Community Bancorp. 10-Q Summary
Reporting period: Quarterly and six-month periods ended June 30, 2013, compared with June 30, 2012 and December 31, 2012 balance-sheet data. The unaudited consolidated statements cover Community Bancorp. and its wholly owned subsidiary, Community National Bank, a Vermont-based community bank serving northern and central New England. The company is a smaller reporting company.
Key Financial Metrics
| Metric | Q2 2013 | Q2 2012 | Change |
|---|---|---|---|
| Total interest income | $5.805 million | $5.633 million | 3.1% increase |
| Net interest income | $4.912 million | $4.394 million | 11.8% increase |
| Provision for loan losses | $120,000 | $250,000 | 52.0% decrease |
| Non-interest income | $1.521 million | $1.533 million | 0.8% decrease |
| Non-interest expense | $4.818 million | $4.718 million | 2.1% increase |
| Net income | $1.238 million | $1.021 million | 21.3% increase |
| EPS | $0.25 | $0.20 | Increase |
| Return on average assets | 0.88% | 0.77% | Increase |
| Return on average equity | 11.23% | 9.74% | Increase |
Six-month results: Net income was $2.280 million versus $1.986 million, up 14.8%. Net interest income was $9.540 million versus $8.713 million. EPS was $0.46 versus $0.40. Tax-equivalent net interest margin was 3.84% versus 3.53%, and the tax-equivalent net interest spread was 3.73% versus 3.40%.
Balance sheet at June 30, 2013: Total assets were $554.644 million; gross loans were $425.812 million; net loans were $420.519 million; deposits were $444.459 million; total liabilities were $510.267 million; and shareholders’ equity was $44.378 million. Book value per common share was $8.65 versus $8.30 at June 30, 2012.
Cash flow and liquidity: Six-month operating cash flow was $4.830 million, investing cash flow was $3.358 million, and financing cash flow was negative $22.787 million. Cash and cash equivalents declined $14.600 million from year-end to $15.282 million. The company had $22.055 million of overnight federal funds purchased at June 30, 2013, no long-term FHLBB advances, and available secured borrowing capacity of approximately $75.7 million through the Federal Reserve Bank of Boston and approximately $73.4 million through the FHLBB, plus a $0.5 million unsecured FHLBB federal funds line.
Credit metrics: The allowance for loan losses was $4.522 million, or 1.077% of average loans, compared with $3.926 million and 0.989% at June 30, 2012. Six-month net charge-offs were $116,151 versus $460,385. Non-accrual loans were $3.672 million, down from $6.701 million a year earlier. Total non-performing assets were $6.492 million, compared with $6.208 million at December 31, 2012, primarily because OREO increased to $2.172 million from $1.075 million.
Capital: At June 30, 2013, the company reported total capital to risk-weighted assets of 12.89%, Tier 1 capital to risk-weighted assets of 11.17%, and Tier 1 capital to average assets of 7.68%. The bank was considered well capitalized under the applicable prompt corrective action framework.
Material Changes Versus Prior Periods
- Gross loans increased 1.9% from December 31, 2012 and 4.3% year over year, led by commercial lending and first-lien residential mortgages.
- Deposits decreased 6.5% from year-end but increased 2.9% year over year. The year-to-date decline was largely seasonal and related to municipal finance balances and operating accounts.
- Held-to-maturity securities declined 42.4% from year-end as approximately $27.7 million of municipal loans matured at the end of the annual municipal finance cycle. Management reported approximately $19 million of renewals and new municipal loans booked in July 2013.
- Cash declined as deposits ran off and loan growth continued. The funding shortfall was partly covered by $22.055 million of overnight borrowings and approximately $5 million of one-way CDARS deposits.
- Net interest income improved primarily because funding costs declined, including a substantial reduction in the rate on junior subordinated debentures, which repriced to 3.130% for the second quarter from 7.56% previously.
- Mortgage production weakened as mortgage rates increased. Second-quarter mortgage originations were $8.542 million versus $12.175 million in the prior-year quarter, although mortgage sale income remained broadly stable because of improved mortgage servicing-rights valuation.
- OREO increased after the company took possession of three commercial properties and one residential property during the second quarter. Management expected a sale in process to reduce OREO toward the 2012 year-end level during the third quarter.
Outlook, Risks and Unusual Items
Management provided no formal earnings or revenue guidance. It stated that the company intends to continue growing commercial and commercial real estate lending, retain selected 10- to 15-year residential mortgages, manage expenses and credit risk, and maintain a strong capital position.
- Second-quarter interest income included a non-recurring $197,072 recovery associated with reclassifying a non-performing loan to OREO. Excluding this item, interest income would have declined modestly year over year.
- Low interest rates continue to pressure asset yields and could limit further reductions in deposit costs. Rising longer-term rates could also affect securities valuations, mortgage demand, prepayments and liquidity.
- Key credit risks include commercial real estate concentrations, residential mortgage and junior-lien exposure, economic weakness, changing property values, unemployment, weather-sensitive local businesses and potential increases in non-performing assets or loan-loss reserves.
- Regulatory costs and requirements, including Dodd-Frank, consumer-protection rules and Basel III, may increase operating costs or affect capital ratios and dividend flexibility. Basel III rules were scheduled to take effect in January 2014, and management was evaluating their impact.
- Off-balance-sheet exposures included $67.3 million of unused home-equity and other credit commitments, $9.3 million of construction lines, $1.1 million of standby and commercial letters of credit, $1.5 million of MPF credit enhancement obligations and $0.3 million of credit-card portfolio recourse. Contract amounts do not necessarily represent future cash requirements.
- Management stated that routine litigation was not expected to be material, and that no additional funds were contractually committed to impaired, non-accrual or restructured borrowers.
Investor Verification Items
- Verify whether the July 2013 municipal loan renewals and deposit inflows occurred as described and whether seasonal liquidity pressure reversed.
- Assess the sustainability of earnings excluding the $197,072 non-performing-loan interest recovery and the benefit from lower borrowing costs.
- Monitor OREO sales, property valuations and any resulting gains, losses or carrying-cost expense.
- Review trends in criticized loans, delinquencies, non-accrual loans, charge-offs and the adequacy of the $4.522 million allowance.
- Evaluate the effect of rising market rates on net interest margin, securities accumulated other comprehensive income, mortgage production and deposit retention.
- Confirm the impact of Basel III implementation on regulatory capital ratios, dividends and the treatment of trust-preferred securities.
- Reconcile the reported net-loan figures used in the selected financial data with the balance-sheet presentation, which separately identifies loans held for sale and related adjustments.