Community Bancorp. — Form 10-Q Summary
Business context and reporting period
Community Bancorp., the parent of Community National Bank, filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2023. The company is a Vermont-based community bank and a smaller reporting company. Results are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $11.2 million | $8.6 million | $22.0 million | $16.8 million |
| Net interest income | $8.3 million | $7.8 million | $16.8 million | $15.4 million |
| Provision for credit losses | $281 thousand | $338 thousand | $568 thousand | $1.2 million |
| Non-interest income | $1.8 million | $1.6 million | $3.6 million | $3.3 million |
| Non-interest expense | $5.9 million | $5.4 million | $11.7 million | $10.9 million |
| Net income | $3.2 million | $3.0 million | $6.5 million | $5.4 million |
| Earnings per common share | $0.58 | $0.56 | $1.19 | $1.00 |
| Tax-equivalent net interest margin | 3.47% | 3.33% | 3.53% | 3.30% |
| Return on average assets | 1.25% | 1.20% | 1.28% | 1.09% |
| Return on average equity | 16.05% | 16.12% | 16.79% | 13.84% |
At June 30, 2023, total assets were $1.032 billion, down 2.3% from December 31, 2022. Loans were $781.0 million, up 4.3%, led by commercial real estate and commercial and industrial lending. Securities available-for-sale were $186.5 million, compared with $192.9 million at year-end.
Total deposits were $851.2 million, down 7.8% from year-end. The decline was concentrated in demand, transaction, money market and savings accounts. Borrowed funds and advances increased to $41.2 million, compared with $1.3 million at December 31, 2022; this included $13.4 million of overnight borrowings and $26.5 million of Federal Reserve Bank Term Funding Program advances. Repurchase agreements were $35.1 million and junior subordinated debentures were $12.9 million.
Cash and cash equivalents declined to $19.3 million from $71.1 million. Management reported $108.1 million of available FHLBB borrowing capacity, $53.7 million of available borrowing capacity under its FRBB borrowing arrangement, $26.5 million of BTFP advances outstanding and additional BTFP capacity subject to collateral. Management stated that liquidity resources were sufficient for current needs.
Shareholders’ equity was $80.5 million, compared with $75.2 million at year-end, and book value per common share increased to $14.44 from $13.55. The Bank was considered well capitalized, with a common equity tier 1 ratio of 13.58%, total capital ratio of 14.83% and tier 1 leverage ratio of 9.69% at June 30, 2023.
Six-month operating cash flow was $5.7 million, compared with $6.3 million in the prior-year period. Investing activities used $25.6 million, primarily reflecting $32.9 million of net loan growth. Financing activities used $31.8 million, primarily due to deposit outflows and common and preferred dividends. Net cash decreased $51.8 million.
Material changes versus prior comparable periods
- Q2 net income increased 5.8%; six-month net income increased 20.4%.
- Net interest income increased 5.5% in Q2 and 9.1% year to date. Higher loan balances and market rates increased interest income, but deposit and borrowing costs rose sharply.
- Total interest expense increased 292.6% in Q2 and 259.7% year to date, driven by higher deposit pricing, increased borrowings and higher rates on subordinated debentures.
- Non-interest income increased 12.5% in Q2 and 8.3% year to date. Income from sold loans declined as higher mortgage rates reduced residential mortgage activity, while CFS Partners income and loan-related fees increased.
- Non-interest expense rose 7.9% in both comparison periods, reflecting higher salaries, benefits, audit costs, FDIC insurance accruals and administrative costs.
- The company adopted CECL on January 1, 2023, recording a $549 thousand after-tax reduction to retained earnings. The allowance for credit losses was $9.3 million, or 1.19% of loans, at June 30.
- Unrealized losses on available-for-sale securities declined modestly, contributing $1.2 million of after-tax other comprehensive income in the first six months, compared with a $14.3 million loss in the prior-year period.
Outlook, commentary, risks and unusual items
- Management described the balance sheet as asset sensitive but cautioned that faster-than-expected deposit repricing or increased borrowing costs could reduce the benefit of higher rates. Its model estimated a 0.3% increase in 12-month net interest income under a 100-basis-point rate decline and a 2.7% decrease under a 200-basis-point increase; these are scenarios, not forecasts.
- Deposit outflows reflected seasonal activity, the continued spend-down of COVID relief funds and customer migration toward higher-yielding products. Continued outflows could increase reliance on borrowings or require asset sales.
- Commercial real estate represented approximately 49.3% of loans, and commercial and industrial plus commercial real estate exposure creates sensitivity to economic conditions, vacancy rates, property values, operating cash flows and refinancing conditions.
- Nonaccrual loans were $7.7 million, or 0.99% of total loans. Total loans past due were $6.6 million. Management stated that the ACL was adequate, but CECL estimates depend on forecasts, delinquency trends, loss assumptions and other judgments.
- The company’s sole LIBOR-linked instrument is its $12.9 million junior subordinated debentures. Following the LIBOR replacement date after June 30, 2023, the rate converts to three-month CME SOFR plus a 0.26161% spread adjustment plus 2.85%.
- Heavy flooding in Vermont in July 2023 damaged homes, businesses and one bank branch, which was closed for restoration. Management stated that customer impacts appeared manageable, but the filing does not provide a quantified financial impact.
- The company declared a $0.23 per common share quarterly dividend payable August 1, 2023. Routine litigation was not expected to be material. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether deposit outflows stabilize and whether funding costs continue to compress the net interest margin.
- Liquidity trends, collateral availability and the maturity and cost of FHLBB, BTFP and other borrowings.
- Commercial real estate credit quality, nonaccrual loans, delinquencies, charge-offs and future CECL provisions.
- The quantified effect of the Vermont flooding and branch closure, including any insurance recoveries or operating disruptions.
- The performance of the available-for-sale securities portfolio and the effect of interest-rate changes on accumulated other comprehensive loss and capital.
- The sustainability of loan growth, fee income and the $0.23 per share dividend in a higher-rate, lower-deposit environment.