Executive Summary / Key Takeaways

• Community Bancorp.VT ($CMTV) is a community-focused regional bank operating in northern and central Vermont, leveraging deep local ties and expertise, particularly in municipal and commercial lending, to drive its core business.
• The company delivered solid financial performance in Q1 2025, with net income increasing 25% year-over-year to $3.5 million, primarily driven by a 13% increase in net interest income after credit loss expense, reflecting loan growth and favorable interest rate dynamics despite rising deposit costs.
• While CMTV benefits from its established local presence and niche market strength, it faces significant competitive pressure from larger, more technologically advanced regional and national banks, particularly in digital service delivery and operational efficiency.
• Management is investing in technology projects and assessing risks from external factors like trade policy and economic uncertainty, aiming to safeguard the balance sheet and support clients, though specific quantitative guidance for future periods was not provided.
• The company maintains a strong capital position, exceeding regulatory requirements, and is actively managing liquidity through diverse funding sources and borrowing capacity, providing a stable foundation amidst evolving market conditions.

A Vermont Foundation: Community Banking in a Changing Landscape

Community Bancorp.VT, established in 1851, operates as the bank holding company for Community National Bank, serving the financial needs of individuals, businesses, and municipalities across northern and central Vermont. Its business model is rooted in traditional community banking, offering a range of services from retail deposits and consumer loans to specialized commercial real estate and municipal financing. This local focus has historically been a key differentiator, fostering strong customer relationships and providing deep market insight.

The company's strategic emphasis lies in commercial lending, a segment that continues to see solid growth, alongside its established residential and municipal portfolios. This strategy is supported by a network of branches and a team with local expertise. A notable historical event shaping the company was the 2007 merger with LyndonBank, which expanded its footprint and asset base. More recently, a shift in its investment in CFS Partners, LLC, increasing its profit and loss share from one-third to one-half starting March 1, 2025, signals an evolving participation in this partnership, expected to influence future non-interest income.

In the competitive landscape, CMTV operates alongside larger regional and national players such as PNC Financial Services Group (PNC), Citizens Financial Group (CFG), Capital One Financial (COF), and Wells Fargo (WFC), as well as various fintech firms and online banks. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, CMTV holds an estimated 0.5-1% aggregate market share in its primary markets. Its competitive positioning is characterized by leveraging its community brand and local network effects, which contribute to higher customer retention rates (estimated 20% better in municipal banking) and potentially superior margins in niche segments (estimated 5-10% higher). Its regulatory licenses for regional banking also enable cost leadership in areas like compliance (estimated 10% lower compliance costs per loan).

However, CMTV faces significant disadvantages due to its smaller scale and technological capabilities relative to larger rivals. Competitors like PNC and CFG boast more advanced mobile banking platforms and digitally integrated offerings, enabling faster processes (e.g., PNC's estimated 20-30% quicker loan approvals via AI, CFG's estimated 25-30% faster online onboarding) and potentially lower operating costs per transaction (CMTV's legacy systems may result in 15-20% higher operating costs per transaction compared to more efficient digital platforms). Capital One's tech-driven approach offers significantly faster loan processing (estimated 40-50% faster via AI), leading to estimated 15% higher operating costs per unit for CMTV in comparison. Wells Fargo's scale also translates to greater efficiency in loan processing (estimated 25% greater efficiency).

Addressing this technological gap is a critical strategic imperative. While details regarding CMTV's specific core banking technology platform or unique technological differentiators with quantifiable benefits are not publicly available, it is highlighted that increased consultant services for "branch network and technology projects" contributed to higher non-interest expenses in Q1 2025. This suggests ongoing investment to enhance capabilities. Competitive analysis indicates that CMTV's slower processes (e.g., estimated 30% longer loan approvals) could impact profitability and market share. Developing "next-gen digital tools," as suggested in the competitive analysis, could target improvements like estimated 30% faster processing with 15% lower costs, directly countering the tech advantages of competitors like Capital One and potentially boosting growth. The "so what" for investors is that while CMTV's local strength provides a foundation, sustained competitiveness and future growth will heavily depend on successful execution of its technology strategy to close the efficiency and service delivery gap with larger, digitally advanced rivals.

Financial Performance: Navigating Rate Dynamics and Operational Costs

Community Bancorp.VT demonstrated a robust start to 2025, with consolidated net income rising to $3.5 million for the three months ended March 31, 2025, a 25% increase from $2.8 million in the same period of 2024. This improvement was significantly driven by a $1.1 million increase in net interest income after credit loss expense.

Total interest income grew by $1.7 million, or 13.0%, year-over-year, reaching $14.52 million in Q1 2025. This growth was primarily fueled by a $1.5 million (13.2%) increase in interest and fees on loans, reflecting both the expansion of the loan portfolio (up 1.33% to $940.27 million) and the impact of higher interest rates on new originations and adjustable-rate loans repricing. The average yield on interest-earning assets increased by 29 basis points to 5.32%.

However, the higher rate environment also led to increased funding costs. Total interest expense rose by $585 thousand, or 13.0%, to $5.09 million. Interest on deposits, the largest component, surged by $1.1 million (35.9%) as competitive pressures necessitated higher rates on money market and time deposit accounts. The average rate paid on interest-bearing liabilities increased by 11 basis points to 2.32%. This pressure on deposit costs was partially mitigated by a significant decrease in interest on borrowed funds ($575 thousand, 60.8%) due to the payoff of Bank Term Funding Program (BTFP) advances that matured in Q1 2025. The net effect was an increase in the tax-equivalent net interest spread by 18 basis points to 3.00% and the net interest margin by 20 basis points to 3.49%.

Credit loss expense saw a modest increase of $11,475 (3.7%) to $325,054 in Q1 2025. This reflected loan growth, changes in economic forecasts, historical loss rates, and adjustments to qualitative factors within the Allowance for Credit Losses (ACL) calculation. Management specifically noted increasing trends in volumes and exceptions in the residential loan portfolio and uncertainty regarding the impact of inflation or a recession on consumer customers' ability to pay as reasons for increasing the risk status of certain qualitative factors.

Non-interest income experienced a slight decrease of $55,298 (3.4%) to $1.58 million. This was primarily attributable to lower income from sold loans, reflecting a decrease in the volume of loans sold into the secondary market, and a decrease in income from CFS Partners due to realized losses from an equity portfolio held within the partnership.

Non-interest expense increased by $203,468 (3.2%) to $6.50 million. Key drivers included higher employee benefits costs (due to increased health insurance claims), increased occupancy expenses (normal contractual increases and the impact of a prior-year flood claim settlement), higher service contract costs (new contracts, transaction-based pricing, inflation adjustments), increased FDIC insurance assessments (due to a higher multiplier and increased assets), and greater utilization of consultant services for technology and branch network projects. These increases were partially offset by lower salaries and wages (reflecting senior leadership changes and unfilled positions), a recovery from a fraudulent check charge-off, and lower collection expenses on non-accruing loans.

Overall, the Q1 2025 results highlight CMTV's ability to grow its core lending business and expand net interest income in the current rate environment, despite facing upward pressure on deposit costs. The increase in non-interest expense, partly driven by necessary technology investments, underscores the operational costs associated with maintaining competitiveness.

Balance Sheet Evolution and Capital Strength

Community Bancorp.VT's balance sheet saw a decrease in total assets to $1.19 billion as of March 31, 2025, down 4.9% from $1.25 billion at December 31, 2024. This change was largely influenced by a significant decrease in federal funds sold and overnight deposits ($85.6 million decrease), which were utilized to fund increases in the loan and investment securities portfolios, cover decreases in deposit balances, and repay maturing BTFP advances.

The loan portfolio continued its growth trajectory, increasing by $12.33 million (1.33%) to $940.27 million. This growth was concentrated in residential first and junior lien loans ($7.6 million increase), CRE loans ($4.6 million increase), and municipal loans ($3.4 million increase), partially offset by a collective decrease of $3.2 million in commercial industrial and purchased loans. Commercial industrial, purchased, CRE, and municipal loans collectively represent a significant portion of the portfolio (71.9%). The CRE portfolio's largest components were owner-occupied ($128.3 million) and non-owner occupied ($151.9 million) as of March 31, 2025. Credit risk in commercial portfolios is partially mitigated by government guarantees (SBA, RD), with $25.3 million in guaranteed loans ($17.1 million guaranteed balance) as of March 31, 2025.

The securities available-for-sale (AFS) portfolio increased by $8.59 million (5.38%) to $168.29 million, driven by $15.0 million in purchases of MBS, partially offset by maturities and principal payments. The portfolio also benefited from a $3.0 million decrease in unrealized losses reflected in Accumulated Other Comprehensive Loss (AOCI). The AFS portfolio plays a key role in the company's liquidity position.

Total deposits decreased by approximately $22.0 million (2.2%) to $979.66 million. This decrease was primarily in interest-bearing transaction accounts ($17.92 million decrease) and money market funds ($6.78 million decrease), partially offset by increases in time deposits ($2.52 million increase) and savings accounts ($387 thousand increase). Management noted that decreases in Q1/Q2 are typical due to tax obligations and municipal spending. The company utilizes alternative funding sources like CDARS/ICS programs ($1.8 million reciprocal CDARS, $31.9 million reciprocal ICS money market, $107.0 million reciprocal ICS demand) and brokered deposits ($14.0 million) to manage liquidity. Estimated uninsured deposits totaled $244.6 million as of March 31, 2025.

Borrowed funds decreased significantly, largely due to the repayment of $41.5 million in BTFP advances that matured in Q1 2025. Outstanding FHLBB advances totaled $36.1 million, with an available capacity of $106.8 million. Management believes its combination of liquid assets, unencumbered securities, cash flows, and borrowing capacity is sufficient for liquidity needs.

The company maintains a strong capital position. As of March 31, 2025, both Community Bancorp.VT and Community National Bank exceeded applicable regulatory capital requirements, with the Bank classified as "well capitalized." The company's common equity tier 1 capital ratio was 12.07%, Tier 1 capital ratio was 13.75%, and Total capital ratio was 15.00% on a consolidated basis, all well above minimum requirements. Shareholders' equity increased to $102.91 million, resulting in a book value per common share of $18.05, up from $17.24 at December 31, 2024. This increase was driven by net income and changes in AOCI, partially offset by dividends and share repurchases under the program authorized in Q3 2024 (2,000 shares repurchased in Q1 2025).

Outlook and Risks

Community Bancorp.VT's outlook is shaped by its strategic focus on commercial lending, ongoing efforts to manage interest rate risk, and the need to adapt to competitive pressures, particularly in the digital realm. While specific quantitative guidance for future periods has not been provided, management's discussion highlights key factors influencing performance.

The company continues to manage its interest rate risk through its Asset Liability Committee (ALCO) process, utilizing rate shock simulations. The analysis indicates that a gradual parallel upward shift of 200 basis points in the yield curve could result in an estimated 3.50% decrease in Net Interest Income over twelve months, while a 100 basis point downward shift could lead to an estimated 0.10% increase. These estimates are within ALCO policy limits but underscore the sensitivity to rate movements. The cost of funds, particularly deposit rates, remains a key variable influenced by competitive dynamics.

Credit risk remains a primary focus, with management actively monitoring credit quality trends and adjusting the ACL based on economic forecasts and portfolio performance. The recent adjustments to qualitative factors reflect a cautious stance regarding potential impacts of inflation or a recession on borrowers' ability to repay.

External factors, such as recent trade policy developments between Canada and the United States, are being assessed for their potential impact on the local economy and customer base. Management acknowledges the uncertainty surrounding the effect on businesses reliant on this trade and states its strategic focus is to safeguard the balance sheet while supporting clients through these challenges.

Competitive pressures, including those from non-bank lenders, fintech, and larger, more technologically advanced institutions, pose ongoing risks to market share and profitability. The need to invest in technology to enhance efficiency and customer experience is evident in the company's recent expenses and competitive positioning. Failure to keep pace with digital innovation could hinder future growth.

Other risks highlighted include cybersecurity threats, the challenge of maintaining a stable workforce, and potential losses from fraudulent or negligent conduct.

Management's stated strategic response to these challenges is centered on maintaining a strong balance sheet and supporting its customer base, leveraging its community bank model. The ability to execute on technology initiatives and effectively manage deposit costs in a dynamic rate environment will be crucial determinants of future financial performance and the realization of the investment thesis.

Conclusion

Community Bancorp.VT presents an investment narrative centered on a well-capitalized community bank with a strong local franchise and a strategic focus on relationship-based commercial and municipal lending. The company's recent financial performance demonstrates resilience and growth in core net interest income, benefiting from loan portfolio expansion and favorable interest rate dynamics in Q1 2025. Its robust capital position provides a solid foundation to absorb potential credit losses and support future growth initiatives.

However, the competitive landscape, increasingly shaped by technological advancements and the scale of larger regional and national players, poses a significant challenge. CMTV's relative lag in digital capabilities compared to peers highlights the need for continued investment to maintain competitiveness and operational efficiency. While management is actively addressing this through technology projects, the successful execution of this strategy will be key to defending market share and enhancing profitability in the long term. Investors should weigh CMTV's foundational strengths in its local market and sound financial management against the operational and competitive pressures driven by the accelerating pace of digital transformation in the banking industry. The company's ability to leverage its community ties while effectively integrating technology will be critical to its future success.