Community Bancorp. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Community Bancorp., the parent of Community National Bank, reported unaudited consolidated results for the three months ended March 31, 2020. The company is a Vermont-based community bank and smaller reporting company. The quarter coincided with the onset of the COVID-19 pandemic, although management stated that the first-quarter financial impact was minimal and that material effects emerged primarily after quarter-end.
Key financial metrics
| Metric | Q1 2020 | Comparable period or date |
|---|---|---|
| Net interest income | $6.30 million | $6.16 million in Q1 2019 |
| Net interest income after provision | $5.92 million | $5.95 million in Q1 2019 |
| Non-interest income | $1.35 million | $1.32 million in Q1 2019 |
| Non-interest expense | $5.09 million | $5.16 million in Q1 2019 |
| Net income | $1.86 million | $1.77 million in Q1 2019 |
| Earnings per common share | $0.35 | $0.34 in Q1 2019 |
| Net interest margin | 3.79% | 3.85% in Q1 2019 |
| Return on average assets | 1.02% | 1.02% in Q1 2019 |
| Return on average equity | 10.77% | 11.38% in Q1 2019 |
| Net cash provided by operating activities | $0.91 million | $2.04 million in Q1 2019 |
| Net cash used in investing activities | $22.92 million | $1.23 million in Q1 2019 |
| Net cash provided by financing activities | $12.08 million | $16.82 million used in Q1 2019 |
- Total assets increased 1.9% from year-end 2019 to $751.7 million.
- Total loans increased 4.5% to $634.4 million; net loans increased to $628.6 million.
- Total deposits increased 0.5% to $618.1 million.
- Cash and cash equivalents declined to $38.6 million from $48.6 million at December 31, 2019.
- The allowance for loan losses increased to $6.19 million from $5.93 million. The allowance was 1.006% of average loans and 131.5% of non-accruing loans.
- Shareholders’ equity increased to $70.6 million, and book value per common share increased to $13.14 from $12.86 at year-end 2019.
- Debt included $22.65 million of borrowed funds, $22.91 million of repurchase agreements and $12.89 million of junior subordinated debentures. The borrowed-funds balance included a $20.0 million Federal Reserve discount-window advance obtained during March and repaid in April.
- Regulatory capital ratios remained above applicable minimums. The bank reported a 13.09% common equity tier 1 ratio, 14.26% total capital ratio and 9.75% tier 1 leverage ratio.
Material changes versus prior comparable periods
- Net income increased 5.0%, supported by higher net interest income, a 2.7% increase in non-interest income and a 1.2% decrease in non-interest expense.
- The provision for loan losses increased 77.2% to $376,503, primarily because of loan growth and higher charge-off activity rather than identified COVID-19 losses.
- Net interest margin declined six basis points to 3.79%. Average loan balances increased 6.1%, but the average loan yield declined 21 basis points following the sharp reduction in short-term interest rates.
- Loan growth was concentrated in commercial and industrial, commercial real estate, municipal and first-lien residential loans. Commercial and industrial plus commercial real estate loans represented 57.6% of total loans at March 31, 2020.
- Available-for-sale securities declined 8.9% to $41.9 million, primarily because of exercised calls, with proceeds used to fund loan growth.
- Non-performing assets increased 5.4% to $6.37 million. Non-accruing loans increased to $4.71 million, while OREO declined to $0.78 million.
- Net cash decreased $9.93 million during the quarter, compared with a $16.01 million decrease in Q1 2019. Investing cash use was driven primarily by a $27.56 million increase in loans, net.
Guidance, outlook, risks and unusual items
- Management provided no formal earnings or revenue guidance. It cautioned that interim results are not necessarily indicative of full-year 2020 results.
- COVID-19 may adversely affect borrowers, collateral values, credit quality, liquidity, interest margins, capital and operating performance. The duration and ultimate financial impact were described as uncertain.
- By March 31, the bank had granted short-term COVID-19-related payment accommodations to 380 borrowers representing approximately $86.6 million of principal. These qualifying modifications were generally not treated as troubled-debt restructurings under applicable guidance and may carry increased future default risk.
- As of May 5, 2020, the SBA had approved approximately 700 PPP applications totaling approximately $95 million. Management expected approximately $3.5 million of related fees and stated that PPP participation could materially affect asset mix and net interest margin for the remainder of 2020.
- The company had access to the Federal Reserve’s PPP Liquidity Facility but had no outstanding PPPLF balance as of May 5. Available borrowing capacity included approximately $95.0 million through the Federal Home Loan Bank, $47.6 million through the Federal Reserve borrower-in-custody arrangement and $21.5 million through unsecured correspondent-bank lines.
- Management expects future provisions and non-performing assets could increase if economic conditions deteriorate. Particularly exposed sectors included retail, restaurants and bars, hotels and lodging, and breweries.
- The company early adopted the simplified goodwill impairment standard on January 1, 2020. It deferred adoption of CECL, applicable to smaller reporting companies for fiscal years beginning after December 15, 2022, and does not intend to early adopt.
- The $12.9 million junior subordinated debenture balance carries interest at three-month LIBOR plus 2.85%. The planned LIBOR phaseout could affect future interest costs, although management expects the exposure to be limited.
- Management stated that litigation in the ordinary course is not expected to be material. Disclosure controls were considered effective, with no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Subsequent-quarter trends in COVID-19 loan modifications, delinquencies, non-accrual loans, charge-offs and allowance coverage.
- Actual PPP loan balances, fee recognition, forgiveness activity, SBA guarantee compliance and any related litigation or indemnification exposure.
- The effect of the Federal Reserve’s near-zero-rate policy and PPP lending on net interest margin, loan yields and funding costs.
- Liquidity after repayment of the $20.0 million discount-window advance and the utilization of available FHLB, Federal Reserve and correspondent-bank facilities.
- Commercial real estate and other pandemic-sensitive loan concentrations, including hotel, lodging, restaurant, retail and brewery exposures.
- Future CECL adoption timing and the potential effect on the allowance for loan losses, regulatory capital and dividends.
- The replacement benchmark and economic effect for the LIBOR-linked junior subordinated debentures.