Community Bancorp. — Form 10-Q Summary
Business context and reporting period
Community Bancorp. is a Vermont bank holding company whose principal subsidiary is Community National Bank. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017, with comparisons to the corresponding 2016 periods and December 31, 2016 balance-sheet data.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total interest income | $6.82 million | $6.25 million | $19.42 million | $18.04 million |
| Net interest income | $6.02 million | $5.56 million | $17.14 million | $16.00 million |
| Net interest income after provision | $5.87 million | $5.41 million | $16.69 million | $15.60 million |
| Non-interest income | $1.45 million | $1.48 million | $4.20 million | $4.04 million |
| Non-interest expense | $4.84 million | $4.79 million | $14.47 million | $14.15 million |
| Net income | $1.79 million | $1.52 million | $4.71 million | $3.98 million |
| Earnings per common share | $0.35 | $0.30 | $0.91 | $0.78 |
| Net interest margin | 4.07% | 4.04% | 3.96% | 3.98% |
| Return on average assets | 1.09% | 0.99% | 0.98% | 0.89% |
| Return on average equity | 12.53% | 11.29% | 11.29% | 10.08% |
At September 30, 2017, total assets were $661.5 million, net loans were $500.9 million, total deposits were $556.8 million, shareholders’ equity was $57.2 million, cash and cash equivalents were $29.7 million, and book value per common share was $10.73.
The allowance for loan losses was $5.44 million, equal to approximately 1.10% of average loans and 199.5% of reported non-accruing loans. Non-accruing loans were $2.73 million, while total non-performing assets were $3.86 million.
Nine-month cash flow from operating activities was $6.57 million, compared with $6.39 million in 2016. Investing activities used $25.54 million, principally reflecting a $19.49 million increase in loans and net investment-security purchases. Financing activities provided $19.07 million, driven by deposit growth and reduced short-term borrowings. Cash and cash equivalents increased by $105,250 to $29.72 million.
At September 30, 2017, FHLBB advances totaled $3.55 million, repurchase agreements totaled $27.46 million, and junior subordinated debentures totaled $12.89 million. Available FHLBB borrowing capacity was $112.9 million, with additional available lines through the Federal Reserve Bank of Boston and correspondent banks. The Bank was considered well capitalized; Bank common equity tier 1, tier 1, total capital, and tier 1 leverage ratios were 12.34%, 12.34%, 13.51%, and 9.07%, respectively.
Material changes versus prior comparable periods
- Third-quarter net income increased 18.3%, and nine-month net income increased 18.2%, primarily from higher net interest income.
- Net loans increased 3.9% from year-end 2016 and 7.7% year over year, with commercial and commercial real estate loans driving growth. These categories represented 57.0% of total loans at September 30, 2017, versus 55.3% a year earlier.
- Total deposits increased 10.3% from year-end 2016 and 10.5% year over year. Growth included demand deposits, savings accounts, and wholesale or brokered time deposits.
- Interest expense rose 15.1% in the third quarter and 12.2% year to date, reflecting higher deposit balances, increased use of brokered deposits, and rising short-term rates.
- Third-quarter net interest margin improved three basis points, but the nine-month margin declined two basis points as funding costs increased faster than asset yields.
- Non-interest income declined 2.3% in the quarter but increased 4.0% year to date. Service-fee growth, including courtesy overdraft fees, was partly offset by lower mortgage-loan sales income.
- Residential mortgage originations declined modestly to $34.49 million for the first nine months, while secondary-market sales fell to $10.91 million from $18.30 million, reflecting reduced refinancing activity.
- Non-interest expense increased 1.1% in the quarter and 2.3% year to date, driven principally by occupancy, marketing, technology, and consulting costs.
- The Company repaid $30.0 million of short-term borrowings outstanding at December 31, 2016 and replaced part of the funding with deposits and $2.0 million of new long-term FHLBB advances.
Guidance, outlook, risks, contingencies, and unusual items
- Management emphasized continued commercial-loan growth, particularly in Central Vermont and the I-89 corridor, supported by a new Chittenden County loan-production office. No formal earnings guidance was provided.
- Management expects a rising-rate environment to support net interest income because the balance sheet is asset sensitive, but warned that faster increases in deposit pricing could reduce the benefit. Modeling estimated a 3.7% increase in 12-month net interest income under a gradual 200-basis-point increase and a 2.8% decrease under a 100-basis-point decline; these are sensitivity estimates, not forecasts.
- The shift toward commercial lending increases credit exposure to business cash flows, construction, commercial real estate values, vacancy rates, cap rates, tourism conditions, and local economic conditions.
- The Company changed its allowance methodology in the second quarter, including removal of government-guaranteed balances, treatment of all troubled debt restructurings as impaired, and use of a fixed historical look-back period. Management said the changes reduced required reserves by approximately $247,000 at June 30, 2017.
- The forthcoming CECL standard may materially increase the allowance for loan losses and reduce regulatory capital ratios upon adoption. The filing does not provide a quantified expected impact.
- Non-performing assets declined 3.4% from year-end, but non-accrual residential mortgage balances increased. OREO was $324,235 and consisted of one residential and one commercial property.
- Off-balance-sheet commitments included $28.64 million of unused home-equity lines, $34.18 million of construction commitments, $35.78 million of commercial and industrial commitments, $52.67 million of other credit commitments, and $1.65 million of standby and commercial letters of credit.
- The Company guaranteed $12.5 million of capital securities issued by CMTV Statutory Trust I; the related $12.887 million subordinated debenture is recorded on the balance sheet.
- The Board declared a $0.17 per common-share quarterly dividend payable November 1, 2017. The dividend was accrued at September 30, 2017. Management reported no material litigation, no material changes in internal controls, and no securities impairment considered other than temporary.
Most important facts for investors to verify
- Whether commercial-loan growth and the new geographic expansion produce adequate risk-adjusted returns without deterioration in criticized, non-accrual, or classified assets.
- The sustainability of deposit growth, particularly the increasing reliance on wholesale, brokered, CDARS, and other rate-sensitive funding.
- Future net interest margin performance as deposit costs rise and the yield curve remains relatively flat.
- The adequacy of the $5.44 million allowance under the revised methodology and the eventual quantified effect of CECL on reserves and regulatory capital.
- Trends in non-accrual residential loans, commercial real estate credit quality, charge-offs, TDRs, and OREO dispositions.
- The conversion of available borrowing capacity and other liquidity sources into actual funding if loan commitments are drawn or deposits decline.
- The company’s ability to maintain well-capitalized status while funding growth and paying dividends.