Community Bancorp. 2017 Q1 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. This unaudited Form 10-Q covers the three months ended March 31, 2017, with comparisons to March 31, 2016 and balance-sheet comparisons to December 31, 2016. The company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total assets | $642.9 million | $593.4 million | Up 8.3% year over year |
| Net loans | $480.8 million | $450.3 million | Up 6.8% |
| Total deposits | $532.4 million | $488.9 million | Up 8.9% |
| Net interest income | $5.42 million | $5.15 million | Up 5.2% |
| Net income | $1.41 million | $1.17 million | Up 20.9% |
| Earnings per common share | $0.27 | $0.23 | Up $0.04 |
| Return on average assets | 0.90% | 0.80% | Improved |
| Return on average equity | 10.47% | 9.04% | Improved |
| Net interest margin | 3.85% | 3.94% | Down 9 basis points |
| Net interest spread | 3.73% | 3.83% | Down 10 basis points |
Interest income was $6.16 million, up 5.8%, while interest expense was $734,000, up 10.7%. Provision for loan losses increased to $150,000 from $100,000. Non-interest income increased 10.7% to $1.37 million, while non-interest expense increased 1.0% to $4.73 million. Income before taxes was $1.91 million and income tax expense was $497,000.
Cash and cash equivalents totaled $32.8 million at March 31, 2017, compared with $29.6 million at December 31, 2016. Operating activities provided $1.54 million of cash; investing activities used $2.74 million; and financing activities provided $4.38 million, producing a net increase in cash of $3.17 million.
The allowance for loan losses was $5.26 million, equal to approximately 1.08% of average loans and 212.7% of non-accruing loans. Net charge-offs were $170,000, compared with $2,000 in the prior-year quarter, primarily reflecting a $160,000 commercial real estate charge-off.
Total shareholders’ equity was $55.2 million, and book value per common share was $10.39. The company and bank exceeded applicable regulatory capital requirements; the bank’s common equity tier 1, tier 1, total capital and tier 1 leverage ratios were 12.34%, 12.34%, 13.51% and 8.97%, respectively. The bank was considered well capitalized.
Material Changes Versus Comparable Periods
- Loan growth was concentrated in commercial and commercial real estate lending. Those categories represented 56.5% of total loans at March 31, 2017, compared with 53.1% one year earlier.
- Commercial and commercial real estate loans grew year over year, while residential first-lien, residential junior-lien and consumer balances declined as percentages of the portfolio.
- Deposit growth funded much of the balance-sheet expansion. Savings and money market accounts increased $18.0 million during the quarter, while brokered certificates of deposit increased year over year.
- Borrowed funds declined to $11.55 million from $31.55 million at December 31, 2016, primarily because $20 million of short-term borrowings was repaid.
- Net interest income increased because of higher earning-asset volumes, particularly loans and tax-exempt securities, but the net interest margin declined because funding costs increased and fixed-rate loan yields remained competitive.
- Service fee income increased 21.1%, substantially reflecting the new courtesy overdraft protection program. Income from sold loans declined 14.0% because of lower secondary-market mortgage sales.
- The quarterly common dividend increased from $0.16 to $0.17 per share. The $0.17 dividend declared on March 8, 2017 was payable May 1, 2017.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management did not provide formal numerical earnings guidance. Management expects commercial loan demand to continue, particularly as construction projects begin drawing and commercial lines of credit move from seasonal lows. A loan production office opened in Chittenden County during the first quarter of 2017.
Management expects the recent Federal Reserve rate increase to benefit net interest income as variable-rate loans reprice in the second quarter, although the longer-term yield curve and rising deposit and borrowing costs remain important margin risks. Interest-rate modeling estimated a 3.1% decline in twelve-month net interest income under a 100-basis-point decline in rates and a 4.4% increase under a 200-basis-point increase. These are simulations, not forecasts.
- Liquidity sources included $65.2 million of available FHLBB borrowing capacity, $79.1 million of available Federal Reserve borrowing capacity secured by eligible loans, and $12.5 million of unsecured correspondent-bank lines. No advances were outstanding under the Federal Reserve or correspondent-bank lines.
- Off-balance-sheet commitments included $152.9 million of unused credit and construction commitments, $2.0 million of standby and commercial letters of credit, $748,000 of MPF credit-enhancement obligations, and $247,000 of credit-card portfolio recourse.
- Non-performing assets totaled $3.73 million, down from $3.99 million at year-end 2016 and $4.44 million one year earlier. Non-accrual loans were $2.47 million.
- OREO increased to $562,000 from $394,000 at year-end 2016. Two commercial properties were acquired through foreclosure during the quarter; one was sold in April 2017 and the other was scheduled for auction in May 2017.
- The company has geographic concentration in northern and central Vermont and faces risks from economic deterioration, credit losses, commercial real estate exposure, interest-rate changes, deposit reductions, competition, regulatory changes, tax policy, fraud and changes in regulatory capital requirements.
- Management is evaluating future accounting requirements, including the current expected credit loss standard, which may materially increase the allowance for loan losses and negatively affect regulatory capital upon adoption. The filing text does not provide a quantified impact.
- Management stated that ordinary-course litigation is not expected to be material. Disclosure controls were deemed effective, with no material changes in internal control over financial reporting.
Most Important Facts to Verify
- Whether commercial loan and commercial real estate growth remains credit-positive as the portfolio becomes more concentrated in those categories.
- Future net interest margin performance as variable-rate assets reprice and deposit, brokered funding and borrowing costs rise.
- Quarterly trends in net charge-offs, non-accrual loans, OREO and the allowance for loan losses.
- The timing and balance-sheet effect of construction-loan commitments and other unused credit facilities.
- The impact and implementation requirements of the current expected credit loss accounting standard on reserves and regulatory capital.
- Whether deposit growth, including brokered and wholesale time deposits and temporary construction escrow balances, remains stable.
- Actual regulatory capital ratios and dividend capacity after future loan growth, credit losses and accounting changes.