CMTV

Business Context and Reporting Period

Company: Community Bancorp (Vermont)

Reporting Period: Quarter ended March 31, 1999

Operations: A bank holding company operating primarily through Community National Bank in Vermont and Liberty Savings Bank in New Hampshire. The company focuses on residential and commercial real estate lending, with 82.7% of its loan portfolio secured by real estate.

Key Financial Metrics

Liquidity: The company maintains $102.5 million in liquid assets, including $6.1 million in credit lines and $96.4 million in FHLB borrowing capacity. Borrowed funds totaled $4.06 million.

Capital Ratios: Tier I Capital ratio is approximately 20% and Total Capital ratio is 22%, significantly exceeding regulatory minimums of 4% and 8% respectively.

Material Changes vs. Prior Period

• Net Income: Increased 0.76% year-over-year to $410,797, driven by a reduction in the provision for loan losses ($150,000 vs. $200,000) and increased non-interest income, partially offset by lower net interest income.
• Net Interest Income: Decreased 2.5% to $2.18 million. The net interest spread narrowed by 34 basis points (from 3.86% to 3.52%) due to a 75 basis point decline in asset yields outpacing a 41 basis point decline in liability costs.
• Loan Portfolio: Gross loans decreased 2.1% to $146.3 million. The yield on loans dropped 65 basis points to 8.78%.
• Investment Portfolio: Taxable investment securities volume increased 49.5% to nearly $50 million, though yields fell 33 basis points. Available-for-sale securities grew to $26.6 million.
• Non-Performing Assets (NPA): Increased to $3.39 million (2.32% of gross loans) from $2.95 million (1.97%) in Q1 1998. This includes a 10.7% increase in non-accruing loans and a 78% increase in loans 90+ days past due.
• Other Operating Income: Rose 25.9% to $373,472, largely due to a 61.2% increase in trust department income and gains on sold loans.

Outlook, Risks, and Contingencies

• Management Commentary: Management attributes the slight income increase to lower loan yields and higher operating expenses. The company plans to expand Liberty Savings Bank into a full-service institution in New Hampshire to broaden its customer base.
• Year 2000 (Y2K) Readiness: The company is in the validation and implementation phases of Y2K remediation. All mission-critical systems were tested and compliant by December 31, 1998. Non-mission-critical testing is expected to complete by June 30, 1999. Budgeted costs for 1999 are $77,000; management does not anticipate a material financial impact.
• Legal Proceedings: Community National Bank is involved in a lawsuit against the State of Vermont regarding title to Other Real Estate Owned (OREO) properties on "filled land" near Lake Memphremagog. Management believes the outcome will not materially impact financial statements.
• Risks: The company faces concentration risk with 82.7% of loans in real estate. While historically stable, rising non-performing assets (specifically loans 90+ days past due) warrant monitoring. The company has no brokered deposits.

Investor Verification Checklist

• Non-Performing Asset Trend: Verify the sustainability of the 78% increase in loans 90+ days past due and the adequacy of the 1.17% allowance for loan losses.
• Net Interest Margin Compression: Assess the impact of the 34 basis point spread compression on future profitability if interest rates remain low.
• OREO Disposition: Monitor the sale of $772,834 in Other Real Estate Owned, particularly the properties involved in the Vermont state lawsuit.
• Y2K Contingency Costs: Confirm that actual Y2K remediation costs remain within the $77,000 budget and do not escalate.
• Liberty Savings Bank Expansion: Track progress on the planned expansion of the New Hampshire subsidiary to generate new revenue streams.