EX-13 2 comm-x13dec2005.htm PORTIONS OF THE ANNUAL REPORT FOR COMMUNITY BANCORP.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Community Bancorp. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Community Bancorp. and Subsidiaries as of December 31, 2005 and 2004 and the related consolidated statements of income, changes in shareholders' equity, and cash ﬂows for each of the three years in the period ended December 31, 2005. These ﬁnancial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these ﬁnancial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall ﬁnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated ﬁnancial statements referred to above present fairly, in all material respects, the consolidated ﬁnancial position of Community Bancorp. and Subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their consolidated cash ﬂows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

Portland, Maine

February 22, 2006

Vermont Registration No. 92-0000278

Community Bancorp. and Subsidiaries
Consolidated Balance Sheets

December 31, 2005 and 2004

ASSETS	2005		2004

Cash and due from banks	$	11,066,745	$	8,390,806
Federal funds sold and overnight deposits		6,508,194		0

Cash and cash equivalents		17,574,939		8,390,806
Securities held-to-maturity (fair value $28,444,000
and $31,587,658 at December 31, 2005 and 2004)		28,391,665		31,579,178
Securities available-for-sale		36,454,426		51,150,344
Restricted equity securities		3,252,150		2,315,450
Loans held for sale		1,586,582		1,833,397
Loans		250,622,955		227,799,788
Allowance for loan losses		(2,189,187)		(2,153,372)
Unearned net loan fees		(684,106)		(763,774)

Net loans		247,749,662		224,882,642
Bank premises and equipment, net		11,617,119		8,057,120
Accrued interest receivable		1,789,251		1,652,827
Other real estate owned, net		0		82,800
Other assets		5,411,770		4,891,930


Total assets	$	353,827,564	$	334,836,494


LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing	$	45,848,972	$	42,725,604
NOW and money market accounts		100,078,793		94,502,798
Savings		45,281,605		47,288,161
Time, $100,000 and over		25,621,541		21,804,521
Other time		77,481,500		76,284,787

Total deposits		294,312,411		282,605,871
Federal funds purchased and other borrowed funds		10,040,000		6,407,000
Securities sold under agreements to repurchase		17,347,140		14,907,518
Accrued interest and other liabilities		3,004,679		2,872,659


Total liabilities		324,704,230		306,793,048


COMMITMENTS AND CONTINGENT LIABILITIES
(Notes 6, 15, 16, 17 and 20)

SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; 6,000,000 shares authorized,
4,279,884 shares issued at December 31, 2005 and 4,037,548
shares issued at December 31, 2004 (including 13,522 shares
issued February 1, 2006 and 12,811 shares issued		10,699,709		10,093,871
on February 1, 2005)
Additional paid-in capital		21,324,481		17,778,605
Retained earnings		2,776,011		1,971,870
Accumulated other comprehensive loss		(452,118)		(168,679)
Less treasury stock, at cost (2005-209,510 shares,
2004-198,444 shares)		(2,614,721)		(2,436,362)


Total shareholders' equity		29,123,334		28,043,446


Total liabilities and shareholders' equity	$	353,827,564	$	334,836,494


The accompanying notes are an integral part of these consolidated financial statements.

Community Bancorp. and Subsidiaries
Consolidated Statements of Income

Years Ended December 31, 2005, 2004, and 2003

	2005		2004		2003

Interest and dividend income
Interest and fees on loans	$	15,645,438	$	13,869,932	$	14,214,617
Interest on debt securities
Taxable		1,482,998		1,973,437		2,394,232
Tax-exempt		1,059,198		1,023,986		938,911
Dividends		133,119		61,075		45,187
Interest on federal funds sold and overnight deposits		36,809		37,915		33,854

		18,357,562		16,966,345		17,626,801

Interest expense
Interest on deposits		4,596,744		4,335,331		4,969,184
Interest on borrowed funds and securities
sold under agreements to repurchase		830,654		426,839		389,944


		5,427,398		4,762,170		5,359,128


Net interest income		12,930,164		12,204,175		12,267,673
Provision for loan losses		150,000		95,000		123,000


Net interest income after provision for loan losses		12,780,164		12,109,175		12,144,673


Non-interest income
Service fees		1,251,910		1,212,020		973,502
Net realized gains on securities		0		44,059		142,904
Other income		1,920,811		1,961,622		2,316,058


		3,172,721		3,217,701		3,432,464


Non-interest expenses
Salaries and wages		4,567,003		4,268,960		4,152,000
Pension and other employee beneﬁts		1,628,501		1,536,441		1,300,895
Occupancy expenses		2,002,091		1,973,934		1,738,790
Other expenses		3,544,654		3,420,155		3,598,005


		11,742,249		11,199,490		10,789,690


Income before income taxes		4,210,636		4,127,386		4,787,447
Income taxes		790,001		730,422		989,181


Net income	$	3,420,635	$	3,396,964	$	3,798,266


Earnings per common share		$0.84		$0.85		$0.96
Weighted average number of common shares
used in computing earnings per share		4,050,993		4,010,894		3,961,385
Dividends declared per share		$0.67		$0.64		$0.61
Book value per share on shares outstanding at
December 31		$7.15		$6.96		$6.81

All per share data and number of shares have been restated to reﬂect a 5% stock dividend declared in June 2005.

The accompanying notes are an integral part of these consolidated financial statements.

Community Bancorp. and Subsidiaries
Consolidated Statements of Shareholders' Equity

Years Ended December 31, 2005, 2004, and 2003

							Accumulated
			Additional				other				Total
	Common Stock		paid-in		Retained		comprehensive		Treasury		stockholders'
	Shares	Amount	capital		earnings		income (loss)		stock		equity

Balances, December 31, 2002	3,756,701	$ 9,847,694	$	16,423,022	$	625,932	$	984,953	$	(2,176,499)	$	25,705,102

Comprehensive income,
net of taxes
Net income	0	0		0		3,798,266		0		0		3,798,266
Net unrealized holding losses on
securities available-for-sale, net
of tax benefit, ($246,730)	0	0		0		0		(478,947)		0		(478,947)


Total comprehensive income												3,319,319


Dividends declared	0	0		0		(2,452,328)		0		0		(2,452,328)
Issuance of stock	32,911	82,279		438,780		0		0		0		521,059
Purchase of treasury stock	(528)	0		0		0		0		(8,006)		(8,006)


Balances, December 31, 2003	3,789,084	9,929,973		16,861,802		1,971,870		506,006		(2,184,505)		27,085,146

Comprehensive income,
net of taxes
Net income	0	0		0		3,396,964		0		0		3,396,964
Net unrealized holding losses on
securities available-for-sale, net
of tax benefit, ($347,565)	0	0		0		0		(674,685)		0		(674,685)


Total comprehensive income												2,722,279


Dividends declared	0	0		0		(2,592,823)		0		0		(2,592,823)
Issuance of stock	65,559	163,898		916,803		0		0		0		1,080,701
Purchase of treasury stock	(15,539)	0		0		0		0		(251,857)		(251,857)


Balances, December 31, 2004	3,839,104	10,093,871		17,778,605		2,776,011		(168,679)		(2,436,362)		28,043,446

Comprehensive income,
net of taxes
Net income	0	0		0		3,420,635		0		0		3,420,635
Net unrealized holding losses on
securities available-for-sale, net
of tax benefit, ($146,014)	0	0		0		0		(283,439)		0		(283,439)


Total comprehensive income												3,137,196


Dividends declared	0	0		0		(2,720,332)		0		0		(2,720,332)
5% stock dividend	192,544	481,360		2,828,971		(3,310,331)		0		0		0
Issuance of stock	49,791	124,478		716,905		0		0		0		841,383
Purchase of treasury stock	(11,065)	0		0		0		0		(178,359)		(178,359)

Balances, December 31, 2005	4,070,374	$10,699,709	$	21,324,481	$	165,983	$	(452,118)	$	(2,614,721)	$	29,123,334

The accompanying notes are an integral part of these consolidated financial statements.

Community Bancorp. and Subsidiaries
Consolidated Statements of Cash Flows

Years Ended December 31, 2005, 2004, and 2003

	2005		2004		2003

CASH FLOWS FROM OPERATING ACTIVITIES	$	3,420,635	$	3,396,964	$	3,798,266
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization		789,587		776,093		642,827
Provision for loan losses		150,000		95,000		123,000
Provision for deferred income taxes		(36,931)		72,768		320,631
Net gain on sale of securities		0		(44,059)		(142,904)
Net gain on sale of loans		(376,946)		(426,198)		(1,168,275)
Loss (gain) on disposal or sale of ﬁxed assets		32,835		24,796		(5,000)
Gains on sales of other real estate owned		(7,710)		(12,684)		(2,651)
(Gain) loss on Trust LLC		(20,825)		15,829		61,540
Amortization of bond premium, net		251,535		406,234		338,595
Proceeds from sales of loans held for sale		29,074,835		36,277,381		66,628,959
Originations of loans held for sale		(28,451,074)		(35,431,429)		(61,544,818)
(Increase) decrease in interest receivable		(136,424)		23,363		68,615
Increase in mortgage servicing rights		(174,143)		(231,583)		(114,516)
(Increase) decrease in other assets		(101,135)		42,063		(387,035)
Decrease in unamortized loan fees		(79,668)		(41,510)		(74,217)
Increase (decrease) in taxes payable		90,881		113,416		(298,250)
Increase (decrease) in interest payable		49,169		(18,636)		(23,234)
Increase (decrease) in accrued expenses		225,818		(351,322)		201,740
(Decrease) increase in other liabilities		(5,167)		47,242		(27,455)


Net cash provided by operating activities		4,695,272		4,733,728		8,395,818


CASH FLOWS FROM INVESTING ACTIVITIES
Securities held-to-maturity
Maturities and paydowns		40,946,852		47,074,787		35,946,144
Purchases		(37,755,503)		(37,107,593)		(38,585,121)
Securities available-for-sale
Sales and maturities		17,000,000		20,461,560		14,213,770
Purchases		(2,988,906)		(16,659,541)		(30,335,404)
Purchase of restricted equity securities		(936,700)		(958,600)		(47,800)
Increase in loans, net		(23,013,545)		(23,840,610)		(3,729,141)
Capital expenditures, net		(4,382,421)		(1,043,086)		(3,165,151)
Proceeds from sales of ﬁxed assets		0		0		5,000
Investments in limited partnerships, net		(305,583)		(1,053,441)		(561,184)
Proceeds from sales of other real estate owned		100,510		68,048		82,151
Recoveries of loans charged off		66,193		127,809		117,563


Net cash used in investing activities		(11,269,103)		(12,930,667)		(26,059,173)

	2005		2004		2003

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, NOW, savings and
money market accounts		6,692,807		6,601,419		19,089,062
Net increase (decrease) in certiﬁcates of deposit		5,013,733		(3,674,807)		(331,433)
Net increase (decrease) in repurchase agreements		2,439,622		2,890,948		(2,052,456)
Net increase (decrease) in borrowed funds		3,633,000		(1,633,000)		3,000,000
Payments to acquire treasury stock		(178,359)		(251,857)		(8,006)
Dividends paid		(1,842,839)		(1,716,868)		(1,699,182)


Net cash provided by ﬁnancing activities		15,757,964		2,215,835		17,997,985


Net increase (decrease) in cash and
cash equivalents		9,184,133		(5,981,104)		334,630

Cash and cash equivalents
Beginning		8,390,806		14,371,910		14,037,280

Ending	$	17,574,939	$	8,390,806	$	14,371,910


SUPPLEMENTAL SCHEDULE OF CASH PAID
DURING THE YEAR
Interest	$	5,378,229	$	4,780,806	$	5,382,362

Income taxes	$	688,200	$	592,088	$	966,800


SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Change in unrealized gain on securities
available-for-sale	$	(429,453)	$	(1,022,251)	$	(725,677)


Other real estate owned acquired in
settlement of loans	$	10,000	$	49,887	$	167,777


Investments in limited partnerships
Increase in limited partnerships	$	(156,289)	$	(385,263)	$	(821,416)
(Decrease) increase in contributions payable		(149,294)		(688,178)		260,232


	$	(305,583)	$	(1,053,441)	$	(561,184)


Dividends paid:
Dividends declared	$	2,720,332	$	2,592,823	$	2,452,328
Increase in dividends payable attributable
to dividends declared		(41,516)		(6,304)		(232,087)
Dividends reinvested		(835,977)		(869,651)		(521,059)


	$	1,842,839	$	1,716,868	$	1,699,182


Stock dividends	$	3,310,331	$	0	$	0


The accompanying notes are an integral part of these consolidated financial statements.

Community Bancorp. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Signiﬁcant Accounting Policies

The accounting policies of Community Bancorp. and Subsidiaries (''Company'') are in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. The following is a description of the signiﬁcant policies.

Basis of presentation and consolidation

The consolidated ﬁnancial statements include the accounts of Community Bancorp. and its wholly-owned subsidiaries, Community National Bank (''Bank'') and, with respect to 2003, its former wholly-owned subsidiary, Liberty Savings Bank (''Liberty''). During the third quarter of 2003, the Company sold its stock interest in Liberty, a New Hampshire guaranty savings bank whose inactive charter was acquired by Community Bancorp. in 1997, prior to the advent of full interstate banking in New Hampshire. The Company was paid $307,500 for this charter valued at $300,000 as of the sale date. All signiﬁcant intercompany accounts and transactions have been eliminated.

Nature of operations

The Company provides a variety of ﬁnancial services to individuals, municipalities, and corporate customers through its branches, ATMs, and telephone and internet banking in northeastern and central Vermont, which is primarily a small business and agricultural area. The Company's primary deposit products are checking and savings accounts and certiﬁcates-of-deposit. Its primary lending products are commercial, real estate, municipal, and consumer loans.

Concentration of risk

The Company's operations are affected by various risk factors, including interest-rate risk, credit risk, and risk from geographic concentration of its deposit taking and lending activities. Management attempts to manage interest rate risk through various asset/liability management techniques designed to match maturities of assets and liabilities. Loan policies and administration are designed to provide assurance that loans will only be granted to creditworthy borrowers, although credit losses are expected to occur because of subjective factors and factors beyond the control of the Company. Although the Company has a diversiﬁed loan portfolio and economic conditions are relatively stable at this time, most of its lending activities are conducted within the geographic area where it is located. As a result, the Company and its borrowers may be especially vulnerable to the consequences of changes in the local economy. In addition, a substantial portion of the Company's loans are secured by real estate, which could experience a decline in value, especially during times of adverse economic conditions.

Use of estimates

The preparation of consolidated ﬁnancial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the ﬁnancial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions involve inherent uncertainties. Accordingly, actual results could differ from those estimates and those differences could be material.

Material estimates that are particularly susceptible to signiﬁcant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management generally obtains independent appraisals for signiﬁcant properties. While the allowances for loan losses and foreclosed real estate represent management's best estimate of probable loan and foreclosure losses as of the balance sheet date, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in a number of factors, especially local market conditions. The amount of the change that is reasonably possible cannot be estimated.

Community Bancorp. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowances for losses on loans and foreclosed real estate. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination.

Presentation of cash ﬂows

For purposes of presentation in the consolidated statements of cash ﬂows, cash and cash equivalents includes cash on hand, amounts due from banks (including cash items in process of clearing), federal funds sold (generally purchased and sold for one day periods), and overnight deposits.

Investment securities

Debt securities the Company has the positive intent and ability to hold to maturity are classiﬁed as held-to-maturity and reported at amortized cost. Debt and equity securities not classiﬁed as held-to-maturity are classiﬁed as available-forsale. Investments classiﬁed as available-for-sale are carried at fair value with unrealized gains and losses net of tax and reclassiﬁcation adjustment reported as a net amount in other comprehensive income. Investment securities transactions are accounted for on a trade date basis. The speciﬁc identiﬁcation method is used to determine realized gains and losses on sales of securities available-for-sale. Premiums and discounts are recognized in interest income using the interest method over the period to maturity or call date.

Other Investments

The Company acquires partnership interests in limited partnerships for low income housing projects. The investments in limited partnerships are amortized using the effective yield method.

The Company has a one-third ownership interest in Community Financial Services Group, LLC (CFSG). The Company's investment in CFSG is accounted for under the equity method of accounting.

Restricted equity securities

Restricted equity securities are comprised of Federal Reserve Bank stock and Federal Home Loan Bank stock. These securities are carried at cost and evaluated for impairment. As a member of the Federal Reserve Bank of Boston (FRB), the Company is required to invest in FRB stock in an amount equal to 3% of Community National Bank's capital stock and surplus.

As a member of the Federal Home Loan Bank of Boston (FHLB), the Company is required to invest in $100 par value stock of the FHLB in an amount that approximates 1% of unpaid principal balances on qualifying loans, as well as an activity base requirement. The stock is nonmarketable, and when redeemed, the Company would receive from the FHLB an amount equal to the par value of the stock.

Loans held for sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income.

Loans

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans.

Community Bancorp. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Loan interest income is accrued daily on the outstanding balances. The accrual of interest is discontinued when a loan is speciﬁcally determined to be impaired or when the loan is delinquent 90 days and management believes, after considering collection efforts and other factors, that the borrower's ﬁnancial condition is such that collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is generally not recognized on speciﬁc impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are generally applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Loans are returned to accrual status when principal and interest payments are brought current and the customer has proven the ability to make future payments on a timely basis. Loans are charged off when collection of principal is considered doubtful. Past due status is determined on a contractual basis.

Loan origination and commitment fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan's yield. The Company is generally amortizing these amounts over the contractual life of the loans.

Allowance for loan losses

The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance reﬂects management's estimate as to the collectibility of the loan portfolio, based on its periodic evaluation of factors it considers relevant, including the nature of the portfolio, credit concentrations, trends in historical loss experience, speciﬁc impaired loans, and prevailing economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash ﬂows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries.

Bank premises and equipment

Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally by the straight-line method over their estimated useful lives. The cost of assets sold or otherwise disposed of, and the related accumulated depreciation is eliminated from the accounts and the resulting gains or losses are reﬂected in the statement of income. Maintenance and repairs are charged to current expense as incurred and the cost of major renewals and betterments are capitalized.

Other real estate owned

Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at the lower of the Company's carrying amount or fair value less estimated selling cost at the date of foreclosure. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, these assets are carried at the lower of their new cost basis or fair value, less cost to sell. Costs of signiﬁcant property improvements are capitalized, whereas costs relating to holding property are expensed. Appraisals are then done periodically on properties that management deem signiﬁcant, or evaluations may be performed by management on properties in the portfolio that are less vulnerable to market conditions. Subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value, less cost to sell.

Income taxes

The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. Adjustments to the Company's deferred tax assets are recognized as deferred income tax expense or beneﬁt based on management's judgments relating to the realizability of such asset.

Community Bancorp. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Foreign currency transactions

Foreign currency (principally Canadian) amounts are converted to U.S. dollars. The U.S. dollar is the functional currency and therefore translation adjustments are recognized in income. Total conversion adjustments, including adjustments on foreign currency transactions, are immaterial.

Mortgage servicing

Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of ﬁnancial assets. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying ﬁnancial assets. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying the rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash ﬂows using market-based assumptions. Impairment is recognized through a valuation allowance, to the extent that fair value is less than the capitalized amount.

Pension costs

Pension costs are charged to salaries and employee beneﬁts expense and accrued over the active service period.

Advertising costs

The Company expenses advertising costs as incurred.

Comprehensive income

Accounting principles generally require recognized revenue, expenses, gains, and losses to be included in net income. Certain changes in assets and liabilities, such as the after-tax effect of unrealized gains and losses on available-forsale securities, are not reﬂected in the income statement, but the cumulative effect of such items from period-to-period is reﬂected as a separate component of the equity section of the balance sheet (accumulated other comprehensive income). Other comprehensive income, along with net income, comprises the Company's total comprehensive income.

The Company's total comprehensive income for the comparison period is calculated as follows:

	2005		2004	2003

Net Income		$3,420,635	$ 3,396,964	$3,798,266
Other comprehensive income (loss), net of tax:
Change in unrealized holdings losses on
available-for-sale securities arising during the period		(429,453)	(983,603)	(583,309)
Reclassiﬁcation adjustment for gains realized in income		0	(38,647)	(142,368)

Net unrealized losses		(429,453)	(1,022,250)	(725,677)
Tax effect		146,014	347,565	246,730

Other comprehensive loss, net of tax		(283,439)	(674,685)	(478,947)

Total comprehensive income		$3,137,196	$ 2,722,279	$3,319,319

Earnings per common share

Earnings per common share amounts are computed based on the weighted average number of shares of common stock issued during the period including Dividend Reinvestment Plan (DRIP) shares payable through dividends declared (retroactively adjusted for a 5% stock dividend declared in June 2005) and reduced for shares held in treasury.

Community Bancorp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)


Off-balance-sheet ﬁnancial instruments

In the ordinary course of business, the Company has entered into off-balance-sheet ﬁnancial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial and municipal letters of credit, standby letters of credit, and risk-sharing commitments on certain sold loans. Such ﬁnancial instruments are recorded in the ﬁnancial statements when they are funded.

Fair values of ﬁnancial instruments

The following methods and assumptions were used by the Company in estimating its fair value disclosures for ﬁnancial instruments:

	Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate their fair values.

	Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

	Restricted equity securities: The carrying amounts of these securities approximate their fair values.

	Loans and loans held for sale: For variable-rate loans that reprice frequently and with no signiﬁcant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, ﬁxed rate residential, commercial real estate, and rental property mortgage loans, and commercial and industrial loans) are estimated using discounted cash ﬂow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The carrying amounts reported in the balance sheet for loans that are held for sale approximate their market values. Fair values for impaired loans are estimated using discounted cash ﬂow analyses or underlying collateral values, where applicable.

	Deposits and borrowed funds: The fair values disclosed for demand deposits (for example, checking and savings accounts) are, by deﬁnition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair values for certiﬁcates of deposit and debt are estimated using a discounted cash ﬂow calculation that applies interest rates currently being offered on certiﬁcates and debt to a schedule of aggregated contractual maturities on such time deposits and debt.

	Short-term borrowings: The carrying amounts reported in the balance sheets for repurchase agreements approximate their fair values. These borrowings are short-term and due on demand.

	Other liabilities: Commitments to extend credit were evaluated and fair value was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit-worthiness of the counterparties. For ﬁxed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

	Accrued interest: The carrying amounts of accrued interest approximates their fair values.

Transfers of ﬁnancial assets

Transfers of ﬁnancial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Community Bancorp. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Reclassiﬁcation

Certain amounts in the 2004 and 2003 ﬁnancial statements have been reclassiﬁed to conform to the current year presentation.

Note 2. Investment Securities

Securities available-for-sale (AFS) and held-to-maturity (HTM) consist of the following:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Securities AFS	Cost		Gains		Losses		Value

December 31, 2005
U.S. agency securities	$	33,115,577	$	1,770	$	651,476	$	32,465,871
U.S. Government securities		2,989,486		983		39,844		2,950,625
Corporate debt securities		1,001,891		3,539		0		1,005,430
Other investments		32,500		0		0		32,500

	$	37,139,454	$	6,292	$	691,320	$	36,454,426


December 31, 2004
U.S. agency securities	$	46,309,380	$	116,009	$	400,402	$	46,024,987
U.S. Government securities		3,056,477		0		15,540		3,040,937
Corporate debt securities		2,007,562		44,358		0		2,051,920
Other investments		32,500		0		0		32,500

	$	51,405,919	$	160,367	$	415,942	$	51,150,344


Securities HTM

December 31, 2005
States and Political Subdivisions	$	28,391,665	$	52,335	$	0	$	28,444,000


December 31, 2004
U.S. agency securities	$	996,164	$	8,480	$	0	$	1,004,644
States and Political Subdivisions		30,583,014		0		0		30,583,014

	$	31,579,178	$	8,480	$	0	$	31,587,658

Included in the caption ''States and Political Subdivisions'' are securities of local municipalities carried at $28,391,665 and $30,583,014 at December 31, 2005 and 2004, respectively, which are attributable to private ﬁnancing transactions arranged by the Company. The current fair value of these securities is an estimation based on an analysis that takes into account future maturities and/or scheduled future repricing. The Company anticipates no losses on these securities and expects to hold them until their maturity.

Investment securities with a book value of $22,106,561 and $18,256,621 and a fair value of $21,675,699 and $18,174,222 at December 31, 2005 and 2004, respectively, were pledged as collateral for larger dollar repurchase agreement accounts and for other purposes as required or permitted by law.

Proceeds from the maturities, call or sale of securities available-for-sale amounted to $17,000,000 in 2005, $20,461,560 in 2004, and $14,213,770 in 2003. Realized gains from sales of investments available-for-sale were $0 in 2005, $70,311 in 2004, and $153,168 in 2003. Realized losses were $0 in 2005, $31,664 in 2004, and $10,800 in 2003. Realized gains of $536 were recognized in 2003 on securities held-to-maturity due to call features exercised

Community Bancorp. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

prior to maturity on certain debt securities. When an investment classiﬁed as held-to-maturity has a call option, sale of the investment is permitted if the sale is within 90 days of the call date and it is highly probable that it will be called. In 2004, a realized gain of $5,412 was recognized through the sale of a held-to-maturity security that met the criteria.

The carrying amount and estimated fair value of securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

The scheduled maturities of securities available-for-sale at December 31, 2005 were as follows:

		Carrying		Fair
		Amount		Value


	Due in one year or less	$	12,034,575	$	11,944,667
	Due from one to ﬁve years		24,066,381		23,470,845
	Due from ﬁve to ten years		1,005,998		1,006,414
	Other investments		32,500		32,500

		$	37,139,454	$	36,454,426


The scheduled maturities of securities held-to-maturity at December 31, 2005 were as follows:

		Carrying		Fair
		Amount		Value*


	Due in one year or less	$	25,638,376	$	25,638,000
	Due from one to ﬁve years		1,407,946		1,422,000
	Due from ﬁve to ten years		696,854		710,000
	Due after ten years		648,489		674,000

		$	28,391,665	$	28,444,000


*Method used to determine fair value rounds values to nearest thousand.

Community Bancorp. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

All investments with unrealized losses are presented either as those with a continuous loss position less than 12 months or as those with a continuous loss position for 12 months or more. Investments with unrealized losses at December 31, 2005 and 2004 were as follows:

December 31, 2005	Less than 12 months		12 months or more		Total
	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
	Value	Loss	Value	Loss	Value	Loss

U.S. agency securities	$ 2,958,580	$ 35,003	$27,499,097	$616,473	$30,457,677	$651,476
U.S. Government securities	979,375	14,919	974,062	24,925	1,953,437	39,844

	$ 3,937,955	$ 49,922	$28,473,159	$641,398	$32,411,114	$691,320


December 31, 2005	Less than 12 months		12 months or more		Total
	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
	Value	Loss	Value	Loss	Value	Loss

U.S. agency securities	$34,885,285	$390,503	$ 990,100	$ 9,900	$35,875,385	$400,403
U.S. Government securities	3,040,937	15,539	0	0	3,040,937	15,539

	$37,926,222	$406,042	$ 990,100	$ 9,900	$38,916,322	$415,942

The unrealized losses are a result of increases in market interest rates and not from deterioration in the creditworthiness of the issuer. At December 31, 2005 there were 33 securities in the investment portfolio that were in an unrealized loss position. These unrealized losses were principally attributable to changes in current interest rates for similar types of securities.

In analyzing an issuer's ﬁnancial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's ﬁnancial condition. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classiﬁed as available-for-sale, no declines are deemed to be other-than-temporary at December 31, 2005 and 2004.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns, or adverse developments relating to the issuer, warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the ﬁnancial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufﬁcient to allow for any anticipated recovery in fair value.

Community Bancorp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)


Note 3. Loans

The composition of net loans at December 31 was as follows:

		2005		2004

	Commercial	$	20,262,855	$	22,035,264
	Real estate-Construction		13,931,238		11,646,486
	Real estate-Mortgage		194,565,926		171,826,925
	Installment and other		21,862,936		22,291,113

			250,622,955		227,799,788


	Deduct:
	Allowance for loan losses		2,189,187		2,153,372
	Unearned net loan fees		684,106		763,774

			2,873,293		2,917,146

		$	247,749,662	$	224,882,642


The total recorded investment in impaired loans as determined in accordance with accounting principles generally accepted in the United States of America approximated $220,000 and $257,000 at December 31, 2005 and 2004, respectively. Allowance for loan losses allocated to these loans amounted to $87,938 and $175,697 at December 31, 2005 and 2004, respectively. The average recorded investment in impaired loans amounted to $284,542, $282,270, and $401,866 for the years ended December 31, 2005, 2004, and 2003, respectively. Cash receipts on impaired loans amounted to $37,042, $24,425, and $196,267 in 2005, 2004, and 2003, respectively, all of which were applied to the principal balances of the loans.

The Company had non-accrual loans of $436,419 and $865,443 at December 31, 2005 and 2004, respectively. If interest on these loans had been recognized at the original interest rates, interest income would have increased approximately $49,644, $63,212, and $121,670 for the years ended December 31, 2005, 2004, and 2003, respectively. The total recorded investment in loans past due ninety days or more and still accruing interest approximated $177,000 and $194,000 at December 31, 2005 and 2004, respectively.

The Company is not committed to lend additional funds to debtors with impaired, non-accrual or modiﬁed loans, except for one loan classiﬁed as non-performing that management is watching closely and which has been performing according to its contract terms.

Note 4. Loan Servicing

Commercial and mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of commercial and mortgage loans serviced for others were $131,941,606 and $123,792,161 at December 31, 2005 and 2004, respectively. Net gains realized on the sale of loans amounted to $376,946, $426,198, and $1,168,275, respectively, for the years ended 2005, 2004, and 2003. The balance of capitalized servicing rights, net of valuation allowances, included in other assets at December 31, 2005 and 2004, was $946,808 and $772,665, respectively. The fair values of these rights were $1,365,244 and $989,470, respectively. The fair value of servicing rights was determined using market prices for similar assets with similar characteristics.

Community Bancorp. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

The following summarizes mortgage servicing rights capitalized and amortized in each year:

	Years Ended December 31,
	2005	2004	2003

Mortgage servicing rights capitalized	$423,133	$446,079	$367,738

Mortgage servicing rights amortized	$248,990	$214,496	$253,222

Note 5. Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31 were as follows:

	2005		2004		2003

Balance, beginning of year	$	2,153,372	$	2,199,110	$	2,155,789
Provisions for loan losses		150,000		95,000		123,000
Recoveries of amounts charged off		66,193		127,809		117,563

		2,369,565		2,421,919		2,396,352
Amounts charged off		(180,378)		(268,547)		(197,242)

Balance, end of year	$	2,189,187	$	2,153,372	$	2,199,110


Note 6. Bank Premises and Equipment

The major classes of bank premises and equipment and accumulated depreciation and amortization at December 31 were as follows:

	2005		2004

Land and land improvements	$	1,566,010	$	988,982
Buildings and improvements		9,301,401		5,830,119
Furniture and equipment		5,039,609		4,604,950
Leasehold improvements		636,789		630,777
Construction in progress		8,127		584,982

		16,551,936		12,639,810
Less accumulated depreciation and amortization		(4,934,817)		(4,582,690)

	$	11,617,119	$	8,057,120

Depreciation included in occupancy and equipment expense amounted to $789,586, $772,886, and $642,827 for the years ended December 31, 2005, 2004, and 2003, respectively.

The Company is obligated under non-cancelable operating leases at ﬁve branch ofﬁce locations expiring in various years through 2022 with options to renew. Minimum future rental payments for these leases with original terms in excess of one year as of December 31, 2005 for each of the next ﬁve years and in aggregate were:

2006	$	166,292
2007		167,562
2008		168,872
2009		182,720
2010		168,451
Subsequent to 2010		809,565

	$	1,663,462

Community Bancorp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)


Total rental expense amounted to $181,201, $173,882, and $178,178 for the years ended December 31, 2005, 2004, and 2003, respectively.

Note 7. Other Real Estate Owned

A summary of foreclosed real estate at December 31, 2004 was as follows:

	Other real estate owned	$82,800
	Less allowance for losses on OREO	0

	Other real estate owned, net	$82,800

There was no OREO at December 31, 2005, and there was no change in the allowance for losses on OREO for the years ended December 31, 2005, 2004 or 2003.

Note 8. Other Investments

The Company purchased various partnership interests in limited partnerships. These partnerships were established to acquire, own and rent residential housing for low and moderate income Vermonters located in northeastern and central Vermont.

The tax credits from these investments were estimated at $320,165, $248,521, and $415,585 for December 31, 2005, 2004, and 2003, respectively, and are recorded as a reduction of income tax expense. Expenses related to amortization of the investments in the limited partnerships are recognized as a component of ''other expenses'', and were $338,216, $292,915, and $403,374 for 2005, 2004, and 2003, respectively. The carrying values of these investments were $2,543,344 and $2,387,055 at December 31, 2005 and 2004, respectively.

The Bank has a one-third ownership interest in a nondepository trust company, Community Financial Services Group, LLC based in Newport, Vermont (''CFSG''), which is held indirectly through Community Financial Services Partners, LLC, a Vermont limited liability company (''Partners'') that owns 100% of the limited liability company equity interests of CFSG. The Bank accounts for its investment in Partners under the equity method of accounting. As of December 31, 2005, the Company's investment in Partners amounted to $119,018 with a gain for 2005 of $20,825, compared to an investment of $98,193 as of December 31, 2004 with a loss of $15,829 for 2004.

Note 9. Deposits

The following is a maturity distribution of time certiﬁcates of deposit at December 31, 2005:

	2006		$ 57,441,512
	2007		23,235,752
	2008		11,242,574
	2009		10,535,511
	2010		647,692

	Total		$103,103,041

Community Bancorp. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Note 10. Borrowed Funds

Borrowings from the Federal Home Loan Bank of Boston (FHLB) as of December 31 were as follows:

	2005		2004

FHLB term borrowing, 4.11% ﬁxed rate, payable
January 18, 2006	$	2,000,000	$	0

FHLB term borrowing, 4.47% ﬁxed rate, payable March 27, 2006		3,000,000		0

Community Investment Program borrowing, 7.57% ﬁxed rate, payable
November 16, 2007		30,000		30,000

FHLB term borrowing, 4.78% ﬁxed rate, payable
January 18, 2011, callable quarterly		5,000,000		5,000,000

Community Investment Program borrowing, 7.67% ﬁxed rate, payable
November 16, 2012		10,000		10,000

	$	10,040,000	$	5,040,000

Federal Funds Purchased		0		1,367,000

	$	10,040,000	$	6,407,000


Principal maturities of borrowed funds as of December 31, 2005 were as follows:

	2006	$ 5,000,000
	2007	30,000
	Thereafter	5,010,000

		$10,040,000


The Company also maintains a $4,301,000 IDEAL Way Line of Credit with FHLB. As of December 31, 2005 and 2004, there were outstanding advances under this line of $0 and $1,367,000, respectively. Interest on these borrowings is at a rate determined daily by FHLB and payable monthly.

Borrowings from FHLB are secured by a blanket lien on qualiﬁed collateral consisting primarily of loans with ﬁrst mortgages secured by one to four family properties and other qualiﬁed assets. Qualiﬁed collateral for these borrowings approximated $114,089,000 and $122,089,000 as of December 31, 2005 and 2004, respectively.

Under a separate agreement, the Company has the authority to collateralize public unit deposits, up to its available borrowing capacity, with letters of credit issued by FHLB. As of December 31, 2005, the Company's potential borrowing capacity was $85.6 million, reduced by outstanding advances. At December 31, 2005, $52,705,000 in letters of credit was pledged as collateral for these deposits. A fee is charged to the Company, quarterly, based on the average daily balance outstanding at a rate of 20 basis points. The average daily balance for the fourth quarter of 2005 was $21.5 million.

Note 11. Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase amounted to $17,347,140 and $14,907,518 as of December 31, 2005 and 2004, respectively. These agreements are collateralized by U. S. government and agency securities and U.S. Treasury notes with a book value of $18,115,155 and $17,251,979 and a fair value of $17,737,454 and $17,180,244 at December 31, 2005 and 2004, respectively. These securities pay interest at rates between 2.375%

Community Bancorp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)


and 6.375% at December 31, 2005 and 2.375% and 7.575% at December 31, 2004 and mature at varying dates through 2012.

The average daily balance of these repurchase agreements approximated $13,986,763 and $12,879,216 during 2005 and 2004, respectively. The maximum borrowings outstanding on these agreements at any month-end reporting period of the Company were $17,347,140 and $14,940,198 in 2005 and 2004, respectively. These repurchase agreements mature daily and carried a weighted average interest rate of 1.48% during 2005, compared to 0.97% during 2004. The securities underlying these agreements are held in safekeeping at the Federal Reserve Bank.

Note 12. Income Taxes

The Company prepares its federal income tax return on a consolidated basis. Federal income taxes are allocated to members of the consolidated group based on taxable income.

Federal income tax expense for the years ended December 31 was as follows:

	2005		2004		2003

Currently paid or payable	$	826,932	$	657,654	$	668,550
Deferred		(36,931)		72,768		320,631

	$	790,001	$	730,422	$	989,181


Total income tax expense differed from the amounts computed at the statutory federal income tax rate of 34 percent primarily due to the following at December 31:

	2005		2004		2003

Computed expected tax expense	$	1,431,616	$	1,403,311	$	1,627,732
Tax exempt interest		(360,127)		(348,155)		(319,230)
Disallowed interest		34,813		36,932		38,103
Partnership tax credits		(320,165)		(248,521)		(361,876)
Other		3,864		(113,145)		4,452

	$	790,001	$	730,422	$	989,181


The deferred income tax provision consisted of the following items for the years ended December 31:

	2005		2004		2003

Depreciation	$	(60,525)	$	4,199	$	125,476
Loan fees		2,721		5,181		9,186
Mortgage servicing		59,209		78,738		38,935
Deferred compensation		(27,654)		(44,742)		8,358
Bad debts		(12,177)		15,551		7,429
Limited partnerships		0		0		53,709
Nonaccrual loan interest		1,495		32,567		100,193
Other		0		(18,726)		(22,655)

	$	(36,931)	$	72,768	$	320,631

Community Bancorp. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Listed below are the signiﬁcant components of the net deferred tax liability at December 31:

	2005		2004

Components of the deferred tax asset:
Bad debts	$	570,148	$	557,970
Unearned loan fees		6,391		9,112
Nonaccrual loan interest		2,342		3,837
Deferred compensation		330,467		305,873
Unrealized loss on securities available-for-sale		232,909		86,896
Other		100,015		96,955

Total deferred tax asset	$	1,242,272	$	1,060,643


Components of the deferred tax liability:
Depreciation	$	305,119	$	365,643
Limited partnerships		255,280		255,280
Mortgage servicing rights		321,915		262,706

Total deferred tax liability	$	882,314	$	883,629

Net deferred tax asset	$	359,958	$	177,014


Accounting principles generally accepted in the United States of America allow for the recognition and measurement of deductible temporary differences (including general valuation allowances) to the extent that it is more likely than not that the deferred tax asset will be realized.

Net deferred tax assets are included in the caption ''Other Assets'' on the balance sheets at December 31, 2005 and 2004.

Note 13. 401(k) and Proﬁt-Sharing Plan

The Company has a deﬁned contribution plan covering all employees who meet certain age and service requirements. Due to the fact that the plan is a deﬁned contribution plan, rather than a deﬁned beneﬁt plan, there is no unfunded past service liability. The provisions for pension expense were $429,000, $379,435, and $353,205 for 2005, 2004, and 2003, respectively. These amounts represent discretionary matching contributions of a portion of the voluntary employee salary deferrals under the 401(k) plan and discretionary proﬁt-sharing contributions under the plan.

Note 14. Deferred Compensation and Supplemental Employee Retirement Plans

The Company maintains a directors deferred compensation plan and, prior to 2005, a retirement plan for its directors. Participants are general creditors of the Company with respect to these beneﬁts. The beneﬁts accrued under these plans were $578,937 and $575,601 at December 31, 2005 and 2004, respectively. Expenses associated with these plans were $15,587, $64,779, and $67,791 for the years ended December 31, 2005, 2004, and 2003, respectively.

Deferrals of director compensation under the plan were suspended during 2005 pending receipt of guidance from the Internal Revenue Service (IRS) for compliance with applicable provisions of the American Jobs Creation Act of 2004 (AJCA). In accordance with IRS guidance issued in 2005, the Company permits new deferrals under the plan for eligible directors effective January 1, 2006.

The Company terminated the directors' retirement plan during 2005, and no beneﬁts for 2005 were accrued. Eligible directors will receive additional current compensation in lieu of beneﬁts payable under the retirement plan. Retirement beneﬁts accrued prior to termination of the plan will be paid out to participants at their retirement from the board.

Community Bancorp. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

The Company also maintains a supplemental employee retirement plan for key employees of the Company. Beneﬁts accrued under this plan were $393,025 and $324,025 at December 31, 2005 and 2004, respectively. The expense associated with this plan was $69,000, $70,565, and $76,795 for the years ended December 31, 2005, 2004, and 2003, respectively.

Certain provisions of these plans will be amended during 2006 to ensure compliance with the American Jobs Creation Act of 2004. Such amendments are not expected to have any material impact upon the Company's ﬁnancial obligations under the plans.

Note 15. Financial Instruments with Off-Balance-Sheet Risk

The Company is a party to ﬁnancial instruments with off-balance-sheet risk in the normal course of business to meet the ﬁnancing needs of its customers and to reduce its own exposure to ﬂuctuations in interest rates. These ﬁnancial instruments include commitments to extend credit, standby letters of credit and ﬁnancial guarantees, commitments to sell loans, and risk-sharing commitments on certain sold loans. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reﬂect the extent of involvement the Company has in particular classes of ﬁnancial instruments.

The Company's exposure to credit loss in the event of nonperformance by the other party to the ﬁnancial instrument for commitments to extend credit and standby letters of credit and ﬁnancial guarantees written is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

The Company generally requires collateral or other security to support ﬁnancial instruments with credit risk.

	Contract or
	-Notional Amount-
	2005	2004

Financial instruments whose contract amount represent credit risk:

Unused portions commercial lines of credit	$17,497,235	$17,289,543


Unused portions of home equity lines of credit	8,867,594	7,187,832


Other commitments to extend credit	10,303,630	5,681,210


Standby letters of credit and commercial letters of credit	621,135	171,500


Credit card arrangements	8,890,318	8,651,321


MPF credit enhancement obligation, net (See Note 16)	1,066,162	853,660


Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have ﬁxed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At December 31, 2005 and 2004, the Company had binding loan commitments at ﬁxed rates approximating $607,600 and $1,319,175, respectively, that are included in commitments to extend credit.

The Company evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management's credit evaluation of the counter-party. Collateral held varies but may include real estate, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Community Bancorp. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Standby letters of credit and ﬁnancial guarantees written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The fair value of standby letters of credit has not been included in the balance sheets as required by Financial Interpretation No. 45 as the fair value is immaterial.

Note 16. Contingent Liability

In February of 2003, the Company began selling loans under a program with FHLB, the Mortgage Partnership Finance program (MPF). Under this program the Company shares in the credit risk of each mortgage, while receiving fee income in return. The Company is responsible for a Credit Enhancement Obligation (CEO) based on the credit quality of these loans. FHLB funds a First Loss Account (FLA) based on the Company's outstanding MPF mortgage balances. This creates a laddered approach to sharing in any losses. In the event of default, homeowner's equity and Private Mortgage Insurance, if any, are the ﬁrst sources of repayment; the FHLB's FLA funds are then utilized, followed by the member's CEO, with the balance picked up by FHLB. These loans meet speciﬁc underwriting standards of the FHLB. As of December 31, 2005 and 2004, the Company had $44.1 million and $39.6 million, respectively, in loans sold through the MPF program. The Company carries a contingent liability calculated on the same methodology used in calculating its allowance for loan loss, adjusted to reﬂect the risk sharing arrangements with the FHLB. The estimated contingent liability as of December 31, 2005 and 2004 was $91,667 and is reﬂected on the balance sheet under ''Accrued Interest and Other Liabilities''. The volume of loans sold to the MPF program and the corresponding credit obligation continues to be closely monitored by management. As of December 31, 2005, the maximum contingent contractual liability related to this program was $1,157,829 compared to $945,327 as of December 31, 2004.

Note 17. Legal Contingencies

In the normal course of business, the Company is involved in various claims and legal proceedings. In the opinion of the Company's management, after consulting with the Company's legal counsel, any liabilities resulting from such proceedings are not expected to have a material adverse effect on the Company's ﬁnancial statements.

Note 18. Transactions with Related Parties

The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal ofﬁcers, their immediate families and afﬁliated companies in which they are principal shareholders (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others and which do not represent more than the normal risk of collectibility, or present other unfavorable features.

Aggregate loan transactions with related parties as of December 31 were as follows:

	2005		2004

Balance, beginning	$	567,907	$	591,276
New loans		378,271		370,614
Repayments		(424,693)		(393,983)

Balance, ending	$	521,485	$	567,907

Total deposits with related parties approximated $1,243,014 and $950,825 at December 31, 2005 and 2004, respectively.

The Company leases approximately 1,466 square feet of condominium space in the state ofﬁce building on Main Street in Newport to its afﬁliate, CFSG. This is the location of CFSG's principal ofﬁces. In January 2004, CFSG began leasing an ofﬁce in the Company's Barre branch.

Community Bancorp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)


The amount of rental income received from CFSG for the twelve months ended December 31 was:

	2005		2004		2003

Newport	$	16,994	$	16,555	$	14,625
Barre		2,225		2,135		0

Total	$	19,219	$	18,690	$	14,625


The Company has utilized the services of CFSG as an investment advisor for the 401(k) plan since August 1, 2002. The Human Resources committee of the Board of Directors is the Trustee of the plan, and CFSG is hired to provide investment advice for the plan. CFSG also acts as custodian of the retirement funds and makes investments on behalf of the plan and its participants. The Company pays monthly management fees to CFSG based on the market value of the total assets under management.

The amount paid to CFSG for the twelve months ending December 31 was:

	2005		2004		2003

Management Fees	$	35,521	$	37,316	$	34,797


Note 19. Restrictions on Cash and Due From Banks

The Company is required to maintain reserve balances in cash with the Federal Reserve Bank. The totals of those reserve balances were approximately $2,845,000 and $2,706,000 at December 31, 2005 and 2004, respectively.

The nature of the Company's business requires that it maintain amounts due from correspondent banks that, at times, may exceed federally insured limits. No losses have been experienced in these accounts. The Company believes it is not exposed to any signiﬁcant risk with respect to these accounts. In addition, the Company was required to maintain contracted clearing balances with correspondent banks of $300,000 at December 31, 2005 and 2004, of which $275,000 is included in the reserve balances reported for the Federal Reserve Bank in the paragraph above.

Note 20. Regulatory Matters

The Company (on a consolidated basis) and the Bank (Community National Bank) are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's ﬁnancial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet speciﬁc capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classiﬁcations are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as deﬁned in the regulations) to risk-weighted assets (as deﬁned), and of Tier 1 capital (as deﬁned) to average assets (as deﬁned). Management believes, as of December 31, 2005, that the Company and the Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2005, the most recent notiﬁcation from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain

Community Bancorp. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notiﬁcation that management believes have changed the Bank's regulatory capital categories.

The Company's and the Bank's actual capital amounts and ratios (000's omitted) are also presented in the table.

					Minimum
					To Be Well
			Minimum		Capitalized Under
			For Capital		Prompt Corrective
	Actual		Adequacy Purposes:		Action Provisions:
	Amount	Ratio	Amount	Ratio	Amount	Ratio

As of December 31, 2005:
Total capital (to risk-weighted assets)
Consolidated	$31,764	14.65%	$17,347	8.0%	N/A	N/A
Bank	$32,037	14.78%	$17,343	8.0%	$21,678	10.0%

Tier I capital (to risk-weighted assets)
Consolidated	$29,575	13.64%	$ 8,674	4.0%	N/A	N/A
Bank	$29,848	13.77%	$ 8,671	4.0%	$13,007	6.0%

Tier I capital (to average assets)
Consolidated	$29,575	8.37%	$14,136	4.0%	N/A	N/A
Bank	$29,848	8.45%	$14,132	4.0%	$17,666	5.0%

As of December 31, 2004:
Total capital (to risk-weighted assets)
Consolidated	$30,365	15.47%	$15,707	8.0%	N/A	N/A
Bank	$29,961	15.27%	$15,693	8.0%	$19,617	10.0%

Tier I capital (to risk-weighted assets)
Consolidated	$28,212	14.37%	$ 7,854	4.0%	N/A	N/A
Bank	$27,808	14.18%	$ 7,847	4.0%	$11,770	6.0%

Tier I capital (to average assets)
Consolidated	$28,212	8.44%	$13,365	4.0%	N/A	N/A
Bank	$27,808	8.33%	$13,357	4.0%	$16,697	5.0%

The Company's ability to pay dividends to its shareholders is largely dependent on the Bank's ability to pay dividends to the Company. The Bank is restricted by law as to the amount of dividends that can be paid. Dividends declared by national banks that exceed net income for the current and preceding two years must be approved by the Ofﬁce of the Comptroller of the Currency. Regardless of formal regulatory restrictions, the Bank may not pay dividends that would result in its capital levels being reduced below the minimum requirements shown above.

Community Bancorp. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Note 21. Fair Value of Financial Instruments

The estimated fair values of the Company's ﬁnancial instruments were as follows:

	December 31, 2005				December 31, 2004
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(in thousands)

Financial assets:
Cash and cash equivalents	$	17,575	$	17,575	$	8,391	$	8,391
Securities held-to-maturity		28,392		28,444		31,579		31,588
Securities available-for-sale		37,139		36,454		51,150		51,150
Restricted equity securities		3,252		3,252		2,315		2,315
Loans and loans held-for-sale, net		249,336		247,367		226,717		229,071
Accrued interest receivable		1,789		1,789		1,653		1,653

Financial liabilities:
Deposits		294,312		292,940		282,606		282,343
Repurchase agreements		17,347		17,335		14,907		14,907
Federal funds purchased and other
borrowed funds		10,040		10,088		6,407		6,629
Accrued interest payable		216		216		167		167

The estimated fair values of deferred fees on commitments to extend credit and letters of credit were immaterial at December 31, 2005 and 2004.

Community Bancorp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)


Note 22. Condensed Financial Information (Parent Company Only)

The following ﬁnancial statements are for Community Bancorp. (Parent Company Only), and should be read in conjunction with the consolidated ﬁnancial statements of Community Bancorp. and Subsidiaries.

COMMUNITY BANCORP. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004

ASSETS	2005		2004

Cash	$	113,967	$	638,845
Investment in subsidiary-Community National Bank		29,395,617		27,639,245
Other assets		89,257		204,754

Total assets	$	29,598,841	$	28,482,844


LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Dividends payable	$	475,507	$	439,398

Total liabilities		475,507		439,398


Shareholders' equity
Common stock, $2.50 par value; 6,000,000 shares authorized,
4,279,884 shares issued at December 31, 2005 and 4,037,548
shares issued at December 31, 2004 (including 13,522 shares issued
February 1, 2006 and 12,811 shares issued February 1, 2005)		10,699,709		10,093,871
Additional paid-in capital		21,324,481		17,778,605
Retained earnings		165,983		2,776,011
Accumulated other comprehensive loss		(452,118)		(168,679)
Less treasury stock, at cost (2005-209,510 shares;
2004-198,444 shares)		(2,614,721)		(2,436,362)

Total shareholders' equity		29,123,334		28,043,446

Total liabilities and shareholders' equity	$	29,598,841	$	28,482,844


The investment in the subsidiary bank is carried under the equity method of accounting. The investment and cash, which is on deposit with the Bank, have been eliminated in consolidation.

Community Bancorp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)


COMMUNITY BANCORP. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
Years Ended December 31, 2005, 2004, and 2003

	2005		2004		2003

Revenues
Dividends
Bank subsidiary-Community National Bank	$	1,491,000	$	2,331,000	$	371,000
Non-bank subsidiary-Liberty Savings Bank		0		0		1,337,349
Other dividend income		600		600		375

Total revenues		1,491,600		2,331,600		1,708,724


Expenses
Administrative and other		167,533		164,466		121,021

Total expenses		167,533		164,466		121,021


Income before applicable income tax and equity in
undistributed net income of subsidiaries		1,324,067		2,167,134		1,587,703
Applicable income beneﬁt		56,757		172,254		41,020


Income before equity in undistributed net income of
subsidiaries		1,380,824		2,339,388		1,628,723
Equity in undistributed net income of subsidiaries		2,039,811		1,057,576		2,169,543

Net income	$	3,420,635	$	3,396,964	$	3,798,266

Community Bancorp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)


COMMUNITY BANCORP. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005, 2004, and 2003

	2005		2004		2003

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,420,635	$	3,396,964	$	3,798,266
Adjustments to reconcile net income to net cash provided
by operating activities
Equity in undistributed net income of subsidiary		(2,039,811)		(1,057,576)		(2,169,543)
Decrease (increase) in income taxes receivable		115,497		(131,234)		(10,794)
Decrease in other liabilities		0		0		0

Net cash provided by operating activities		1,496,321		2,208,154		1,617,929


CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of stock in subsidiary-Liberty
Savings Bank		0		0		300,000
Purchase of investment available for sale		0		0		(32,500)

Net cash provided by investing activities		0		0		267,500


CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock		(178,359)		(251,857)		(8,006)
Dividends paid		(1,842,840)		(1,716,868)		(1,699,182)

Net cash used in ﬁnancing activities		(2,021,199)		(1,968,725)		(1,707,188)

Net (decrease) increase in cash		(524,878)		239,429		178,241

Cash
Beginning		638,845		399,416		221,175

Ending	$	113,967	$	638,845	$	399,416


SUPPLEMENTAL SCHEDULE OF CASH RECEIVED
DURING THE YEAR

Income taxes	$	172,254	$	41,019	$	30,225


SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Change in unrealized gain on securities
available-for-sale	$	(429,453)	$	(1,022,251)	$	(725,677)

Dividends paid:
Dividends declared	$	2,720,332	$	2,592,823	$	2,452,328
Increase in dividends payable attributable
to dividends declared		(41,516)		(6,304)		(232,087)
Dividends reinvested		(835,977)		(869,651)		(521,059)

	$	1,842,839	$	1,716,868	$	1,699,182

Stock dividend	$	3,310,331	$	0	$	0

Community Bancorp. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Note 23. Quarterly Financial Data (Unaudited)

A summary of ﬁnancial data for the four quarters of 2005, 2004, and 2003 is presented below:

COMMUNITY BANCORP. AND SUBSIDIARY

	Quarters in 2005 ended
	March 31,		June 30,		Sept. 30,		Dec. 31,

Interest income	$4,357,163		$4,421,948		$4,648,748		$4,929,703
Interest expense		1,179,886		1,318,911		1,394,072		1,534,529
Provision for loan losses		37,500		37,500		37,500		37,500
Securities gains		0		0		0		0
Non-interest income		694,589		796,303		821,370		860,459
Non-interest expense		2,951,815		2,953,735		2,896,883		2,939,816
Net income		730,141		757,044		918,112		1,015,338
Earnings per common share		0.18		0.19		0.23		0.24

	Quarters in 2004 ended
	March 31,		June 30,		Sept. 30,		Dec. 31,

Interest income	$4,161,101		$4,177,138		$4,172,423		$4,455,683
Interest expense		1,255,820		1,226,265		1,145,625		1,134,460
Provision for loan losses		51,000		34,000		10,000		0
Securities gains		0		18,631		25,428		0
Non-interest income		663,209		884,152		855,239		815,101
Non-interest expense		2,740,438		2,777,099		2,875,104		2,806,849
Net income		763,842		819,201		800,123		1,013,798
Earnings per common share		0.19		0.20		0.20		0.26

	Quarters in 2003 ended
	March 31,		June 30,		Sept. 30,		Dec. 31,

Interest income	$4,332,512		$4,401,300		$4,541,547		$4,351,442
Interest expense		1,429,208		1,374,087		1,288,754		1,267,079
Provision for loan losses		75,000		18,000		10,000		20,000
Securities gains		142,904		0		0		0
Non-interest income		946,030		989,715		768,058		728,661
Non-interest expense		2,564,445		2,622,596		2,720,590		2,882,059
Net income		909,056		1,088,881		1,000,589		799,740
Earnings per common share		0.23		0.28		0.25		0.20

Community Bancorp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)


Note 24. Other Income and Other Expenses

The components of other income and other expenses which are in excess of one percent of total revenues in any of the three years disclosed are as follows:

	2005		2004		2003

Income

Income from sold loans, net of amortization	$	551,091	$	657,781	$	1,268,852

Expenses

Printing and supplies	$	214,263	$	219,379	$	241,843
State deposit tax		240,000		264,000		208,760
Loss on limited partnerships		338,216		292,915		403,374
Advertising		219,996		213,309		205,664
Telephone		193,121		207,348		206,670
ATM Fees		229,003		197,716		176,941

Note 25. Subsequent Event

Effective December 13, 2005, the Company declared a cash dividend of $0.17 per share payable February 1, 2006 to shareholders of record as of January 15, 2006. This dividend has been recorded as of the declaration date including shares issuable under the DRIP plan.

Management's Discussion and Analysis of Financial

Condition and Results of Operations

For the Years Ended December 31, 2005, 2004, and 2003

FORWARD-LOOKING STATEMENTS

The Company's Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements about the results of operations, ﬁnancial condition and business of the Company and its subsidiaries. When used therein, the words "believes," "expects," "anticipates," "intends," "estimates," "plans," "predicts," or similar expressions, indicate that management of the Company is making forward-looking statements.

Forward-looking statements are not guarantees of future performance. They necessarily involve risks, uncertainties and assumptions. Future results of the Company may differ materially from those expressed in these forward-looking statements. Examples of forward-looking statements included in this discussion include, but are not limited to, estimated contingent liability related to assumptions made within the asset/liability management process, management's expectations as to the future interest rate environment and the Company's related liquidity level, credit risk expectations relating to the Company's participation in the FHLB Mortgage Partnership Finance (MPF) program, and management's general outlook for the future performance of the Company, summarized below under "Overview". Although forward-looking statements are based on management's current expectations and estimates, many of the factors that could inﬂuence or determine actual results are unpredictable and not within the Company's control. Readers are cautioned not to place undo reliance on such statements as they speak only as of the date they are made. The Company does not undertake, and disclaims any obligation, to revise or update any forward-looking statements to reﬂect the occurrence or anticipated occurrence of events or circumstances after the date of this Report, except as required by applicable law. The Company claims the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995.

Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities: (1) competitive pressures increase among ﬁnancial service providers in the Company's northern New England market area or in the ﬁnancial service industry generally, including competitive pressures from non-bank ﬁnancial service providers, from increasing consolidation and integration of ﬁnancial service providers, and from changes in technology and delivery systems; (2) interest rates change in such a way as to reduce the Company's margins; (3) general economic or monetary conditions, either nationally or regionally, are less favorable than expected, resulting in a deterioration in credit quality or a diminished demand for the Company's products and services; (4) changes in laws or government rules, or the way in which courts interpret those laws or rules, adversely affect the Company's business; and (5) changes in federal or state tax policy.

OVERVIEW

The following Management's Discussion and Analysis explains in detail the results of 2005.

2005 was an eventful year for the Company. It was a year of challenges and successes. We completed the spacious addition to our main ofﬁce in Derby. The addition created improved working conditions for operational personnel that are so vital to the delivery of our products and services. The existing building was also remodeled resulting in a teller line with more privacy for our customers, a new drive up ATM, and a larger customer lobby with improved seating space for customers. The project provided construction jobs in the Northeast Kingdom and allowed us to ﬁll two needed support positions in the Bank. Additionally, we were able to relocate our supplies and archiving functions to the main ofﬁce, as well as a department associated with our consumer loan operations and underwriting.

We successfully grew the bank by $19 million or 5.7%. Growth was primarily in loans as loan demand continued to be strong during 2005. Mortgage interest rates remained low throughout the year fueling this loan growth, while short-term rates increased steadily each quarter. The challenge was maintaining a respectable spread as the yield curve continued to ﬂatten. Our net interest spread for 2005 was 3.87% compared to 3.79% in 2004. This increase is a result of the redeployment of investment securities into loans at a higher yield, while cost of funds increased relative to increases in short-term rates.

Net income for 2005 was $3,420,635, or $0.84 per share, compared to $3,396,964, or $0.85 per share, in 2004, as adjusted for the 5% stock dividend that was paid in June, 2005. The increase in net income was achieved despite the $116,540 tax beneﬁt during 2004 attributable to a one-time capital loss on the sale of an inactive bank charter. Given that, and the challenging interest rate environment, we were pleased with the outcome.

Non-interest income was down from $3,217,701 in 2004 to $3,172,721 in 2005. This decrease was due in part to a decrease in the number of mortgages that we sold in the secondary market as we made a strategic decision to keep more loans in house. Although the number of mortgages that we sold in the secondary market decreased, we still managed to grow our portfolio of sold loans.

Non-interest expense was up from $11,199,490 in 2004 to $11,742,249 in 2005. This 4.8% increase is due primarily to a 7% and 6% increase in salaries and beneﬁts respectively, while occupancy expense was up 1.4%.

The following pages describe the ﬁnancial results of our year in much more detail. Please take the time to read them to more fully understand 2005 in relation to other recent years. The discussion below should be read in conjunction with the Consolidated Financial Statements of the Company and related notes. This report includes forward-looking statements within the meaning of the Securities and Exchange Act of 1934 (the "Exchange Act").

CRITICAL ACCOUNTING POLICIES

The Company's consolidated ﬁnancial statements are prepared according to accounting principles generally accepted in the United States of America. The preparation of such ﬁnancial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities in the consolidated ﬁnancial statements and related notes. The Securities and Exchange Commission (SEC) has deﬁned a company's critical accounting policies as the ones that are most important to the portrayal of the Company's ﬁnancial condition and results of operations, and which require the Company to make its most difﬁcult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Because of the signiﬁcance of these estimates and assumptions, there is a high likelihood that materially different amounts would be reported for the Company under different conditions or using different assumptions or estimates.

Management evaluates on an ongoing basis its judgment as to which policies are considered to be critical. Management believes that the calculation of the allowance for loan losses (ALL) is a critical accounting policy that requires the most signiﬁcant judgments and estimates used in the preparation of its consolidated ﬁnancial statements. In estimating the ALL, management considers historical experience as well as other factors including the effect of changes in the local real estate market on collateral values, current economic indicators and their probable impact on borrowers and changes in delinquent, non-performing or impaired loans. Management's estimates used in calculating the ALL may increase or decrease based on changes in these factors, which in turn will affect the amount of the Company's provision for loan losses charged against current period income. Actual results could differ signiﬁcantly from these estimates under different assumptions, judgments or conditions.

Occasionally, the Company acquires property in connection with foreclosures or in satisfaction of debt previously contracted. To determine the value of property acquired in foreclosure, management often obtains independent appraisals for signiﬁcant properties. Because the extent of any recovery on these loans depends largely on the amount the Company is able to realize upon liquidation of the underlying collateral, the recovery of a substantial portion of the carrying amount of foreclosed real estate is susceptible to changes in local market conditions. The amount of the change that is reasonably possible cannot be estimated. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for losses on loans and foreclosed real estate. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination.

Management utilizes numerous techniques to estimate the carrying value of various assets held by the Company, including, but not limited to, property, plant and equipment, mortgage servicing rights, and deferred taxes. The assumptions considered in making these estimates are based on historical experience and on various other factors that are believed by management to be reasonable under the circumstances. Management acknowledges that the use of different estimates or assumptions could produce different estimates of carrying values.

RESULTS OF OPERATIONS

The Company's net income of $3.42 million for the year ended December 31, 2005 represented an increase of less than one percent from $3.4 million for the 2004 calendar year, compared to a 10.6% decrease for 2004 over 2003. Most of this increase is due to a higher volume of in-house mortgages, creating more interest income in 2005 compared to 2004. As rates began to increase during 2004, mortgage loan activity returned to a more normal level, accounting for the decrease from 2003 to 2004. Originations of loans sold on the secondary market in 2004 were $35.4 million compared to $61.5 million in 2003. Earnings for 2005, 2004 and 2003 resulted in earnings per share of $0.84, $0.85, and $0.96 respectively. The Company's average assets grew by 3.5% in 2005 resulting in total average assets of $340.7 million during 2005, compared to average assets of $329.3 million during 2004. The Company's growth came primarily from an increase in residential loans. The Company's decision to reduce the level of secondary market sales and keep more loans in house during 2005 accounted for most of the approximately $23 million increase in loans. Signiﬁcant growth of the Company's assets, together with moderate earnings, resulted in a return on average assets of 1.00% for 2005, compared to 1.03% for 2004.

Return on average assets (ROA), which is net income divided by average total assets, measures how effectively a corporation uses its assets to produce earnings. Return on average equity (ROE), which is net income divided by average shareholders' equity, measures how effectively a corporation uses its equity capital to produce earnings. The following table shows these ratios, as well as other equity ratios, for each of the last three ﬁscal years:

		December 31,
		2005	2004	2003

	Return on Average Assets	1.00%	1.03%	1.20%
	Return on Average Equity	12.05%	12.32%	14.28%
	Dividend Payout Ratio	79.76%	76.40%	63.37%
	Average Equity to Average Assets Ratio	8.33%	8.38%	8.41%

The following table summarizes the earnings performance and balance sheet data of the Company during each of the last five fiscal years:

SELECTED FINANCIAL DATA

Year Ended December 31,	2005		2004		2003		2002		2001
	(Dollars in Thousands, except per share data)

Total Interest Income	$	18,357	$	16,966	$	17,627	$	18,379	$	19,044
Total Interest Expense		(5,427)		(4,762)		(5,359)		(6,680)		(8,586)

Net Interest Income		12,930		12,204		12,268		11,699		10,458
Provision for Loan Losses		(150)		(95)		(123)		(326)		(410)
Non-Interest Income		3,173		3,218		3,432		3,319		2,344
Non-Interest Expense		(11,742)		(11,200)		(10,790)		(10,527)		(8,719)

Income Before Income Taxes		4,211		4,127		4,787		4,165		3,673
Applicable Income Taxes (1)		(790)		(730)		(989)		(925)		(875)

Net Income	$	3,421	$	3,397	$	3,798	$	3,240	$	2,798


Balance Sheet Data:

Net Loans	$	249,336	$	226,716	$	203,526	$	204,047	$	190,197
Total Assets		353,828		334,836		330,742		309,228		288,678
Total Deposits		294,312		282,606		279,679		260,922		238,070
Borrowed Funds		10,040		6,407		8,040		5,040		5,055
Total Liabilities		324,704		306,793		303,657		283,523		265,231
Total Shareholders' Equity		29,123		28,043		27,085		25,705		23,447

Per Share Data: (2)

Earnings per Share	$	0.84	$	0.85	$	0.96	$	0.83	$	0.71
Cash Dividends Declared	$	0.67	$	0.64	$	0.61	$	0.60	$	0.60
Weighted Average Number of Common
Shares Outstanding		4,050,993		4,010,894		3,961,386		3,923,625		3,913,315
Number of Common Shares Outstanding		4,070,374		4,031,060		3,978,538		3,944,536		3,921,162

(1)	Applicable income taxes above includes the income tax effect, assuming a 34% tax rate, on securities gains, which totaled $0 in 2005, $14,980 in 2004, $48,587 in 2003, $10,646 in 2002, and $58,106 in 2001.
(2)	All per share data has been restated to reﬂect a 5% stock dividend declared in the second quarter of 2005.

INTEREST INCOME VERSUS INTEREST EXPENSE

The largest component of the Company's operating income is net interest income, which is the difference between interest earned on loans and investments versus the interest paid on deposits and other sources of funds (i.e. other borrowings). The Company's level of net interest income can ﬂuctuate over time due to changes in the level and mix of earning assets, and sources of funds (volume) and from changes in the yield earned and costs of funds (rate). Tables A and B below provide a visual comparison for each period. A portion of the Company's income from municipal investments is not subject to income taxes. Because the proportion of tax-exempt items in the Company's portfolio varies from period-to-period, to improve comparability of information across periods, the non-taxable income shown in tables A and B below has been converted to a tax equivalent amount. Because the Company's corporate tax rate is 34%, to equalize tax-free and taxable income in the comparison, we must divide the tax-free income by 66%, with the result that every tax-free dollar is equivalent to $1.52 in taxable income.

The following table provides a reconciliation between net interest income presented in the statement of income and the tax equivalent net interest income presented in Table A below for the 12 months comparison periods of 2005, 2004, and 2003.

	For the year ended December 31,
	2005		2004		2003
	(Dollars in Thousands)

Net interest income as presented	$	12,930	$	12,204	$	12,267
Effect of tax-exempt income		546		527		484

Net interest income, tax equivalent	$	13,476	$	12,731	$	12,751

The table below presents the following information for each of the last three ﬁscal years: average earning assets (including non-accrual loans) and average interest-bearing liabilities supporting earning assets; and tax equivalent interest income and interest expense expressed both in dollars and as a rate/yield.

Table A
AVERAGE BALANCES AND INTEREST RATES

	2005			2004			2003
	Average	Income/	Rate/	Average	Income/	Rate/	Average	Income/	Rate/
	Balance	Expense	Yield	Balance	Expense	Yield	Balance	Expense	Yield
	(Dollars in Thousands)

Interest-Earning Assets

Loans (1)	$238,376	$15,645	6.56%	$212,460	$13,870	6.53%	$205,237	$14,215	6.93%
Taxable Investment
Securities	44,243	1,483	3.35%	55,621	1,974	3.55%	56,632	2,394	4.23%
Tax-exempt Investment
Securities	32,092	1,605	5.00%	37,386	1,551	4.15%	33,382	1,422	4.26%
Federal Funds Sold	465	17	3.66%	1,146	12	1.05%	1,465	15	1.02%
Overnight Deposits	591	20	3.38%	2,059	26	1.26%	2,114	19	0.90%
Other Securities	3,014	133	4.41%	1,969	60	3.05%	1,346	45	3.34%

TOTAL	$318,781	$18,903	5.93%	$310,641	$17,493	5.63%	$300,176	$18,110	6.03%


Interest-Bearing Liabilities

Savings Deposits	$ 46,722	$ 163	0.35%	$ 45,154	$ 164	0.36%	$ 40,744	$ 254	0.62%
NOW and Money
Market Funds	88,152	1,452	1.65%	91,258	1,272	1.39%	89,827	1,450	1.61%
Time Deposits	99,042	2,981	3.01%	100,656	2,903	2.88%	102,538	3,265	3.18%
Other Borrowed Funds	16,106	624	3.87%	8,763	298	3.40%	6,449	269	4.17%
Repurchase Agreements	13,987	207	1.48%	12,880	125	0.97%	11,686	121	1.04%

TOTAL	$264,009	$ 5,427	2.06%	$258,711	$ 4,762	1.84%	$251,244	$ 5,359	2.13%


Net Interest Income		$13,476			$12,731			$12,751
Net Interest Spread (2)			3.87%			3.79%			3.90%
Interest Differential (3)			4.23%			4.10%			4.25%

(1)	Included in gross loans are non-accrual loans with an average balance of $623,011 for 2005, $1,191,852 for 2004, and $1,377,720 for 2003.
(2)	Net interest spread is the difference between the yield on earning assets and the rate paid on interest-bearing liabilities.
(3)	Interest differential is tax equivalent net interest income divided by average earning assets.

Interest income from loans accounts for approximately 82.8% of total interest income for 2005, reporting $15.6 million for 2005, $13.9 million for 2004, and $14.2 million for 2003, with average yields of 6.56%, 6.53%, and 6.93%, respectively. Although an increase in the average volume of loans is noted throughout the comparison periods, the rate earned on these assets decreased 40 basis points from 2003 to 2004 and then increased 3 basis points from 2004 to 2005. After a three-year period of record low interest rates, short-term rates started to increase in the second half of 2004 and continued throughout 2005. The Company's loans that are contractually scheduled to reprice based on benchmarks such as Prime Rate, increased according to their repricing schedule. This resulted in higher interest income

to the Company on the loans tied to short-term indexes. Long-term rates however, did not increase accordingly. The increase in short-term rates while long-term rates remained at an all-time low created an even flatter yield curve. The Company chose to originate more adjustable rate mortgages and keep them in house, allowing the Company to grow the balance sheet with assets that will reprice as interest rates fluctuate.

The increasing short-term interest rates posed a challenge to the Company to manage interest cost during 2005. Interest expense on time deposits represents approximately 61.2% of total interest expense for 2005. This percentage has been constant for the past several years. Totals for the comparison periods were $2.98 million for 2005, $2.90 million for 2004, $3.27 million for 2003, with average rates paid of 3.01%, 2.88%, and 3.18%, respectively. Growth in loans outpaced growth in deposits, requiring an increase in short-term borrowings. The increase in cost of funds for 2005 over 2004 reﬂects both the increase in borrowed funds and the increase in rates being paid on time deposits driven by market demands. Maintaining spreads continues to be challenging as deposit rates are driven higher by short term market rates. The ﬂattening yield curve (short-term rates increasing faster than long-term rates) has delayed the beneﬁts of the rising rates.

Table B
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE

	2005 vs. 2004						2004 vs. 2003
	Variance Due to (1)				Total		Variance Due to (1)				Total
RATE VOLUME	Rate		Volume		Variance		Rate		Volume		Variance
	(Dollars in Thousands)

Interest-Earning Assets

Loans (2)	$	83	$	1,692	$	1,775	$	(845)	$	500	$	(345)
Taxable Investment Securities		(110)		(381)		(491)		(384)		(36)		(420)
Tax-exempt Investment Securities		319		(265)		54		(43)		171		128
Federal Funds Sold		30		(25)		5		1		(3)		(2)
Overnight Deposits		44		(50)		(6)		8		(1)		7
Other Securities		41		32		73		(6)		21		15

Total Interest Earnings	$	407	$	1,003	$	1,410	$	(1,269)	$	652	$	(617)


Interest-Bearing Liabilities

Savings Deposits	$	(7)	$	6	$	(1)	$	(117)	$	27	$	(90)
NOW and Money Market Funds		231		(51)		180		(201)		23		(178)
Time Deposits		127		(49)		78		(308)		(54)		(362)
Other Borrowed Funds		76		250		326		(68)		97		29
Repurchase Agreements		71		11		82		(8)		12		4

Total Interest Expense	$	498	$	167	$	665	$	(702)	$	105	$	(597)

Change in Net Interest
Income	$	(91)	$	836	$	745	$	(567)	$	547	$	(20)

(1)	Items which have shown a year-to-year increase in volume have variances allocated as follows:
	Variance due to rate = Change in rate x new volume
	Variance due to volume = Change in volume x old rate
	Items which have shown a year-to-year decrease in volume have variances allocated as follows:
	Variance due to rate = Change in rate x old volume
	Variance due to volume = Change in volume x new rate
(2)	Loans are stated before deduction of unearned discount and allowance for loan losses. Interest on non-accrual loans is excluded from income. The principal balances of non-accrual loans are included in calculations of the yield on loans.

NON-INTEREST INCOME AND NON-INTEREST EXPENSE

Non-interest Income: The Company's non-interest income declined 1.4% to $3.17 million in 2005 from $3.2 million in 2004, which decreased approximately 5.9% from $3.4 million in 2003. Income from sold loans is the largest single item that contributes to total non-interest income. Originations of loans sold to the secondary market were $28.5 million in 2005 compared to $35.4 million in 2004. In 2003, originations totaling $61.5 million were sold to the secondary market generating all-time high point fee and service fee income for the year. Although originations have declined throughout the comparison periods, 2005 and 2004 were still considered strong years and the Company will continue to beneﬁt from higher servicing fee income from the record sales in 2003 and 2002. Additionally, in 2003, gain on sales of securities contributed $142,904 to non-interest income. During 2005 and 2004, an increase in service fees, as well as currency exchange income of $200,000 and $198,000, respectively, helped to partially offset lower income from loan sales to the secondary market.

Non-interest Expense: The Company's non-interest expense increased approximately 5% to $11.7 million for 2005 compared to $11.2 million for 2004, which increased 3.8% over 2003 expenses totaling $10.8 million. Non-interest expense was up compared to 2004 levels in absolute dollar terms, while, as a percentage of total assets, a decrease of two basis points is noted (3.32% for 2005 versus 3.34% for 2004). Salaries, wages and employee beneﬁts increased throughout the comparison periods with increases of $390,103 from 2004 to 2005 and $352,506 from 2003 to 2004. The increase for 2005 and 2004 is due in part to some additional staff, annual salary increases, as well as an increase in health beneﬁt payments for several major unforeseen claims against the Company's self-insured health plan that fell below the individual and aggregate insured stop loss limit as deﬁned by the plan.

Total losses relating to various limited partnership investments constitute a generous portion of non-interest expenses. These losses amounted to $338,216 in 2005, $292,915 in 2004, and $403,374 in 2003. These investments provide tax beneﬁts, including tax credits in exchange for our participation in low income housing projects throughout the Company's market area. The Company amortizes its investments in these limited partnerships under the effective yield method, resulting in the asset being amortized consistent with the periods in which the Company receives the tax beneﬁt. Investment in limited partnerships with qualiﬁed rehabilitation credits results in a large portion of the beneﬁt received in the form of tax credits in the ﬁrst year, resulting in a lower tax expense. Consistent with applying the effective yield method, amortization of the asset is also proportionately larger in the ﬁrst year.

Many of the components of non-interest expenses are estimated on a yearly basis and accrued in monthly installments. In an attempt to present accurate ﬁgures on the statement of income for any interim period, these expenses are reviewed quarterly by senior management to ensure that monthly accruals are accurate, and any necessary adjustments are made at that time.

APPLICABLE INCOME TAXES

Provisions for income taxes increased 8.2% for 2005 versus 2004 while a decrease of approximately 26.2% was noted for 2004 versus 2003. The increase in 2005 is consistent with earnings, while the ﬂuctuation in 2004 is attributable to lower net income and the tax effect of a capital loss recognized in 2004 related to the Company's sale in 2003 of the Liberty Saving Bank charter. Tax credits for the investments in the limited partnerships mentioned above amounted to $320,165 in 2005 compared $248,521 for 2004 and $361,876 for 2003.

CHANGES IN FINANCIAL CONDITION

The Company had total average assets of $340.7 million during 2005 and $329.3 million during 2004, representing a 3.5% growth in average assets. Average earning assets grew by 2.6% with totals of $318.8 million during 2005 compared to $310.6 million during 2004. The growth of the balance sheet during 2005 was due primarily to the Company's efforts to increase its in-house loan portfolio mentioned earlier in this discussion. The portfolio of government bonds and agency securities decreased from 2004 to 2005 as maturities were used to help fund a portion of the loan growth.

Changes to liabilities, which also provide funding for the growth in assets, came from an increase in total average liabilities of $10.6 million. Average demand deposits increased by $5.9 million, while average NOW and money market accounts decreased by $3.1 million and average total time deposits decreased by $1.6 million. Average borrowed funds increased by $7.3 million. The decrease in time deposits was a result of the prolonged low interest rate envi-

ronment. This trend was due to customers shifting funds to non-maturing products, such as savings or money market funds; parking the funds while they waited for rates to increase on the time deposits or assess other investment opportunities, such as the stock market. Although average balances have decreased, the actual balances in time deposits at year-end 2005 have increased by $5.0 million over year-end 2004, while the actual balance in Savings has decreased by $2.0 million. This trend is continuing and could indicate that the customers are starting to shift funds from non-maturing deposits to time deposits as rates increase.

Repurchase agreements ended the years of 2005 and 2004 at average volumes of $14.0 million and $12.9 million, respectively, resulting in an increase of $1.1 million. As required, securities from our investment portfolio are pledged against these agreements with a book value of $18.1 million and $17.3 million, respectively, for year-end 2005 and 2004, and a fair value of $17.7 million and $17.2 million, respectively.

The following table provides a visual comparison of the breakdown of average assets and liabilities as well as shareholders' equity for the comparison periods.

DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY

	Year ended December 31,
	2005			2004			2003
AVERAGE ASSETS	Balance		%	Balance		%	Balance		%
	(Dollars in Thousands)

Taxable Investment Securities (1)	$	44,243	12.99%	$	55,621	16.89%	$	56,632	17.91%
Tax-exempt Investment Securities (1)		32,092	9.42%		37,386	11.35%		33,382	10.56%
Other Securities (1)		3,014	0.88%		1,969	0.60%		1,346	0.43%

Total Investment Securities		79,349	23.29%		94,976	28.84%		91,360	28.90%


Cash and Due from Banks
Non-Interest Bearing		8,618	2.53%		7,816	2.37%		7,377	2.33%
Overnight Deposits		591	0.17%		2,059	0.63%		2,114	0.67%
Federal Funds Sold		465	0.14%		1,146	0.35%		1,465	0.46%
Gross Loans		238,376	69.97%		212,460	64.52%		205,237	64.93%
Reserve for Loan Losses and
Accrued Fees		(2,892)	-0.85%		(3,004)	-0.91%		(3,056)	-0.97%
Premises and Equipment		7,602	2.23%		7,713	2.34%		5,344	1.69%
Other Real Estate Owned		5	0.00%		103	0.03%		59	0.02%
Other Assets		8,579	2.52%		6,020	1.83%		6,211	1.97%

Total Average Assets	$	340,693	100%	$	329,289	100%	$	316,111	100%


AVERAGE LIABILITIES

Demand Deposits	$	46,078	13.53%	$	40,140	12.19%	$	34,817	11.01%
Now and Money Market Accounts		88,152	25.87%		91,258	27.71%		89,827	28.42%
Savings Accounts		46,722	13.71%		45,154	13.71%		40,744	12.89%
Time Deposits		99,042	29.07%		100,656	30.57%		102,538	32.44%

Total Deposits		279,994	82.18%		277,208	84.18%		267,926	84.76%


Other Borrowed Funds		16,106	4.73%		8,763	2.66%		6,449	2.04%
Repurchase Agreements		13,987	4.11%		12,880	3.91%		11,686	3.70%
Other Liabilities		2,215	0.65%		2,859	0.87%		3,459	1.09%

Total Average Liabilities	$	312,302	91.67%	$	301,710	91.62%	$	289,520	91.59%

AVERAGE SHAREHOLDERS' EQUITY

Common Stock	$	10,430	3.06%	$	10,021	3.04%	$	9,889	3.13%
Surplus		19,754	5.80%		17,373	5.28%		16,640	5.26%
Retained Earnings		1,054	0.31%		2,250	0.68%		1,462	0.46%
Less: Treasury Stock		(2,483)	-0.73%		(2,277)	-0.69%		(2,183)	-0.69%
Accumulated Other Comprehensive
Income (1)		(364)	-0.11%		212	0.07%		783	0.25%

Total Average Shareholders' Equity		28,391	8.33%		27,579	8.38%		26,591	8.41%

Total Average Liability and
Shareholders' Equity	$	340,693	100%	$	329,289	100%	$	316,111	100%

(1)

In accordance with FASB No. 115, securities classiﬁed as held-to-maturity are carried at book value and securities classiﬁed as available-for-sale are carried at fair value with the unrealized gain (loss), net of applicable income taxes, reported as a net amount in accumulated other comprehensive income. The Company does not carry, nor does it intend to carry, securities classiﬁed as trading.

RISK MANAGEMENT

Interest Rate Risk and Asset and Liability Management--Management actively monitors and manages its interest rate risk exposure and attempts to structure the balance sheet to maximize net interest income while controlling its exposure to interest rate risk. The Company's Asset/Liability Management Committee (ALCO) is made up of the Executive Ofﬁcers and all the Vice Presidents of the Bank. The ALCO formulates strategies to manage interest rate risk by evaluating the impact on earnings and capital of such factors as current interest rate forecasts and economic indicators, potential changes in such forecasts and indicators, liquidity, and various business strategies. The ALCO meets monthly to review ﬁnancial statements, liquidity levels, yields and spreads to better understand, measure, monitor and control the Company's interest rate risk. In the ALCO process, the committee members apply policy limits set forth in the Asset Liability, Liquidity and Investment policies approved by the Company's Board of Directors. The ALCO's methods for evaluating interest rate risk include an analysis of the effects of interest rate changes on net interest income and an analysis of the Company's interest rate sensitivity "gap", which provides a static analysis of the maturity and repricing characteristics of the entire balance sheet.

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company's ﬁnancial instruments also change, thereby impacting net interest income (NII), the primary component of the Company's earnings. Fluctuations in interest rates can also have an impact on liquidity. The ALCO uses an outside consultant to perform rate shock simulations to the Company's net interest income, as well as a variety of other analyses. It is the ALCO's function to provide the assumptions used in the modeling process. The ALCO utilizes the results of this simulation model to quantify the estimated exposure of NII and liquidity to sustained interest rate changes. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reﬂected on the Company's balance sheet. Furthermore, the model simulates the balance sheet's sensitivity to a prolonged ﬂat rate environment. All rate scenarios are simulated assuming a parallel shift of the yield curve; however further simulations are performed utilizing a ﬂattening yield curve as well. This sensitivity analysis is compared to the ALCO policy limits which specify a maximum tolerance level for NII exposure over a 1-year horizon, assuming no balance sheet growth, given a 200 basis point (bp) shift upward and a 100 bp shift downward in interest rates. The analysis also provides a summary of the Company's liquidity position. Furthermore, the analysis provides testing of the assumptions used in previous simulation models by comparing the projected NII with actual NII. The asset/liability simulation model provides management with an important tool for making sound economic decisions regarding the balance sheet.

While assumptions are developed based upon current economic and local market conditions, the Company cannot provide any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor inﬂuences might change.

The following reflects the Company's NII sensitivity analysis over one-year and two-year horizons, assuming a parallel shift of the yield curve, as prepared by the consultant's review and measured as of December 31, 2005:

One Year Horizon		Two Year Horizon
Rate Change	Percent Change in NII	Rate Change	Percent Change in NII

Down 200 basis points	-2.53%	Down 200 basis points	-11.33%
Up 200 basis points	-3.71%	Up 200 basis points	-2.91%

The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment/replacement of asset and liability cash ﬂows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor inﬂuences might change.

An interest rate sensitivity "gap" is deﬁned as the difference between the interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market interest rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category.

The following tables set forth the estimated maturity or repricing of the Company's interest-earning assets and interest-bearing liabilities at December 31, 2005 and December 31, 2004. The Company prepares its interest rate sensitivity "gap" analysis by scheduling assets and liabilities into periods based upon the next date on which such assets and liabilities could mature or reprice. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual term of the assets and liabilities, except that:

*	Adjustable rate loans and certiﬁcates of deposit are included in the period when they are ﬁrst scheduled to adjust and not in the period in which they mature;
*	Fixed rate loans reﬂect scheduled contractual amortization, with no estimated prepayments;
*	NOW, money markets, and savings deposits, which do not have contractual maturities, reﬂect estimated levels of attrition, which are based on studies by the Company of the sensitivity of each such category of deposit, to changes in interest rates.

Management believes that these assumptions approximate actual experience and considers them reasonable. However, the interest rate sensitivity of the Company's assets and liabilities in the tables could vary substantially if different assumptions were used or actual experience differs from the historical experiences on which the assumptions are based. The asset/liability management process includes quarterly back testing of the assumptions to test for reasonableness.

GAP ANALYSIS
Community Bancorp. & Subsidiary
December 31, 2005
Cumulative repriced within:

	3 Months		4 to 12		1 to 3		3 to 5		Over 5
	or less		Months		Years		Years		Years		Total
	(Dollars in Thousands, by repricing date)

Interest sensitive assets:
Federal funds sold	$	3,120	$	0	$	0	$	0	$	0	$	3,120
Overnight deposits		3,388		0		0		0		0		3,388
Investments-
Available-for-Sale		3,000		8,945		13,703		9,768		1,006		36,422
Held-to-Maturity		3,342		22,297		711		697		1,345		28,392
Restricted equity securities		0		0		0		0		3,252		3,252
Loans (1)		48,180		38,453		32,687		59,910		72,544		251,774

Total interest sensitive assets	$	61,030	$	69,695	$	47,101	$	70,375	$	78,147	$	326,348


Interest sensitive liabilities:
Time deposits $100,000 and over	$	3,234	$	10,650	$	8,701	$	3,037	$	0	$	25,622
Other time deposits		14,839		34,219		20,421		8,002		0		77,481
Money markets		1,268		26,155		0		0		30,000		57,423
Regular savings		0		5,281		0		0		40,000		45,281
Now and super now accounts		0		0		0		0		42,656		42,656
Borrowed funds		5,000		0		30		0		5,010		10,040
Repurchase agreements		17,347		0		0		0		0		17,347

Total interest sensitive liabilities	$	41,688	$	76,305	$	29,152	$	11,039	$	117,666	$	275,850


Net interest rate sensitivity gap	$	19,342	$	(6,610)	$	17,949	$	59,336	$	(39,519)
Cumulative net interest rate
sensitivity gap	$	19,342	$	12,732	$	30,681	$	90,017	$	50,498
Cumulative net interest rate
sensitivity gap as a percentage of
total assets		5.47%		3.60%		8.67%		25.44%		14.27%
Cumulative interest sensitivity gap
as percentage of total interest-
earning assets		5.93%		3.90%		9.40%		27.58%		15.47%
Cumulative interest earning assets
as a percentage of cumulative
interest-bearing liabilities		146.40%		110.79%		120.85%		156.91%		118.31%

(1)	Loan totals exclude non-accruing loans amounting to $436,419.

GAP ANALYSIS
Community Bancorp. & Subsidiary
December 31, 2004
Cumulative repriced within:

	3 Months		4 to 12		1 to 3		3 to 5		Over 5
	or less		Months		Years		Years		Years		Total
	(Dollars in Thousands, by repricing date)

Interest sensitive assets:
Federal funds sold	$	0	$	0	$	0	$	0	$	0	$	0
Overnight deposits		0		0		0		0		0		0
Investments-
Available for Sale		3,007		10,116		17,138		18,818		2,071		51,150
Held to Maturity		948		26,486		970		709		2,466		31,579
Restricted equity securities		0		0		0		0		2,315		2,315
Loans (1)		53,100		43,963		39,874		27,355		64,476		228,768

Total interest sensitive assets	$	57,055	$	80,565	$	57,982	$	46,882	$	71,328	$	313,812


Interest sensitive liabilities:
Time deposits $100,000 and over	$	1,206	$	7,809	$	10,735	$	2,055	$	0	$	21,805
Other time deposits		9,715		30,797		29,302		6,471		0		76,285
Money markets		806		29,066		0		0		24,000		53,872
Regular savings		0		17,288		0		0		30,000		47,288
Now accounts		0		0		0		0		40,631		40,631
Borrowed funds		1,367		0		30		0		5,010		6,407
Repurchase agreements		14,908		0		0		0		0		14,908

Total interest sensitive liabilities	$	28,002	$	84,960	$	40,067	$	8,526	$	99,641	$	261,196


Net interest rate sensitivity gap	$	29,053	$	(4,395)	$	17,915	$	38,356	$	(28,313)
Cumulative net interest rate
sensitivity gap	$	29,053	$	24,658	$	42,573	$	80,929	$	52,616
Cumulative net interest rate
sensitivity gap as a percentage
of total assets		8.68%		7.36%		12.71%		24.17%		15.71%
Cumulative interest sensitivity gap
as a percentage of total interest-
earning assets		9.26%		7.86%		13.57%		25.79%		16.77%
Cumulative interest earning assets
as a percentage of cumulative
interest-bearing liabilities		203.75%		121.83%		127.82%		150.09%		120.14%

(1)	Loan totals exclude non-accruing loans amounting to $865,443.

Credit Risk--A primary concern of management is to reduce the exposure to credit loss within the loan portfolio. Management follows established underwriting guidelines, and any exceptions to the policy must be approved by a loan ofﬁcer with higher authority than the loan ofﬁcer originating the loan. The adequacy of the loan loss coverage is reviewed quarterly by the risk management committee of the Board of Directors. This committee meets to discuss, among other matters, potential exposures, historical loss experience, and overall economic conditions. Existing or potential problems are noted and addressed by senior management in order to assess the risk of probable loss or delinquency. A variety of loans are reviewed periodically by an independent ﬁrm in order to assure accuracy of the Company's internal risk ratings and compliance with various internal policies and procedures, as well as those set by the regulatory authorities. The Company also employs a Credit Administration Ofﬁcer whose duties include monitoring and reporting on the status of the loan portfolio including delinquent and non-performing loans.

COMPOSITION OF LOAN PORTFOLIO

	2005			2004			2003			2002			2001
	Total		% of	Total		% of	Total		% of	Total		% of	Total		% of
	Loans		Total	Loans		Total	Loans		Total	Loans		Total	Loans		Total
	(Dollars in Thousands)

Real Estate Loans
Construction & Land
Development	$	13,931	5.52%	$	11,646	5.07%	$	8,929	4.32%	$	9,969	4.81%	$	3,365	1.74%
Farm Land		2,870	1.14%		2,496	1.09%		2,783	1.35%		2,818	1.36%		2,597	1.34%
1-4 Family Residential		144,777	57.40%		127,555	55.55%		120,848	58.51%		121,138	58.50%		116,281	60.20%
Commercial Real
Estate		48,505	19.23%		43,610	18.99%		33,422	16.18%		30,277	14.62%		32,924	17.05%
Loans to Finance
Agricultural Production		214	0.09%		443	0.19%		529	0.26%		369	0.18%		432	0.22%
Commercial & Industrial		20,049	7.95%		21,592	9.40%		16,951	8.21%		18,846	9.10%		13,340	6.91%
Consumer Loans		21,296	8.44%		21,716	9.46%		22,517	10.90%		23,110	11.16%		23,820	12.33%
All Other Loans		567	0.23%		575	0.25%		552	0.27%		556	0.27%		397	0.21%

Gross Loans		252,209	100%		229,633	100%		206,531	100%		207,083	100%		193,156	100%


Less:
Reserve for Loan
Losses		(2,189)	-0.87%		(2,153)	-0.94%		(2,199)	-1.06%		(2,156)	-1.04%		(2,008)	-1.04%
Deferred Loan Fees		(684)	-0.27%		(764)	-0.33%		(805)	-0.39%		(880)	-0.43%		(951)	-0.49%

Net Loans	$	249,336	98.86%	$	226,716	98.73%	$	203,527	98.55%	$	204,047	98.53%	$	190,197	98.47%

The following table shows the estimated maturity of the Company's commercial loan portfolio as of December 31, 2005.

MATURITY SCHEDULE

	Fixed Rate Loans								Variable Rate Loans
	Within		1 - 5		After				Within		1 - 5		After
	1 Year		Years		5 Years		Total		1 Year		Years		5 Years		Total
	(Dollars in Thousands)

Real Estate
Construction & Land Development	$	5,786	$	9	$	334	$	6,129	$	4,743	$	1,882	$	1,177	$	7,802
Secured by Farm Land		0		0		675		675		1,856		339		0		2,195
Commercial Real Estate		102		1,879		9,272		11,253		16,213		11,909		9,130		37,252
Loans to Finance Agricultural
Production		40		37		0		77		137		0		0		137
Commercial & Industrial Loans		1,201		5,911		1,434		8,546		7,943		3,112		448		11,503

Total	$	7,129	$	7,836	$	11,715	$	26,680	$	30,892	$	17,242	$	10,755	$	58,889

Allowance for loan losses and provisions--The Company continues to maintain an allowance for loan losses at a level that management believes is adequate to absorb losses inherent in the loan portfolio. As of December 31, 2005, the Company maintained a residential loan portfolio of $145 million and a commercial real estate portfolio (including construction, land development and farm land loans) of $65 million, together accounting for approximately 83% of the total loan portfolio. The Company's commercial loan portfolio includes loans that carry guarantees from government programs. At December 31, 2005, the Company had $18.7 million in guaranteed loans, compared to $14.6 million at December 31, 2004. This volume, together with the low historical loan loss experience in these portfolios, helps to support the Company's basis for loan loss coverage. Furthermore, the Company is committed to a conservative lending philosophy and maintains high credit and underwriting standards. The allowance for loan loss uses qualitative factors to simulate current lending conditions. The lenders and credit administration staffs are highly skilled and dedicated to the high standards and expectations of the Company. The expansion into Central Vermont has given the Company an opportunity to diversify the geographic risk in the loan portfolio with loans from a stronger economic community. When

the Company expanded into the new market in Central Vermont, experienced lenders were hired and trained to be sure that the same high level of standards would be followed for the loans originated in this new market; all credit administration and underwriting is centralized to ensure consistency.

The loan loss provision increased from $95,000 or .04% of average total loans in 2004 to $150,000 or .06% of average total loans in 2005. Despite the continued declining trend in the levels of delinquency and non-accrual loans, which ultimately lowers reserve and provision requirements, very strong 2005 growth in the real estate portfolio, as well as continued growth in the commercial real estate portfolio, warranted an increase in the 2005 provision in order to maintain adequate reserve coverage of the loan portfolio.

Net losses decreased for 2005 compared to 2004, with 2003 noting a record low year for the Company. The following table summarizes the Company's loan loss experience for each of the last ﬁve years.

SUMMARY OF LOAN LOSS EXPERIENCE

December 31,	2005		2004		2003		2002		2001
	(Dollars in Thousands)

Loans Outstanding End of Period	$	252,209	$	229,633	$	206,531	$	207,083	$	193,156

Average Loans Outstanding During
Period	$	238,376	$	212,460	$	205,237	$	196,528	$	181,631


Loan Loss Reserve, Beginning of Period	$	2,153	$	2,199	$	2,156	$	2,008	$	1,797

Loans Charged Off:
Residential Real Estate Loans		5		26		2		55		60
Commercial Real Estate Loans		0		0		10		0		1
Commercial Loans not Secured by
Real Estate		45		54		0		5		3
Consumer Loans		130		189		185		237		274

Total		180		269		197		297		338


Recoveries:
Residential Real Estate Loans		1		1		4		3		5
Commercial Real Estate Loans		0		0		0		0		0
Commercial Loans not Secured by
Real Estate		6		12		3		4		7
Consumer Loans		59		115		110		112		127

Total		66		128		117		119		139


Net Loans Charged Off		114		141		80		178		199
Provision Charged to Income		150		95		123		326		410


Loan Loss Reserve, End of Period	$	2,189	$	2,153	$	2,199	$	2,156	$	2,008


Net Losses as a Percent of Average
Loans		0.05%		0.07%		0.04%		0.09%		0.11%
Provision Charged to Income as a
Percent of Average Loans		0.06%		0.04%		0.06%		0.17%		0.23%

At End of Period:
Loan Loss Reserve as a Percent of
Outstanding Loans		0.87%		0.94%		1.06%		1.04%		1.04%

A comparison of non-performing assets reveals decreases of 46% and 19%, respectively for 2005 compared to 2004 and 2004 compared to 2003. Non-performing assets were made up of the following:

NON PERFORMING ASSETS

December 31,	2005		2004		2003		2002		2001
	(Dollars in Thousands)

Accruing Loans Past Due 90 Days
or More:
Consumer	$	8	$	7	$	4	$	16	$	16
Commercial		0		50		0		1		0
Commercial Real Estate		0		0		0		198		4
Residential Real Estate		169		137		15		142		39

Total		177		194		19		357		59

Non-accrual Loans		436		865		1,295		1,631		1,571


Total Non-accrual, Past Due Loans		613		1,059		1,314		1,988		1,630
Other Real Estate Owned		0		83		88		0		60


Total Non-Performing Loans	$	613	$	1,142	$	1,402	$	1,988	$	1,690


Percent of Gross Loans		0.24%		0.50%		0.68%		0.96%		0.87%
Reserve Coverage of Non-Performing
Loans		357.10%		188.53%		156.85%		108.45%		118.82%

When it is determined that future collection of interest and principal is doubtful, a loan is placed in non-accrual status. At this point, the Company's policy is to reverse the accrued interest against current income and to discontinue the accrual of interest until the borrower clearly demonstrates the ability to resume normal payments. Our portfolio of non-accrual loans for the years ended 2005, 2004, 2003, 2002, and 2001, are made up primarily of residential real estate loans. Management does not anticipate any substantial effect to future operations if any of these loans are liquidated. Although interest on non-accrual loans is included in income only to the extent received from the borrower, deferred taxes are calculated monthly, based on the accrued interest of all non-accrual loans. This accrued interest amounted to $6,889 in 2005, $11,287 in 2004, $107,073 in 2003, $401,758 in 2002, and $404,880 in 2001. The decrease in accrued interest from 2003 to 2004 is attributable to the change from non-accrual to accrual status on loans that had been in the non-accrual portfolio for a number of years.

The Company is not committed to lend additional funds to debtors with impaired, non-accrual or modiﬁed loans, except for one loan classiﬁed as non-performing that management is watching closely and which has been performing according to its contract terms.

Other real estate owned is made up of property that the Company has acquired by deed in lieu of foreclosure or through normal foreclosure proceedings, and property that the Company does not hold title to but is in actual control of, known as in-substance foreclosure. The estimated fair market value of the property is determined prior to transferring the balance to other real estate owned. The balance transferred to OREO is the lesser of the estimated fair market value of the property, or the book value of the loan, less estimated cost to sell. A write-down may be deemed necessary to bring the book value of the loan equal to the appraised value. Appraisals or loan ofﬁcer evaluations are then done periodically thereafter charging any additional write-downs to the appropriate expense account.

Speciﬁc allocations are made in the allowance for loan losses in situations management believes may represent a greater risk for loss. In addition, a portion of the allowance (termed "unallocated") is established to absorb inherent losses that exist as of the valuation date although not speciﬁcally identiﬁed through management's objective processes for estimated credit losses. A quarterly review of various qualitative factors, including levels of, and trends in, delinquencies and non-accruals and national and local economic trends and conditions, helps to ensure that areas with potential risk are noted and coverage increased or decreased to reﬂect the trends in delinquencies and non-accruals. Residential mortgage loans make up the largest part of the loan portfolio and have the lowest historical loss ratio, helping to alleviate the overall risk. While the allowance is described as consisting of separate allocated portions, the entire allowance is available to support loan losses, regardless of category.

Allocation of the allowance for loan losses, as well as the percent of loans in each category to total loans as of December 31,

December 31,	2005		%	2004		%	2003		%	2002		%	2001		%
	(Dollars in Thousands)

Residential Real Estate	$	973	57%	$	725	55%	$	809	59%	$	873	59%	$	838	60%
Commercial (1)		858	34%		936	35%		786	30%		646	30%		595	27%
Consumer		229	9%		260	10%		325	11%		430	11%		493	13%
Unallocated		129	0%		232	0%		279	0%		207	0%		82	0%

Total	$	2,189	100%	$	2,153	100%	$	2,199	100%	$	2,156	100%	$	2,008	100%

(1)	Includes commercial loans secured by real estate, as well as unsecured commercial loans and those secured by other types of collateral.

Market Risk--In addition to credit risk in the Company's loan portfolio and liquidity risk, the Company's business activities also generate market risk. Market risk is the risk of loss in a ﬁnancial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. The Company does not have any market risk sensitive instruments acquired for trading purposes. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. Interest rate risk is directly related to the different maturities and repricing characteristics of interest-bearing assets and liabilities, as well as to loan prepayment risks, early withdrawal of time deposits, and the fact that the speed and magnitude of responses to interest rate changes vary by product. As discussed above under "Interest Rate Risk and Asset and Liability Management", the Company actively monitors and manages its interest rate risk through the ALCO process.

INVESTMENT SECURITIES

The Company maintains an investment portfolio of various securities to diversify its revenues, as well as provide interest rate risk and credit risk diversiﬁcation and to provide for its liquidity and funding needs. The Company's portfolio of available-for-sale securities decreased approximately $14.7 million in 2005, from $51.2 million to $36.5 million as of December 31, 2005, as maturities were used to fund loan demand. Additionally, as of December 31, 2005, the Company held in its investment portfolio U.S. Government agency securities and Obligations of State and Political Subdivisions classiﬁed as held-to-maturity, with a book value of $28.4 million, compared to $31.6 million as of December 31, 2004.

Accounting standards require banks to recognize all appreciation or depreciation of investments classiﬁed as either trading securities or available-for-sale either through the income statement or on the balance sheet even though a gain or loss has not been realized. Securities classiﬁed as "trading securities" are marked to market with any gain or loss charged to income. The Company's investment policy does not permit the holding of trading securities. Securities classiﬁed as "held-to-maturity" are to be held at book value. Securities classiﬁed as "available-for-sale" are marked to market with any gain or loss after taxes charged to the equity portion of the balance sheet. These ﬁgures amounted to unrealized losses after taxes of $452,118 and $168,679, respectively, at the end of 2005 and 2004. The increase in unrealized loss is due to the increasing interest rate environment. As rates increase, bonds with lower coupons decrease in value in order to equalize the yield. Although classiﬁed as available for sale, these bonds are short term and we anticipate keeping them until maturity, therefore, this unrealized loss is considered a temporary position for the Company.

Some of the Company's investment portfolios have a "call" feature, meaning that the issuer may call in the investment, before maturity, at predetermined call dates and prices. Given the low rate environment, many of those investments with call features were exercised during 2005 and 2004, and some were replaced with investments at current market prices, while proceeds from others were used to fund loan growth. A provision of the Statement of Financial Accounting Standards No. 115 allows an investor to sell an investment classiﬁed as held-to-maturity before its maturity date if the security has a call feature. It is permissible to sell such a security within 90 days of the call date if it is highly probable that the security will be called. During the third quarter of 2004, the Company sold an investment from the held-to-maturity portfolio as permitted by this special provision. This security was called on November 2, 2004.

The Company's investment portfolios as of December 31, 2005 and 2004 were as follows:

	COMPOSITION OF INVESTMENT PORTFOLIO

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(Dollars in Thousands)

December 31, 2005

Available-for-Sale
U.S. agency securities	$	33,116	$	2	$	652	$	32,466
U.S. Government securities		2,989		1		39		2,951
Corporate debt securities		1,002		3		0		1,005
Other investments		32		0		0		32

	$	37,139	$	6	$	691	$	36,454


Held-to-Maturity
States and political subdivisions	$	28,392	$	52	$	0	$	28,444


Restricted Equity Securities	$	3,252	$	0	$	0	$	3,252

Total	$	68,783	$	58	$	691	$	68,150


December 31, 2004

Available-for-Sale
U.S. agency securities	$	46,309	$	116	$	400	$	46,025
U.S. Government securities		3,057		0		16		3,041
Corporate debt securities		2,008		44		0		2,052
Other investments		32		0		0		32

	$	51,406	$	160	$	416	$	51,150


Held-to-Maturity
U.S. Government and agency securities	$	996	$	8	$	0	$	1,004
States and political subdivisions		30,583		0		0		30,583

	$	31,579	$	8	$	0	$	31,587


Restricted Equity Securities	$	2,315	$	0	$	0	$	2,315

Total	$	85,300	$	168	$	416	$	85,052

Realized gains and losses for each of the last three years' end were as follows:

	2005		2004		2003
	(Dollars in Thousands)

Available-for-Sale
Realized Gains	$	0	$	70	$	153
Realized Losses		0		(31)		(11)

Net Realized Gains	$	0	$	39	$	142


Held-to-Maturity
Realized Gains	$	0	$	5	$	1

Total Realized Gains	$	0	$	44	$	143

Realized gains on securities held-to-maturity were due to call features exercised prior to maturity on certain debt securities.

The following is an analysis of the maturities and yields of the Company's investment portfolio for each of the last three fiscal years:

MATURITIES AND YIELDS OF INVESTMENT PORTFOLIO

	December 31,
	2005				2004			2003
			Wtd.				Wtd.			Wtd.
	Fair/Book		Ave.		Fair/Book		Ave.	Fair/Book		Ave.
	Value (1)		Rate		Value (1)		Rate	Value (1)		Rate
	(Dollars in Thousands)

U.S. Treasury & Agency Obligations

Available-for-Sale
Due within 1 year	$	10,939	2.92%		$	12,114	3.05%	$	2,053	5.06%
Due after 1 year within 5 years		23,472	3.47%			34,913	3.09%		41,807	3.98%
Due after 5 years within 10 years		1,006	5.31%			2,039	5.78%		7,188	5.64%

Total	$	35,417	3.35%		$	49,066	3.19%	$	51,048	4.25%


Held-to-Maturity
Due within 1 year	$	0	0.00%		$	0	0.00%	$	3,013	3.98%
Due after 1 year within 5 years		0	0.00%			0	0.00%		1,000	7.40%
Due after 5 years within 10 years		0	0.00%			996	7.66%		3,007	6.54%

Total	$	0	0.00%		$	996	7.66%	$	7,020	5.56%


Obligations of State & Political Subdivisions (2)

Held-to-Maturity
Due within 1 year	$	25,638	5.04%		$	27,280	4.02%	$	31,253	3.23%
Due after 1 year within 5 years		1,409	5.73%			1,679	5.25%		1,675	5.41%
Due after 5 years within 10 years		697	7.09%			956	6.48%		930	6.67%
Due after 10 years		648	10.90%			668	10.90%		686	10.90%

Total	$	28,392	5.25%		$	30,583	4.31%	$	34,544	3.58%


Corporate Bonds

Available-for-Sale
Due within 1 year	$	1,005	5.86%		$	1,010	4.50%	$	3,108	6.98%
Due after 1 year within 5 years		0	0.00%			1,042	5.89%		2,131	5.53%
Due after 5 years within 10 years		0	0.00%			0	0.00%		0	0.00%

Total	$	1,005	5.86%		$	2,052	5.21%	$	5,239	6.39%


Restricted Equity Securities	$	3,252	4.90%	$		2,315	3.65%	$	1,357	3.08%

Total	$	3,252	4.90%		$	2,315	3.65%	$	1,357	3.08%

(1)	Investments classiﬁed as available-for-sale are presented at fair value, and investments classiﬁed as held-to-maturity are presented at book value.
(2)	Income on Obligations of State and Political Subdivisions is stated on a tax equivalent basis assuming a 34 percent tax rate.

BANK PREMISES AND EQUIPMENT

Major classes of bank premises and equipment and the total accumulated depreciation and amortization are as follows:

		2005		2004
		(Dollars in Thousands)

	Land and land improvements	$	1,566	$	989
	Buildings and improvements		9,301		5,830
	Furniture and equipment		5,040		4,605
	Leasehold improvements		637		631
	Construction in progress		8		585

			16,552		12,640
	Less accumulated depreciation and amortization		(4,935)		(4,583)

		$	11,617	$	8,057


The Barre branch building was constructed on leased land under a twenty-year ground lease. The lease includes an option to purchase exercisable after the 6th year, with one-half of the annual rental previously paid applied to the purchase price. This purchase deposit is included in other assets. The anticipated future payments under this lease are included in the schedule of future rental payments in the Aggregate Contractual Obligations table below.

In October of 2004, the Company began the ﬁrst of three phases in the construction of an operations center adjoining the main ofﬁce located on Route 5 in Derby, Vermont. Phase one consisted of the construction of a new three-lane drive up teller system; the third lane being served by a drive-up ATM. The relocation of the drive-up was necessary to make way for the construction of the operations center. Phase two was the most signiﬁcant part of the overall project as the Company completed a new 19,000 square foot addition to the main ofﬁce. The addition created space for support staff in the loan and deposit functions, a new and improved computer room, and a new training facility for our staff that is also available for use by our community non-proﬁt groups. The new facility, equipped with a loading dock, enabled the Company to centralize the central supplies department and the document destruction and archiving functions that were housed in other branches. Phase three entailed remodeling of the teller lobby and upgrading some other areas of the bank's main ofﬁce. The ﬁrst two phases of the project were completed close to the estimated completion date of November 15, 2005, with the ﬁnal phase winding down during the beginning of the ﬁrst quarter of 2006. The cost of this project was approximately $4.3 million. The ﬁnancial impact to the Company's earnings, from recording the cost of this project in 2005, was limited to less than two months of depreciation, amounting to approximately $44,000, and thereby not signiﬁcant to the 2005 ﬁnancial condition and results of operations of the Company.

Depreciation included in occupancy and equipment expense amounted to $789,586, $772,886, and $642,826 for the years ended December 31, 2005, 2004 and 2003, respectively. The amount of additional depreciation included in the ﬁgures for 2005, 2004 and 2003 from the Barre Branch project which was recorded at the end of 2003, amounted to $157,692, $155,242 and $12,369, respectively.

The Company now leases ﬁve of its nine locations. In addition to the land lease for the Barre branch, these leased facilities include branch ofﬁces in Island Pond, Barton, St. Johnsbury, and Montpelier, Vermont. The operating leases for these ﬁve locations expire in various years through 2022 with options to renew.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is a party to ﬁnancial instruments with off-balance-sheet risk in the normal course of business to meet the ﬁnancing needs of its customers. These ﬁnancial instruments include commitments to extend credit, standby letters of credit and risk-sharing commitments on certain sold loans. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reﬂect the extent of involvement the Company has in particular classes of ﬁnancial instruments. From December 31, 2004 to December 31, 2005, there has not been any activity that has created any additional types of off-balance-sheet risk.

The Company generally requires collateral or other security to support financial instruments with credit risk. The Company's financial instruments whose contract amount represents credit risk as of December 31, 2005 and 2004 are as follows:

		Contract or
		-Notional Amount-
		2005		2004
		(Dollars in Thousands)

	Unused portions of commercial lines of credit	$	17,497	$	17,290

	Unused portions of home equity lines of credit		8,868		7,188

	Other commitments to extend credit		10,304		5,681

	Standby letters of credit and commercial letters of credit		621		172

	Credit card arrangements		8,890		8,651

	MPF credit enhancement obligation, net of liability
	recorded		1,066		854


Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

AGGREGATE CONTRACTUAL OBLIGATIONS

As of December 31, 2005, the Company had the following contractual obligations in the time periods indicated:

	Less						More
	than		1-3		3-5		than
	1 year		years		years		5 years		Total
	(Dollars in Thousands)

Operating Leases	$	166	$	336	$	351	$	810	$	1,663
Housing Limited Partnerships		433		124		0		0		557
Construction in progress		8		0		0		0		8
FHLB Borrowings		5,000		30		0		5,010		10,040

Total	$	5,607	$	490	$	351	$	5,820	$	12,268

EFFECTS OF INFLATION

Rates of inﬂation affect the reported ﬁnancial condition and results of operations of all industries, including the banking industry. The effect of monetary inﬂation is generally magniﬁed in bank ﬁnancial and operating statements because most of a bank's assets and liabilities are monetary in nature and, as costs and prices rise, cash and credit demands of individuals and businesses increase, while the purchasing power of net monetary assets declines.

The impact of inﬂation on the Company's ﬁnancial results depends on management's ability to react to changes in interest rates in order to reduce inﬂationary effect on performance. Interest rates do not necessarily move in conjunction with changes in the prices of other goods and services. As discussed above, management seeks to manage the relationship between interest-sensitive assets and liabilities in order to protect against signiﬁcant interest rate ﬂuctuations, including those resulting from inﬂation.

LIQUIDITY AND CAPITAL RESOURCES

Managing liquidity risk is essential to maintaining both depositor conﬁdence and stability in earnings. Liquidity management refers to the ability of the Company to adequately cover ﬂuctuations in assets and liabilities. Meeting loan demand (assets) and covering the withdrawal of deposit funds (liabilities) are two key components of the liquidity management process. The Company's principal sources of funds are deposits, amortization and prepayment of loans and securities, maturities of investment securities, sales of loans available for sale, and earnings and funds provided from operations. Maintaining a relatively stable funding base, which is achieved by diversifying funding sources, com-

petitively pricing deposit products, and extending the contractual maturity of liabilities, reduces the Company's exposure to roll over risk on deposits and limits reliance on volatile short-term borrowed funds. Short-term funding needs arise from declines in deposits or other funding sources and funding requirements for loan commitments. The Company's strategy is to fund assets to the maximum extent possible with core deposits that provide a sizable source of relatively stable and low-cost funds.

In recent years, while depositors were waiting for improved performance in stock-market based investments, banks were ﬂush with deposits, creating excess liquidity. This liquidity was put to good use while loan demand was high. As depositors gained conﬁdence in the markets, deposit growth has become stagnate, while loan demand has remained steady. Funding for loan growth has been augmented with short-term borrowings and cash ﬂows from maturing investments.

The Company has taken the approach of offering deposit specials at competitive rates, in varying terms that ﬁt within the balance sheet mix. The strategy of offering specials is meant to provide a means to retain deposits while not having to reprice the entire deposit portfolio.

The Company has a credit line with the Federal Home Loan Bank of Boston (FHLB) with an available balance of $4.3 million at December 31, 2005. Interest is chargeable at a rate determined daily approximately 25 basis points higher than the rate paid on federal funds sold. Additional borrowing capacity of approximately $85.6 million through the FHLB is secured by the Company's qualifying loan portfolio.

As of December 31, 2005, the Company had total advances of approximately $10.0 million against the $85.6 million line, consisting of the following:

	Annual		Principal
Purchase Date	Rate	Maturity Date	Balance

October 18, 2005	4.11%	January 18, 2006	$	2,000,000
November 25, 2005	4.47%	March 27, 2006		3,000,000
November 16, 1992	7.57%	November 16, 2007		30,000
November 16, 1992	7.67%	November 16, 2012		10,000
January 16, 2001	4.78%	January 18, 2011		5,000,000

Total Long-term Advances			$	10,040,000

Under a separate agreement, the Company has the authority to collateralize public unit deposits up to its FHLB borrowing capacity ($85.6 million less outstanding advances) with letters of credit issued by the FHLB. The Company offers a Government Agency Account to the municipalities collateralized with these letters of credit issued by FHLB. At December 31, 2005, approximately $52.7 million was pledged as collateral for these deposits. Interest is charged to the Company quarterly based on the average daily balance outstanding at a rate of 20 basis points. As of December 31, 2005, an average daily balance for the fourth quarter of approximately $21.5 million was reported.

A cash dividend of $0.16 per share was declared in the ﬁrst quarter and $0.17 per share for the second, third and fourth quarters of 2005. These dividends totaling $0.67 for the year represent an increase of 5% over the cash dividends declared in 2004 and 10% over the cash dividend declared in 2003. A 5% stock dividend was declared in the second quarter of 2005, payable on July 1, 2005 to shareholders of record as of June 15, 2005. As a result of this stock dividend, all per share data for the previous quarters and years have been restated. In December, 2005, the Company declared a $0.17 per share cash dividend, payable February 1, 2006 to shareholders of record as of January 15, 2006, requiring the Company to accrue a liability of $691,964 for this dividend in the fourth quarter of 2005.

The following table illustrates the changes in shareholders' equity from December 31, 2004 to December 31, 2005:

Balance at December 31, 2004 (book value $6.94 per share)	$	28,043,446
Net income		3,420,635
Issuance of stock		841,383
Purchase of treasury stock		(178,359)
Total dividends declared		(2,720,332)
Change in unrealized gains on available-for-sale securities,
net of tax		(283,439)

Balance at December 31, 2005 (book value $7.15 per share)	$	29,123,334

As of December 31, 2005, of the 405,000 shares authorized for the stock buyback plan announced in 2000 and extended in 2002, 178,890 shares had been repurchased, leaving 226,110 shares available for repurchase. The repurchase price paid for these shares ranged from $9.75 per share in May of 2000 to $16.50 per share in September of 2005. The last purchase in 2005 was on December 23, 2005 in which 4,938 shares were repurchased at a price of $16.00 per share.

The primary source of funds for the Company's payment of dividends to its shareholders is dividends paid to the Company by the Bank. The Bank, as a National Bank, is subject to the dividend restrictions set forth by the Comptroller of the Currency ("OCC"). Under such restrictions, the Bank may not, without the prior approval of the OCC, declare dividends in excess of the sum of the current year's earnings (as deﬁned) plus the retained earnings (as deﬁned) from the prior two years.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital (as deﬁned in the regulations) to risk-weighted assets (as deﬁned), and of Tier 1 capital (as deﬁned) to average assets (as deﬁned). Under current guidelines, banks must maintain a risk-based capital ratio of 8.0%, of which at least 4.0% must be in the form of core capital (as deﬁned). The risk based ratios of the Company and its subsidiary exceeded regulatory guidelines at December 31, 2005 with reported risk-weighted assets of $216.8 million compared to $196.3 million at December 31, 2004 and total capital of $31.8 million and $30.4 million, respectively. The Company's total risk-based capital to risk-weighted assets was 14.65% and 15.47% at December 31, 2005 and 2004, respectively. The Company's Tier 1 capital to risk-weighted assets was 13.64% and 14.37% at December 31, 2005 and 2004, respectively. In addition to risk-based capital requirements, bank holding companies are required to maintain minimum leverage capital ratios of core capital to average assets of 4.0%. As of December 31, 2005, the Company's leverage ratio was 8.37% and as of December 31, 2004 was 8.44%.

Regulators have also established guidelines for minimum capital ratio requirements that deﬁne a bank as well-capitalized under prompt corrective action provisions. These minimums are risk-based capital ratio of 10.0% and Tier 1 capital ratio of 6.0%. As of December 31, 2005, the Company and its Subsidiary were deemed well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that time that management believes have changed the Company's classiﬁcation.

The Company intends to continue the past policy of maintaining a strong capital resource position to support its asset size and level of operations. Consistent with that policy, management will continue to anticipate the Company's future capital needs.

From time to time the Company may make contributions to the capital of Community National Bank. At present, regulatory authorities have made no demand on the Company to make additional capital contributions.

RECENT ACCOUNTING DEVELOPMENTS

Statement of Financial Accounting Standard (SFAS) No. 154, Accounting Changes and Error Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3, changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include speciﬁc transition provisions. When a pronouncement includes speciﬁc transition provi-

sions, those provisions should be followed. Until such time the Company has a change in accounting principle, this Statement has no effect on the financial condition and operations of the Company.

FASB Staff Position (FSP) 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, was issued on November 3, 2005. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. Guidance in the FSP shall be applied to reporting periods beginning after December 15, 2005 with earlier application permitted. The Company has applied the guidance in this FSP in the ﬁnancial statements for the year ended December 31, 2005, the effect of which was limited to disclosure in Note 2 of the Company's ﬁnancial statements with no ﬁnancial impact.

Common Stock Performance by Quarter*

	2005				2004
	First	Second	Third	Fourth	First	Second	Third	Fourth

Trade Price
High	$17.34	$17.10	$18.25	$16.75	$18.05	$17.10	$16.15	$19.95
Low	$15.68	$14.96	$15.00	$15.00	$14.96	$15.58	$14.73	$14.73

	2005				2004
	First	Second	Third	Fourth	First	Second	Third	Fourth

Bid Price
High	$17.10	$16.86	$17.60	$16.25	$18.05	$17.10	$15.91	$16.86
Low	$15.68	$14.73	$14.75	$15.00	$14.96	$15.44	$14.73	$14.73

Cash Dividends
Declared	$ 0.16	$ 0.17	$ 0.17	$ 0.17	$ 0.16	$ 0.16	$ 0.16	$ 0.16

*	There is no established public trading market for the Company's common stock. Trade price and bid price information is based on high and low trade and bid prices reported in the OTC Bulletin Boardmaintained by NASDAQ, and may not represent all trades effected during the relevant periods. Per share prices have been restated to reﬂect a 5% stock dividend declared during the second quarter of 2005.

As of February 1, 2006, the Corporation's common stock ($2.50 par value) was owned by approximately 949 shareholders of record.

Form 10-K
A copy of the Form 10-K Report ﬁled with the Securities and Exchange Commission may be obtained without charge upon written request to:

	Stephen P. Marsh, President & COO
	Community Bancorp.
	P.O. Box 259
	Derby, Vermont 05829

Shareholder Services
For shareholder services or information contact:

	Chris Bumps, Corporate Secretary
	Community Bancorp.
	P.O. Box 259
	Derby, Vermont 05829
	(802) 334-7915

Annual Shareholders' Meeting
The 2006 Annual Shareholders' Meeting will be held at 5:30 p.m., May 2, 2006, at the Elks Club in Derby. We hope to see many of our shareholders there.

Additional Information Regarding Community Bancorp. Stock
Although there is no established public trading market in the Corporation's common stock, several brokerage ﬁrms follow the stock and have executed trades in the stock for their customers. Trading in the Corporation's stock, however, is not active. You can contact these ﬁrms at the following addresses:

Silverlake Wealth Management	Winslow, Evans & Crocker	A.G. Edwards
Wachovia Securities Financial Network	175 Federal Street	1184 Main Street, Suite 1
1795 Williston Road	Boston, Massachusetts 02110	St. Johnsbury, Vermont 05819
South Burlington, Vermont 05403	(800) 556-8600	(800) 457-1002
(800) 235-0435

Community Bancorp.
Performance at-a-Glance (Dollars in Thousands)


Assets	Earnings


Deposits	Total Loan Originations