Community Bancorp. — 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 quarter and six months ended June 30, 2018, with comparisons to June 30, 2017 and December 31, 2017. Results are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net interest income | $6.09 million, up 6.9% | $12.00 million, up 7.9% |
| Net interest income after provision | $5.91 million, up 6.6% | $11.64 million, up 7.6% |
| Non-interest income | $1.69 million, up 22.3% | $3.09 million, up 12.1% |
| Non-interest expense | $5.10 million, up 4.3% | $9.84 million, up 2.2% |
| Net income | $2.00 million, up 33.6% | $3.99 million, up 36.8% |
| Earnings per common share | $0.39 versus $0.29 | $0.77 versus $0.57 |
| Net interest margin | 4.05% versus 3.96% | 4.00% versus 3.90% |
| Return on average assets | 1.23% versus 0.93% | 1.22% versus 0.92% |
| Return on average equity | 13.66% versus 10.80% | 13.73% versus 10.64% |
- Total assets were $655.0 million at June 30, 2018, down 1.8% from year-end but up 1.1% year over year.
- Gross loans were $521.1 million and net loans were $516.0 million, each approximately 3.7% above both comparison periods. Commercial and commercial real estate loans represented 58.7% of the portfolio.
- Total deposits were $526.9 million, down 6.0% from December 31, 2017 and 1.2% year over year. The decline was primarily seasonal municipal deposit runoff and lower time deposits.
- Cash and cash equivalents were $28.8 million, compared with $42.7 million at December 31, 2017 and $37.0 million at June 30, 2017.
- The allowance for loan losses was $5.4 million, or approximately 1.04% of gross loans. Six-month net charge-offs were $385,076, compared with $204,067 in 2017; the provision was $360,000 versus $300,000.
- Non-performing assets were $5.15 million, including $4.27 million of non-accrual loans and $364,235 of other real estate owned, versus $4.63 million at December 31, 2017 and $3.45 million at June 30, 2017.
- Total shareholders’ equity was $59.5 million and book value per common share was $11.18, compared with $10.84 at December 31, 2017.
- Borrowed funds were $22.6 million, including $21.0 million of overnight FHLBB borrowings, versus $3.6 million at year-end. Repurchase agreements were $30.3 million and junior subordinated debentures were $12.9 million.
- Six-month operating cash flow was $5.0 million, compared with $3.3 million in 2017. Investing activities used $3.9 million and financing activities used $14.9 million, resulting in a $13.8 million decrease in cash and cash equivalents.
- Available FHLBB borrowing capacity was $106.0 million. Additional available capacity included a $46.3 million Federal Reserve Bank collateralized line and $12.5 million of unsecured correspondent-bank lines.
- The Bank was considered well capitalized. At June 30, 2018, the Bank’s common equity tier 1, tier 1, total capital, and tier 1 leverage ratios were 12.68%, 12.68%, 13.81%, and 9.45%, respectively.
Material changes versus prior comparable periods
- Profitability improved substantially as higher loan balances, higher loan yields, a favorable commercial-loan mix, and rising short-term rates increased interest income. Deposit and borrowing costs also increased, but net interest spread and margin expanded.
- Non-interest income benefited from higher service fees, increased CFSG Partners income, and a $263,118 gain on the sale of an office condominium to an affiliate. These benefits were partly offset by realized losses on sales of available-for-sale securities.
- The 2017 Tax Act reduced the corporate tax rate from 34% to 21%, lowering income tax expense despite higher pre-tax income.
- Non-interest expense increased, particularly salaries, employee benefits, information-technology-related service contracts, consulting, and collection costs. Core deposit intangible amortization ceased because the intangible was fully amortized in 2017.
- Management redeemed five Series A preferred shares for $500,000 on March 31, 2018, representing 20% of the then-outstanding preferred shares.
- The quarterly common dividend increased to $0.19 per share from $0.17. A $0.19 dividend was declared June 14, 2018, payable August 1, 2018.
- Held-to-maturity securities declined 34.0% from year-end because municipal tax-anticipation investments matured at the June 30 Vermont school-district fiscal year-end. Management stated that comparable replacement funding was made on July 1, 2018.
- Management adopted revenue and financial-instrument accounting updates during 2018 without a material impact. The company is evaluating the future CECL standard, which may materially increase the allowance for credit losses and negatively affect regulatory capital at adoption.
Outlook, commentary, risks, contingencies and unusual items
- Management describes the balance sheet as asset sensitive: a 200-basis-point increase in rates was modeled to increase 12-month net interest income by 2.1%, while a 100-basis-point decrease was modeled to reduce it by 2.4%. These are sensitivity estimates, not forecasts.
- Management expects rising rates to support variable-rate loan yields, but continued deposit repricing and a relatively anchored long-term yield curve could pressure margins.
- Credit risk is increasing as the portfolio shifts toward commercial and commercial real estate lending. Non-accrual loans increased year over year, and non-performing assets rose 11.1% during the first six months of 2018.
- The loan portfolio is geographically concentrated in northern New England and includes meaningful commercial real estate exposure. Risks include economic deterioration, weaker property cash flows, vacancies, construction delays, collateral declines, and tourism-related conditions.
- Other risks include deposit runoff, reliance on short-term or alternative funding, interest-rate changes, regulatory and tax changes, cybersecurity incidents, technology costs, accounting changes, fraud, and changes in consumer and business borrowing behavior.
- The company reported routine litigation but does not expect it to be material. It had one contractual commitment to lend under an SBA-guaranteed line to a borrower whose relationship had previously been restructured.
- All securities with unrealized losses were attributed principally to interest-rate changes, and management identified no other-than-temporary impairment as of June 30, 2018.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether seasonal municipal deposit and securities runoff reversed after July 1, 2018 as management expected.
- The sustainability of loan growth and the effect of rising funding costs on net interest margin.
- Trends in non-accrual loans, non-performing assets, commercial real estate exposure, charge-offs, and the allowance under the forthcoming CECL methodology.
- Actual deposit stability and the extent to which overnight FHLBB borrowings or other wholesale funding remain necessary.
- The impact and implementation timing of CECL, including any effect on capital ratios and retained earnings.
- Whether the $263,118 affiliate property-sale gain and other unusual income items are non-recurring.
- Future dividend capacity after the preferred-stock redemption, common dividend increase, and applicable regulatory capital requirements.