CMTV

Business Context and Reporting Period

Company: Community Bancorp. (Vermont)

Filing Type: Form 10-Q (Unaudited)

Reporting Period: Quarter and nine months ended September 30, 2004

Community Bancorp. operates as a bank holding company with its principal subsidiary, Community National Bank. The company focuses on lending and deposit-taking activities in northern New England. As of November 9, 2004, there were 3,826,171 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Decline: Net income decreased 20% in Q3 2004 and 21% for the nine-month period compared to 2003. This was driven by lower net interest income and higher non-interest expenses.
• Net Interest Margin Pressure: The tax-equivalent net interest spread narrowed from 3.94% in the first nine months of 2003 to 3.69% in 2004. Management attributes this to a flattening yield curve where the prime rate increased by 75 basis points while mortgage rates remained stagnant.
• Expense Growth: Non-interest expenses increased $154,514 in Q3 and $485,010 year-to-date. Primary drivers included costs associated with opening a new branch in Barre and higher-than-expected healthcare claims under the company's self-insured plan.
• Asset Composition: Total assets declined slightly from year-end 2003 levels due to the non-renewal of certain municipal loans and the payoff of Federal Home Loan Bank borrowings. However, gross loans increased to $218.7 million as of September 30, 2004, supported by a new commercial loan program.
• Non-Interest Income: While Q3 non-interest income rose due to stronger mortgage sales and service fees, year-to-date non-interest income fell $301,203 due to lower security gains and reduced loan sales volume in the first two quarters.

Guidance, Outlook, and Risks

• Outlook: Management expects 2004 full-year results to be lower than 2003. However, they anticipate spreads will improve as interest rates rebound from historically low levels and adjustable-rate loans reprice.
• Capital Projects: In October 2004, the company broke ground on a 17,000-square-foot addition to its main office in Derby to alleviate space constraints and improve customer service.
• Interest Rate Risk: The company maintains an asset-sensitive position. Management utilizes an Asset/Liability Management Committee (ALCO) to monitor exposure to interest rate changes, including simulations of yield curve shifts.
• Credit Risk: The allowance for loan losses is maintained at approximately 1% of the total gross loan portfolio. Non-performing assets totaled $1.33 million (0.41% of total assets) as of September 30, 2004. Residential mortgages comprise the largest portion of the portfolio (52.79%) and have the lowest historical loss ratio.
• Liquidity: The company holds significant liquidity through a $91 million borrowing capacity at the Federal Home Loan Bank (FHLB), with only $5.04 million in long-term advances outstanding. Municipal deposits, which comprise 44% of NOW and money market accounts, are subject to seasonal fluctuations.
• Regulatory Capital: The company is deemed "well-capitalized" under prompt corrective action provisions, with a total risk-based capital ratio of 16.02% and a Tier 1 capital ratio of 14.77%.

Investor Verification Checklist

• Verify the impact of the flattening yield curve on future net interest margins as adjustable-rate loans reprice.
• Monitor the performance of the new Barre branch and the cost trajectory of the new Derby office expansion.
• Review the renewal rates of the $33 million municipal investment portfolio maturing within the next year amidst increased competition.
• Assess the adequacy of the allowance for loan losses given the concentration in residential and commercial real estate (80% of portfolio).
• Track the company's ability to maintain deposit growth, particularly in non-maturing accounts, as time deposits mature from higher rates.