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, serving markets in Vermont and New Hampshire. This unaudited Form 10-Q covers the three months ended March 31, 2021, with comparisons to March 31, 2020 and December 31, 2020. The company is a smaller reporting company and a non-accelerated filer.
Financial condition and performance
| Metric | Q1 2021 / March 31, 2021 | Comparable period or prior year-end |
|---|---|---|
| Total assets | $937.5 million | $918.2 million at December 31, 2020 |
| Total loans | $729.5 million | $709.4 million at December 31, 2020 |
| Net loans | $719.7 million | $701.0 million at December 31, 2020 |
| Deposits | $806.0 million | $782.3 million at December 31, 2020 |
| Cash and cash equivalents | $93.2 million | $115.0 million at December 31, 2020 |
| Available-for-sale securities | $81.9 million | $60.7 million at December 31, 2020 |
| Net interest income | $7.8 million | $6.3 million in Q1 2020 |
| Net income | $3.0 million | $1.9 million in Q1 2020 |
| Earnings per common share | $0.57 | $0.35 in Q1 2020 |
| Net interest margin | 3.63% | 3.79% in Q1 2020 |
| Return on average assets | 1.33% | 1.02% in Q1 2020 |
| Return on average equity | 15.75% | 10.77% in Q1 2020 |
| Shareholders’ equity | $78.1 million | $77.3 million at December 31, 2020 |
| Book value per common share | $14.36 | $14.25 at December 31, 2020 |
| Operating cash flow | $5.9 million | $0.9 million in Q1 2020 |
Total interest income increased 10.9% to $8.6 million, supported by $1.2 million of PPP loan processing fees recognized from the SBA. Interest expense declined 42.1% to $854,000 as deposit and other funding costs repriced lower following Federal Reserve rate cuts. Non-interest income increased 16.1% to $1.6 million, while non-interest expense increased 5.3% to $5.4 million.
The provision for loan losses declined 29.0% to $267,000. The allowance for loan losses was $7.5 million at March 31, 2021, compared with $7.2 million at December 31, 2020. Net charge-offs were $8,000 in Q1 2021 compared with $116,000 in Q1 2020.
Cash used in investing activities was $45.9 million, primarily reflecting $27.4 million of securities purchases and $20.2 million of net loan growth. Financing activities provided $18.2 million, principally from deposit growth. Debt and other funding included $2.3 million of borrowed funds, $32.1 million of repurchase agreements and $12.9 million of junior subordinated debentures.
Material changes versus comparable periods
- Net income increased 62.6%, driven primarily by PPP processing fees and sharply lower interest expense.
- Net interest income increased $1.5 million, although the net interest margin declined 16 basis points because of the low-rate environment and the 1% yield on PPP loans.
- Loans increased $20.1 million from year-end 2020. Management attributed the growth principally to $53.1 million of Q1 PPP originations, partially offset by forgiveness and repayments.
- PPP loans outstanding were $88.4 million at March 31, 2021. The company had originated 1,564 PPP loans totaling $158.1 million and had recognized $3.4 million of an expected $6.0 million of lifetime SBA-related fees.
- Deposits increased $23.7 million, or 3.0%, led by demand, money market and savings balances; time deposits declined $3.6 million.
- Available-for-sale securities increased $21.2 million, or 35.0%, due primarily to purchases during the quarter.
- Non-performing assets declined 17.1% from year-end 2020 to $4.3 million. Non-accrual loans were $3.7 million, while loans 90 days or more past due and still accruing were $610,000.
- Accumulated other comprehensive income declined by $1.3 million after tax because of unrealized losses on available-for-sale securities, reducing total comprehensive income to $1.7 million.
Guidance, outlook, risks and unusual items
No formal earnings or financial guidance was provided. Management expects the prolonged low-interest-rate environment and COVID-19 effects could continue to pressure net interest income, margins, credit quality, liquidity and capital. Interest-rate sensitivity modeling estimated a 0.5% decline in twelve-month net interest income under a 100-basis-point rate decrease and a 3.3% increase under a 200-basis-point increase; management cautioned that these scenarios are not forecasts.
COVID-19-related payment deferrals and concessions remained material. As of March 31, 2021, 582 business and retail loans with unpaid principal balances of $115.3 million remained modified for temporary relief. Separately, 435 borrowers with aggregate principal balances of $110.5 million had received short-term concessions under regulatory guidance. These loans may carry elevated future default risk.
The loan portfolio is concentrated in commercial and industrial and commercial real estate lending, which together represented 71.2% of loans. Particularly affected sectors included retail, restaurants and bars, hotels and lodging, and breweries. A Vermont residential foreclosure moratorium remained in effect at quarter-end.
The company had no PPPLF advances and reported available borrowing capacity of $94.7 million through the FHLBB, $52.7 million through an FRBB borrowing arrangement and $25.5 million through correspondent-bank lines. The company and bank exceeded applicable regulatory capital requirements, and the bank was considered well capitalized.
The company has $12.9 million of junior subordinated debentures tied to three-month LIBOR plus 2.85%. Management expects LIBOR transition exposure to be limited primarily to this debt but cannot predict the effect on future interest expense. The company also identified risks from economic deterioration, deposit reductions, commercial real estate exposure, cybersecurity, regulation, accounting changes and future COVID-19 impacts. CECL adoption is not expected before fiscal years beginning after December 15, 2022, and the company does not intend to early adopt.
Management stated that ordinary-course litigation is not expected to be material. Disclosure controls were effective as of March 31, 2021, and no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Whether PPP fee income and loan forgiveness activity remain significant contributors to earnings in subsequent quarters.
- The sustainability of deposit growth and the effect of excess liquidity and securities purchases on future net interest margin.
- Performance of the commercial, commercial real estate, hospitality and other COVID-19-sensitive loan segments.
- Future delinquency, non-accrual, charge-off and allowance trends as payment deferrals expire.
- The final effect and timing of CECL adoption on the allowance and regulatory capital.
- The replacement benchmark and potential interest-cost impact for the LIBOR-linked junior subordinated debentures.
- Whether unrealized securities losses affect accumulated other comprehensive income, capital or liquidity if interest rates rise.
- Continuation of the $0.22 per-share quarterly common dividend and the bank’s capacity to upstream dividends to the holding company.