Community Bancorp. 10-Q Summary
Business context and reporting period
Community Bancorp. is the parent of Community National Bank, serving northern New England. This unaudited Form 10-Q covers the quarter ended March 31, 2019, with comparisons to March 31, 2018 and December 31, 2018.
Key financial metrics
| Metric | Q1 2019 | Comparable period | Change |
|---|---|---|---|
| Total assets | $706.7 million | $666.0 million at March 31, 2018 | +6.1% year over year |
| Total loans | $578.9 million | $551.9 million | +4.9% year over year |
| Net loans | $573.5 million | $546.9 million | +4.9% year over year |
| Total deposits | $590.9 million | $558.2 million | +5.9% year over year |
| Net interest income | $6.16 million | $5.91 million | +4.3% |
| Net interest income after provision | $5.95 million | $5.73 million | +3.8% |
| Non-interest income | $1.32 million | $1.40 million | -5.5% |
| Non-interest expense | $5.16 million | $4.73 million | +9.0% |
| Net income | $1.77 million | $1.98 million | -10.6% |
| Earnings per common share | $0.34 | $0.38 | Down $0.04 |
| Return on average assets | 1.02% | 1.22% | Down 20 basis points |
| Return on average equity | 11.38% | 13.80% | Down 242 basis points |
| Net interest margin | 3.85% | 3.94% | Down 9 basis points |
| Net interest spread | 3.60% | 3.80% | Down 20 basis points |
Operating cash flow was $2.04 million, compared with $2.37 million in the prior-year quarter. Investing activities used $1.23 million and financing activities used $16.82 million, producing a $16.01 million decrease in cash and cash equivalents. Ending cash and cash equivalents were $51.92 million.
The allowance for loan losses was $5.73 million, or 0.989% of average loans. Net charge-offs were $87,202, compared with $276,879 in Q1 2018. Non-accruing loans were $4.26 million, and total non-performing assets were $5.30 million, up 16.5% from December 31, 2018.
Borrowed funds were $1.55 million, repurchase agreements were $32.83 million, and junior subordinated debentures were $12.89 million. Available borrowing capacity included approximately $104.6 million through the Federal Home Loan Bank, $52.9 million through a Federal Reserve Bank lending arrangement, and $21.5 million through correspondent-bank lines. The Bank was considered well capitalized; its March 31, 2019 capital ratios included 12.97% common equity tier 1, 14.13% total risk-based capital, and 9.35% tier 1 leverage.
Material changes versus prior comparable periods
- Loan growth was concentrated in commercial lending. Commercial and industrial loans plus commercial real estate loans represented 55.5% of total loans, compared with 52.0% a year earlier.
- Interest income rose 13.6%, supported by higher average loan balances, higher short-term rates, and a shift toward higher-yielding commercial loans.
- Interest expense increased 77.1%, primarily because deposit pricing and other funding costs rose in the higher-rate environment. Deposit interest expense increased 86.7%.
- The net interest margin declined despite higher net interest income, reflecting faster growth in funding costs than asset yields.
- Non-interest income declined because of lower loan-sale income and lower other loan income. The decline was partly offset by higher CFS Partners income and VISA card commissions.
- Non-interest expense increased $424,808, primarily from salaries, employee benefits, technology and administrative costs, and collection and non-accruing loan expenses.
- Deposits declined 2.9% from year-end, mainly because a large municipal account ran off as expected, but increased 5.9% year over year. Brokered and wholesale deposits were used as supplemental funding.
- Shareholders’ equity increased to $63.63 million from $62.60 million at year-end. Book value per common share increased to $11.97 from $11.72 at December 31, 2018.
- The Company redeemed five shares of Series A preferred stock for $500,000 and declared a $0.19 quarterly common dividend payable May 1, 2019.
- The Company opened a loan production office in Lebanon, New Hampshire on May 1, 2019, targeting commercial lending opportunities in the greater White River Junction area.
Guidance, outlook, commentary, risks and unusual items
- No formal earnings or financial guidance was provided. Management expects continued commercial loan growth but notes that higher funding costs are pressuring margins.
- Management’s interest-rate modeling estimated that a gradual 100-basis-point decline in rates would reduce one-year net interest income by 1.4%, while a gradual 200-basis-point increase would increase it by 1.5%. These scenarios are not forecasts.
- Credit risk increased as non-performing assets rose, primarily from residential real estate and commercial real estate loans. Management stated that the allowance was appropriate at March 31, 2019.
- The loan portfolio is becoming more concentrated in commercial real estate and commercial and industrial lending, exposing results to economic conditions, property values, vacancy rates, construction and development performance, and borrower cash flows.
- The Company is preparing for adoption of the CECL credit-loss model, effective for fiscal years beginning after December 15, 2019. Management expects CECL could materially increase the allowance for loan losses and negatively affect regulatory capital ratios.
- The $12.89 million of junior subordinated debentures bear interest at three-month LIBOR plus 2.85% and mature in 2037. LIBOR is expected to be phased out by the end of 2021; management expects exposure to be limited to these debentures and believes the indenture permits a substitute benchmark.
- Other risks include interest-rate volatility, deposit reductions, competition, regulatory and accounting changes, cybersecurity, technology costs, geographic concentration, fraud, and deterioration in national or regional economic conditions.
- Management does not expect ordinary-course litigation to be material. Disclosure controls were considered effective, and no material changes in internal control over financial reporting were reported.
Most important facts for investors to verify
- Whether commercial real estate growth and the planned Lebanon office produce sufficient risk-adjusted returns without further deterioration in credit quality.
- Trends in non-accrual loans, non-performing assets, criticized loans, charge-offs and the adequacy of the allowance before CECL adoption.
- The effect of deposit repricing, brokered deposits and other wholesale funding on net interest margin and liquidity.
- The expected opening CECL adjustment and its impact on tangible and regulatory capital ratios.
- The replacement benchmark and future interest cost for the LIBOR-linked junior subordinated debentures.
- Whether declining net income, return on assets, return on equity and operating cash flow stabilize as loan growth continues.