Community Bancorp. 2023 Q3 Form 10-Q Summary
Business context and reporting period
Community Bancorp., through Community National Bank, provides banking and related financial services primarily in northern New England. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023, with comparisons to the corresponding 2022 periods and December 31, 2022 balance-sheet data.
Financial condition and key metrics
- Assets: $1.083 billion at September 30, 2023, up 2.6% from $1.056 billion at December 31, 2022.
- Loans: $838.6 million, up 12.0%; commercial real estate represented $407.0 million, or 48.5%, of loans. Net loans were $829.6 million.
- Deposits: $901.2 million, down 2.4% from year-end. Demand, transaction, money market and savings balances declined, while time deposits increased $13.0 million.
- Liquidity and borrowings: Cash and cash equivalents declined to $17.5 million from $71.1 million. Borrowed funds increased to $49.2 million from $1.3 million, including $44.5 million of Federal Reserve Bank Term Funding Program advances. Repurchase agreements were $31.6 million and junior subordinated debentures were $12.9 million.
- Capital: Shareholders’ equity was $78.8 million versus $75.2 million at year-end. Book value per common share increased to $14.08 from $13.55. The Bank remained well capitalized; its common equity tier 1, total capital and tier 1 leverage ratios were 13.40%, 14.65% and 9.49%, respectively.
- Third-quarter revenue and earnings: Total interest income was $12.1 million, net interest income was $8.4 million, net income was $3.4 million, and diluted earnings per common share were $0.61, compared with $3.6 million and $0.66 in the 2022 quarter.
- Nine-month revenue and earnings: Total interest income was $34.1 million, net interest income was $25.2 million, net income was $9.9 million, and earnings per common share were $1.80, compared with $9.0 million and $1.67 in the prior-year period.
- Margins and returns: Tax-equivalent net interest margin was 3.37% for the quarter versus 3.49% in 2022 and 3.47% for the nine months versus 3.35%. Third-quarter annualized ROA and ROE were 1.24% and 16.48%; nine-month ROA and ROE were 1.27% and 16.68%.
- Credit costs: The provision for credit losses was $240,889 in the quarter and $808,557 for the nine months. The allowance for credit losses was $9.5 million, or 1.13% of loans, versus 1.16% at year-end.
- Credit quality: Nonaccrual loans were $7.2 million, or 0.86% of loans, compared with $7.9 million, or 1.05%, at year-end. Loans past due were $6.1 million. Net charge-offs for the nine months were $314,177.
- Cash flow: Operating activities provided $10.6 million. Investing activities used $85.8 million, primarily due to $90.5 million of net loan growth. Financing activities provided $21.6 million, including $44.5 million of BTFP proceeds. Cash and cash equivalents decreased $53.6 million.
- Dividends: The Board declared a quarterly common dividend of $0.23 per share, consistent with the 2022 quarterly dividend.
Material changes versus the prior comparable periods
- Loan growth and higher market rates increased interest income, but substantially higher deposit and borrowing costs limited the benefit. Third-quarter interest expense rose 245.4%, while nine-month interest expense rose 253.6%.
- Third-quarter net income declined 6.9%, despite higher net interest income, because interest costs and operating expenses increased. Nine-month net income increased 9.5%, supported by higher interest income and lower credit-loss provisions.
- Third-quarter net interest margin declined 12 basis points, reflecting funding-cost pressure. The nine-month margin increased 12 basis points because loan yields and asset mix improved earlier in the year.
- Non-interest income increased 11.8% in the quarter and 9.4% for the nine months, aided by CFS Partners income, loan-related fees, foreign exchange income and higher Visa card commissions. Nine-month income from sold loans declined 29.5%.
- Non-interest expense increased 8.9% in the quarter and 8.2% year to date, led by salaries, employee benefits, audit costs and FDIC insurance expense.
- The company adopted CECL on January 1, 2023, recording a $549,113 cumulative reduction to retained earnings. The adoption also established an allowance for certain off-balance-sheet credit exposures.
- Accumulated other comprehensive loss increased to $23.5 million, primarily from unrealized losses on available-for-sale securities. Management attributed the losses to higher interest rates rather than credit deterioration and reported no securities-related credit-loss allowance.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings or revenue guidance. Management expects loan growth and elevated asset yields to support earnings, but recognizes that competitive deposit pricing and increased wholesale borrowing costs are compressing spreads. The company’s interest-rate model estimated that a gradual 200-basis-point increase in rates would reduce 12-month net interest income by 3.1%, while a 100-basis-point decline would increase it by 0.5%; management cautioned that these estimates are not forecasts.
- Deposit outflows and loan growth have increased reliance on higher-cost borrowings, creating liquidity and funding-cost risk.
- The loan portfolio is concentrated in commercial and commercial real estate lending; CRE loans represented 48.5% of total loans. Risks include weaker economic conditions, declining property values, vacancies, refinancing pressure and borrower cash-flow deterioration.
- Management identified risks from inflation, recession, interest-rate changes, deposit reductions, credit losses, regulatory changes, higher FDIC assessments, competition, cybersecurity, technology, workforce availability and operational failures.
- Heavy July flooding in Vermont temporarily closed one branch. Management stated that customer impact was manageable and anticipated a full-service reopening by mid-November 2023.
- The company’s $12.9 million of junior subordinated debentures transitioned from three-month LIBOR to three-month CME SOFR plus the prescribed spread adjustment and 2.85% margin after June 30, 2023.
- Management stated that ordinary-course litigation is not expected to materially affect financial condition or results. No loan modifications were reported during the first nine months of 2023.
- Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deposit balances stabilize and whether further loan growth requires additional high-cost wholesale funding.
- Trends in net interest margin, deposit betas, borrowing costs and the effect of future Federal Reserve rate changes.
- Commercial real estate concentration, criticized and nonaccrual loans, delinquencies and the adequacy of the $9.5 million CECL allowance.
- The duration and potential capital impact of the $29.8 million unrealized loss on available-for-sale securities.
- Liquidity availability and collateral requirements for FHLBB, Federal Reserve and BTFP facilities, including the April-August 2024 BTFP maturities.
- The financial and operating impact of the Vermont branch flood and restoration costs.
- Future FDIC insurance assessments, regulatory capital requirements and the sustainability of the $0.23 quarterly common dividend.