Community Bancorp. — Q1 2018 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. The unaudited filing covers the three months ended March 31, 2018, with comparative results for the three months ended March 31, 2017 and balance-sheet comparisons with December 31, 2017.
Financial condition and key metrics
| Metric | Q1 2018 / Mar. 31, 2018 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $666.0 million | $642.9 million at Mar. 31, 2017; $667.0 million at Dec. 31, 2017 |
| Gross loans | $504.0 million | $485.7 million at Mar. 31, 2017; $502.9 million at Dec. 31, 2017 |
| Net loans | $499.0 million | $480.8 million at Mar. 31, 2017 |
| Total deposits | $558.2 million | $532.4 million at Mar. 31, 2017; $560.6 million at Dec. 31, 2017 |
| Cash and cash equivalents | $41.5 million | $32.8 million at Mar. 31, 2017; $42.7 million at Dec. 31, 2017 |
| Total debt-like funding | $46.7 million, including borrowings, repurchase agreements, leases and subordinated debentures | $52.6 million at Mar. 31, 2017 |
| Shareholders’ equity | $58.3 million; book value per common share $10.99 | $55.2 million and $10.39 at Mar. 31, 2017 |
| Net income | $2.0 million | $1.4 million in Q1 2017 |
| Earnings per common share | $0.38 | $0.27 in Q1 2017 |
| Net interest income | $5.9 million | $5.4 million in Q1 2017 |
| Net interest margin | 3.94% | 3.85% in Q1 2017 |
| Return on average assets | 1.22% | 0.90% in Q1 2017 |
| Return on average equity | 13.80% | 10.47% in Q1 2017 |
- Total interest income rose 10.1% to $6.8 million, while interest expense increased 18.3% to $0.9 million.
- Net interest income after the loan-loss provision increased 8.7% to $5.7 million.
- Non-interest income increased 1.9% to $1.4 million. Non-interest expense was essentially unchanged at $4.7 million.
- Income before taxes increased 25.2% to $2.4 million. The effective tax burden declined following the reduction of the corporate tax rate from 34% to 21% under the 2017 Tax Act.
- Net cash provided by operating activities was $2.4 million. Investing activities used $1.6 million and financing activities used $2.0 million, resulting in a $1.2 million decrease in cash and cash equivalents during the quarter.
- The allowance for loan losses was $5.3 million, or 1.054% of average loans. Net charge-offs were $276,879, compared with $170,005 in Q1 2017, and the provision was $180,000.
- Non-accrual loans were $3.6 million, compared with $2.5 million at March 31, 2017. Total non-performing assets were $4.5 million, down from $4.6 million at December 31, 2017 but up from $3.7 million a year earlier.
- Regulatory capital remained strong. At March 31, 2018, the Bank reported common equity tier 1 capital of 12.81%, total capital of 13.96%, and tier 1 leverage capital of 9.26%; management stated that the Bank was well capitalized.
Material changes versus comparable periods
- Net income increased 40.2%, driven primarily by loan growth, higher loan yields, improved net interest margin, lower income taxes, and stable operating expenses.
- Average loans increased 4.4% year over year, while the average loan yield rose to 4.92% from 4.69%. Commercial and commercial real estate loans represented 57.0% of total loans at quarter-end, reflecting the Company’s continued shift toward commercial lending.
- Deposits increased 4.9% year over year but declined 0.4% from year-end. Money market and savings balances grew during the quarter, while demand and time deposits declined.
- Borrowed funds declined $8.0 million year over year to $3.6 million. Repurchase agreements increased to $30.2 million from $27.7 million a year earlier.
- Accumulated other comprehensive loss widened to $0.7 million, primarily because of higher unrealized losses on available-for-sale securities as interest rates increased. Management did not identify any other-than-temporary impairments.
- The Company partially redeemed Series A non-cumulative perpetual preferred stock for $500,000 on March 31, 2018. It declared a $0.17-per-share common dividend payable May 1, 2018.
- The Company adopted new revenue and financial-instrument accounting guidance during 2018; management reported no material effect on the consolidated financial statements.
Guidance, outlook, commentary, risks and unusual items
- Management emphasized improving balance-sheet profitability while prudently managing operating expenses, credit risk, liquidity and capital in a rising-rate environment. No formal earnings or revenue guidance was provided.
- The balance sheet is asset sensitive. Management estimated that a gradual 200-basis-point increase in rates could increase 12-month net interest income by 3.7%, while a 100-basis-point decline could reduce it by 3.0%; these scenarios are not forecasts.
- Rising deposit costs, competition for deposits, changes in the yield curve, loan prepayments and the geographic concentration of lending could pressure future margins and liquidity.
- Credit risks include the growing concentration in commercial and commercial real estate lending, higher non-accrual loans, charge-offs, construction and development exposure, and economic weakness in the Northern New England market.
- The Company expects the adoption of the current expected credit loss model, or CECL, to potentially increase the allowance for loan losses and negatively affect regulatory capital ratios, although the ultimate impact was not yet determined.
- Off-balance-sheet commitments included approximately $150.8 million of unused credit commitments, standby and commercial letters of credit, credit-card recourse and MPF credit-enhancement obligations. Many commitments are expected to expire undrawn.
- Available liquidity included $108.2 million of borrowing capacity through the Federal Home Loan Bank, a $44.9 million Federal Reserve credit line, and $12.5 million of unsecured correspondent-bank lines, none of which had outstanding advances at quarter-end except the $3.6 million of FHLB long-term advances.
- Management stated that ordinary-course litigation is not expected to be material and that disclosure controls were effective as of March 31, 2018.
Most 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 or required provisions.
- Whether deposit costs accelerate as interest rates rise and reduce the reported net interest margin benefit.
- The eventual CECL adoption impact on the allowance for loan losses, retained earnings and regulatory capital.
- The sustainability of the 40.2% year-over-year earnings increase, including the benefit from the lower tax rate and the absence of prior-year core deposit intangible amortization.
- Changes in liquidity usage, repurchase agreements, brokered deposits and available borrowing capacity.
- Whether unrealized securities losses remain attributable to interest-rate movements rather than credit deterioration.