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CMTV > SEC Filings for CMTV > Form 10-Q on 13-May-2013All Recent SEC Filings

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Form 10-Q for COMMUNITY BANCORP /VT


13-May-2013

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 March 31, 2013

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 March 31, 2013, December 31, 2012 and March 31, 2012, 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. In accordance with such provisions, the Company has elected to provide its interim consolidated statements of income, comprehensive income, and cash flows for two, rather than three, years.

The following discussion should be read in conjunction with the Company's audited consolidated financial statements and related notes contained in its 2012 Annual Report on form 10-K filed with the SEC.

FORWARD-LOOKING STATEMENTS

This 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. Words used in the discussion below such as "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 or the local or national economy. 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 services 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 or 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, among other things, would 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 ("FRB"), 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 (as presented in the tables in the section labeled Interest Income Versus Interest Expense (Net Interest Income), 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.


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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 March 31, 2013 were $560,380,381, a decrease of $15,357,864, or 2.7% from December 31, 2012, and an increase of $1,573,755, or 0.3% from March 31, 2012. The most significant change in assets in the year-to-date comparison period was a decrease in cash of $21,179,670, or 70.9%. This decrease from year end reflects the use of cash to increase the securities available-for-sale portfolio, which increased $5,124,254 or 12.5% and to fund loans which increased $939,942 or 0.2%. The decrease in cash also reflected a decrease in deposits from year end of $11,234,760, or 2.4%. This decrease in deposits is typical for the Company in the first quarter of the year and is mostly due to cyclical fluctuations in the balances of municipal customer accounts, as account balances typically increase during the second and third quarters of the year and then run off during the first half of the following year. While there was not a significant change in total assets year over year, the mix of earning assets shifted from the available-for-sale portfolio to loans as the Company took an opportunity to sell lower yielding bonds to support the loan growth during 2012.

In the year over year comparison, deposits increased $10,268,950, or 2.3%. Contributing to the deposit growth was an increase of $10,885,460 in the Company's non-interest bearing checking accounts and NOW accounts, and an increase of $17,839,928 in money market funds. A portion of the increase in money market accounts is due to an increase in municipal accounts that are subject to the municipal bidding process each year. These increases in non-maturing account balances were offset by a decrease in time deposits of $22,176,768, or 15.3%; $11,476,000 of the decrease in other time deposits represents a reduction in deposits which had been purchased through Certificate of Deposit Account Registry Service (CDARS) of Promontory Interfinancial Network during the first quarter of 2012 to help fund loan demand. The decrease in customer time deposits is a trend that has been prevalent for several years while rates have been at all-time lows. Management believes that the low interest rates being paid on certificates of deposit and other investment products is likely causing some depositors to place their money in non-maturing products such as demand and savings accounts while awaiting an improvement in interest rates and market conditions. Early in the quarter, the last long-term borrowing of $6 million with the Federal Home Loan Bank of Boston (FHLBB) was paid off. Demand for commercial loans was strong throughout 2012 and demand for 1-4 family residential loans remained steady. The Company retained in the loan portfolio some 10 - 15 year mortgages to help maintain the level of the 1-4 family loans, while continuing to sell 30 year mortgage loans in the secondary market to manage interest rate risk. Applications for commercial and 1-4 family residential loans during the first quarter of 2013 have been respectable, accounting for the increase of $939,942 in gross loans.

Interest rates have remained at historically low levels for several years causing erosion of yields on earning assets. While interest income decreased in the first quarter of 2013 compared to the first quarter of 2012, that decrease was more than offset by a larger decrease in interest expense. The lower interest expense was attributed to a combination of the decrease in interest paid on deposits and a decrease in interest paid on borrowings, including the Company's junior subordinated debentures. The decrease in interest paid on the debentures is due to a scheduled rate adjustment, which resulted in a decrease of $141,821 for the first quarter of 2013, and is further described in the Results of Operations section of this report. The decrease in interest paid on deposits is attributable to a decrease in the average rate paid on the interest bearing liabilities as customer funds shift out of higher yielding CDs to lower yielding demand and savings accounts. The combined effects of these changes resulted in an increase of $330,060 in tax-equivalent net interest income. Economic data continues to indicate that policy makers are likely to keep interest rates low through sometime in 2015, maintaining current levels of net interest income in future periods will remain a challenge.

Net income for the first quarter of 2013 was $1,041,778, or $0.21 per common share, compared to $964,849, or $0.19 per common share for the same period in 2012, an increase of 8.0%. Total non-interest income increased slightly during the first quarter of 2013 compared to the first quarter 2012. One of the components of non-interest income is income generated from selling loans in the secondary market. For several years, the Federal Reserve's efforts to stimulate the real estate market by keeping mortgage interest rates low provided for several refinancing cycles which continued through 2012. The momentum of this cycle has slowed and mortgage business declined during the first quarter of 2013 causing a decrease in fee income from the sale of residential loans in the secondary market. During the first quarter of 2013 mortgage activity resulted in originations of $7,849,733 compared to $11,270,799 for the first quarter of 2012 providing points and premiums from the sales of these mortgages of $199,870 and $260,856 respectively. These decreases were offset by an improvement in the balance of the impairment of the mortgage servicing rights in 2013 of $66,679 versus a negative adjustment of $36,161 in 2012, resulting in net gains from the sales of mortgages of $387,591 for the first quarter of 2013 compared to $387,211 for the first quarter of 2012. Operating expenses for the quarter were relatively stable resulting in an increase of 0.9% over the first quarter of 2012. Please refer to the Non-interest Expense section for more information.


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On March 12, 2013, the Company's Board of Directors declared a quarterly cash dividend of $0.14 per common share, payable on May 1, 2013 to shareholders of record on April 15, 2013. The Company is focused on increasing the profitability of the balance sheet, prudently managing operating expenses and risk, particularly credit risk, in order to remain a well-capitalized bank in this challenging economic environment.

National economic data suggests that the economy is struggling to gain traction despite strong markets and improving confidence. The housing outlook is improving with low inventory of for-sale homes, low interest rates and rising consumer confidence. Builders, however, are challenged with being able to respond to the rising demand for new homes due to difficulties in obtaining construction credit due to overly restrictive mortgage lending rules and construction costs that are increasing at a faster pace than appraised values. Although employment has continued to expand at a moderate pace, the unemployment rate remains elevated. At the latest meeting of the FOMC, they decided to keep interest rates at historic lows and to continue with its bond-buying stimulus, despite a more optimistic labor outlook. Their goal is to maintain downward pressure on longer-term interest rates, support mortgage markets, and to support a stronger economic recovery.

More locally, economic indicators in Vermont, such as the unemployment rate and employment by industry, are more positive. According to the State of Vermont Department of Labor, the seasonally adjusted unemployment rate in Vermont is currently 4.4%, down from the annual 2012 rate of 5.0% and well below the national average of 7.6%. According to industry statistics, real estate sales activity increased in 2012 compared to the lows of 2009 through 2010, with a gradual increase in median sale prices across most counties. The 2012 through 2013 snowfall was greater than the 2011-2012 season but was short and snowfall did not return to historical levels. Those businesses impacted by winter weather, lodging, restaurants, winter recreation dealers, retailers and suppliers may continue to struggle. Other retail and service businesses are reporting stronger results for 2012 and are cautiously optimistic going into 2013. A positive addition to Northern Vermont is a multi-phase expansion project of an Orleans County ski area, where construction of two hotels, a hockey arena, an indoor water park and a golf clubhouse has transformed the ski resort and golf course to a year-round indoor and outdoor recreation and wedding destination resort. This project initially injected nearly $100 million of construction funding into the local economy over the last two years utilizing Federal EB5 program capital from foreign investors. A second project is well underway to upgrade snowmaking and build hotels at another local ski resort in Caledonia County. It was recently announced that further investments of EB5 capital are intended to be utilized for several projects in the region including a bio-tech manufacturing and research facility, a window manufacturing plant, a water-front hotel and conference center, and a major revitalization project for downtown Newport with construction to take place between 2013 and 2015. Separate from the EB5 projects, it was announced recently that a Vermont developer has committed to bringing a Wal-Mart Super Store to Orleans County. Furthermore, the area recently received status as a foreign trade zone propelling a major renovation project at the local airport. The projects that are underway have created jobs and boosted economic activity in the area.

The regulatory environment continues to increase operating costs and place extensive burden on personnel resources to comply with a myriad of legal requirements, including those under the Dodd-Frank Act of 2010, the Sarbanes-Oxley Act of 2002, the USA Patriot Act, the Bank Secrecy Act, the Real Estate Settlement Procedures Act and the Truth in Lending Act. It is unlikely that these administrative costs and burdens will moderate in the future.

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, 2012 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, 2012 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 2012 Annual Report on Form 10-K.


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RESULTS OF OPERATIONS

The Company's net income for the first quarter of 2013 was $1,041,778, representing an increase of $76,929 or 8.0% over net income of $964,849 for the first quarter of 2012. This resulted in earnings per common share of $0.21 for the first quarter of 2013 compared to $0.19 for the first quarter of 2012. Core earnings (net interest income) for the first quarter of 2013 increased $308,283 or 7.1%, compared to the first quarter of 2012, despite continued pressure on the net interest margin and spread in this persistently low interest rate environment. To offset this pressure, the Company shifted assets from taxable investments to loans minimizing the decrease in interest income to only $27,847 or 0.5% compared to the same period last year. Although total deposits increased $10,268,950 or 2.3% year over year, interest expense on deposits, the major component of total interest expense, decreased $129,521 or 14.3% between quarterly periods, attributable in part to a decrease in the rates paid on interest-bearing deposit accounts. In terms of dollars, the rate change on the Company's junior subordinated debentures was of greater impact than lower interest cost on deposits. The rate paid on these debentures repriced from a fixed rate of 7.56% through December 15, 2012, to a quarterly adjustable floating rate equal to the 3-month London Interbank Offered Rate (LIBOR) plus 2.85%, or 3.158% for the first quarter of 2013. This translates to a decrease of $141,821 or 58.2% with interest paid of $101,743 for the first quarter of 2013, compared to $243,564 for the first quarter of 2012. The Company recorded a provision for loan losses of $206,250 for the first quarter of 2013 compared to $250,003 for the first quarter of 2012, a decrease of $43,753 or 17.5%. Non-interest income increased $13,215 or 1.0%, from $1,354,977 for the first quarter in 2012 to $1,368,192 for the first quarter of 2013. Non-interest expense increased $39,358 or 0.9% for the first quarter in 2013 compared to the same quarter in 2012, with figures of $4,589,290 and $4,549,932, respectively. The section below labeled Non-Interest Income and Non-Interest Expense provide a more detailed discussion on the significant components of these two items.

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 March 31,    2013       2012

Return on Average Assets            0.75 %     0.72 %
Return on Average Equity            9.71 %     9.35 %


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The following table summarizes the earnings performance and certain balance sheet data of the Company for the 2013 and 2012 comparison periods.

                      SELECTED FINANCIAL DATA (Unaudited)

                                  March 31,       December 31,
                                    2013              2012
Balance Sheet Data

Net loans*                      $ 414,530,681     $ 413,734,575
Total assets                      560,380,381       575,738,245
Total deposits                    464,262,099       475,496,859
Borrowed funds                      7,845,000         6,000,000
Total liabilities                 516,528,402       532,385,670
Total shareholders' equity         43,851,979        43,352,575

*includes loans held-for-sale

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