COMMUNITY BANCORP quarterly report, Q3 FY2011

Community Bancorp. — Q3 2011 Form 10-Q Summary

Business Context and Reporting Period

Community Bancorp., headquartered in Derby, Vermont, operates through Community National Bank and provides community banking, lending, deposit, mortgage-loan sales, trust and investment-management services in northern New England. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011, with comparisons to the corresponding 2010 periods and December 31, 2010. The Company reported 4,703,837 common shares outstanding at November 7, 2011.

Financial Performance and Position

Metric	Q3 2011	Q3 2010	9M 2011	9M 2010
Net income	$820,624	$787,805	$2,636,811	$2,459,250
Earnings per common share	$0.17	$0.16	$0.54	$0.51
Net interest income	$4,336,750	$4,341,381	$12,821,683	$12,803,158
Provision for loan losses	$287,500	$433,334	$712,500	$858,334
Non-interest income	$1,114,448	$1,230,782	$3,853,112	$3,649,015
Non-interest expense	$4,252,653	$4,326,559	$12,988,826	$12,975,838

Third-quarter net income increased 4.2%; nine-month net income increased 7.2%.
Year-to-date reported net interest margin was 3.60%, down from 3.88%; tax-equivalent net interest margin was also pressured by lower asset yields.
Year-to-date return on average assets was 0.64%, versus 0.65% in 2010; return on average equity was 8.78%, versus 8.70%.
Common dividends declared were $0.14 per share in the third quarter and $0.42 per share for the first nine months, compared with $0.12 and $0.36, respectively, in 2010. Book value per common share was $8.07, versus $7.73 at September 30, 2010.

Balance Sheet, Liquidity, Debt and Capital

Total assets were $550.7 million at September 30, 2011, up 0.9% from year-end 2010 and 4.5% year over year.
Total deposits were $451.2 million, up 3.0% from year-end and 7.5% year over year. Growth was concentrated in demand, NOW and savings accounts, while time deposits declined.
Gross loans were $391.0 million, essentially unchanged from year-end and up 0.2% year over year. Residential real estate represented approximately 52.8% of gross loans and commercial real estate approximately 28.7%.
Cash and cash equivalents were $47.8 million. Available-for-sale securities increased to $31.5 million, while held-to-maturity securities declined to $36.9 million.
Federal funds purchased and other borrowed funds declined to $18.0 million from $33.0 million at both December 31, 2010 and September 30, 2010. Repurchase agreements were $24.1 million and junior subordinated debentures were $12.9 million.
The Company reported $67.9 million of available Federal Reserve borrowing capacity and approximately $76.7 million of additional secured FHLBB borrowing capacity; no advances were outstanding under the Federal Reserve line.
Shareholders’ equity was $40.5 million, compared with $39.1 million at year-end. At September 30, 2011, the Company’s total capital-to-risk-weighted-assets ratio was 12.54%, Tier 1 risk-based capital ratio was 10.77%, and Tier 1 leverage ratio was 7.44%. The Bank was considered well capitalized.

Cash Flow and Credit Quality

For the first nine months, operating activities provided $4.0 million of cash, investing activities used $9.3 million, and financing activities provided $1.6 million. Cash and cash equivalents decreased $3.7 million to $47.8 million.
The allowance for loan losses was $3.84 million, compared with $3.73 million at year-end. Nine-month net charge-offs were $604,595, and the allowance equaled 0.981% of average loans.
Non-accruing loans increased 61.2% from $4.43 million at year-end to $7.13 million. Total non-performing assets increased 17.2% to $8.20 million, despite the elimination of $1.21 million of OREO through property sales.
Past-due loans totaled $10.09 million at September 30, 2011, compared with $10.55 million at year-end; loans 90 days or more past due and accruing declined to $1.06 million.
Seventeen non-accrual loans totaling $3.78 million were troubled debt restructurings. The Company recognized 22 additional modified loans as TDRs since year-end, including 13 placed on non-accrual status.

Material Changes Versus Comparable Periods

Lower interest expense, reduced loan-loss provisions and lower non-interest expense supported higher earnings, while interest income and non-interest income declined in the third quarter.
Year-to-date interest income declined 3.6%, but interest expense declined 13.3%, producing a slight 0.14% increase in net interest income.
Average earning-asset yields fell 56 basis points, compared with a 26-basis-point decline in average funding costs. Management attributed the resulting margin compression to the prolonged low-interest-rate environment.
Third-quarter income from sold loans declined 36.2%, reflecting lower loan-sale point fees and premiums. Loan-sale volume was $7.6 million in the quarter versus $10.7 million in the prior-year quarter.
FDIC insurance expense declined because the assessment formula changed from a deposit-based formula to an asset-based formula effective April 1, 2011.
Available-for-sale securities increased 47.1% from year-end as deposit growth exceeded loan demand and the Company redeployed excess liquidity into investments.

Outlook, Risks, Contingencies and Unusual Items

Management described Vermont’s economic recovery as slow and cautious. Hurricane Irene caused customer business disruption, and one $1.0 million loan was placed on non-accrual status following flood damage.
Key risks include continued economic weakness, rising fuel costs, housing and commercial real estate performance, loan delinquencies and charge-offs, interest-rate changes, deposit volatility, competitive pressure and regulatory costs.
Management expects the low-rate environment to continue pressuring net interest spread and margin. It also expects competitive effects from Regulation II to reduce debit-card interchange income and the repeal of Regulation Q to increase competition for deposits.
The Company’s commercial and commercial real estate strategy may increase credit exposure; management stated that additional commercial-credit resources will be added as this portfolio grows.
The Company accrued $50,000 related to a Sales and Use Tax audit while challenging approximately $80,000 of the amount assessed.
Off-balance-sheet exposure included $20.3 million of unused home-equity lines, $40.8 million of other credit commitments, $5.0 million of construction commitments, $1.5 million of standby and commercial letters of credit, and a $1.9 million net MPF credit-enhancement obligation. Management does not expect significant losses from the credit-card recourse commitment.
Management reported no material litigation, no material changes in market-risk exposures, effective disclosure controls, and no material changes in internal control over financial reporting.

Important Facts for Investors to Verify

Whether the increase in non-accrual loans, TDRs and non-performing assets persists and produces higher charge-offs or reserve requirements.
Whether continued low interest rates further compress net interest margin and whether loan demand improves enough to redeploy excess liquidity into higher-yielding assets.
The sustainability of deposit growth, particularly the contribution from affiliate-related balances and the potential volatility of non-maturity deposits.
The future impact of debit-card interchange-fee competition, broader Dodd-Frank implementation and other regulatory costs.
The adequacy of the $3.84 million loan-loss allowance relative to the residential and commercial real estate concentrations and $7.13 million of non-accrual loans.
The filing presents slightly different “net loans” amounts in selected financial data and the balance sheet, reflecting differing treatment of loans held for sale; investors should reconcile the definitions before comparing periods.