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CMTV > SEC Filings for CMTV > Form 10-Q on 14-Nov-2012All Recent SEC Filings

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Form 10-Q for COMMUNITY BANCORP /VT


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for the Period Ended September 30, 2012

The following discussion analyzes the consolidated financial condition of Community Bancorp. (the Company) and its wholly-owned subsidiary, Community National Bank (the Bank), as of September 30, 2012, December 31, 2011 and September 30, 2011, and its consolidated results of operations for the two interim periods presented. The Company is considered a "smaller reporting company" under applicable regulations of the Securities and Exchange Commission (SEC) and is therefore eligible for relief from certain disclosure requirements.

The following discussion should be read in conjunction with the Company's audited consolidated financial statements and related notes contained in its 2011 Annual Report on form 10-K filed with the SEC.

FORWARD-LOOKING STATEMENTS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements about the results of operations, financial condition and business of the Company and its subsidiary. When used therein, the words "believes," "expects," "anticipates," "intends," "estimates," "plans," "predicts," or similar expressions, indicate that management of the Company is making forward-looking statements.

Forward-looking statements are not guarantees of future performance. They necessarily involve risks, uncertainties and assumptions. Future results of the Company may differ materially from those expressed in these forward-looking statements. Examples of forward looking statements included in this discussion include, but are not limited to, estimated contingent liability related to assumptions made within the asset/liability management process, management's expectations as to the future interest rate environment and the Company's related liquidity level, credit risk expectations relating to the Company's loan portfolio and its participation in the Federal Home Loan Bank of Boston (FHLBB) Mortgage Partnership Finance (MPF) program, and management's general outlook for the future performance of the Company, summarized below under "Overview". Although forward-looking statements are based on management's current expectations and estimates, many of the factors that could influence or determine actual results are unpredictable and not within the Company's control. Readers are cautioned not to place undue reliance on such statements as they speak only as of the date they are made. The Company does not undertake, and disclaims any obligation, to revise or update any forward-looking statements to reflect the occurrence or anticipated occurrence of events or circumstances after the date of this Report, except as required by applicable law. The Company claims the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995.

Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities: (1) general economic conditions, either nationally, regionally or locally continue to deteriorate, resulting in a decline in credit quality or a diminished demand for the Company's products and services; (2) competitive pressures increase among financial service providers in the Company's northern New England market area or in the financial service industry generally, including competitive pressures from non-bank financial service providers, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems; (3) interest rates change in such a way as to reduce the Company's margins; (4) changes in laws or government rules, or the way in which courts and government agencies interpret or implement those laws or rules, increase our costs of doing business or otherwise adversely affect the Company's business; (5) changes in federal or state tax policy; (6) changes in the level of nonperforming assets and charge-offs; (7) changes in estimates of future reserve requirements based upon relevant regulatory and accounting requirements; (8) changes in consumer and business spending, borrowing and savings habits; (9) proposed changes to the calculation of the Company's regulatory capital ratios, which are due to be implemented on January 1, 2013, and which, among other things, will require additional regulatory capital, phase out the Tier 1 capital treatment for trust preferred securities, change the framework for risk-weighting of assets and require accumulated other comprehensive income to be reflected in regulatory capital; and (10) the effect of and changes in the United States monetary and fiscal policies, including the interest rate policies, regulation of the money supply by the Federal Reserve Board, and adverse changes in the credit rating of U.S. government debt.

NON-GAAP FINANCIAL MEASURES

Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with generally accepted accounting principles in the United States (US GAAP or GAAP) must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company's reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, two non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin, have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G.


Management believes that these non-GAAP financial measures are useful in evaluating the Company's financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.

OVERVIEW

The Company's consolidated assets on September 30, 2012 were $561,661,955, an increase of $8,756,438, or 1.58% from December 31, 2011, and an increase of $10,940,029, or 1.99% from September 30, 2011. The most significant change in assets in both comparison periods was an increase in loans and a decrease in cash. Demand for commercial loans increased since year-end and demand for 1-4 family residential loans has remained steady. The Company has retained in the loan portfolio some 10 and 15 year fixed rate mortgages to help maintain the relative level of the 1-4 family loans in the overall portfolio, while continuing to sell 30 year mortgage loans in the secondary market to manage interest rate risk. Cash decreased $13,940,583 from year-end and $38,239,112 year over year. Cash was used to purchase available-for-sale securities during the later part of 2011 and continuing into the first quarter of 2012, increasing the portfolio by $15,475,543 year over year. As loan demand increased in 2012, cash was used to fund loans, which increased $20,422,606 from year end and $18,134,539 from September 30, 2011. This resulted in a decrease of $19,090,099 in securities available-for-sale from year-end to September 30, 2012. Deposits at September 30, 2012 were $457,101,572, an increase of $5,938,237, or 1.32% from September 30, 2011 and an increase of $2,708,263, or 0.6% from December 31, 2011. Although there was not a significant increase in total deposits, some changes within the mix are worth noting. The decrease in NOW accounts of $7,147,030 from September 30, 2011 to September 30, 2012 is attributed to a decrease in an account with the Company's affiliate, Community Financial Services Group (CFSG) in the amount of $10,569,228 which was partially offset by growth in core customer accounts of $2,427,057. The cyclical fluctuations in the balances of municipal customer accounts contributed to the fluctuations in NOW and money market accounts, with a decrease in Government Agency accounts (NOW accounts) from December 31, 2011 to September 30, 2012 of $14,900,150, and an increase in the non arbitrage deposit accounts (money market accounts) of $9,888,181 from December 31, 2011 to September 30, 2012 and $9,556,445 from September 30, 2011 to September 30, 2012. While an increase is noted in core money market and savings accounts, management believes, to a certain extent that this increase may be related to the $8,474,421 or 6.2% decrease in time deposits year over year as customers shift funds from maturing time deposits to non-maturing deposit accounts due to the low interest rate environment.

Net income for the third quarter of 2012 was $1,267,351 or $0.26 per common share compared to $820,624 or $0.17 per common share for the third quarter of 2011. Net interest income increased in the third quarter of 2012 compared to the third quarter of 2011, due to both an increase in interest income and a decrease in interest expense. The increase in interest income is due to a combination of the growth of the balance sheet and a shift from lower earning assets to higher earning assets. The lower interest expense was attributed to a combination of the decrease in other time deposits and long-term borrowings, as well as a decrease in rates paid on interest bearing deposits. Non-interest income increased during the third quarter of 2012 compared to the third quarter 2011, due mostly to an increase in fee income from the sale of residential loans in the secondary market. Normal operating expenses have remained fairly stable with increases in other expenses for the third quarter and year to date mostly attributed to the increase in the amortization of the Company's investment in tax credit projects as further described in the results of operation section of this report.

On September 25, 2012, the Company's Board of Directors declared a quarterly cash dividend of $0.14 per common share, payable on November 1, 2012 to shareholders of record on October 15, 2012. The Company is focused on increasing the profitability of the balance sheet, improving expense efficiency, and prudently managing risk, particularly credit risk, in order to remain a well-capitalized bank in this challenging economic environment.

CRITICAL ACCOUNTING POLICIES

The Company's significant accounting policies, which are described in Note 1 (Significant Accounting Policies) to the Company's consolidated financial statements in the December 31, 2011 Annual Report on Form 10-K, are fundamental to understanding the Company's results of operations and financial condition because they require management to use estimates and assumptions that may affect the value of the Company's assets or liabilities and financial results. These policies are considered by management to be critical because they require subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. The critical accounting policies govern:

? the allowance for loan losses;
? other real estate owned (OREO);
? valuation of residential mortgage servicing rights (MSRs); ? other than temporary impairment of investment securities; and ? the carrying value of goodwill.


These policies are described further in the Company's December 31, 2011 Annual Report on Form 10-K in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" and in Note 1 (Significant Accounting Policies) to the consolidated financial statements. There have been no material changes in the critical accounting policies described in the 2011 Annual Report on Form 10-K.

RESULTS OF OPERATIONS

The Company's net income for the third quarter of 2012 was $1,267,351, representing an increase of $446,727 or 54.4% over net income of $820,624 for the third quarter of 2011. This resulted in earnings per common share of $0.26 for the third quarter of 2012 compared to $0.17 for the third quarter of 2011. Net income for the first nine months of 2012 was $3,253,392 compared to $2,636,811 for the same period in 2011, representing an increase of $616,581 or 23.4%. This resulted in earnings per common share for the nine months ended September 30, of $0.65 for 2012 and $0.54 for 2011. Core earnings (net interest income) for the third quarter of 2012 increased $206,940 or 4.8%, compared to the third quarter of 2011, despite continued pressure on the net interest margin and spread in this persistently low interest rate environment. Growth in the balance sheet combined with an effort to increase earning assets and decrease cash resulted in an increase in interest income of $100,917 or 1.8% compared to the same period last year. Although total deposits increased $5,938,237 year over year, interest expense on deposits, the major component of total interest expense, decreased $97,712 or 10.1% between quarterly periods, partly attributable to a decrease in the rates paid on interest-bearing deposit accounts, as certificates of deposits matured and were renewed into products at lower rates. Furthermore, it appears that some customers may be parking funds in more liquid, non maturing products such as savings or money market accounts while rates remain at historical lows. These same trends affected net interest income for the first nine months of 2012, resulting in net interest income of $13,256,365, an increase of $434,682 or 3.4% over the first nine months of 2011. The Company recorded a provision for loan losses of $249,999 for the third quarter of 2012 compared to $287,500 for the third quarter of 2011, a decrease of 13.0% and the provision for the nine months ended September 30, 2012 was $750,001 compared to $712,500 for the same period in 2011, an increase of 5.3%.

Non-interest income increased $415,769 or 37.3%, when compared to the third quarter of 2011. Strong mortgage activity and commercial loan demand had a positive impact on non-interest income. Fees related to the sales and servicing of loans sold on the secondary market were the major component of the increase in total non-interest income between the two quarters. Point fees and premiums collected on sold mortgages were $322,637 for the third quarter of 2012 compared to $165,590 for the same period in 2011, an increase of 94.8%. Also contributing to the increase in total non-interest income for the comparison period were gains of $99,676 on the sale of securities available-for-sale, as further discussed in the Changes in Financial Condition section of this report. The increase in non-interest income for the nine months ended September 30, 2012 was $565,114 or 14.7% from the same period in 2011, with similar trends causing the variance.

Total non-interest expense increased $330,370 or 7.1% for the third quarter 2012 compared to the same quarter in 2011. The most significant increase was the amortization of the Company's investments in tax credit projects which was $295,317 for the third quarter of 2012 compared to $122,146 for the third quarter of 2011; an increase of $173,171, or 141.8%. The amortization for the nine months ended September 30, 2012 was $885,951 compared to $366,440; an increase of $519,511 or 141.8% over the first nine months of 2011. The tax credit investments provided tax benefits of $977,229 for the first nine months of 2012 compared to $400,554 for the first nine months of 2011. During the quarter, the Company was able to reduce the accrual for the employee health insurance plan in the amount of $107,000 due to lower than expected claims. Otherwise, operating expenses remained relatively stable compared to the same period last year.

Return on average assets, which is net income divided by average total assets, measures how effectively a corporation uses its assets to produce earnings. Return on average equity, which is net income divided by average shareholders' equity, measures how effectively a corporation uses its equity capital to produce earnings. The following table shows these ratios annualized for the comparison periods.

For the quarter ended September 30,        2012        2011

Return on Average Assets                     0.90 %     0.58 %
Return on Average Equity                    11.85 %     8.01 %

For the nine months ended September 30,     2012        2011

Return on Average Assets                     0.78 %     0.64 %
Return on Average Equity                    10.35 %     8.78 %


The following table summarizes the earnings performance and certain balance sheet data of the Company for the 2012 and 2011 comparison periods.

                              SELECTED FINANCIAL DATA (Unaudited)

                                                               September 30,      December 31,
                                                                    2012              2011
Balance Sheet Data

Net loans*                                                     $  405,081,157     $ 384,792,788
Total assets                                                      561,661,955       552,905,517
Total deposits                                                    457,101,572       454,393,309
Borrowed funds                                                     16,850,000        18,010,000
Total liabilities                                                 518,783,063       511,987,108
Total shareholders' equity                                         42,878,892        40,918,409
*includes loans held-for-sale

Statement of Income Data

Nine Months Ended September 30,                                      2012              2011

Total interest income                                          $   17,004,840     $  17,099,075
Less:
Total interest expense                                              3,748,475         4,277,392
 Net interest income                                               13,256,365        12,821,683
Less:
Provision for loan losses                                             750,001           712,500

Non-interest income                                                 4,418,226         3,853,112
Less:
Non-interest expense                                               13,821,168        12,988,826
 Income before income taxes                                         3,103,422         2,973,469
Less:
Applicable income tax (benefit) expense                              (149,970 )         336,658

Net Income                                                     $    3,253,392     $   2,636,811

Per Share Data

Earnings per common share                                      $         0.65     $        0.54
Dividends declared per common share                            $         0.42     $        0.42
Book value per common shares outstanding                       $         8.42     $        8.07
Weighted average number of common shares outstanding                4,759,383         4,662,261
Number of common shares outstanding, period end                     4,796,998         4,704,676

INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST INCOME)

The largest component of the Company's operating income is net interest income, which is the difference between interest earned on loans and investments versus the interest paid on deposits and other sources of funds (i.e. other borrowings). The Company's level of net interest income can fluctuate over time due to changes in the level and mix of earning assets, and sources of funds (volume) and from changes in the yield earned and costs of funds (rate). A portion of the Company's income from municipal investments is not subject to income taxes. Because the proportion of tax-exempt items in the Company's portfolio varies from year-to-year, to improve comparability of information, the non-taxable income shown in the tables below has been converted to a tax equivalent basis. Because the Company's corporate tax rate is 34%, to equalize tax-free and taxable income in the comparison, we divide the tax-free income by 66%, with the result that every tax-free dollar is equivalent to $1.52 in taxable income.


The Company's tax-exempt income is derived from its municipal investments, which comprised the entire held-to-maturity portfolio of $50,065,653 at September 30, 2012, and $36,898,097 at September 30, 2011.

The following table shows the reconciliation between reported net interest income and tax equivalent, net interest income for the comparison periods of 2012 and 2011.

For the nine months ended September 30,       2012             2011

Net interest income as presented          $ 13,256,365     $ 12,821,683
Effect of tax-exempt income                    367,345          392,612
  Net interest income, tax equivalent     $ 13,623,710     $ 13,214,295

The following table presents average earning assets and average interest-bearing liabilities supporting earning assets. Interest income (excluding interest on non-accrual loans) and interest expense are both expressed on a tax equivalent basis, both in dollars and as a rate/yield for the 2012 and 2011 comparison periods.

                                                         For the Nine Months Ended September 30,
                                                 2012                                               2011
                                                                 Average                                            Average
                               Average          Income/           Rate/           Average          Income/           Rate/
                               Balance          Expense           Yield           Balance          Expense           Yield
Interest-Earning Assets

 Loans (1)                  $ 399,953,037     $ 15,786,521            5.27 %   $ 390,948,990     $ 15,998,085            5.47 %
 Taxable investment
securities                     62,357,637          439,642            0.94 %      26,217,030          229,612            1.17 %
 Tax-exempt investment
securities                     37,882,741        1,080,426            3.81 %      35,628,634        1,154,741            4.33 %
 Sweep and interest
earning accounts                6,184,367            3,434            0.07 %      33,887,918           52,730            0.21 %
 Other investments (4)          4,482,770           62,162            1.85 %       4,695,550           56,519            1.61 %
   Total                    $ 510,860,552     $ 17,372,185            4.54 %   $ 491,378,122     $ 17,491,687            4.76 %

Interest-Bearing
Liabilities

 NOW                        $ 105,668,556     $    245,440            0.31 %   $ 104,526,578     $    347,805            0.44 %
 Money market accounts         78,214,169          577,481            0.99 %      72,950,935          600,954            1.10 %
 Savings deposits              64,471,836           76,915            0.16 %      60,237,153           85,090            0.19 %
 Time deposits                135,606,637        1,736,909            1.71 %     142,288,283        2,085,747            1.96 %
 Federal funds purchased
and
 other borrowed funds          23,461,496          231,603            1.32 %      19,460,549          266,422            1.83 %
 Repurchase agreements         24,690,402          100,249            0.54 %      21,201,727          110,968            0.70 %
 Capital lease
obligations                       809,263           49,185            8.10 %         816,188           49,713            8.12 %
 Junior subordinated
debentures                     12,887,000          730,693            7.57 %      12,887,000          730,693            7.58 %
   Total                    $ 445,809,359     $  3,748,475            1.12 %   $ 434,368,413     $  4,277,392            1.32 %

Net interest income                           $ 13,623,710                                       $ 13,214,295
Net interest spread (2)                                               3.42 %                                             3.44 %
Net interest margin (3)                                               3.56 %                                             3.60 %

(1) Included in gross loans are non-accrual loans with an average balance of $6,804,857 and $5,008,281 for the nine months ended September 30, 2012 and 2011, respectively. Loans are stated before deduction of deferred loan costs
(fees) and allowance for loan losses.
(2) Net interest spread is the difference between the average yield on average earning assets and the average rate paid on average interest-bearing liabilities.
(3) Net interest margin is net interest income divided by average earning assets.
(4) Included in other investments is the Company's FHLBB Stock with an average balance of $3,507,620 and a dividend payout rate of approximately 0.52% per quarter.


The average volume of earning assets for the first nine months of 2012 increased $19,482,430 or 4.0% compared to the same period of 2011, while the average yield decreased 22 basis points. The average volume of loans increased $9,004,047 or 2.3%, while the average yield decreased 20 basis points. Interest earned on the loan portfolio equaled 90.9% of total interest income for the first nine months of 2012 and 91.5% for the 2011 comparison period. The average volume of sweep and interest earning accounts decreased $27,703,551 or 81.8%, as the Company shifted cash into higher yielding assets, primarily loans and investment securities. The average volume of the taxable investment portfolio (classified as available-for-sale) increased $36,140,607 or 137.9% for the same period, while the average yield decreased 23 basis points. The Company increased its taxable investment portfolio with U.S. government sponsored enterprise securities, as deposit funding increased in 2011, yet loan demand was weak. The Company has now seen an increase in loan demand throughout 2012 allowing for the reallocation of funds into higher earning assets. The average volume of the tax exempt investment portfolio (classified as held-to-maturity) increased $2,254,107 or 6.3% between periods, while the average tax equivalent yield decreased 52 basis points. Interest earned on tax exempt investments (which is presented in the table on a tax equivalent basis) comprised 6.2% of total interest income for the first nine months of 2012 compared to 6.6% for the same period in 2011.

In comparison, the average volume of interest bearing liabilities for the first nine months of 2012 increased $11,440,946 or 2.6% over the 2011 comparison period, while the average rate paid on these liabilities decreased 20 basis points. The average volume of NOW accounts increased $1,141,978 or 1.1% and money market funds increased $5,263,234 or 7.2% while the average rate paid decreased 13 basis points and 11 basis points, respectively. The average volume carried in the Company's money market product, an insured cash sweep account (ICS) offered through Promontory Interfinancial Network, increased $3,336,693 year over year from $8,975,493 in 2011 to $12,312,186 in 2012. Although this product has brought in some new funds, most of the interest has come from the Company's Certificate of Deposit Account Registry Service (CDARS) of Promontory Interfinancial Network customers looking for alternatives to placing their money . . .

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