Community Bancorp. 2012 Q3 Form 10-Q Summary
Business context and reporting period
Community Bancorp. is a Vermont-based bank holding company whose wholly owned subsidiary is Community National Bank. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012, with comparisons to the corresponding 2011 periods and December 31, 2011 balance-sheet data. The company was classified as a smaller reporting company.
Financial condition and key metrics
- Total assets: $561.7 million at September 30, 2012, up 1.6% from December 31, 2011 and 2.0% year over year.
- Gross loans: $409.1 million, up 5.2% from year-end and 4.6% year over year. Net loans were $403.6 million.
- Deposits: $457.1 million, up 0.6% from year-end and 1.3% year over year. Time deposits declined while savings, demand and money-market balances increased.
- Cash and equivalents: $9.5 million, down from $23.5 million at December 31, 2011 and $47.8 million at September 30, 2011.
- Shareholders’ equity: $42.9 million, compared with $40.9 million at year-end and $40.5 million a year earlier. Book value per common share was $8.42 versus $8.07 at September 30, 2011.
- Third-quarter net income: $1.27 million, up 54.4% from $0.82 million in the third quarter of 2011. Earnings per common share increased to $0.26 from $0.17.
- Nine-month net income: $3.25 million, up 23.4% from $2.64 million. Earnings per common share increased to $0.65 from $0.54.
- Net interest income: $4.54 million in the third quarter, up 4.8%, and $13.26 million for nine months, up 3.4%.
- Net interest margin: 3.56% for the first nine months, down from 3.60%; net interest spread declined to 3.42% from 3.44%.
- Non-interest income: $1.53 million in the quarter, up 37.3%, and $4.42 million year to date, up 14.7%. Growth was driven primarily by mortgage loan sales and servicing fees and $99,676 of securities gains.
- Non-interest expense: $4.55 million in the quarter, up 7.1%, and $13.82 million year to date, up 6.4%. Higher tax-credit investment amortization was the principal increase.
- Provision and credit costs: The loan-loss provision was $250,000 in the quarter and $750,001 year to date. Net charge-offs were $521,273 year to date, compared with $604,595 in 2011.
- Returns: Third-quarter annualized return on average assets was 0.90% and return on average equity was 11.85%, compared with 0.58% and 8.01%, respectively, in 2011. Nine-month ratios were 0.78% and 10.35% versus 0.64% and 8.78%.
- Cash flow: Nine-month operating cash flow was $5.13 million. Investing activities used $25.57 million, principally for loan growth and securities activity, while financing activities provided $6.50 million. Cash and equivalents declined by $13.94 million.
- Borrowings: Total federal funds purchased and other borrowed funds were $16.85 million, including $12.01 million of long-term borrowings and $4.84 million of overnight borrowings. Repurchase agreements were $28.08 million and junior subordinated debentures were $12.89 million.
- Capital: The bank was considered well capitalized. At September 30, 2012, bank total risk-based capital was 12.97%, Tier 1 risk-based capital was 11.86%, and Tier 1 leverage capital was 8.08%.
Material changes versus prior comparable periods
- Loan growth accelerated as commercial demand improved and the company retained certain 10- and 15-year residential mortgages rather than selling them.
- Available-for-sale securities decreased $19.1 million from year-end as securities were sold to fund loan growth; the company sold $12.75 million of securities during the third quarter and recognized a $99,676 gain.
- Held-to-maturity securities increased $20.4 million from year-end, primarily municipal securities.
- Interest expense declined because of lower deposit rates, maturities and repricing of time deposits, and reduced long-term borrowings. The company expects a lower rate on its $12.887 million of junior subordinated debentures beginning December 15, 2012, when the rate converts to three-month LIBOR plus 2.85%.
- Non-interest expense rose primarily because amortization of affordable-housing and other tax-credit investments increased to $885,951 for nine months from $366,440. Related tax benefits increased to $977,229 from $400,554.
- Income tax expense was only $3,534 in the third quarter versus $90,421 in 2011; the nine-month period produced a $149,970 tax benefit versus $336,658 of expense in 2011, primarily due to increased tax credits.
- Non-performing assets declined to $6.93 million from $9.28 million at year-end, although other real estate owned increased to $1.15 million from $90,000. Non-accrual loans declined to $4.71 million from $7.95 million.
Guidance, outlook, commentary and risks
Management did not provide quantitative earnings or balance-sheet guidance. It stated that the company is focused on improving balance-sheet profitability and expense efficiency while prudently managing credit risk and maintaining strong capitalization.
- The prolonged low-interest-rate environment continues to pressure asset yields, net interest spread and net interest margin. Management noted that deposit rates have less room to decline.
- Management intends to continue growing commercial and commercial real estate lending, but acknowledged that weak economic conditions and a slow recovery could limit demand and increase credit risk.
- Key credit risks include commercial real estate performance, housing prices, unemployment, borrower cash flows, construction and development exposures, and continued foreclosure or collection activity.
- Liquidity risks include loan growth exceeding deposit growth, deposit mix shifts, reliance on short-term borrowings and possible changes in customer funding behavior. The company had substantial unused borrowing capacity, including approximately $70.6 million under its Federal Reserve borrowing arrangement and approximately $69.9 million of additional secured FHLBB capacity.
- Off-balance-sheet commitments included $21.3 million of unused home-equity lines, $50.8 million of other credit commitments, $3.7 million of construction lines, $1.6 million of standby and commercial letters of credit, and $1.0 million of MPF credit-enhancement obligations.
- Proposed Basel III and other capital-rule changes could increase required capital, alter risk weightings, affect treatment of trust-preferred securities and require accumulated other comprehensive income to be included in regulatory capital.
- Management reported no material litigation, no material changes in market-risk exposures, and effective disclosure controls. Adoption of the accounting updates discussed in the filing had no material impact.
- The board declared a $0.14 per common share dividend payable November 1, 2012. The filing notes that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether loan growth can continue without materially increasing non-performing assets, charge-offs or the allowance for loan losses.
- Whether the declining net interest margin stabilizes as the junior subordinated debenture reprices and deposit costs remain low.
- The sustainability of mortgage-sale income, securities gains and tax-credit-related tax benefits, which materially supported reported earnings.
- Liquidity coverage and borrowing capacity if deposits remain relatively flat while loans continue to grow.
- The effect of proposed capital-rule changes on regulatory capital ratios, dividend capacity and the treatment of trust-preferred securities.
- Future performance and valuation of OREO, impaired loans, mortgage servicing rights and tax-credit investments.