Community Bancorp. (Vermont) — Q2 2022 Form 10-Q Summary
Business context and reporting period
Community Bancorp. is the holding company for Community National Bank, a Vermont-focused community bank providing commercial, real estate, municipal, residential mortgage, consumer and related financial services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022, compared primarily with the same 2021 periods and December 31, 2021 balance-sheet amounts.
Financial condition and key metrics
| Metric | Q2 2022 / June 30, 2022 | Comparable period or prior year-end |
|---|---|---|
| Total assets | $999.4 million | $1,019.1 million at December 31, 2021 |
| Gross loans | $702.9 million | $690.0 million at December 31, 2021 |
| Deposits | $871.9 million | $879.4 million at December 31, 2021 |
| Cash and cash equivalents | $67.1 million | $110.4 million at December 31, 2021 |
| Available-for-sale securities | $188.8 million | $182.3 million at December 31, 2021 |
| Shareholders’ equity | $74.0 million | $84.8 million at December 31, 2021 |
| Book value per common share | $13.41 | $15.48 at December 31, 2021 |
| Net income, three months | $3.02 million; $0.56 per common share | $3.05 million; $0.57 in Q2 2021 |
| Net income, six months | $5.43 million; $1.00 per common share | $6.07 million; $1.13 in 2021 |
| Net interest income, three months | $7.84 million | $7.51 million in Q2 2021 |
| Net interest income, six months | $15.40 million | $15.27 million in 2021 |
| Tax-equivalent net interest margin | 3.30% for Q2; 3.27% for six months | 3.48% and 3.54%, respectively |
| Return on average assets | 1.20% for Q2; 1.09% for six months | 1.30% and 1.32%, respectively |
| Return on average equity | 16.12% for Q2; 13.84% for six months | 15.46% and 15.60%, respectively |
| Operating cash flow, six months | $6.26 million | $8.71 million in 2021 |
Q2 total interest income rose 3.7% to $8.59 million, while total interest expense declined 2.0% to $0.75 million. Provision for loan losses increased 26.2% to $337,500. Non-interest income declined 7.6% to $1.63 million, and non-interest expense increased 3.1% to $5.43 million. Six-month provision expense was $1.20 million, compared with $535,000 in 2021.
The allowance for loan losses was $8.23 million, or 1.17% of loans, compared with 1.12% at year-end 2021. Non-accruing loans were $4.86 million, or 0.69% of loans, compared with $5.94 million, or 0.86%, at year-end. Six-month net charge-offs were $677,483, substantially driven by a $667,474 write-down on one non-performing commercial real estate loan.
Debt and funding consisted primarily of $31.2 million of repurchase agreements, $12.9 million of junior subordinated debentures and $1.3 million of long-term advances. Available liquidity included approximately $89.8 million of FHLBB borrowing capacity, $62.8 million under a Federal Reserve borrower-in-custody arrangement and $20.5 million of unsecured correspondent-bank lines. Management reported that the Bank was well capitalized and that consolidated capital exceeded applicable requirements.
Material changes versus prior comparable periods
- Net income was essentially flat in Q2, down 0.8%, but declined 10.6% for the first six months.
- Net interest income increased modestly despite the runoff of PPP fee amortization. PPP balances declined to approximately $1.6 million at June 30, 2022, from $12.2 million at December 31, 2021.
- Loan balances grew $12.9 million, or 1.9%, from year-end, led by commercial and industrial and commercial real estate lending. Municipal and PPP balances declined.
- Deposits declined $7.5 million, or 0.9%, primarily because of business and municipal account runoff; savings deposits increased $14.7 million.
- Cash and cash equivalents declined $43.3 million, reflecting deposit runoff and deployment into loans and securities. Investing activities used $38.7 million and financing activities used $10.9 million during the first six months.
- Accumulated other comprehensive loss increased by $14.3 million, net of tax, because of unrealized losses on available-for-sale securities as market interest rates rose. Total shareholders’ equity fell 12.7%, although management stated that the temporary securities losses did not affect regulatory capital ratios.
- Commercial and industrial plus commercial real estate loans represented 68.3% of the loan portfolio at June 30, 2022, increasing exposure to business conditions, property values, occupancy and cash-flow performance.
Guidance, outlook, commentary, 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, but noted that faster or greater deposit repricing could reduce the benefit. The company’s modeled 12-month net interest income sensitivity was a 1.7% decline under a 100-basis-point rate decrease and a 0.1% decline under a 200-basis-point increase; management cautioned that these are not forecasts.
Key risks include credit deterioration in commercial and commercial real estate loans, inflation, recession, changing interest rates, deposit runoff, competition, cybersecurity and operational failures, regulatory and accounting changes, workforce constraints and continued effects of COVID-19. The company also identified geographic concentration in northern New England as a risk.
The company expects to adopt the CECL credit-loss model beginning in fiscal 2023. Management continues parallel calculations and stated that adoption could increase the allowance and negatively affect regulatory capital ratios. The company is also evaluating the transition from three-month LIBOR for its $12.9 million of junior subordinated debentures due 2037; the filing does not provide a clear estimate of the future interest-cost impact.
COVID-related concessions had been granted to 595 borrowers; 339 loans with aggregate principal of $93.7 million remained outstanding at June 30, 2022. None were in deferral status, but management acknowledged potential future default risk. Legal proceedings were described as ordinary-course matters not expected to be material.
Facts investors should verify
- Whether commercial real estate credit quality, the $667,474 loan write-down and future charge-offs require additional provisioning.
- The pace and composition of deposit changes, particularly business and municipal deposit runoff and the cost of funding as rates rise.
- Whether the securities portfolio’s $19.6 million of unrealized losses at June 30, 2022 remain temporary or become realized or credit-related losses.
- The effect of CECL adoption in 2023 on the allowance, earnings and regulatory capital.
- The replacement rate and resulting interest expense for the $12.9 million of LIBOR-linked junior subordinated debentures.
- Whether loan growth can offset PPP runoff while maintaining liquidity and capital above regulatory requirements.