Community Bancorp. — Q1 2015 Form 10-Q Summary
Business context and reporting period
Community Bancorp. is a Vermont bank holding company whose principal subsidiary is Community National Bank. This unaudited Form 10-Q covers the three months ended March 31, 2015, with comparisons to March 31, 2014 and balance-sheet comparisons to December 31, 2014. The company focuses on commercial, commercial real estate, residential mortgage and consumer banking in northern and central Vermont.
Key financial metrics
| Metric | Q1 2015 | Comparable / prior period |
|---|---|---|
| Total assets | $585.6 million | $583.1 million at March 31, 2014; $586.7 million at December 31, 2014 |
| Total loans | $452.6 million | $452.2 million at March 31, 2014; $447.8 million at December 31, 2014 |
| Net loans | $447.9 million | $447.7 million at March 31, 2014; $443.2 million at December 31, 2014 |
| Total deposits | $477.1 million | $482.6 million at March 31, 2014; $493.0 million at December 31, 2014 |
| Cash and cash equivalents | $17.3 million | $19.1 million at March 31, 2014; $25.0 million at December 31, 2014 |
| Net interest income | $5.14 million | $4.82 million in Q1 2014 |
| Net interest income after provision | $4.99 million | $4.69 million in Q1 2014 |
| Net income | $1.11 million | $1.07 million in Q1 2014 |
| Earnings per common share | $0.22 | $0.22 in Q1 2014 |
| Net interest margin | 4.01% | 3.85% in Q1 2014 |
| Return on average assets | 0.78% | 0.76% in Q1 2014 |
| Return on average equity | 9.08% | 9.37% in Q1 2014 |
| Shareholders’ equity | $49.7 million | $46.6 million at March 31, 2014 |
Interest income increased 4.4% to $5.87 million, while interest expense declined 8.3% to $0.73 million. The company recorded a $150,000 provision for loan losses, compared with $135,000 in the prior-year quarter. Non-interest income declined 7.7% to $1.21 million, while non-interest expense increased 1.8% to $4.80 million. Income before taxes was $1.40 million and income tax expense was $294,643.
Cash flow from operating activities was negative $670,784, compared with positive $1.40 million in Q1 2014. Investing activities used $5.15 million, primarily reflecting net loan growth and capital expenditures. Financing activities used $1.81 million, as deposit declines and dividend payments exceeded new short-term borrowings. Cash and cash equivalents decreased $7.63 million during the quarter.
Borrowed funds included $15.0 million of short-term Federal Home Loan Bank advances, compared with none at December 31, 2014 and $12.0 million at March 31, 2014. The company also had $28.2 million of repurchase agreements and $12.9 million of junior subordinated debentures. Available liquidity included an $82.9 million Borrower-in-Custody line, approximately $65.6 million of additional FHLBB borrowing capacity, $7.5 million of correspondent-bank lines and a $0.5 million unsecured FHLBB federal funds line.
Material changes versus comparable periods
- Net income increased 3.6%, although earnings per share remained $0.22 because the weighted-average share count increased.
- Net interest income increased 6.5% before the loan-loss provision. Management attributed the improvement to commercial loan growth, lower deposit funding costs, a larger tax-exempt municipal portfolio and higher-yielding agency mortgage-backed securities.
- The reported margin benefited from approximately $200,000 of interest income recaptured when two non-accrual loans were paid off. Management stated that the underlying margin, excluding this item, was comparable with the prior year.
- Commercial and commercial real estate loans increased to 52.8% of total loans from 50.4% a year earlier. Residential mortgage loans declined as refinancing activity slowed and more originations were sold into the secondary market.
- Deposits declined 3.2% from year-end and 1.1% year over year. The decline reflected seasonal municipal deposit runoff, the absence of $10.0 million of one-way CDARS funding present in the prior year and continued migration from time deposits to non-maturity deposits.
- Mortgage originations increased 11.6% to $5.68 million, but secondary-market loan sales declined to $4.46 million from $4.92 million, reducing sold-loan income.
- Non-performing assets were $6.50 million, essentially unchanged from $6.52 million at year-end but up from $5.79 million a year earlier. Non-accrual loans rose to $4.92 million from $4.29 million a year earlier.
- The allowance for loan losses increased to $5.00 million from $4.84 million a year earlier. Net charge-offs decreased to $52,825 from $152,337, and allowance coverage was 101.6% of non-accrual loans.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects continued opportunities for commercial lending, particularly in central Vermont, but notes that the prolonged low-interest-rate environment continues to pressure asset yields and limits further reductions in deposit costs. The company projects net interest income to be broadly flat in a continued low-rate environment, approximately 6.0% higher over twelve months under a gradual 200-basis-point rate increase and approximately 0.6% lower under a 100-basis-point decline; these scenarios are not forecasts.
- Key risks include deterioration in local or national economic conditions, commercial real estate and commercial-credit losses, higher non-performing assets, interest-rate and liquidity risk, deposit competition, regulatory and compliance costs, tax-policy changes, Basel III capital requirements and changes in consumer or business borrowing behavior.
- Commercial lending growth increases exposure to borrower cash-flow weakness, vacancy, property values, construction delays, permitting and environmental risks.
- Off-balance-sheet commitments included $24.1 million of unused home-equity lines, $54.9 million of other commitments to extend credit, $23.2 million of construction lines, $2.0 million of letters of credit, $1.0 million of MPF credit-enhancement obligations and $248,050 of credit-card portfolio recourse.
- Seven loan restructurings totaling $482,578 of post-modification recorded investment occurred during the quarter. The company had no commitments to lend additional funds to borrowers with impaired, non-accrual or restructured loans.
- The company announced that two Caledonia County branches would close on July 17, 2015 and be consolidated into two other branches. The filing does not quantify expected closure costs or savings.
- Management reported no material litigation, no material changes in critical accounting policies, effective disclosure controls and no material changes in internal control over financial reporting.
- The bank was considered well capitalized. At March 31, 2015, the bank’s common equity Tier 1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 12.20%, 12.20%, 13.44% and 8.82%, respectively.
Important facts for investors to verify
- Whether commercial and commercial real estate growth produces sustainable returns without increasing delinquency, non-accrual loans or provision expense.
- Whether the reported 4.01% net interest margin can be maintained after excluding the $200,000 non-accrual interest recapture.
- The sustainability of deposits and the company’s reliance on $15.0 million of short-term FHLBB advances to fund loan growth and seasonal deposit runoff.
- Trends in non-accrual loans, troubled debt restructurings, foreclosures and the allowance relative to credit losses.
- The effect of slower mortgage activity on loan-sale income and other non-interest revenue.
- The financial impact and timing of the two branch closures, including any restructuring charges or operating savings.
- Future dividend capacity under Basel III capital requirements and the company’s policy of paying $0.16 per common share quarterly.