CMTV

Community Bancorp. 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2010, for Community Bancorp. and its subsidiary, Community National Bank. The Company is a smaller reporting company headquartered in Derby, Vermont, operating primarily in northern Vermont. The financial statements are unaudited.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Q2 2010 net income decreased 27.3% compared to Q2 2009. This was primarily due to the absence of a $447,420 one-time gain from the sale of mortgage-backed securities recorded in Q2 2009 and a decrease in income from sold loans due to lower refinancing activity.
• Net Interest Income Growth: Net interest income increased 5.2% in Q2 2010 compared to Q2 2009. This was driven by a 13.9% decrease in interest expense, largely due to lower rates paid on deposits and a strategic shift from higher-cost time deposits to lower-cost Federal Home Loan Bank (FHLBB) borrowings.
• Expense Reduction: Non-interest expenses decreased 8.3% in Q2 2010 compared to Q2 2009. Significant reductions were seen in FDIC insurance expense (due to a special assessment in 2009) and salaries/benefits (due to retirements).
• Loan Loss Provision: The provision for loan losses increased to $300,000 in Q2 2010 from $125,001 in Q2 2009, reflecting higher charge-off activity and the resolution of non-performing loans.
• Balance Sheet Shifts: Total deposits decreased $32.9 million from year-end 2009, driven by a $35.8 million drop in municipal deposits and a $20.5 million drop in time deposits. Conversely, borrowed funds increased significantly as the Company replaced maturing CDARS funds with FHLBB advances.

Outlook, Risks, and Management Commentary

• Economic Environment: Management notes a slow recovery with a stagnant local economy. Sectors most affected include construction and dairy farming. However, there are signs of improvement in manufacturing and a major $90 million ski resort expansion project is expected to inject capital into the local economy.
• Credit Quality: Non-performing assets increased, with non-accruing loans rising to $5.03 million (from $3.84 million at year-end 2009). The increase is largely attributed to two commercial real estate loans with 90% USDA guarantees. Management maintains that non-performing assets remain below national peer group levels.
• Investment Portfolio: The Company holds Fannie Mae preferred stock with a fair value of $30,728 (down from $71,488 at year-end 2009) following a delisting order. Management determined the impairment was not "other-than-temporary" as of June 30, 2010, citing the ability and intent to hold the investment.
• Liquidity Strategy: The Company is actively managing liquidity by extending short-term funding into longer-term FHLBB advances to lock in low rates and protect against a potential rising rate environment.
• Dividends: A quarterly cash dividend of $0.12 per common share was declared on June 8, 2010, payable August 1, 2010.

Investor Verification Checklist

• Non-Performing Assets: Verify the trend in non-accruing loans and the specific impact of the two large commercial real estate loans with USDA guarantees on the allowance for loan losses.
• Fannie Mae Exposure: Monitor the valuation of the Fannie Mae preferred stock holdings and any potential future other-than-temporary impairment charges.
• Deposit Stability: Assess the sustainability of the shift from time deposits to borrowed funds and the impact of the seasonal decline in municipal deposits.
• Loan Sales Income: Evaluate the sustainability of income from sold loans given the expiration of the first-time homebuyer tax credit and tighter underwriting standards.
• Capital Ratios: Confirm that the Company remains "well-capitalized" under regulatory guidelines despite the increase in loan loss provisions.