Community Bancorp. 2019 Q3 Form 10-Q Summary
Business context and reporting period
Community Bancorp. is a Vermont bank holding company whose wholly owned subsidiary is Community National Bank. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019, with comparisons to the corresponding 2018 periods and to December 31, 2018.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net income | $2.262 million | $2.270 million | $6.453 million | $6.255 million |
| Earnings per common share | $0.43 | $0.44 | $1.23 | $1.20 |
| Net interest income | $6.397 million | $6.297 million | $19.273 million | $18.295 million |
| Provision for loan losses | $0.412 million | $0.210 million | $0.767 million | $0.570 million |
| Non-interest income | $1.597 million | $1.543 million | $4.350 million | $4.629 million |
| Non-interest expense | $4.864 million | $4.874 million | $15.099 million | $14.709 million |
| Net interest margin | 3.91% | 3.99% | 3.98% | 3.99% |
| Return on average assets | 1.28% | 1.33% | 1.23% | 1.26% |
| Return on average equity | 13.99% | 14.99% | 13.36% | 14.16% |
At September 30, 2019, total assets were $729.2 million, up 1.2% from December 31, 2018. Gross loans were $604.1 million and net loans were $598.6 million, increases of approximately 4.4% from year-end. Total deposits were $606.4 million, down 0.4%. Shareholders’ equity was $67.3 million, compared with $62.6 million at year-end, and book value per common share increased to $12.60 from $11.72.
Cash and cash equivalents were $46.6 million, compared with $67.9 million at December 31, 2018. Nine-month operating cash flow was $7.0 million, while investing activities used $28.4 million, principally reflecting $26.3 million of net loan growth. Financing activities provided $45 thousand, resulting in a $21.3 million decrease in cash and cash equivalents.
Outstanding funding included $1.55 million of FHLBB advances, $35.8 million of repurchase agreements and $12.9 million of junior subordinated debentures. Available borrowing capacity included approximately $101.7 million through the FHLBB, $55.5 million through the Federal Reserve Bank of Boston borrowing arrangement, $21.5 million through correspondent-bank lines and $0.5 million through an unsecured FHLBB federal-funds line. The bank was well capitalized under applicable regulatory standards; its September 30, 2019 common equity tier 1, total risk-based capital and tier 1 leverage ratios were 13.15%, 14.30% and 9.78%, respectively.
Material changes versus comparable periods
- Third-quarter net income decreased 0.3%, while nine-month net income increased 3.2%.
- Net interest income increased 1.6% in the quarter and 5.3% year to date, supported by loan growth, higher loan yields and a shift toward commercial lending.
- Interest expense increased 23.7% in the quarter and 51.8% year to date, primarily because of higher deposit pricing and increased interest-bearing balances. Net interest margin declined eight basis points in the quarter and one basis point year to date.
- The provision for loan losses increased 96.4% in the quarter and 34.5% year to date. Management attributed the increase to loan growth and higher charge-off activity, including write-down adjustments on loans in workout.
- Non-interest income increased 3.5% in the quarter but decreased 6.0% year to date. The year-to-date decline reflected lower gains from loans sold and the absence of a $263,118 property-sale gain recognized in 2018.
- Non-interest expense was essentially flat in the quarter and increased 2.7% year to date. Salaries and employee benefits increased, partly offset by a $164,007 Small Bank FDIC assessment credit.
- Loan growth was concentrated in commercial and industrial loans, commercial real estate and municipal loans, while residential real estate loans declined. Management purchased approximately $7.5 million of loans through a new Bankers Healthcare Group program and acquired a $4.0 million CRE loan participation from Atlantic Community Bankers Bank.
- Non-performing assets increased 26.4% to $6.563 million from $5.194 million at year-end. Non-accrual loans increased to $5.339 million, and loans past due 90 days or more and still accruing increased to $1.151 million.
- Accumulated other comprehensive income improved to $315 thousand from a $648 thousand loss at year-end, primarily due to unrealized gains on available-for-sale securities.
Outlook, risks, contingencies and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects lower short-term rates to reduce some deposit-pricing pressure, but warns that the yield curve and changing funding costs could pressure future margins. Interest-rate modeling estimated that a gradual 100-basis-point decline could reduce 12-month net interest income by 1.2%, while a 200-basis-point increase could increase it by 1.6%; management states these are not forecasts.
- Credit risk is increasing as the portfolio shifts toward commercial and CRE lending. Commercial and CRE loans represented 56.7% of total loans at September 30, 2019, and the allowance for loan losses was $5.884 million, or approximately 1.0% of average loans.
- The company identified economic deterioration, interest-rate changes, deposit reductions, geographic concentration, regulatory changes, cybersecurity, technology costs and ineffective risk management as material risks.
- The company expects to adopt the current expected credit loss model after the small-reporting-company extension; it does not intend to early adopt. Management expects adoption could increase the allowance for loan losses and negatively affect regulatory capital.
- The company has $12.887 million of junior subordinated debentures with a floating rate tied to three-month LIBOR plus 2.85%, due in 2037. Management expects limited LIBOR exposure beyond these debentures, but the replacement benchmark had not been determined.
- One commercial property remained in other real estate owned at September 30, 2019 and was expected to be listed for sale after court approval. Management does not expect routine litigation to be material.
- The Board declared a quarterly common dividend of $0.19 per share, payable November 1, 2019. The company also redeemed $500 thousand of preferred stock during the first quarter.
- The company adopted the new lease accounting standard on January 1, 2019 without a material impact. Operating lease liabilities of $1.321 million and finance lease liabilities of $174 thousand were recognized at September 30, 2019.
Most important facts for investors to verify
- Whether the increase in non-performing assets, charge-offs and loan-loss provisions persists as commercial and CRE exposure grows.
- The sustainability of loan growth from the BHG purchased-loan program and the associated credit performance and concentration risks.
- The effect of lower interest rates, deposit repricing and the yield curve on net interest margin and earnings.
- The company’s final CECL implementation date, methodology, allowance impact and effect on capital ratios.
- The replacement benchmark and pricing consequences for the LIBOR-linked junior subordinated debentures.
- Deposit stability and the continued availability of FHLBB, Federal Reserve and correspondent-bank liquidity sources.
- The filing’s unaudited status and the effect of the municipal-loan reclassification on comparisons with prior periods.