CMTV

Business Context and Reporting Period

Company: Community Bancorp. (Vermont-based bank holding company)

Filing Type: Form 10-Q (Quarterly Report)

Period Ended: September 30, 2009

Overview: The Company operates primarily in northern Vermont. Total assets increased to $496.0 million as of September 30, 2009, driven by loan growth and a cyclical increase in municipal investments. The Company is classified as a smaller reporting company.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Surge: Net income for Q3 2009 increased 222% compared to Q3 2008. This improvement is largely attributable to the absence of a $739,332 non-cash write-down of Fannie Mae preferred stock that occurred in Q3 2008.
• Net Interest Income Compression: Net interest income decreased 6.1% in Q3 2009 and 2.5% for the nine-month period due to a prolonged low-interest-rate environment. Asset yields declined faster than funding costs, compressing the net interest margin to 3.80% (from 3.95% in 2008).
• Non-Interest Income Growth: Non-interest income rose 27.5% in Q3 2009, driven by increased loan origination volume and gains from the sale of loans to the secondary market ($901,497 for the nine months ended Sept 30, 2009).
• Expense Management: Non-interest expenses decreased 10% in Q3 2009 compared to 2008, primarily due to the lack of the Fannie Mae write-down. However, FDIC insurance premiums increased significantly ($142,855 in Q3 2009 vs. $26,526 in Q3 2008) due to special assessments.
• Asset Quality Deterioration: Non-performing assets increased to $5.27 million (1.06% of total assets) from $2.37 million at year-end 2008. Non-accrual loans rose 114.8% to $4.55 million during the nine-month period.

Outlook, Risks, and Management Commentary

• Economic Environment: Management notes the recession continues to negatively impact the local economy, specifically construction, farming, and wood product manufacturing. Tourism remains a bright spot.
• Credit Risk: The Company has increased its provision for loan losses and qualitative factors in its allowance calculation to reflect rising delinquencies and non-performing loans. Approximately 96% of non-performing loans are secured by real estate.
• Investment Portfolio: The Company recorded an additional $94,446 write-down on Fannie Mae preferred stock in Q2 2009. Dividends on Fannie Mae and Federal Home Loan Bank stock have ceased and are unlikely to resume in 2009.
• Liquidity: The Company maintains a stable funding base but relies on borrowed funds (FHLBB advances) to cover seasonal deposit declines and fund loan growth. Total borrowed funds increased to $23.5 million.
• Regulatory Capital: As of September 30, 2009, the subsidiary bank is deemed "well capitalized," exceeding all regulatory minimums for total risk-based capital (11.60%) and Tier 1 capital (10.57%).
• Dividends: A cash dividend of $0.12 per share was declared on September 8, 2009, payable November 1, 2009.

Investor Verification Checklist

• Allowance Adequacy: Verify if the current allowance for loan losses ($3.48 million) is sufficient given the 114% increase in non-accrual loans and the specific concentration in residential real estate.
• Net Interest Margin Trend: Monitor the trajectory of the net interest margin (currently 3.80%) to assess the impact of the low-rate environment on future core earnings.
• Fannie Mae Exposure: Confirm the current fair value and potential for further impairment on the remaining Fannie Mae preferred stock holdings.
• FDIC Assessments: Review the impact of ongoing FDIC special assessments on future non-interest expenses.
• Loan Sales Volume: Assess the sustainability of non-interest income growth, which is currently heavily reliant on secondary market loan sales volume.