CMTV

Business Context and Reporting Period

Company: Community Bancorp. (Vermont-based holding company for Community National Bank)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2008
Context: The Company completed the acquisition of LyndonBank on December 31, 2007. Consequently, 2008 results reflect the merged institution, while 2007 comparative figures exclude LyndonBank. The Company is classified as a smaller reporting company.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income for Q3 2008 decreased 66.1% compared to Q3 2007. This decline is primarily attributed to a non-cash write-down of $739,332 on Fannie Mae preferred stock following the government conservatorship of Fannie Mae and Freddie Mac. Without this charge, Q3 2008 net income would have been approximately $1.05 million.
• Expense Increase: Non-interest expenses increased 43% in Q3 2008. Excluding the Fannie Mae write-down, expenses increased 20% due to the LyndonBank merger (increased salaries, occupancy, and integration costs).
• Asset Growth: Total assets increased year-over-year due to the LyndonBank acquisition, though they decreased slightly from year-end 2007 levels due to seasonal municipal loan maturities and deposit runoff.
• Deposit Trends: Total deposits decreased $27.09 million from year-end 2007. The Company experienced post-merger deposit runoff and seasonal declines in municipal accounts, partially offset by the acquisition of LyndonBank deposits.
• Interest Rates: Net interest spread decreased 34 basis points year-over-year due to the low interest rate environment, though net interest income increased due to higher asset volumes from the merger.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Item (Fannie Mae Write-down): The Company recorded a $739,332 other-than-temporary impairment charge on Fannie Mae preferred stock. While the Emergency Economic Stabilization Act (EESA) allows this loss to be treated as an ordinary loss for tax purposes, the tax benefit of approximately $251,000 will not be recognized until Q4 2008 under GAAP.
• TARP Consideration: Management is considering applying for the Troubled Asset Relief Program (TARP) Capital Purchase Program to raise Tier 1 capital. Participation is voluntary but encouraged by the Treasury. Issuance of preferred stock to the Treasury would require consent from existing preferred shareholders.
• Liquidity: The Company faces net deposit outflows of approximately $27 million year-to-date. Liquidity is being managed through FHLB borrowings ($13.6 million outstanding) and the use of CDARS (Certificate of Deposit Account Registry Service) to attract brokered deposits.
• Legal Proceedings: Two pending matters exist: a safe deposit box claim ($50,000) and a contract dispute with a service provider ($72,000). No accruals have been made as of the filing date.
• Capital Adequacy: The Company remains "well capitalized" under regulatory guidelines. Total risk-based capital ratio was 10.44% and Tier 1 risk-based capital ratio was 9.51% as of September 30, 2008.

Investor Verification Checklist

• Fannie Mae Tax Benefit Timing: Verify the recognition of the ~$251,000 tax benefit in Q4 2008 financial statements.
• TARP Application Status: Monitor announcements regarding the decision to participate in the TARP Capital Purchase Program and the associated terms.
• Deposit Runoff: Track deposit trends in Q4 to determine if the post-merger runoff stabilizes or if seasonal municipal deposits return as expected.
• Legal Resolution: Confirm the outcome of the pending safe deposit box and service provider disputes before year-end.
• Dividend Sustainability: Note that dividends declared ($0.17/share) exceeded net income for the quarter; verify management's rationale for maintaining the dividend rate against future earnings projections.