Community Bancorp. 10-Q Summary
Business context and reporting period
Community Bancorp. is a Vermont bank holding company whose principal subsidiary is Community National Bank, serving markets in Vermont and New Hampshire. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods and to December 31, 2020 for balance-sheet data.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total interest income | $9.2 million | $8.1 million | $26.1 million | $24.1 million |
| Net interest income | $8.5 million | $7.0 million | $23.8 million | $20.3 million |
| Provision for loan losses | $89,167 | $362,499 | $624,165 | $1.0 million |
| Non-interest income | $1.7 million | $1.9 million | $5.0 million | $5.1 million |
| Non-interest expense | $5.5 million | $5.1 million | $16.2 million | $15.2 million |
| Net income | $3.7 million | $2.9 million | $9.8 million | $7.6 million |
| Earnings per common share | $0.69 | $0.54 | $1.82 | $1.43 |
| Dividends declared per common share | $0.22 | $0.19 | $0.66 | $0.57 |
Third-quarter net income increased 28.4%, while nine-month net income increased 28.8%. The primary drivers were recognition of PPP loan-processing fees and lower deposit and other funding costs.
Third-quarter net interest margin increased to 3.86% from 3.54%; the nine-month margin declined slightly to 3.64% from 3.67%. Third-quarter return on average assets was 1.54% and return on average equity was 17.87%; nine-month figures were 1.40% and 16.39%, respectively.
Balance sheet, cash flow, debt and liquidity
- Total assets were $968.6 million at September 30, 2021, up 5.5% from $918.2 million at December 31, 2020.
- Total deposits increased 7.4% to $840.1 million, led by growth in demand, money market and savings balances.
- Net loans declined 2.5% to $683.7 million, primarily because PPP loan forgiveness reduced the portfolio. Excluding PPP loans, management reported year-to-date loan growth of approximately 1.9%.
- Available-for-sale securities increased 82.3% to $110.7 million after approximately $66.0 million of purchases during the first nine months.
- Cash and cash equivalents increased to $129.8 million from $115.0 million at year-end.
- Net cash provided by operating activities was $10.5 million. Investing activities used $34.1 million, primarily reflecting securities purchases, while financing activities provided $38.3 million, principally from deposit growth.
- Borrowed funds were $2.3 million, repurchase agreements were $22.4 million, and junior subordinated debentures were $12.9 million. The company had no outstanding advances through its Federal Reserve Bank borrowing facility and maintained available borrowing capacity of $96.6 million through the FHLBB and $51.7 million through its FRBB borrowing arrangement.
- Shareholders’ equity increased to $83.2 million from $77.3 million, and book value per common share increased to $15.23 from $14.25.
- The company and bank exceeded applicable regulatory capital requirements. At September 30, 2021, the bank’s common equity tier 1, total capital and tier 1 leverage ratios were 14.49%, 15.74% and 8.94%, respectively.
Material changes versus prior periods
- PPP loan balances declined to $35.7 million from $64.4 million at December 31, 2020. The company had originated 1,843 PPP loans totaling $163.6 million and had recognized $5.8 million of expected loan fees by September 30, 2021.
- Interest expense fell 30.7% in the third quarter and 37.1% for the first nine months, reflecting lower deposit rates and the prolonged low-rate environment.
- Non-interest income declined 12.4% in the third quarter and was essentially flat for the nine-month period. Income from sold loans declined as mortgage loan-sale volume decreased.
- Non-interest expense increased 8.4% in the third quarter and 6.5% year to date, including higher occupancy, employee benefit, state deposit tax and technology-related costs. The company also recorded $66,004 of fraudulent-check losses in the third quarter.
- The allowance for loan losses increased to $7.8 million from $7.2 million at year-end. Net charge-offs were minimal at $13,343 for the first nine months, compared with $184,884 in the 2020 period.
- Non-performing assets increased to $5.9 million from $5.2 million at December 31, 2020, driven primarily by higher commercial real estate non-accrual loans and residential mortgage delinquencies.
- Unrealized after-tax losses on available-for-sale securities reduced other comprehensive income by $1.2 million for the first nine months, compared with after-tax comprehensive income from securities of $711,315 in the 2020 period.
Outlook, risks, contingencies and unusual items
- The filing provides no formal earnings or revenue guidance. Management expects the COVID-19 pandemic, possible variants, economic conditions and prolonged low interest rates to continue affecting credit quality, liquidity, margins and results, although the timing and magnitude are uncertain.
- As of September 30, 2021, 593 borrowers had received COVID-related short-term loan concessions covering $109.5 million of principal; only six loans totaling $3.4 million remained in deferral. These loans may carry elevated future default risk.
- Commercial real estate and commercial and industrial loans represented a substantial portion of the portfolio. Management identified risks from economic deterioration, property values, vacancy rates, tourism, restaurants, hotels and other COVID-sensitive industries.
- The company has not yet adopted the CECL expected-credit-loss model and does not intend to early adopt it. Adoption is expected for smaller reporting companies for fiscal years beginning after December 15, 2022 and could increase the allowance and reduce regulatory capital.
- The $12.9 million of junior subordinated debentures use three-month LIBOR plus 2.85%. The filing states that the phaseout of three-month U.S. dollar LIBOR by June 30, 2023 could affect interest expense, although the magnitude cannot yet be predicted.
- Management stated that ordinary-course litigation is not expected to be material. No material changes to internal control over financial reporting were reported.
- Management’s interest-rate simulation estimated a 0.9% decline in twelve-month net interest income under a 100-basis-point rate decrease and a 4.3% increase under a 200-basis-point increase; these scenarios are not forecasts.
Important facts for investors to verify
- Whether PPP fee income and forgiveness activity remain significant after the PPP portfolio continues to run off.
- Trends in commercial real estate non-accrual loans, non-performing assets and COVID-sensitive borrowers.
- The adequacy of the $7.8 million allowance for loan losses and the potential effect of CECL adoption on capital.
- The sustainability of deposit growth and the company’s ability to maintain liquidity as stimulus-related and PPP-related balances decline.
- The effect of future interest-rate changes on net interest margin, securities fair values and deposit costs.
- The eventual replacement mechanism and pricing impact for the LIBOR-linked junior subordinated debentures.
- The sustainability of the $0.22 quarterly common dividend relative to earnings, capital requirements and the bank’s ability to upstream dividends.