Business Context and Reporting Period
Company: Community Bancorp. (Vermont)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: The Company is a bank holding company whose operations are conducted primarily through its wholly-owned subsidiary, Community National Bank. The Bank provides retail banking services in northeastern and central Vermont. In December 2007, the Company completed the acquisition of LyndonBank, adding approximately $128 million in assets and $111 million in deposits net of a branch sale. As of December 31, 2008, the Bank employed 142 full-time and 22 part-time employees.
Regulatory Status: The Company qualifies as a "smaller reporting company." Both the Company and the Bank were considered "well capitalized" under applicable regulatory guidelines as of December 31, 2008.
Key Financial Metrics
Note: Specific revenue, profit, cash flow, and margin figures are incorporated by reference to the Annual Report to Shareholders (Exhibit 13) and are not explicitly detailed in the text of this Form 10-K.
- Capital Ratios (Dec 31, 2008):
- Total Capital to Risk-Weighted Assets: 11.04%
- Tier 1 Capital to Risk-Weighted Assets: 10.07%
- Leverage Ratio: 7.08%
- Stock Information:
- Shares Outstanding (as of March 26, 2009): 4,473,041
- Market Value of Non-Affiliate Voting Stock (as of June 30, 2008): $52,726,298
- Share Price (June 30, 2008): $13.27
- Dividends: The Company maintained a high dividend payout ratio, significantly exceeding 100% (151%) in 2008.
- Debt/Capital Structure: The 2007 LyndonBank merger was financed in part by $12.9 million in trust preferred securities and $2.5 million in Series A Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock.
Material Changes and Operational Updates
- Acquisition Integration: The 2007 acquisition of LyndonBank resulted in the addition of five banking offices and increased staffing by 33 positions (30 full-time, 3 part-time) in 2008.
- Property Transactions:
- Sold the Vergennes, Vermont branch to the National Bank of Middlebury in 2007 (approx. $8.9 million in deposits transferred).
- Sold a former LyndonBank building and lot in Lyndonville to a non-profit organization in Q3 2008.
- Consolidated a former LyndonBank office in Derby with the main office in March 2008; the building is now vacant.
- Stock Repurchases: The Board terminated the stock buyback program in August 2008. In Q4 2008, 13,400 shares were purchased at an average price of $10.50, but these were for the Company's Retirement Savings Plan, not a public repurchase plan.
- Regulatory Assessments: FDIC deposit insurance assessment rates increased by 7 basis points effective January 1, 2009. An emergency special assessment of 20 basis points was also announced for collection in September 2009.
Outlook, Risks, and Contingencies
- Dividend Policy Risk: Due to the 151% payout ratio in 2008, the Company must consult with and obtain approval from Federal Reserve staff for any future dividends that exceed current period earnings. New supervisory guidance issued in February 2009 heightens expectations for capital retention.
- Legal Contingency: The Bank is involved in a contract dispute with a service provider regarding charges of approximately $72,000. A contingent liability of $50,000 was accrued as of December 31, 2008. The matter is in mediation.
- Market Risk: The Company is subject to interest rate risk and general economic conditions. The Federal Home Loan Bank of Boston (FHLBB) reported a net loss of $73.2 million in 2008 and likely suspended quarterly dividends for 2009, impacting the Company's investment income.
- Competition: The Company faces increased competition from larger banks, credit unions (some of which have expanded membership fields), and non-traditional financial service providers.
- Internal Controls: Management concluded that disclosure controls and internal controls over financial reporting were effective as of December 31, 2008. However, the report does not include an attestation report from independent auditors regarding internal controls for this period.
Investor Verification Checklist
- Financial Statements: Review Exhibit 13 (Annual Report to Shareholders) for specific revenue, net income, and cash flow figures, as these are omitted from the 10-K text.
- Dividend Sustainability: Verify the Company's ability to sustain a dividend payout ratio exceeding 100% given new Federal Reserve guidance requiring consultation for dividends exceeding earnings.
- Asset Quality: Examine the allowance for loan losses and non-performing loan ratios in the detailed financial statements to assess credit risk in the post-merger portfolio.
- Legal Resolution: Monitor the status of the $72,000 contract dispute to determine if the $50,000 accrual is sufficient or if further liability exists.
- FHLBB Exposure: Assess the impact of the Federal Home Loan Bank of Boston's financial distress and dividend suspension on the Company's investment income.