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, 2003
Business Overview: A bank holding company with one operating subsidiary, Community National Bank, serving northeastern and north central Vermont through nine offices. The company recently sold its interest in Liberty Savings Bank for $307,500 in September 2003.

Key Financial Metrics

Liquidity & Capital: The company reported a net decrease in cash and cash equivalents of $4.76 million for the nine-month period. As of September 30, 2003, the company was deemed "well capitalized" with a Total Capital ratio of 16.92% and a Tier 1 Capital ratio of 15.67% (consolidated).

Material Changes vs. Prior Period

• Profitability: Net income increased 24.9% in Q3 2003 and 26.8% for the nine-month period compared to 2002. This was driven by a 23.7% increase in pre-tax income for the quarter.
• Net Interest Income: Increased $539,521 for the nine months ended September 30, 2003. This improvement resulted from a 20.4% decrease in interest expense (due to lower rates paid on liabilities) outpacing a 3.6% decrease in total interest income.
• Operating Expenses: Total operating expenses increased 4.8% for the nine-month period. Salaries and wages rose 10.5% ($284,911 increase), partially attributed to the opening of a new branch in Barre, Vermont.
• Asset Composition: The loan portfolio decreased slightly by $929,185 over the nine months, while the investment portfolio increased by approximately $17 million, primarily in Government Agency securities.
• Loan Loss Provision: The provision for loan losses decreased significantly to $103,000 for the nine months of 2003, compared to $276,000 in 2002, reflecting lower charge-offs and stable credit quality.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management anticipates continued favorable income from the sale and servicing of loans on the secondary market. The company is actively managing liquidity by purchasing 3-5 year Government Agency securities to maximize yields.
• Unusual Items:
  • Liberty Savings Bank Sale: Sold stock interest and charter for $307,500 in September 2003.
  • Security Gains: Realized gains of $142,904 on the sale of corporate bonds in the first nine months of 2003.
  • Goodwill: No goodwill amortization expense in 2003; the remainder was expensed in Q2 2002.
• Risks:
  • Interest Rate Risk: The company maintains a positive interest rate sensitivity gap in the short term (3 months), which could adversely affect net interest income if rates fall, though a negative gap in the 4-12 month window suggests some protection against rising rates.
  • Credit Risk: Non-performing assets totaled $1.37 million (0.43% of total assets). Residential mortgages comprise 59% of the portfolio and have the lowest historical loss ratio.
  • Off-Balance Sheet: The company participates in the FHLB Mortgage Partnership Finance (MPF) program, sharing a portion of credit risk on sold mortgages. Management deems this risk immaterial.

Investor Verification Checklist

• Loan Portfolio Quality: Verify the stability of the $1.2 million in non-accruing loans and the adequacy of the $2.2 million allowance for loan losses (1.09% of gross loans).
• Branch Expansion Costs: Confirm the long-term profitability of the new Barre branch, which contributed to increased salary expenses.
• Deposit Stability: Assess the sustainability of the $12.2 million increase in non-interest bearing and low-cost deposits, which management attributes to a temporary "safe haven" economic environment.
• Investment Portfolio Yield: Review the impact of the 63 basis point decrease in average yield on earning assets on future net interest margins.
• MPF Program Exposure: Monitor the volume of loans sold under the FHLB MPF program and the associated credit enhancement obligations ($434,000).