Community Bancorp. — Form 10-Q Summary
Business Context and Reporting Period
Community Bancorp. and its subsidiary, Community National Bank, filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company is a Vermont-based banking organization focused on commercial, commercial real estate, residential mortgage, consumer lending, deposits and related financial services. The company reported as a smaller reporting company.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2015 | Six Months Ended June 30, 2015 |
|---|---|---|
| Total interest income | $5.75 million | $11.62 million |
| Net interest income | $5.08 million | $10.22 million |
| Provision for loan losses | $150,000 | $300,000 |
| Net interest income after provision | $4.93 million | $9.92 million |
| Non-interest income | $1.30 million | $2.52 million |
| Non-interest expense | $4.78 million | $9.48 million |
| Net income | $1.08 million | $2.19 million |
| Earnings per common share | $0.21 | $0.43 |
- Second-quarter return on average assets was 0.74% and return on average equity was 8.60%; six-month figures were 0.76% and 8.84%, respectively.
- Tax-equivalent net interest margin was 3.90% in the second quarter and 3.96% for the first six months. Reported net interest margin in management’s discussion was 3.80% and 3.96%, respectively; investors should confirm the applicable presentation when comparing periods.
- At June 30, 2015, total assets were $576.5 million, net loans were $454.7 million, total deposits were $455.1 million, total liabilities were $526.5 million and shareholders’ equity was $50.0 million.
- The allowance for loan losses was $5.10 million, or approximately 1.11% of total loans. Six-month net charge-offs were $110,662, and the allowance covered 103.6% of non-accruing loans.
- Cash and cash equivalents were $19.5 million. Six-month operating cash flow was $2.5 million, investing cash flow was $5.3 million and financing cash flow was negative $13.3 million, producing a net decrease in cash of $5.5 million.
- Borrowed funds were $30.0 million, consisting of short-term Federal Home Loan Bank advances. The company also had $24.4 million of repurchase agreements and $12.9 million of junior subordinated debentures.
- The Bank was considered well capitalized. At June 30, 2015, the Bank’s common equity Tier 1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 12.03%, 12.03%, 13.26% and 8.82%, respectively.
Material Changes Versus Comparable Periods
- Second-quarter net income declined 16.1% from $1.28 million to $1.08 million; six-month net income declined 7.2% from $2.36 million to $2.19 million. EPS declined from $0.26 to $0.21 for the quarter and from $0.47 to $0.43 year to date.
- Net interest income increased 2.9% in the quarter and 4.7% for the six months, supported by loan growth, a higher-yielding investment mix and lower deposit funding costs.
- Interest expense decreased 13.6% in the quarter and 10.9% year to date, primarily because customers shifted from higher-cost time deposits to lower-cost demand and savings products.
- Non-interest income decreased 2.5% in the quarter and 5.0% year to date. Income from sold loans declined despite higher mortgage originations, as mortgage sale margins narrowed.
- Non-interest expense increased 9.2% in the quarter and 5.6% year to date. Increases included employee benefits, computer outsourcing, collection expenses, OREO costs and debit-card replacement costs.
- Net loans increased 2.6% from December 31, 2014 and 2.0% year over year, driven principally by commercial lending. Commercial and commercial real estate loans represented 53.6% of total loans at June 30, 2015, compared with 50.8% a year earlier.
- Total deposits decreased 7.7% from year-end, primarily because of seasonal municipal deposit runoff, but were essentially unchanged year over year. Short-term borrowings increased to $30.0 million from zero at year-end.
- Non-performing assets increased to $6.66 million from $6.52 million at December 31, 2014, while non-accrual loans increased to $4.92 million from $4.15 million.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal earnings guidance. Management expects the low-interest-rate environment to continue pressuring asset yields and margins, although funding-cost reductions and commercial loan growth are expected to provide support.
- Interest-rate sensitivity modeling estimated that a gradual 100-basis-point decline in rates would reduce 12-month net interest income by 0.60%, while a 200-basis-point increase would increase it by 5.70%. Management stated that these estimates were within policy limits and were not forecasts.
- The company plans to continue growing commercial and commercial real estate lending while maintaining a significant residential portfolio. Management acknowledged that this strategy carries greater credit risk and has increased the unallocated loan-loss reserve to address growth in relatively new, unseasoned commercial exposures.
- The allowance methodology was modified during the quarter to eliminate use of the 1999–2001 loss period and instead use the highest annual loss rates from the most recent one- to five-year periods. The change reduced required reserves by $529,234, partially offset by higher qualitative factors for commercial and commercial real estate lending.
- The company recorded a $45,320 OREO write-down in the second quarter. OREO totaled $1.12 million at June 30, 2015.
- Two branch offices were scheduled to close on July 17, 2015 and be consolidated into two other Caledonia County branches. Related severance and other closure costs affected second-quarter expenses.
- The company declared a quarterly common dividend of $0.16 per share, payable August 1, 2015. A $791,903 dividend payable was accrued at June 30, 2015.
- Off-balance-sheet commitments included $25.4 million of unused home-equity lines, $69.5 million of other commitments to extend credit, $18.5 million of construction lines, $2.0 million of standby and commercial letters of credit, and a $1.0 million net MPF credit-enhancement obligation.
- Management stated that routine litigation was not expected to have a material effect. Disclosure controls were assessed as effective, and no material changes in internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Reconcile the reported net interest margin and tax-equivalent margin presentations before making peer or period comparisons.
- Assess whether continued commercial loan growth and the shift away from residential lending justify the higher concentration and associated credit risk.
- Monitor non-accrual loans, troubled debt restructurings, criticized loans and the adequacy of the $5.10 million allowance after the reserve methodology change.
- Evaluate liquidity implications of seasonal municipal deposit runoff and the increased reliance on $30.0 million of short-term borrowings.
- Determine whether higher operating costs, branch closures, debit-card replacement expenses and OREO write-downs are recurring or non-recurring.
- Review the sustainability of mortgage banking income, particularly the effect of lower secondary-market margins despite increased mortgage originations.