COMMUNITY BANCORP VT

OVERVIEW

The Company’s consolidated assets at year-end 2023 were $1.10 billion compared to $1.06 billion at year-end 2022, an increase of 4.1%. Asset growth in 2023 was driven by increases in loans of $96.9 million, or 12.9% which was partially offset by a decrease of $53.4 million, or 90.8%, in cash on deposit at FRBB. Loan growth was attributable to increases in the CRE portfolio of $58.0 million, or 16.3%, the commercial & industrial loan portfolio of $8.8 million, or 7.8%, the purchased loan portfolio of $3.04 million, or 40.4%, the municipal loan portfolio of $19.8 million, or 57.3%, and the residential real estate portfolio of $10.1 million, or 5.1%. These increases were partially offset by a decrease in the residential real estate Jr lien portfolio of $2.1 million, or 6.2%.

Funding of the loan growth was provided by a combination of the decrease in cash at the FRBB and a $53.3 million increase in borrowed funds, which totaled $54.6 million at December 31, 2023 compared to $1.3 million at December 31, 2022. This funding also helped to offset a decrease of $26.0 million, or 2.8%, in total deposits, which decreased from $923.0 million on December 31, 2022, to $897.0 million on December 31, 2023. These decreases were due to the combined effect of decreases in core deposits (demand deposit accounts, both interest bearing and non-interest bearing) of $10.1 million, or 2.0%, money market funds of $18.7 million, or 13.4%, and savings accounts of $19.5 million, or 11.4%, which were partially offset by an increase in CDs of $22.4 million, or 22.0%.

Total interest income increased $9.8 million, or 26.4%, year over year due in part to the increase in the volume of the loan portfolio as well as the increases in the prime rate throughout 2022 into 2023.

Total interest expense increased $8.7 million, or 215.0%, for the year ended December 31, 2023 compared to 2022, driven mostly by the 100 basis point increase in short-term rates initiated by the FRB in 2023, together with the increased reliance on borrowed funds. Please refer to the interest rate sensitivity discussion in the Interest Rate Risk and Asset and Liability Management section for more information on the impact that FRB action and changes in the yield curve could have on net interest income.

The credit loss expense for the year ended December 31, 2023, was determined under ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, commonly referenced as the Current Expected Credit Losses, or CECL, which the Company adopted effective January 1, 2023. The credit loss expense for the year ended 2023 was $1.5 million compared to $978 thousand for 2022, resulting in an increase of 51.4% year over year. The increase in net charge-offs in 2023 compared to 2022 coupled with the increase in the loan portfolio were key factors for the increase year over year. The increase in charge-offs in the year over year comparison is due to higher-than-normal recoveries in 2022 that resulted in net recoveries of $21 thousand compared to net charge-offs of $341 thousand in 2023. Please refer to the ACL and provisions discussion in the Credit Risk section for more information on these increases.

Consolidated net income in 2023 decreased $308 thousand, or 2.2%, from $13.7 million for 2022 to $13.4 million for 2023. The $9.8 million increase in interest income was partially offset by an increase of $8.7 million in interest expense and coupled with an increase of $503 thousand in the credit loss expense between periods, resulted in a moderate increase of $622 thousand in net interest income after credit loss expense. Non-interest income increased $532 thousand, or 8.0%, while non-interest expense increased $1.7 million, or 7.8% year over year. These changes, along with other significant changes in non-interest income and non-interest expense are discussed in the appropriate sections of this MD&A.

Equity capital increased to $89.0 million, with a book value per share of $15.87 as of December 31, 2023, compared to equity capital of $75.2 million and a book value of $13.55 as of December 31, 2022. This increase in equity capital reflected net income for 2023 of $13.4 million and a decrease of $4.7 million, net of tax, in the accumulated other comprehensive loss in the shareholders’ equity portion of the balance sheet, due to a decrease in unrealized losses in the investment portfolio, reflecting lower bond rates. This unrealized loss position is considered temporary and does not impact the Company’s regulatory capital ratios.

On December 21, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.23 per common share, payable on February 1, 2024 to shareholders of record on January 15, 2024.

Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and the demand for loans and other products and services we offer, which are highly dependent on the business environment in our local banking markets and in the country. Recent economic reports for the state of Vermont show employment in the hardest hit industries such as leisure and hospitality has risen but is still below pre-pandemic levels. The Vermont unemployment rate, seasonally adjusted, in December of 2023 was reported at 2.1% compared to the low of 1.9% in July of 2023.

As of December 31, 2023, all the Company’s capital ratios, and those of our subsidiary Bank, were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an economic downturn from any headwinds related to inflation or recessionary periods, should one occur, our equity capital and regulatory capital ratios could be adversely impacted, including as a result of credit losses and other adverse impacts of the pandemic or government monetary policy.