COMMUNITY BANCORP quarterly report, Q2 FY2019

Community Bancorp. 10-Q Summary

Business Context and Reporting Period

Community Bancorp. is the parent of Community National Bank, operating primarily in northern New England. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019, with comparisons to June 30, 2018 and December 31, 2018.

Key Financial Metrics

Metric	Q2 2019	Six months 2019	Comparable period
Net income	$2.419 million	$4.191 million	$2.003 million and $3.985 million, respectively
Earnings per common share	$0.46	$0.80	$0.39 and $0.77, respectively
Net interest income	$6.715 million	$12.875 million	$6.090 million and $11.998 million, respectively
Net interest income after provision	$6.574 million	$12.521 million	$5.910 million and $11.638 million, respectively
Non-interest income	$1.434 million	$2.753 million	$1.690 million and $3.086 million, respectively
Non-interest expense	$5.079 million	$10.235 million	$5.104 million and $9.835 million, respectively
Provision for loan losses	$141,666	$354,169	$180,000 and $360,000, respectively
Net cash provided by operating activities	$4.846 million	$4.956 million

Second-quarter net income increased 20.8% year over year; six-month net income increased 5.2%. The annualized return on average assets was 1.39% for the quarter and 1.21% for the six months. Return on average equity was 15.13% and 13.28%, respectively. Net interest margin was 4.19% for the quarter and 4.02% for the six months.

Total assets were $679.5 million at June 30, 2019, down 5.7% from December 31, 2018.
Net loans were $562.0 million, down 2.0% from year-end; gross loans were $567.4 million.
Available-for-sale securities were $47.6 million, up 20.8% from year-end.
Total deposits were $556.1 million, down 8.7%, primarily due to seasonal municipal deposit runoff.
Cash and cash equivalents were $29.5 million, down from $67.9 million at year-end.
Total shareholders’ equity was $65.7 million, compared with $62.6 million at year-end; book value per common share increased to $12.32 from $11.72.
Debt and funding included $7.65 million of borrowed funds, $32.1 million of repurchase agreements, and $12.9 million of junior subordinated debentures.
Six-month net cash used in financing activities was $46.9 million, driven mainly by deposit reductions. Ending cash declined $38.4 million to $29.5 million.

Material Changes Versus Prior Periods

Interest income rose 17.6% in the second quarter and 15.6% for the first six months, supported by higher loan yields, increased earning assets, rising short-term rates, and a $440,656 prepayment penalty on an early-paid commercial real estate construction loan.
Interest expense increased 64.8% in the quarter and 70.7% year to date, primarily from higher deposit pricing and increased costs of repurchase agreements and subordinated debt. The six-month net interest spread declined to 3.77% from 3.84%, while the quarterly spread increased to 3.93% from 3.89%.
Non-interest income declined 15.2% in the quarter and 10.8% year to date. Lower loan-sale income and the absence of a 2018 property-sale gain were only partly offset by higher service fees, CFSG Partners income, and VISA card commissions.
Non-interest expense decreased 0.5% in the quarter but increased 4.1% year to date, primarily due to higher employee benefits, salaries, information-technology costs, and a $95,008 write-down on two OREO properties.
Management voluntarily reclassified municipal debt instruments from held-to-maturity investments to loans effective January 1, 2019, with prior periods restated. Management states the change was not material to consolidated results.
Non-performing assets increased 30.2% from year-end to $6.76 million. Non-accrual loans increased to $5.83 million from $4.26 million, while OREO declined to $92,084 from $201,386.
The allowance for loan losses increased to $5.72 million from $5.60 million. Six-month net charge-offs declined to $232,957 from $385,076.
Commercial and industrial plus commercial real estate loans represented 57.1% of total loans at June 30, 2019, up from 54.6% at year-end, reflecting the strategic shift toward commercial lending.

Guidance, Outlook, Risks, and Unusual Items

No formal earnings or revenue guidance is provided. Management expects commercial loan growth opportunities in the greater White River Junction area and opened a loan production office in Lebanon, New Hampshire, on May 1, 2019.
Management describes the balance sheet as asset sensitive. Its interest-rate simulation estimated a 0.7% decline in twelve-month net interest income under a gradual 100-basis-point rate decline and a 0.3% increase under a 200-basis-point increase; these scenarios are not forecasts.
Liquidity is supported by deposits, loan and securities cash flows, brokered and reciprocal deposits, repurchase agreements, and borrowing capacity. Available FHLBB borrowing capacity was $102.3 million, and additional correspondent-bank capacity was $21.5 million at June 30, 2019.
The Bank was considered well capitalized. At June 30, 2019, the Bank reported common equity tier 1, total risk-based, and tier 1 leverage ratios of 13.30%, 14.46%, and 9.64%, respectively.
CECL adoption may materially increase the allowance for loan losses and could reduce regulatory capital ratios. The company was evaluating implementation and noted a potential extended effective date for smaller reporting companies.
The $12.887 million junior subordinated debentures bear interest at three-month LIBOR plus 2.85% and mature in 2037. LIBOR’s planned phaseout could affect future interest costs; the trustee had not yet selected a replacement benchmark.
Key risks include deposit outflows, rising funding costs, commercial real estate and commercial-loan concentration, higher non-performing assets, economic deterioration, interest-rate changes, cybersecurity, regulatory changes, and accounting changes.
Management expects routine litigation to be immaterial. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.

Important Facts for Investors to Verify

Whether the substantial decline in deposits and cash is seasonal or indicates a persistent funding trend.
Whether non-accrual loans and non-performing assets continue to increase, particularly in residential real estate and commercial real estate.
The sustainability of net interest income growth after the one-time commercial-loan prepayment penalty and amid higher deposit costs.
The eventual impact and timing of CECL adoption on the allowance, earnings, and regulatory capital.
The replacement benchmark and potential interest-cost impact for the LIBOR-linked subordinated debentures.
Whether the commercial lending expansion and new Lebanon office generate sufficient growth without materially increasing credit and concentration risk.
The composition and availability of liquidity sources, including brokered deposits, repurchase agreements, and unused borrowing capacity.