COMMUNITY BANCORP annual report, FY2019

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Community Bancorp. 2019 Form 10-K Summary

Business Context and Reporting Period

Community Bancorp. is a Vermont bank holding company whose principal operations are conducted through Community National Bank. The filing covers the fiscal year ended December 31, 2019, although the request identifies the period as 2019 Q4. The Bank operates 12 banking offices in northern and central Vermont, loan production offices in Chittenden County, Vermont and Grafton County, New Hampshire, and provides commercial, residential, consumer, municipal and retail banking services.

The Company had 123 full-time and 13 part-time Bank employees at December 31, 2019. It remains focused on growth in Central Vermont, Chittenden County and western New Hampshire, where management believes economic activity and growth opportunities are stronger than in its Orleans and Caledonia County markets.

Financial Metrics and Capital Position

  • The filing text provided does not include clear values for revenue, net income, earnings per share, net interest income, net interest margin, operating expenses, cash flow from operations, total assets, deposits, loans, liquidity ratios or profitability margins. These financial statements are incorporated by reference from the 2019 Annual Report.
  • Outstanding junior subordinated debentures totaled $12.887 million at December 31, 2019. The debentures mature December 15, 2037 and bear interest at three-month LIBOR plus 2.85%.
  • The Company had approximately $11.6 million of goodwill at December 31, 2019. Management concluded that goodwill was not impaired as of that date.
  • At December 31, 2019, the Company and Bank exceeded applicable regulatory capital requirements and satisfied the fully phased-in 2.5% capital conservation buffer.
  • The Bank was classified as “well capitalized” under FDICIA prompt corrective action requirements as of December 31, 2019. The filing does not provide the specific capital ratios in the supplied text.
  • FDIC insurance assessments decreased to $64,079 in 2019 from $274,772 in 2018, primarily due to the FDIC Small Bank Assessment Credit.
  • At year-end, CDARS deposits totaled approximately $10.8 million, consisting of $6.8 million in exchanged funds and $4.0 million in one-way funds. Purchased wholesale deposits totaled $7.1 million.
  • The Bank’s investment in Federal Home Loan Bank of Boston stock was $753,700 at December 31, 2019.

Material Changes Versus the Prior Comparable Period

  • The Company opened a loan production office in Grafton County, New Hampshire, during 2019, expanding its commercial lending presence beyond Vermont.
  • FDIC insurance assessment expense declined materially from 2018 to 2019, as noted above.
  • The Bank’s former vacant St. Johnsbury premises lease was terminated during the fourth quarter of 2019, with the lease paid in full as of December 31, 2019.
  • The NMTC financing investment structure matured in the fourth quarter of 2018; the Company exited the investment and terminated its interest in the related LLC.
  • The Basel III capital requirements and capital conservation buffer became fully phased in for the Company and Bank on January 1, 2019.
  • The Company and Bank qualified to use the simplified Community Bank Leverage Ratio framework beginning January 1, 2020. The framework requires a CBLR above 9% and other qualifying conditions; the filing does not provide the Company’s calculated CBLR.
  • No shares were repurchased during the three months ended December 31, 2019, and no publicly announced repurchase program was outstanding.

Outlook, Management Commentary, Risks and Unusual Items

  • Management views Central Vermont, Chittenden County and western New Hampshire as principal growth markets, while acknowledging weaker economic conditions in portions of northeastern Vermont.
  • Net interest income and earnings remain sensitive to changes in deposit, borrowing and asset yields. Interest-rate changes may also affect loan demand, loan-sale income, securities values, credit quality and the cost of the Company’s variable-rate debentures and Series A preferred stock.
  • The Company faces a transition risk from the expected retirement of LIBOR after 2021. The debentures reference three-month LIBOR, and the trustee had not informed the Company how it intended to proceed if LIBOR became unavailable.
  • Liquidity depends primarily on deposit gathering. Greater reliance on purchased deposits or Federal Home Loan Bank borrowings could increase funding costs and affect earnings, cash flow and regulatory capital.
  • Credit risk is concentrated in the Company’s Vermont and nearby markets, with potential exposure to commercial real estate, residential real estate, consumer borrowers and local economic conditions. Future increases in the allowance for loan losses could reduce earnings and capital.
  • The CECL credit-loss model is expected to become mandatory for the Company in fiscal 2023 and could increase the allowance for credit losses and adversely affect regulatory capital at adoption.
  • Other material risks include intense competition from banks, credit unions and nonbank providers; cybersecurity and systems failures; regulatory and compliance costs; changes in accounting standards; possible goodwill impairment; environmental liabilities associated with foreclosed property; and the limited liquidity of the Company’s OTC-traded common stock.
  • There were no material pending legal proceedings other than routine litigation incidental to banking operations. Management reported effective disclosure controls and effective internal control over financial reporting as of December 31, 2019, with no material control changes during the fourth quarter.

Most Important Facts for Investors to Verify

  • Obtain the incorporated 2019 Annual Report to verify net income, revenue and expense trends, net interest margin, asset quality, allowance coverage, loan and deposit growth, liquidity and operating cash flow.
  • Review the detailed regulatory capital ratios for both Community Bancorp. and Community National Bank, including the capital conservation buffer and pro forma CBLR.
  • Assess the maturity, fallback provisions and repricing exposure of the $12.887 million LIBOR-based subordinated debentures.
  • Review nonperforming assets, charge-offs, criticized loans and allowance methodology, particularly in the Company’s geographically concentrated lending markets.
  • Evaluate the sustainability of common-stock dividends in light of holding-company debt service, preferred-stock dividends, Bank dividend restrictions and capital requirements.
  • Confirm the Company’s trading liquidity, market valuation and dividend history because the common stock is not exchange-listed and trades sporadically on OTCQX.