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CMTV > SEC Filings for CMTV > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for COMMUNITY BANCORP /VT

Form 10-Q for COMMUNITY BANCORP /VT


14-Aug-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 June 30, 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 June 30, 2013, December 31, 2012 and June 30, 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, including the rules of the federal Consumer Financial Protection Bureau, or the way in which courts or government agencies interpret or implement those laws or rules, increase our costs of doing business causing us to limit or change our product offerings or pricing, 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) the effect of changes to the calculation of the Company's regulatory capital ratios under the recently adopted Basel III capital framework which, among other things, will require additional regulatory capital, and change the framework for risk-weighting of certain assets; 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.


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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.

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 June 30, 2013 were $554,644,442, a decrease of $21,093,803, or 3.7% from December 31, 2012, and an increase of $1,266,867, or 0.2% from June 30, 2012. The most significant changes in the balance sheet from year end are attributable to the annual municipal finance cycle, as short-term municipal loans, recorded as held-to-maturity securities, generally mature at the end of the second quarter and are not replaced until after the start of the third quarter. Municipal loans totaling $27.7 million matured on June 30, 2013, with renewals and new municipal loans of approximately $19 million recorded in July, 2013. Deposit account balances related to these loans decreased simultaneously in the amount of $16.6 million. The balances in these accounts have since increased by $19 million as the new loans were booked in July. Another $16 million in municipal operating accounts ran off as the municipalities spend down tax dollars. These decreases in deposit balances contributed to the $31,037,755, or 6.53% decrease in total deposits during the six months ended June 30, 2013. Cash decreased by $14,599,526, or 48.9% in the year-to-date comparison period to partially fund the deposit outflow. Additional funding came from an increase in borrowed funds of $16,055,000, after payoff during the first quarter of 2013 of a $6,000,000 matured long-term borrowing from the FHLBB. The entire $22,055,000 balance of borrowed funds at June 30, 2013 represented overnight federal funds. Funding was also obtained through a $5,000,000 purchase of funds through the Certificate of Deposit Account Registry Service (CDARS) of Promontory Interfinancial Network during the second quarter of 2013. These funds purchased through CDARS are included in Time Deposits, $100,000 and over, accounting for nearly all of the increase in Time Deposits during the first six months of 2013. After only a modest increase in the loans during the first quarter of 2013, loans increased by $7,324,076 during the second quarter, with a total increase of $7,935,176, or 1.9% during the first six months of 2013, including increases in commercial and 1-4 family residential loans.

In the year over year comparison, deposits increased $12,305,349, or 2.9% with increases in non maturing deposits while balances in time deposits with customers have decreased. 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. The increase in loans, year over year was $17,630,647, or 4.3%, with increases in commercial, including commercial real estate, and 1-4 family residential loans. 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 loans remained strong while application for 1-4 family residential loans were down significantly at quarter end due to the increase in mortgage rates.

Interest rates have been at historically low levels for several years causing erosion of yields on earning assets. Maintaining asset yields continues to be a challenge; however during the second quarter of 2013, the Company recorded $197,072 in a recovery of interest income as a result of reclassifying a non performing loan to Other Real Estate Owned. Without this recovery, interest income would have been $5,607,777 for the second quarter compared to $5,632,862 for the same period in 2012, a decrease of $25,085. While interest income, before the adjustment, decreased in the second quarter of 2013 compared to the second 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 $138,238 for the second quarter of 2013 and $280,060 year over year. The decrease in interest paid on deposits is attributable to a decrease in the average rate paid on 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 $871,428 in tax-equivalent net interest income. The yield on the 10-year Treasury bond has been rising recently after being stuck near historic lows ever since the recession. While this rally in the bond market resulted in an increase in long term interest rates, economic data continues to indicate that policy makers are likely to keep short-term interest rates low through sometime in 2015, creating a steeper yield curve than what we have seen in recent years.


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Net income for the second quarter of 2013 was $1,238,344, or $0.25 per common share, compared to $1,021,192, or $0.20 per common share for the same period in 2012, an increase of 21.3%. Total non-interest income decreased 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 six months of 2013 causing a decrease in fee income from the sale of residential loans in the secondary market. During the second quarter of 2013 mortgage activity resulted in originations of $8,542,157 compared to $12,175,278 for the second quarter of 2012 providing points and premiums from the sales of these mortgages of $207,110 and $326,814, respectively. These decreases were offset by an improvement in the balance of the impairment of the mortgage servicing rights so far in 2013 of $160,008 versus a negative adjustment of $46,836 in 2012, resulting in net gains from the sales of mortgages of $451,934 for the second quarter of 2013 compared to $450,958 for the second quarter of 2012. Operating expenses for the quarter were relatively stable resulting in an increase of 1.1% over the second quarter of 2012. Please refer to the Non-interest Income and Expense sections for more information.

On June 11, 2013, the Company's Board of Directors declared a quarterly cash dividend of $0.14 per common share, payable on August 1, 2013 to shareholders of record on July 15, 2013. The Company is focused on increasing the profitability of the balance sheet, and 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 for the second quarter reported low GDP growth and disappointing news on retail sales and production suggesting that inflation remains contained. The housing outlook however is improving with low inventory of for-sale homes and construction spending growing steadily. 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. The recent comments at the meeting of the FOMC indicated that it may start to taper its bond purchases if economic performance warrants, but suggested that it was not considering an exit any time soon. Nevertheless, these comments cause the average fixed mortgage rates to spike to 2011 levels. Despite the recent increases in mortgage rates, national data suggests that homebuyer affordability remains strong for the typical family in most parts of the country, which should help fuel the ongoing housing 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%. State economist Jeff Carr recently reported that of the six New England states, Vermont's economic recovery is only behind Massachusetts, and he predicts that prerecession employment levels will return in the next six to twelve months. On a statewide basis job growth has been centered in the trade, transportation, utility and government sectors. Vermont's construction sector is ranked one of the lowest for job growth, and with post-tropical storm Irene projects now complete, forecasts for construction jobs are less than optimistic. Federal spending cuts, i.e. sequestrations, are hampering the New England economy as a whole, but economists say that continued strength in the "Vermont" brand has helped recovery in the manufacturing sector. The Vermont housing market has continued to strengthen, and the tide is beginning to shift from a buyer's market to a more level playing field. Although the 2012 through 2013 snowfall was greater than in 2011-2012, the season 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 reported stronger results for 2012 and were cautiously optimistic going into 2013. The entire state experienced record early summer rain that made it tough on weather-dependent businesses. It is too early to tell how the wet start to the summer season will impact the hospitality and recreational sector. In Central Vermont, the Company's growth market, ongoing downtown revitalization and improvement projects are bringing energy and economic growth to the area. Several workforce anchors in the region continue to provide stable operations and employment to the area including Green Mountain Coffee Roasters which employs an estimated 500 employees throughout Washington and Chittenden Counties and which just announced that it has reached a minimum five year agreement with Starbucks Coffee Company to manufacture, market, distribute and sell Starbuck's single serve Keurig packs. Technology, financial services and light manufacturing, particularly of specialty artisan foods, continue to be the economic leaders throughout Central Vermont.

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 upgraded snowmaking and will soon begin construction of new 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 late 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, including an aviation flight school and small plane manufacturing plant in Newport. 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, and the new Basel III capital framework. It is unlikely that these administrative costs and burdens will moderate in the future.


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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.

RESULTS OF OPERATIONS

The Company's net income for the second quarter of 2013 was $1,238,344, representing an increase of $217,152 or 21.3% over net income of $1,021,192 for the second quarter of 2012. This resulted in earnings per common share of $0.25 and $0.20, respectively. Net income for the first six months of 2013 increased $294,080 or 14.8% to $2,280,122 compared to $1,986,042 for the same period in 2012. Core earnings (net interest income) for the second quarter of 2013 increased $518,740 or 11.8%, compared to the second quarter of 2012, and the six months figures show an increase of $827,022 or 9.5% for 2013 compared to 2012. Despite continued pressure on the net interest margin and spread in this persistently low interest rate environment, the Company was pleased with these increases. To offset this pressure, the Company shifted assets from lower yielding taxable investments to loans. Contributing to the $171,987 or 3.1% increase in interest income for the second quarter of 2013 over 2012 and the $144,138 or 1.3% increase for the first six months of 2013 compared to 2012 was a recovery of interest income in the amount of $197,072 on a non performing loan as a result of reclassifying the loan to Other Real Estate Owned. Although total deposits increased $12,305,349 or 2.9% year over year, interest expense on deposits, the major component of total interest expense, decreased $133,491 or 15.4% between quarterly periods and $263,012 or 14.9% for the six month comparison periods, which are both attributable 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 3.130% for the second quarter of 2013. This translates to a decrease in interest expense of $138,238 or 56.8% for the second quarter of 2013, compared to the second quarter of 2012, and a decrease of $280,060 or 57.5% year over year. The Company recorded a provision for loan losses of $120,000 for the second quarter of 2013 and $326,250 for the first six months of 2013 compared to $249,999 for the second quarter of 2012 and $500,002 for the first six months of 2012, resulting in decreases of $129,999 or 52.0% and $173,752 or 34.8%, respectively. Non-interest income decreased $12,174 or 0.8% for the second quarter of 2013 compared to the second quarter of 2012, while a modest increase of $1,041 or 0.04% is noted year over year. Non-interest expense increased $100,050 or 2.1% for the second quarter in 2013 compared to the same quarter in 2012, with figures of $4,818,263 and $4,718,213, respectively. Non-interest expense also increased for the six month comparison periods with an increase of $139,408 or 1.5% and figures of $9,407,552 for 2013 and $9,268,144 for 2012. The section below labeled Non-Interest Income and Non-Interest Expense provides 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.


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The following table shows these ratios annualized for the comparison periods.

For the quarter ended June 30,    2013        2012

Return on Average Assets            0.88 %     0.77 %
Return on Average Equity           11.23 %     9.74 %



For the six months ended June 30,     2013        2012

Return on Average Assets               0.81 %     0.74 %
Return on Average Equity              10.48 %     9.58 %

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)

Balance Sheet Data                June 30,        December 31,
                                    2013              2012

Net loans*                      $ 421,537,775     $ 413,734,575
Total assets                      554,644,442       575,738,245
Total deposits                    444,459,104       475,496,859
Borrowed funds                     22,055,000         6,000,000
Total liabilities                 510,266,731       532,385,670
Total shareholders' equity         44,377,711        43,352,575

*includes loans held-for-sale

Six Months Ended June 30,                                  2013             2012

Operating Data
Total interest income                                 $ 11,366,897     $ 11,222,759
Total interest expense                                   1,827,200        2,510,084
Net interest income                                      9,539,697        8,712,675

Provision for loan losses                                  326,250          500,002
Net interest income after provision for loan losses      9,213,447        8,212,673

Non-interest income                                      2,889,050        2,888,009
Non-interest expense                                     9,407,552        9,268,144
Income before income taxes                               2,694,945        1,832,538
Applicable income tax expense (benefit)(1)                 414,823         (153,504 )

Net Income                                            $  2,280,122     $  1,986,042



As of or for the six months ended June 30,                             2013                  2012

Per Common Share Data

Earnings per common share                                        $        0.46         $        0.40
Dividends declared per common share                              $        0.28         $        0.28
Book value per common shares outstanding                         $        8.65         $        8.30
Weighted average number of common shares outstanding                 4,823,988             4,748,013
Number of common shares outstanding                                  4,841,679             4,776,527

(1) Applicable income tax expense (benefit) includes the income tax effect, assuming a 34% tax rate, on securities gains which totaled $0 and $41,295 for the six months ended June 30, 2013 and 2012, respectively.

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