Community Bancorp. 2013 Q3 SEC Filing 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 nine months ended September 30, 2013, compared primarily with the corresponding 2012 periods and December 31, 2012 balance sheet data.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Change |
|---|---|---|---|
| Net income | $1.355 million | $1.267 million | Up 6.9% |
| Earnings per common share | $0.28 | $0.26 | Up $0.02 |
| Net interest income | $4.788 million | $4.544 million | Up 5.4% |
| Provision for loan losses | $0.138 million | $0.250 million | Down 45.0% |
| Non-interest income | $1.540 million | $1.530 million | Up 0.7% |
| Non-interest expense | $4.472 million | $4.553 million | Down 1.8% |
| Return on average assets | 0.96% | 0.90% | Up 6 basis points |
| Return on average equity | 12.00% | 11.85% | Up 15 basis points |
| Metric | Nine months 2013 | Nine months 2012 | Change |
|---|---|---|---|
| Net income | $3.635 million | $3.253 million | Up 11.7% |
| Earnings per common share | $0.74 | $0.65 | Up $0.09 |
| Net interest income | $14.327 million | $13.256 million | Up 8.1% |
| Net interest margin | 3.83% | 3.56% | Up 27 basis points |
| Net interest spread | 3.73% | 3.42% | Up 31 basis points |
| Net cash provided by operating activities | $6.916 million | $5.133 million | Up $1.782 million |
| Net cash used in investing activities | $(8.745) million | $(25.570) million | Lower use of cash |
| Net cash from financing activities | $(14.671) million | $6.496 million | Shifted to cash use |
- Total assets were $564.1 million at September 30, 2013, down 2.0% from year-end 2012 and up 0.4% year over year.
- Gross loans were $433.2 million, up 3.7% from December 31, 2012 and 5.9% year over year. Net loans were $427.5 million.
- Total deposits were $470.5 million, down 1.0% from year-end but up 2.9% year over year.
- Shareholders’ equity was $45.3 million, compared with $43.4 million at December 31, 2012. Book value per common share was $8.81 versus $8.42 at September 30, 2012.
- Cash and cash equivalents were $13.4 million, down from $29.9 million at December 31, 2012 but above $9.5 million at September 30, 2012.
- Borrowings consisted principally of $8.325 million of overnight federal funds purchased and $12.887 million of junior subordinated debentures. The $6.0 million long-term FHLBB borrowing outstanding at year-end was repaid in January 2013.
- The allowance for loan losses was $4.799 million, equal to approximately 1.11% of gross loans and 97.9% of non-accrual loans.
Material changes versus prior comparable periods
- Profitability improved primarily because lower funding costs more than offset lower interest income. Interest expense declined 33 basis points on average interest-bearing liabilities for the first nine months, helped by repricing of junior subordinated debentures from 7.56% to a third-quarter 2013 rate of 3.130%.
- Management continued shifting assets from lower-yielding taxable securities into loans. Average loans increased 5.7% year over year, while average taxable investment securities declined 30.6%.
- Mortgage activity weakened. Third-quarter mortgage originations were $6.4 million versus $12.7 million in the prior-year quarter, and income from sold loans declined to $396,770 from $418,594.
- Service fees increased following changes to certain demand deposit account fee structures. Non-interest income was broadly stable because higher service fees and other income offset lower securities-sale gains and mortgage-related income.
- Credit costs improved: the nine-month provision declined 38.2% to $463,750, and net charge-offs were a recovery of $23,601 compared with net charge-offs of $521,273 in the prior-year period.
- Non-performing assets increased to $6.494 million from $6.208 million at year-end, despite management reporting a 15.2% decrease in non-performing assets during the first nine months based on its comparison measure. Non-accrual loans were $4.902 million, while OREO was $1.125 million at September 30.
- OREO activity was significant: the Company sold properties and acquired additional collateral during the period. Two additional commercial properties were sold shortly after quarter-end, reducing OREO to $885,205.
- Tax expense increased materially because of higher pretax income and fewer available tax credits. Nine-month income tax expense was $778,929 compared with a $149,970 benefit in 2012.
Guidance, outlook, management commentary, risks and unusual items
Management did not provide formal earnings guidance. Its stated priorities are to improve balance-sheet profitability and expense efficiency, grow commercial and commercial real estate lending, maintain capital strength, and prudently manage credit risk.
- Management expects continued pressure from the prolonged low-interest-rate environment because asset yields are declining while deposit rates have less room to fall.
- Demand for commercial loans increased in the third quarter and remained steady, while demand for one-to-four-family residential loans moderated.
- The Company identified risks from economic weakness, competition, changing interest rates, regulatory and compliance costs, changes in tax policy, nonperforming assets and charge-offs, reserve estimates, consumer and business behavior, Basel III implementation, monetary and fiscal policy, and changes in U.S. government debt credit quality.
- Liquidity was supported by core deposits, loan and securities cash flows, loan sales, and borrowing capacity. At September 30, 2013, available secured Federal Reserve borrowing capacity was approximately $76.6 million and additional FHLBB secured borrowing capacity was approximately $74.0 million; no advances were outstanding against the Federal Reserve line.
- Off-balance-sheet commitments included $23.4 million of unused home-equity lines, $47.2 million of other commitments to extend credit, $15.2 million of construction lines, $1.1 million of standby and commercial letters of credit, and a $1.5 million MPF credit-enhancement obligation.
- There were no third-quarter TDRs and no TDR payment defaults during the twelve months ended September 30, 2013. Management stated that ordinary-course litigation was not expected to be material.
- The Company and Bank exceeded applicable regulatory capital requirements. The Bank was considered well capitalized, with total risk-based capital of 12.81%, Tier 1 risk-based capital of 11.56%, and Tier 1 leverage capital of 8.16% at September 30, 2013.
- New Basel III rules were scheduled to phase in beginning January 2014; management was evaluating their potential effect on capital ratios, dividends, and capital planning.
- Management concluded that disclosure controls were effective and reported no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm whether loan growth and the shift from securities to loans can offset future margin compression as interest rates and funding costs change.
- Review the composition and migration of Group B and Group C loans, non-accrual loans, OREO, and commercial real estate exposure.
- Assess whether the allowance for loan losses remains adequate, particularly after the increase in the allowance balance and changes in coverage of non-accrual loans net of government guarantees.
- Monitor liquidity after the substantial year-to-date decline in cash and cash equivalents and the increased use of overnight borrowings.
- Evaluate the sustainability of earnings given lower mortgage activity, reduced tax credits, and the benefit from the debenture rate repricing.
- Review the effect of Basel III capital rules on regulatory capital, dividend capacity, and the treatment of preferred stock and trust-preferred debentures.
- Verify post-quarter-end OREO sales and the resulting reported OREO balance.