Community Bancorp. — 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 quarter and nine months ended September 30, 2016, compared primarily with the corresponding 2015 periods and December 31, 2015 balance-sheet data.
Financial condition and key metrics
- Total assets: $605.8 million at September 30, 2016, up 1.6% from year-end 2015 and 2.9% from September 30, 2015.
- Loans: Gross loans were $470.2 million and net loans were $465.3 million, up 2.6% year to date and 3.2% year over year. Commercial and commercial real estate loans represented 55.3% of gross loans.
- Deposits: $503.8 million, up 1.7% year to date and 5.2% year over year. Growth included higher demand, savings and time deposits, partly offset by lower interest-bearing transaction and money-market balances.
- Cash and equivalents: $12.4 million at quarter-end, compared with $28.9 million at December 31, 2015 and $14.7 million at September 30, 2015.
- Shareholders’ equity: $53.8 million, compared with $51.4 million at year-end 2015 and $51.0 million a year earlier. Book value per common share was $10.18.
- Borrowings and debt: Federal funds purchased and other borrowed funds were $5.8 million, repurchase agreements were $25.8 million, and junior subordinated debentures were $12.9 million. Total borrowings declined from $10.0 million at year-end 2015 and $20.0 million a year earlier, although the company also had $0.55 million of long-term FHLBB advances.
- Liquidity: Available FHLBB borrowing capacity was approximately $67.4 million, and an additional $71.3 million was available through the Federal Reserve Bank lending program. The company had no outstanding advances under the latter facility or its correspondent-bank credit lines.
- Third-quarter earnings: Net income was $1.516 million, or $0.30 per common share, versus $1.440 million, or $0.29 per share, in the third quarter of 2015.
- Nine-month earnings: Net income was $3.981 million, or $0.78 per common share, versus $3.627 million, or $0.72 per share, in the prior-year period.
- Net interest income: $5.562 million for the third quarter and $16.004 million for the first nine months, increases of 4.8% and 3.1%, respectively, before considering the provision for loan losses. Net interest income after provision increased 3.4% for the quarter and 3.0% year to date.
- Net interest margin: 4.04% for the third quarter versus 4.00% in 2015; 3.98% for the first nine months, unchanged from 2015. The nine-month net interest spread was 3.86% versus 3.87%.
- Non-interest income and expense: Non-interest income increased 14.1% for the quarter and 5.8% year to date. Non-interest expense increased 5.7% and 1.0%, respectively.
- Profitability: Annualized return on average assets was 0.99% for the quarter and 0.89% for the first nine months, versus 0.97% and 0.83% in the prior-year periods. Annualized return on average equity was 11.42% and 10.08%, versus 11.31% and 9.68%.
- Cash flow: Operating activities provided $6.4 million during the first nine months. Investing activities used $28.9 million, principally reflecting securities purchases and $12.7 million of net loan growth. Financing activities provided $6.0 million. Cash and equivalents therefore decreased $16.5 million during the period.
- Credit quality: Non-performing assets declined to $4.2 million from $6.4 million at year-end 2015 and $7.1 million a year earlier. Non-accrual loans were $2.6 million. The allowance for loan losses was $5.2 million, or 1.11% of average loans for the nine-month period.
- Capital: At September 30, 2016, the bank was considered well capitalized. Bank common equity tier 1, tier 1, total capital and tier 1 leverage ratios were 12.31%, 12.31%, 13.50% and 9.03%, respectively.
Material changes versus comparable periods
- Management continued shifting the balance sheet toward higher-yielding commercial lending while maintaining a relatively stable residential portfolio. Commercial real estate loans increased to $190.2 million from $171.6 million a year earlier.
- Held-to-maturity municipal securities increased 31.1% from year-end 2015 and 19.3% year over year, partly due to a $6.3 million participation in a local hospital bond financing.
- Interest income benefited from loan growth and asset-mix changes, while interest expense rose in the third quarter because of higher short-term rates and increased short-term funding.
- The third-quarter provision for loan losses doubled to $150,000 from $75,000; the nine-month provision increased 6.7% to $400,000. Net charge-offs declined to $231,913 from $264,887 in the prior-year period.
- Service fee income rose partly because of a courtesy overdraft program introduced in the first quarter of 2016. Income from sold loans declined modestly, while commercial loan documentation fees increased.
- Non-interest expense reflected higher salaries, employee benefits, technology and compliance costs. Year-to-date expenses benefited from the absence of approximately $100,000 of 2015 chip-card issuance costs.
- The company declared a quarterly common dividend of $0.16 per share, payable November 1, 2016. Nine-month common dividends declared were $0.48 per share.
Outlook, commentary, risks and unusual items
- Management expects continued pressure from historically low interest rates and a relatively flat yield curve, although commercial-loan growth, lower-cost non-maturity deposits and selected higher-yielding investments have supported margins.
- The company planned to open a loan production office in Chittenden County during the fourth quarter of 2016, where management identified stronger economic activity and lending opportunities.
- Management’s interest-rate modeling estimated that a gradual 100-basis-point decline in rates would reduce 12-month net interest income by 1.40%, while a 200-basis-point increase would increase it by 4.50%. These scenarios are not forecasts.
- Key risks include deterioration in local or national economic conditions, commercial real estate concentration, changing interest rates, competitive and regulatory pressures, higher non-performing assets or charge-offs, reserve-estimation changes, and changes in capital requirements.
- A related-party commercial lending relationship went into default during the third quarter. A director purchased the commercial line of credit at par plus unpaid interest. A related real-estate-secured loan had principal outstanding of $2.56 million plus $7,121 of accrued interest; management believed collateral value exceeded the indebtedness and expected liquidation within two years under a forbearance agreement.
- Off-balance-sheet commitments included approximately $26.7 million of unused home-equity lines, $27.9 million of commercial real estate and other construction commitments, $31.9 million of commercial and industrial commitments, and $44.5 million of other commitments to extend credit.
- The company stated that ordinary-course litigation was not expected to be material. It was evaluating the future effects of newly issued accounting standards covering financial instruments, leases and expected credit losses.
Important facts for investors to verify
- Whether continued commercial-loan growth increases concentration and credit risk faster than the allowance for loan losses.
- Whether the decline in cash balances and increased use of CDARS deposits, repurchase agreements and other funding remain consistent with liquidity needs.
- The performance and collateral liquidation outcome of the related-party real estate loan.
- The effect of future interest-rate changes on net interest margin, funding costs and deposit pricing.
- Whether the planned Chittenden County loan production office generates sufficient incremental loan volume and fee income.
- The eventual effect of the expected-credit-loss accounting standard on reserves and capital when adopted.
- The sustainability of earnings growth given higher personnel, benefits, technology and compliance expenses and the presence of unusual income adjustments.