Community Bancorp. 10-Q Summary
Business Context and Reporting Period
Community Bancorp., through Community National Bank, is a Vermont-based community banking organization serving northern New England. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods and December 31, 2020 balance-sheet data.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Change |
|---|
| Total interest income | $8.3 million | $8.2 million | Up 1.1% |
| Net interest income | $7.5 million | $7.0 million | Up 7.5% |
| Provision for loan losses | $267,501 | $307,499 | Down 13.0% |
| Non-interest income | $1.8 million | $1.8 million | Up 0.4% |
| Non-interest expense | $5.3 million | $5.0 million | Up 5.7% |
| Net income | $3.0 million | $2.8 million | Up 7.2% |
| Earnings per common share | $0.57 | $0.54 | Up $0.03 |
| Net interest margin | 3.48% | 3.69% | Down 21 bps |
| Metric | Six Months 2021 | Six Months 2020 | Change |
|---|
| Total interest income | $16.9 million | $16.0 million | Up 5.8% |
| Net interest income | $15.3 million | $13.3 million | Up 15.0% |
| Provision for loan losses | $534,998 | $684,002 | Down 21.8% |
| Non-interest income | $3.3 million | $3.1 million | Up 7.2% |
| Non-interest expense | $10.6 million | $10.1 million | Up 5.5% |
| Net income | $6.1 million | $4.7 million | Up 29.1% |
| Earnings per common share | $1.13 | $0.89 | Up $0.24 |
| Net interest margin | 3.54% | 3.74% | Down 20 bps |
- Total assets were $925.5 million at June 30, 2021, up 0.8% from December 31, 2020.
- Net loans were $693.7 million, down 1.0%, primarily because of seasonal municipal-loan maturities.
- Available-for-sale securities increased 50.8% to $91.6 million after $41.6 million of purchases.
- Total deposits increased 2.3% to $799.9 million, led by demand and savings deposits.
- Cash and cash equivalents were $96.3 million, compared with $115.0 million at year-end 2020.
- Shareholders’ equity increased to $80.7 million from $77.3 million; book value per common share rose to $14.81 from $14.25.
- Borrowed funds were $2.3 million, repurchase agreements were $23.5 million, and junior subordinated debentures were $12.9 million.
- Six-month operating cash flow was $8.7 million. Investing activities used $30.0 million, principally reflecting securities purchases, while financing activities provided $2.6 million.
- The quarterly common dividend increased to $0.22 per share from $0.19 in the prior-year quarter.
Material Changes Versus Prior Comparable Period
- Results benefited from lower funding costs. Second-quarter interest expense declined 36.5%, and six-month interest expense declined 39.6%, despite higher deposits.
- PPP processing-fee income was a significant earnings contributor. The company recognized $835,999 in PPP fees during the second quarter and $2.1 million during the first six months of 2021.
- Net interest margin declined because asset yields fell faster than funding costs, reflecting the low-rate environment and the 1% mandated rate on PPP loans.
- Non-interest expenses increased, particularly employee benefits, state deposit taxes, ATM costs, FDIC insurance and other operating expenses.
- The allowance for loan losses increased to $7.7 million from $6.5 million at June 30, 2020 and $7.2 million at December 31, 2020. Six-month net charge-offs were only $24,226.
- Non-performing assets declined 5.5% from year-end 2020 to $4.9 million. Non-accrual loans were $3.7 million, while loans 90 days or more past due and still accruing were $1.2 million.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management expects future results to remain sensitive to the duration of the low-interest-rate environment, yield-curve changes and the continuing effects of COVID-19.
- As of June 30, 2021, 525 borrowers had COVID-19-related short-term concessions or modifications covering approximately $111.0 million of principal. These loans may carry elevated future default risk.
- The company had originated 1,843 PPP loans totaling $163.6 million and expected approximately $7.0 million of lifetime PPP fee income; $4.2 million had been recognized by June 30, 2021. PPP loans outstanding were approximately $71.6 million.
- COVID-19 variants, renewed restrictions, unemployment, economic deterioration and government responses could adversely affect credit quality, liquidity, capital and earnings. A Vermont foreclosure moratorium remained in effect at quarter-end.
- Commercial and commercial real estate loans represented approximately 70.1% of total loans, creating exposure to business cash flows, property values, vacancy rates and local economic conditions. Retail, restaurant, hotel and brewery exposures were identified as particularly sensitive to pandemic effects.
- The company had $12.9 million of junior subordinated debentures indexed to three-month LIBOR plus 2.85%. The filing states that the LIBOR transition could affect future interest expense, although the magnitude is not clear.
- Management estimated that a gradual 100-basis-point decline in rates would reduce 12-month net interest income by 0.7%, while a 200-basis-point increase would increase it by 4.4%; these are simulations, not forecasts.
- The company had available liquidity through FHLBB borrowing capacity of $96.4 million, an FRBB borrowing line of $52.2 million, and $25.5 million of unsecured correspondent-bank lines. No PPPLF advances were outstanding.
- Management stated that the company and bank exceeded applicable regulatory capital requirements and that the bank was well capitalized. Disclosure controls were evaluated as effective, and management did not expect routine litigation to be material.
- The company plans to adopt the CECL credit-loss model after the extension applicable to smaller reporting companies; it does not intend to early adopt. Adoption may increase reserves and reduce regulatory capital.
Most Important Facts for Investors to Verify
- Whether PPP-related fee income remains a meaningful contributor after loan forgiveness and the conclusion of the PPP program.
- The performance and migration of the $111.0 million of COVID-19-modified loans, particularly after relief periods expire.
- Credit quality trends in the commercial real estate, hospitality, restaurant, retail and brewery portfolios.
- The sustainability of the $7.7 million allowance for loan losses and the effect of eventual CECL adoption.
- Whether deposit growth and excess liquidity offset continued pressure on net interest margin.
- The replacement benchmark and ultimate interest-cost effect for the $12.9 million of LIBOR-linked debentures.
- Capital ratios, dividend capacity and liquidity availability if credit losses or economic disruption increase.
