412 (0.19% of total assets) as of September 30, 2005, down from $1.14 million at year-end 2004. The allowance for loan losses was $2.19 million, or 0.89% of total loans.
- Regulatory and Operational Risk: Increased costs associated with Sarbanes-Oxley compliance and rising fraudulent activity related to debit cards.
- Liquidity Risk: Loan growth outpaced deposit growth, necessitating increased reliance on borrowed funds and the FHLB.
Investor Verification Checklist
- Accumulated Deficit: Verify the sustainability of the dividend policy given the temporary accumulated deficit in retained earnings caused by the stock dividend and cash dividend accruals.
- Loan Growth vs. Deposit Growth: Assess the long-term cost of funding loan growth through borrowed funds (FHLB advances) rather than core deposits, especially in a rising rate environment.
- Non-Interest Expense Trends: Monitor the trajectory of legal, audit, and fraud-related expenses to ensure they do not erode the gains from net interest income.
- Capital Ratios: Confirm that the company remains "well-capitalized" under regulatory guidelines (Total Risk-Based Capital was 14.65% and Tier 1 was 13.40% as of Sept 30, 2005).
- Real Estate Exposure: Review the concentration of the loan portfolio, which is heavily weighted toward residential (52.9%) and commercial real estate (17.6%), and the impact of local market conditions on collateral values.