Community Bancorp. 10-Q Summary
Business context and reporting period
Community Bancorp. is a Vermont bank holding company whose principal subsidiary is Community National Bank. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2012, with comparisons to June 30, 2011 and December 31, 2011. The company is classified as a smaller reporting company.
Financial condition and operating results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net income | $1.02 million | $0.87 million | $1.99 million | $1.82 million |
| Earnings per common share | $0.20 | $0.18 | $0.40 | $0.37 |
| Net interest income | $4.39 million | $4.32 million | $8.71 million | $8.48 million |
| Provision for loan losses | $0.25 million | $0.24 million | $0.50 million | $0.43 million |
| Non-interest income | $1.53 million | $1.28 million | $2.89 million | $2.74 million |
| Non-interest expense | $4.72 million | $4.39 million | $9.27 million | $8.74 million |
| Return on average assets | 0.77% | 0.64% | 0.74% | 0.67% |
| Return on average equity | 9.74% | 8.69% | 9.58% | 9.18% |
- Second-quarter net income increased 17.2%; six-month net income increased 9.4%. Results benefited from lower funding costs, stronger mortgage-related fee income and tax credits.
- Six-month tax-equivalent net interest income was $8.93 million versus $8.76 million in the prior-year period. Net interest margin declined to 3.53% from 3.61%, and net interest spread declined to 3.40% from 3.46%, reflecting the prolonged low-rate environment.
- Total assets were $553.4 million at June 30, 2012, essentially unchanged from year-end and up 7.8% year over year. Gross loans were $408.2 million, up 5.0% from year-end and 3.7% year over year. Net loans reported on the balance sheet were $401.3 million; management’s selected-data presentation includes loans held for sale and reports $404.3 million.
- Total deposits were $432.2 million, down 4.9% from year-end but up 3.7% year over year. Core demand deposits increased 16.2% year over year, while time deposits declined 8.9% year over year.
- Cash and cash equivalents were $15.1 million, down from $23.5 million at December 31, 2011 and $26.4 million at June 30, 2011. Securities available-for-sale were $60.1 million, and held-to-maturity securities were $24.0 million.
- Six-month operating cash flow was $2.0 million, compared with $3.4 million in the prior-year period. Investing activities used $9.4 million, primarily reflecting a $20.2 million increase in loans, while financing activities used $1.0 million. Cash decreased $8.4 million during the period.
- Borrowed funds were $37.8 million, compared with $18.0 million at year-end and June 30, 2011. The increase principally comprised $25.8 million of overnight federal funds borrowings, partly offset by repayment of a $6.0 million long-term advance.
- The allowance for loan losses was $3.9 million, or 0.989% of average loans. Six-month net charge-offs were $460,000, compared with $302,000 in the prior-year period; non-accrual loans were $6.7 million.
- Book value per common share was $8.30, compared with $8.04 a year earlier. The quarterly common dividend remained $0.14 per share.
Material changes versus comparable periods
- Interest income declined despite loan growth because average loan yields and investment yields decreased. Interest expense declined 12.8% in the second quarter and 14.4% for the first six months, driven by lower deposit and borrowing rates and repricing of maturing time deposits.
- Non-interest income increased 19.8% in the second quarter, primarily from mortgage loan sales, loan fees and a $41,000 gain on securities sales. Six-month non-interest income increased 5.5%.
- Non-interest expense increased 7.6% in the second quarter and 6.1% year to date. The largest increase was the amortization of affordable-housing and other tax-credit investments, which rose 141.8% year over year to $590,634 for the six months. Related tax credits increased to $639,714 from $267,036 and contributed to an income-tax benefit of $153,504 for the six months.
- Non-performing assets declined to $8.6 million from $9.3 million at year-end, but other real estate owned increased to $1.0 million from $90,000 following four residential property foreclosures.
- Commercial and industrial loans increased materially, reaching $51.4 million versus $38.2 million at year-end. Management intends to continue commercial and commercial real estate growth while adding credit-administration resources.
Guidance, outlook, risks, contingencies and unusual items
- No formal earnings or revenue guidance was provided. Management stated that it is focused on improving balance-sheet profitability, expense efficiency and credit-risk management while maintaining strong capitalization.
- Management expects continued pressure on net interest spread and margin because earning assets are repricing downward while rates on non-maturity deposits have less room to decline.
- Liquidity is supported by core deposits, loan and securities maturities, loan sales and borrowing capacity. At June 30, available lines included approximately $70.2 million from the Federal Reserve Bank of Boston, $67.7 million of secured FHLBB capacity and a $0.5 million unsecured FHLBB line; no Federal Reserve advances were outstanding.
- Key risks include economic weakness, commercial and commercial real estate credit exposure, housing values, rising non-performing assets, interest-rate changes, deposit volatility, competition, regulatory changes and possible higher reserve requirements.
- Off-balance-sheet exposures included $62.1 million of unused credit commitments, $1.5 million of standby and commercial letters of credit, a $2.0 million MPF credit-enhancement obligation and other smaller recourse commitments. Management stated that many commitments are expected to expire undrawn.
- Foreclosure actions were in process on relationships totaling approximately $4.3 million. Non-performing loans included approximately $2.7 million of federal government guarantees.
- A Vermont sales and use tax assessment was settled for $65,846 during the quarter; $65,000 had previously been accrued.
- The bank and company exceeded applicable regulatory capital requirements. At June 30, 2012, the bank’s total risk-based capital ratio was 12.56%, Tier 1 risk-based ratio was 11.47% and Tier 1 leverage ratio was 7.90%; the bank was considered well capitalized.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing states that routine litigation is not expected to be material.
Important facts for investors to verify
- Whether net interest margin continues to contract as loans and investments reprice in the low-rate environment.
- The sustainability of mortgage-sale fees and tax-credit benefits supporting current earnings.
- Trends in non-accrual loans, charge-offs, criticized assets, OREO and reserve coverage, particularly within commercial real estate and junior-lien residential loans.
- Deposit stability and the extent to which loan growth remains funded by overnight or other borrowed funds.
- The effect of proposed Basel III capital rules and any resulting restrictions on dividends or capital treatment.
- The reconciliation between balance-sheet net loans and the selected-data amount that includes loans held for sale.