Community Bancorp. — Q1 2024 Form 10-Q Summary
Business context and reporting period
Community Bancorp. is a Vermont-based bank holding company whose wholly owned subsidiary is Community National Bank. This unaudited Form 10-Q covers the three months ended March 31, 2024, with comparisons to the three months ended March 31, 2023 and the December 31, 2023 balance sheet. The company is a smaller reporting company and non-accelerated filer.
Key financial metrics
| Metric | Q1 2024 | Comparable / prior period |
|---|---|---|
| Total assets | $1.107 billion | $1.099 billion at Dec. 31, 2023 |
| Loans | $866.4 million | $845.4 million at Dec. 31, 2023 |
| Total deposits | $883.8 million | $897.0 million at Dec. 31, 2023 |
| Net interest income | $8.36 million | $8.52 million in Q1 2023 |
| Net income | $2.82 million | $3.34 million in Q1 2023 |
| Earnings per common share | $0.51 | $0.61 in Q1 2023 |
| Net interest margin, tax-equivalent | 3.29% | 3.59% in Q1 2023 |
| Return on average assets | 1.03% | 1.31% in Q1 2023 |
| Return on average equity | 12.74% | 17.57% in Q1 2023 |
| Book value per common share | $15.88 | $15.87 at Dec. 31, 2023 |
| Common dividend declared | $0.23 per share | $0.23 in Q1 2023 |
Revenue, profitability, cash flow, margins, debt and liquidity
- Total interest income increased 19.4% to $12.86 million, primarily from loan growth, higher loan yields and repricing of adjustable-rate loans.
- Total interest expense doubled to $4.50 million, driven by higher deposit pricing and substantially greater borrowing costs. Net interest income declined 1.9%, and the tax-equivalent net interest margin fell 30 basis points to 3.29%.
- Non-interest income declined 7.1% to $1.63 million, mainly because of lower loan-sale proceeds and lower loan-related income. Non-interest expense increased 7.2% to $6.30 million, reflecting higher salaries, employee benefits, FDIC insurance, electronic banking costs, service contracts and check-fraud losses.
- Credit loss expense was $313,579, compared with $286,526 in Q1 2023. The allowance for credit losses increased to $10.03 million, or 1.16% of loans. Non-accruing loans declined to $6.39 million, or 0.74% of loans, from 0.82% at year-end.
- Net cash provided by operating activities was $1.70 million. Investing activities used $13.52 million, principally because of a $21.07 million increase in loans. Financing activities provided $7.30 million, including $30.6 million of short- and long-term borrowing, partly offset by deposit and repurchase-agreement outflows.
- Cash and cash equivalents declined to $15.92 million from $20.43 million at year-end. Available-for-sale securities totaled $180.6 million, with $22.39 million of unrealized losses; management considers these losses primarily rate-related and temporary.
- Borrowed funds were $85.2 million, up from $54.6 million at year-end. Outstanding borrowings included $67.5 million under the Federal Reserve Bank Term Funding Program, $17.7 million of FHLBB advances and overnight borrowings, and $12.9 million of junior subordinated debentures.
- FHLBB borrowing capacity was $109.8 million, and an FRBB borrowing line secured by eligible loans provided an additional $48.5 million of available capacity. Management stated that liquid assets, unencumbered securities, operating cash flows and borrowing capacity were sufficient for liquidity and capital needs.
- Estimated uninsured deposits were $152.1 million at March 31, 2024, down from $217.3 million at year-end.
Material changes versus prior comparable period
- Net income decreased $515,860, or 15.5%, and EPS declined from $0.61 to $0.51.
- Average interest-earning assets increased 7.2%, while the average yield rose 50 basis points. Average interest-bearing liabilities increased 10.1%, while their average cost rose 98 basis points, compressing the spread and margin.
- Average loan balances increased 13.5%, and loans represented 81.3% of average interest-earning assets versus 76.8% in Q1 2023.
- Loan balances grew 2.5% from year-end, led by commercial real estate, commercial and industrial, municipal and residential first-lien loans. Commercial lending represented 71.8% of the loan portfolio.
- Deposits declined 1.5% from year-end as demand and transaction accounts, money market funds and savings balances decreased; time deposits increased 9.8% as the company offered competitive certificate-of-deposit rates.
- Accumulated other comprehensive loss increased by $1.51 million, net of tax, due to unrealized losses on available-for-sale securities. Total shareholders’ equity nevertheless increased to $89.4 million from $89.0 million.
Outlook, management commentary, risks and unusual items
- Management expects funding costs and deposit pricing to remain important drivers of net interest income. The company’s rate-sensitivity model estimated a 0.4% increase in twelve-month net interest income under a gradual 100-basis-point rate decline and a 3.1% decrease under a gradual 200-basis-point increase; these scenarios are not forecasts.
- Management reported improving delinquency trends in commercial and commercial real estate portfolios and stabilization of residential real estate values. The qualitative adjustments used in the allowance model were reduced accordingly.
- Management identified interest-rate changes, deposit runoff, reliance on borrowings, economic deterioration, inflation, commercial real estate and geographic concentration, credit losses, regulatory changes, FDIC assessment increases, competition, cybersecurity, technology implementation, fraud and workforce availability as key risks.
- The company reported no loan modifications during the quarter and no material litigation is expected from proceedings in the ordinary course of business.
- The Board declared a $0.23 per common share dividend on March 20, 2024, payable May 1, 2024. The filing states that the company exceeded applicable capital requirements and that the Bank was well capitalized.
- The BTFP ceased extending new loans on March 11, 2024. The company had $67.5 million of BTFP borrowings outstanding at quarter-end, with maturities in 2024 and 2025.
Investor verification points
- Monitor whether deposit outflows continue and whether replacement funding increases interest expense and further compresses the net interest margin.
- Review the maturity and refinancing plan for BTFP and FHLBB borrowings, including the effect of the discontinued BTFP facility.
- Assess commercial real estate concentrations, delinquency trends, non-accrual loans and the adequacy of the $10.0 million allowance for credit losses.
- Track the $22.4 million unrealized loss position in available-for-sale securities and the potential effect of future interest-rate movements on liquidity and capital.
- Verify future dividend capacity against earnings, regulatory capital requirements and the Bank’s ability to upstream dividends to the holding company.
- Evaluate whether higher personnel, technology, FDIC insurance, fraud and compliance costs persist.