COMMUNITY BANCORP annual report, FY2018

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Community Bancorp. — 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, 2018, and was filed March 15, 2019. The Bank operates 12 banking offices, including its Derby headquarters and 11 branches across northern and central Vermont, plus a Burlington-area loan production office.

The Bank provides business, commercial real estate, residential mortgage, consumer, municipal and retail banking services. Its growth focus is Central Vermont and Chittenden County, where management views economic activity as stronger than in its Orleans and Caledonia County markets. The Company had 123 full-time and 12 part-time Bank employees at year-end.

Financial metrics, liquidity and capital

  • The filing text provided does not include clear values for 2018 revenue, net income, earnings per share, net interest margin, return on assets, return on equity, operating cash flow or total assets; these statements are incorporated by reference from the 2018 Annual Report.
  • The Bank’s 2018 FDIC insurance assessment was $274,772.
  • At December 31, 2018, CDARS deposits totaled $3.5 million in exchanged funds and $723,774 in one-way funds. Purchased wholesale deposits totaled $35.3 million. Company policy limits brokered deposits to 5% of total assets.
  • The Company issued $12.5 million of trust preferred securities through CMTV Statutory Trust I. Existing trust preferred securities remained eligible for grandfathered Tier 1 capital treatment, subject to applicable limits.
  • The Company and Bank exceeded applicable Basel III capital requirements at year-end. The Bank was classified as “well capitalized” under FDICIA prompt corrective action standards and satisfied the fully phased-in 2.5% capital conservation buffer.
  • The Bank held approximately $1.1 million of Federal Home Loan Bank of Boston stock at year-end and remained subject to potential future FHLBB capital calls.
  • The holding company had 5,174,326 common shares outstanding as of March 7, 2019. The June 30, 2018 market value of voting stock held by non-affiliates was $82.1 million, based on a $17.25 per-share OTC price.

Material changes versus the prior comparable period

  • The 2017 Tax Act reduced the federal corporate income tax rate from 35% to 21%, effective January 1, 2018, and eliminated the deductibility of FDIC assessments. Certain tax effects had already been recognized in 2017.
  • The Company’s federal New Markets Tax Credit financing matured in the fourth quarter of 2018. The Company exited the investment and terminated its interest in the related limited liability company.
  • Effective with 2018 periodic reports, the Company became subject to accelerated-filer requirements, including external auditor attestation of internal control over financial reporting, while retaining smaller-reporting-company scaled disclosures.
  • New beneficial-ownership customer due-diligence requirements became effective May 11, 2018. The Bank also qualified for regulatory relief relating to mortgage lending, HMDA data collection and reciprocal deposits.
  • During the fourth quarter, 3,291 shares were purchased at an average price of $16.90 for participants in the Company Stock Fund under the retirement savings plan; there was no publicly announced repurchase program.

Guidance, outlook, commentary and risks

The filing does not provide quantitative earnings or revenue guidance. Management identifies Central Vermont and Chittenden County as the principal opportunities for growth and emphasizes relationship banking, small-to-medium-sized businesses and community ties.

  • Net interest income is exposed to changes in interest rates, including deposit-cost increases, loan repricing, investment-security values and potential increases in the dividend rate on Series A preferred stock and interest expense on LIBOR-linked debentures.
  • Liquidity depends primarily on deposit gathering. Greater reliance on purchased deposits or FHLBB borrowings could increase funding costs and adversely affect earnings, cash flow and regulatory capital.
  • Credit risk is concentrated in the Company’s northern and central Vermont markets and includes commercial real estate, residential real estate, commercial and industrial and consumer exposures. Higher defaults, weaker collateral values or an inadequate allowance for loan losses could reduce earnings and capital.
  • The forthcoming CECL credit-loss model could materially increase the allowance for loan losses and adversely affect earnings and regulatory capital upon adoption.
  • The Company faces significant competition from banks, credit unions, nonbank lenders and technology-enabled financial providers. Its common stock trades over the counter with sporadic volume and limited liquidity.
  • Other material risks include regulatory and compliance costs, cybersecurity and system failures, changing accounting standards, goodwill impairment, environmental liabilities associated with foreclosed property, and restrictions on dividends from the Bank to the holding company.
  • Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with no material changes in internal control during the fourth quarter. The filing reports no material legal proceedings beyond routine banking litigation.

Important facts for investors to verify

  • Obtain the incorporated 2018 Annual Report and verify consolidated revenue, net income, EPS, loan and deposit growth, net interest margin, provision expense, allowance coverage, nonperforming assets, liquidity and cash-flow figures.
  • Review Note 20 for the Company’s and Bank’s exact regulatory capital ratios and the amount of capital in excess of minimum and “well-capitalized” thresholds.
  • Assess the effect of the 2017 Tax Act, the fourth-quarter 2018 NMTC exit and any unusual tax or investment-related gains or charges on 2018 comparability.
  • Review debt terms, including the $12.5 million trust preferred securities, LIBOR exposure, Series A preferred stock terms and any maturity or repricing risk.
  • Evaluate the concentration and credit quality of the Vermont loan portfolio, including commercial real estate exposure, criticized and nonaccrual loans, charge-offs and CECL implementation impacts.
  • Confirm the Company’s dividend history and whether Bank-level earnings, capital requirements or regulatory limitations could restrict future holding-company dividends.
  • Consider the limited OTC trading market, the $17.25 reference share price and the resulting liquidity and valuation risks for common shareholders.