Community Bancorp. — Form 10-Q Summary
Business context and reporting period
Community Bancorp. is the parent of Community National Bank, serving northern and central Vermont markets. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017, compared primarily with the corresponding 2016 periods and December 31, 2016. The company is a smaller reporting company.
Financial condition and performance
| Metric | Q2 2017 | Q2 2016 | Change |
|---|
| Total interest income | $6.445 million | $5.963 million | +8.1% |
| Net interest income | $5.695 million | $5.286 million | +7.7% |
| Net income | $1.500 million | $1.295 million | +15.8% |
| Earnings per common share | $0.29 | $0.25 | +16.0% |
| Return on average assets | 0.93% | 0.87% | +6 basis points |
| Return on average equity | 10.80% | 9.87% | +93 basis points |
| Net interest margin | 3.96% | 3.99% | -3 basis points |
| Metric | Six months ended June 30, 2017 | Six months ended June 30, 2016 | Change |
|---|
| Total interest income | $12.601 million | $11.782 million | +7.0% |
| Net interest income | $11.117 million | $10.441 million | +6.5% |
| Net income | $2.914 million | $2.465 million | +18.2% |
| Earnings per common share | $0.57 | $0.48 | +18.8% |
| Provision for loan losses | $300,000 | $250,000 | +20.0% |
| Net interest margin | 3.90% | 3.96% | -6 basis points |
| Return on average assets | 0.92% | 0.84% | +8 basis points |
| Return on average equity | 10.64% | 9.46% | +118 basis points |
- Total assets were $648.2 million at June 30, 2017, up 1.7% from year-end 2016 and 8.7% year over year.
- Gross loans were $502.8 million and net loans were $497.7 million, up 3.2% from year-end and 6.6% year over year. Commercial and commercial real estate loans represented 57.5% of gross loans.
- Total deposits were $533.3 million, up 5.7% from year-end and 13.7% year over year. Growth included savings accounts and wholesale or brokered time deposits.
- Cash and cash equivalents were $37.0 million. Six-month operating cash flow was $3.3 million, compared with $4.1 million in 2016. Investing activities used $3.6 million, while financing activities provided $7.7 million. Ending cash increased $7.4 million to $37.0 million.
- Borrowed funds were $13.6 million, repurchase agreements were $28.9 million, and junior subordinated debentures were $12.9 million.
- The allowance for loan losses was $5.4 million, or approximately 1.07% of gross loans. Non-accrual loans were $2.7 million, and total non-performing assets were approximately $3.5 million.
- The Bank remained well capitalized. At June 30, 2017, the Bank reported common equity Tier 1 capital of 12.13%, Tier 1 capital of 12.13%, total capital of 13.29%, and Tier 1 leverage capital of 8.93%.
- Book value per common share was $10.54, compared with $10.27 at December 31, 2016 and $10.04 at June 30, 2016.
Material changes versus comparable periods
- Earnings growth was driven primarily by loan growth, a larger commercial loan mix, higher short-term rates, and increased service-fee income following implementation of a courtesy overdraft program.
- Net interest margin declined despite higher net interest income. Management cited the flat yield curve, higher funding costs, competitive pricing, and growth in larger, lower-priced commercial loans.
- Non-interest income increased 4.8% in the quarter and 7.6% year to date, led by service fees. Income from sold loans declined 20.4% in the quarter and 17.3% year to date as higher market rates reduced refinancing activity and secondary-market mortgage sales.
- Non-interest expense increased 4.7% in the quarter and 2.8% year to date, reflecting occupancy, technology, marketing, consulting, and electronic banking investments.
- Held-to-maturity securities declined 27.0% from year-end because municipal tax-anticipation loans matured on June 30. Management stated that comparable fiscal-year 2018 funding occurred on July 1, 2017.
- During the second quarter, the company changed its allowance methodology and implemented new software. The methodology changes reduced required reserves by approximately $247,000, largely offsetting increases related to loan growth and higher delinquency and criticized-loan factors.
- The quarterly common dividend increased to $0.17 per share from $0.16 in 2016. A $862,376 dividend payable August 1, 2017 was accrued at June 30.
Guidance, outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management expects the recent Federal Reserve rate increase to benefit net interest income as variable-rate loans reprice, but noted that long-term rates and deposit pricing will remain important to margins.
- The company intends to continue shifting assets toward commercial and commercial real estate lending, including through its new Chittenden County loan production office. This strategy may improve yields but increases commercial credit risk and exposure to construction, real estate, economic, vacancy, collateral, and industry conditions.
- Management’s interest-rate simulation estimated that a gradual 100-basis-point rate decline would reduce one-year net interest income by 2.7%, while a 200-basis-point increase would increase it by 3.5%. These are scenarios, not forecasts.
- Liquidity sources include deposits, loan and securities cash flows, loan sales, FHLBB advances, repurchase agreements, Federal Reserve borrowing capacity, and correspondent-bank lines. FHLBB borrowing capacity was $85.0 million at June 30, 2017, with additional available Federal Reserve and correspondent-bank lines.
- Off-balance-sheet commitments included approximately $148.4 million of unused credit commitments, $1.9 million of standby and commercial letters of credit, $596,000 of MPF credit-enhancement obligations, and $269,000 of credit-card-sale recourse.
- The future CECL accounting standard is expected to require recognition of lifetime expected credit losses. Management expects adoption could increase the allowance and negatively affect regulatory capital ratios; the filing does not provide a quantified impact.
- Other risks include deposit concentration and reliance on brokered or purchased deposits, interest-rate changes, local economic conditions, geographic concentration in Vermont, regulatory and tax changes, fraud, technology risks, and potential changes in non-performing assets and charge-offs.
- Legal proceedings are described as incidental to the normal course of business and are not expected to be material. The company reported effective disclosure controls and no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether commercial loan growth and the new Chittenden County office generate targeted returns without materially increasing delinquencies, criticized assets, or charge-offs.
- Whether deposit growth can continue without greater reliance on higher-cost brokered or wholesale funding.
- The sustainability of the 3.90% year-to-date net interest margin as interest rates and funding costs change.
- The effect of the allowance methodology changes and the eventual CECL adoption on reserves, earnings, and regulatory capital.
- Liquidity availability and collateral requirements under FHLBB, Federal Reserve, correspondent-bank, and repurchase-agreement facilities.
- Future mortgage origination and loan-sale volumes, which declined from 2016 levels.
- The company’s ability to maintain well-capitalized status while funding growth and paying dividends.
