Business Context and Reporting Period
Community Bancorp., together with its wholly owned subsidiary Community National Bank, is a Vermont-based community bank focused on commercial, real estate, municipal, residential and consumer lending. This unaudited Form 10-Q covers the three months ended March 31, 2022, with comparisons to March 31, 2021 and balance-sheet comparisons to December 31, 2021. The company is a smaller reporting company and non-accelerated filer.
Key Financial Metrics
| Metric | Q1 2022 | Comparable / Prior Period |
|---|---|---|
| Total assets | $1.005 billion | $1.019 billion at December 31, 2021 |
| Total loans | $696.3 million | $690.0 million at December 31, 2021 |
| Total deposits | $877.3 million | $879.4 million at December 31, 2021 |
| Net interest income | $7.56 million | $7.76 million in Q1 2021 |
| Net interest margin | 3.24% | 3.63% in Q1 2021 |
| Non-interest income | $1.69 million | $1.57 million in Q1 2021 |
| Non-interest expense | $5.45 million | $5.37 million in Q1 2021 |
| Provision for loan losses | $862,500 | $267,497 in Q1 2021 |
| Net income | $2.41 million | $3.03 million in Q1 2021 |
| Diluted earnings per common share | $0.44 | $0.57 in Q1 2021 |
| Return on average assets | 0.97% | 1.33% in Q1 2021 |
| Return on average equity | 11.76% | 15.75% in Q1 2021 |
| Book value per common share | $14.08 | $15.48 at December 31, 2021 |
Cash Flow, Debt and Liquidity
- Operating activities provided $2.7 million of cash, compared with $5.9 million in Q1 2021.
- Investing activities used $21.7 million, primarily reflecting $19.1 million of available-for-sale securities purchases and $7.0 million of net loan growth.
- Financing activities used $6.9 million, reflecting deposit mix changes, reduced repurchase agreements and cash dividends.
- Cash and cash equivalents decreased $25.9 million to $84.5 million.
- Outstanding borrowings included $1.3 million of long-term advances, $28.7 million of repurchase agreements and $12.9 million of junior subordinated debentures.
- Available borrowing capacity was approximately $95.3 million through the Federal Home Loan Bank of Boston, $65.1 million through the Federal Reserve Bank of Boston borrowing arrangement and $20.5 million through correspondent-bank lines. No advances were outstanding under the latter two facilities.
- The company and bank exceeded applicable regulatory capital requirements. At March 31, 2022, the bank reported a 13.97% common equity tier 1 ratio, a 13.97% tier 1 risk-based capital ratio, a 15.22% total risk-based capital ratio and an 8.82% tier 1 leverage ratio.
Material Changes Versus Prior Comparable Period
- Net income declined 20.5% year over year, primarily because of lower PPP loan fee amortization and a higher loan-loss provision.
- Net interest income declined 2.6%; the tax-equivalent net interest margin fell 39 basis points to 3.24%. Average loan balances and loan yields decreased as PPP loans were forgiven or paid down.
- PPP balances fell to approximately $5.1 million at March 31, 2022 from $12.2 million at December 31, 2021 and $92.6 million at the end of February 2021.
- Interest expense declined 18.9%, benefiting from lower deposit and repurchase-agreement costs.
- Non-interest income increased 7.3%, led by higher service fees, loan-sale income and loan documentation fees.
- Total loans increased 0.9% from year-end, with commercial and industrial and commercial real estate loans growing by approximately $13.9 million in aggregate, partly offset by PPP paydowns.
- Total deposits declined 0.2%, including reductions in demand and interest-bearing transaction accounts that were partly offset by higher savings and money-market balances.
- Shareholders’ equity declined $7.3 million to $77.4 million. The principal driver was an $8.7 million after-tax increase in accumulated other comprehensive loss from unrealized available-for-sale securities losses, which management characterized as temporary and stated did not affect regulatory capital ratios.
- Available-for-sale securities had $12.6 million of gross unrealized losses at March 31, 2022, compared with $1.9 million at year-end. Management attributed the losses principally to higher interest rates and reported no other-than-temporary impairment.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings or revenue guidance was provided. Management expects the rising-rate environment to have a positive effect on 2022 net interest income because the balance sheet is asset sensitive. Its model estimated a 0.9% increase in 12-month net interest income under a gradual 200-basis-point rate increase and a 1.2% decrease under a 100-basis-point decline; management cautioned these are not forecasts.
- The Q1 provision increase was driven primarily by a $667,474 write-down on a single non-performing commercial real estate loan in foreclosure. Net charge-offs were $682,108, compared with $7,694 in Q1 2021.
- The allowance for loan losses increased to $7.9 million, or 1.13% of total loans. Non-accrual loans were $5.4 million, or 0.78% of loans, and the allowance covered 145.72% of non-accrual loans.
- Commercial and industrial and commercial real estate loans represented 68.7% of total loans, creating exposure to business conditions, property values, vacancies, rents, construction and development performance, and regional economic conditions.
- Of 595 borrowers receiving qualifying pandemic-related short-term concessions, 351 loans totaling $103.2 million remained outstanding at March 31, 2022. The filing states that these concessions were not treated as troubled debt restructurings under applicable guidance.
- The company expects to adopt the CECL credit-loss model in fiscal 2023. It expects adoption may increase the allowance and negatively affect regulatory capital ratios, but the filing does not provide a clear quantified impact.
- The company has $12.9 million of junior subordinated debentures indexed to three-month LIBOR. LIBOR is scheduled to phase out, and the trustee had not informed the company how the replacement-rate process would proceed. The company could not predict the effect on future interest expense.
- Other principal risks include inflation, recession, deposit outflows, interest-rate volatility, credit losses, cybersecurity and operational failures, competition, regulatory changes, workforce availability and continuing effects of COVID-19. Management does not expect normal-course litigation to be material.
- The board declared a $0.23 per common share quarterly dividend payable May 1, 2022.
Most Important Facts for Investors to Verify
- Whether the elevated Q1 commercial real estate charge-off is isolated or signals broader deterioration in the commercial loan portfolio.
- Subsequent trends in non-accrual loans, delinquencies, criticized loans, charge-offs and the allowance coverage ratio.
- The pace of PPP runoff and its effect on loan yields, fee income and reported net interest income.
- Deposit stability and whether continued runoff requires increased reliance on wholesale funding or borrowing capacity.
- The duration and potential capital impact of unrealized available-for-sale securities losses as interest rates change.
- The quantified effect of CECL adoption on the allowance, earnings and regulatory capital when disclosed.
- The replacement rate and resulting interest cost for the LIBOR-indexed junior subordinated debentures.
- Whether the company maintains its capital ratios and $0.23 quarterly dividend amid credit, liquidity and interest-rate pressures.