Community Bancorp. — Form 10-Q Summary
Business context and reporting period
Community Bancorp. is the parent of Community National Bank, serving northern New England markets. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018, with comparisons to the same 2017 periods and December 31, 2017 balance-sheet data. The filing was signed November 8, 2018.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net interest income | $6.30 million, up 4.5% | $18.30 million, up 6.7% |
| Provision for loan losses | $210,000, up 40.0% | $570,000, up 26.7% |
| Non-interest income | $1.54 million, up 6.5% | $4.63 million, up 10.2% |
| Non-interest expense | $4.87 million, up 0.7% | $14.71 million, up 1.7% |
| Net income | $2.27 million, up 26.6% | $6.25 million, up 32.9% |
| Earnings per common share | $0.44 versus $0.35 | $1.20 versus $0.91 |
| Return on average assets | 1.38% versus 1.09% | 1.26% versus 0.98% |
| Return on average equity | 14.99% versus 12.53% | 14.16% versus 11.29% |
- Total assets were $694.5 million, up 4.1% from year-end 2017 and 5.0% year over year.
- Gross loans were $530.5 million and net loans were $525.2 million, up 5.5% from year-end and 4.9% year over year. Commercial and industrial loans and commercial real estate loans represented 59.1% of gross loans.
- Total deposits were $585.5 million, up 4.4% from year-end and 5.2% year over year. Growth included a significant increase in wholesale time deposits.
- Cash and cash equivalents were $40.4 million. Nine-month operating cash flow was $7.2 million, compared with $6.6 million in 2017. Investing activities used $31.7 million, primarily reflecting net loan growth, while financing activities provided $22.3 million. Ending cash declined $2.3 million from year-end but exceeded September 2017 by $10.7 million.
- Net interest margin was 3.99% for the first nine months, compared with 3.96% in 2017; third-quarter margin was 3.99%, compared with 4.07%. Net interest spread narrowed to 3.78% in the third quarter and 3.81% for the nine months.
- Borrowed funds were $1.55 million, down from $3.55 million at year-end and at September 30, 2017. Repurchase agreements were $30.7 million, and junior subordinated debentures were $12.9 million.
- The allowance for loan losses was $5.64 million, or 1.09% of average loans. Non-accruing loans were $4.35 million, compared with $3.10 million at year-end 2017 and $2.73 million at September 2017. Non-performing assets totaled $5.73 million, up 23.8% from year-end.
- Shareholders’ equity was $60.9 million, and book value per common share was $11.42 versus $10.84 at year-end. The company declared a quarterly common dividend of $0.19 per share.
- At September 30, the company reported common equity tier 1, total capital, and tier 1 leverage ratios of 12.78%, 13.93%, and 9.45%, respectively. The bank was described as well capitalized under Prompt Corrective Action requirements.
Material changes versus comparable periods
- Loan growth, particularly in commercial and commercial real estate lending, increased interest income and supported higher net interest income. Average loan yields rose to 5.11% in the third quarter and 5.02% for the nine months.
- Rising short-term rates also increased funding costs. Interest expense rose 53.3% in the third quarter and 32.8% for the nine months, with deposit interest expense up 46.4% and 34.2%, respectively.
- Profit growth benefited from the federal corporate tax-rate reduction under the 2017 Tax Act. Income-tax expense declined to $485,606 in the third quarter and $1.39 million for the nine months.
- Non-interest income benefited from higher service fees and CFSG Partners income. Nine-month results also included a $263,118 gain on sale of an office condominium to an affiliate.
- The company realized losses on available-for-sale securities of $9,741 in the third quarter and $19,977 year to date, compared with gains in 2017. Management stated that the securities were replaced with higher-yielding investments and expected the higher interest income to recover the losses.
- Non-interest expense included a September employee bonus and hourly wage increase, higher technology, audit, consulting, and collection costs. Core deposit intangible amortization ended after the intangible was fully amortized in 2017.
- Net charge-offs increased to $366,872 for the first nine months from $292,132 in 2017, while the provision increased to $570,000 from $450,000.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide formal earnings or revenue guidance. Management expects continued loan growth but notes that rising deposit and wholesale funding costs may pressure net interest income and margins.
- Interest-rate sensitivity modeling estimated a 1.6% decline in 12-month net interest income under a gradual 100-basis-point rate decrease and a 2.0% increase under a gradual 200-basis-point increase. Management cautioned that these scenarios are not forecasts.
- Management identified credit risk from commercial and commercial real estate concentration, geographic concentration, borrower performance, economic conditions, foreclosure activity, and potential increases in non-performing assets and charge-offs.
- The company is preparing for adoption of the CECL credit-loss model. Management expects adoption may materially increase the allowance for loan losses, reduce carrying values for certain held-to-maturity securities, and negatively affect regulatory capital ratios.
- Liquidity resources included $108.6 million of available FHLBB borrowing capacity, a $52.5 million Federal Reserve Bank credit line secured by eligible loans, $12.5 million of unsecured correspondent-bank lines, cash and securities, deposits, and loan-sale proceeds.
- The company issued $30 million of brokered certificates of deposit during the third quarter, with maturities in January 2019 and August 2020.
- There was one contractual commitment to lend under an SBA-guaranteed line to a borrower whose relationship had previously been restructured. Management does not expect routine litigation to materially affect financial condition or results.
- Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether commercial and commercial real estate loan growth continues without a disproportionate increase in non-accrual loans, charge-offs, and required reserves.
- The effect of rising deposit, brokered-CD, repurchase-agreement, and other funding costs on net interest margin.
- The final CECL implementation impact on the allowance for loan losses, retained earnings, and regulatory capital ratios.
- The sustainability of tax-related earnings benefits and unusual items, including the affiliate property-sale gain and securities-sale losses.
- The maturity and renewal risk associated with the $30 million of brokered CDs and the company’s reliance on wholesale funding.
- Changes in non-performing assets, TDRs, foreclosure balances, OREO, and government-guaranteed loan claims.