SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~September 30, 2010~~March 31, 2011

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-16435

Vermont	03-0284070
(State of Incorporation)	(IRS Employer Identification Number)

4811 US Route 5, Derby, Vermont	05829
(Address of Principal Executive Offices)	(zip code)

Registrant's Telephone Number: (802) 334-7915

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file for such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ( X ) No ( )

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ( ) NO ( )

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ( )	Accelerated filer ( )
Non-accelerated filer ( ) (Do not check if a smaller reporting company)	Smaller reporting company ( X )

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

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

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

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

Notes to Consolidated Financial Statements

Note 1. Basis of Presentation and Consolidation

The interim consolidated financial statements of Community Bancorp. and Subsidiary are unaudited. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments necessary for fair presentation of the financial condition and results of operations of the Company contained herein have been made. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, ~~2009~~2010 contained in the Company's Annual Report on Form ~~10-K/A.~~10-K. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full annual period ending ~~Dec ember~~December 31, ~~2010,~~2011, or for any other interim period.

~~Certain amounts in the 2009 financial statements have been reclassified to conform to the current year presentation.~~

Note 2. Recent Accounting Developments

In June 2009, the Financial Accounting Standards Board (FASB) issued a change to Accounting Standards Codification (ASC) Topic 860, "Transfers and Servicing", to improve the reporting for the transfer of financial assets resulting from (1) practices that have developed since the issuance of a previous FASB statement that are not consistent with the original intent and key requirements of that statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. This ASC became effective for the Company on January 1, 2010. Adoption of this Statement did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued a change to ASC Topic 810, "Consolidation", to amend certain requirements of consolidation of variable interest entities, to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. The ASC became effective for the Company on January 1, 2010. Adoption of this Statement did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, "Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements," to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the Company on January 1, 2010, except for the disclosure on the roll forward activities for any Level 3 fair value measurements, which ~~will become~~became effective ~~with~~for the ~~reporting period beginning~~Company on January 1, 2011. Adoption of this new guidance requires additional disclosures of fair value measurements but did not have a material impact ~~on the Company’s consolidated financial statements.~~

In February 2010, the FASB issued ASU 2010-09, “Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements,” related to events that occur after the balance sheet date but before financial statements are issued. This guidance amends existing standards to address potential conflicts with Securities and Exchange Commission (“SEC”) guidance and refines the scope of the reissuance disclosure requirements to include revised financial statements only. Under this guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated. The adoption of this update did not have a material effect on the Company’s consolidated financial statements.

On July 21, 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The ASU is intended to enhance transparency about an entity’s allowance for credit losses and the credit quality of loan and lease receivables by requiring disclosure of an evaluation of the nature of the credit risk inherent in the entity’s financing receivables portfolio, as well as disclosure of how that risk is analyzed and assessed in arriving at the allowance for credit losses and the changes and reasons for those changes in the allowance. Under this standard, disclosures about the allowance for credit losses and fair value are to be presented by portfolio segment, while credit quality information, impaired financing receivables and ~~nonaccrual~~non-accrual status are to be presented by class of financing receivable. In addition to existing requirements, ASU 2010-20 requires an entity to provide additional disclosures about (1) credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables; (2) the aging of past due financing receivables at the end of the reporting period by class of financing receivable; (3) the nature and extent of troubled debt restructurings that occurred during the period, by class of financing receivable, and their effect on the allowance for credit losses; (4) the nature and extent of financing receivables modified as troubled debt restructurings within the previous 12 months that defaulted during the reporting period, by class of financing receivable, and their effect on the allowance for credit losses; and (5) significant purchases and sales of financing receivables during the reporting period, disaggregated by portfolio segment. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. ASU 2010-20 ~~will be~~is effective for interim and annual financial reporting periods ending after December 15, 2010, as it relates to disclosures required as of the end of a reporting period. On January 19, 2011, the FASB issued ASU 2011-01, “Receivables (Topic 310): Deferral of the Effective Date of Disclosures ~~that relate~~about Troubled Debt Restructurings in Update No. 2010-20,” temporarily deferring the ASU 2010-20 effective date of the disclosure requirements for public entities about troubled debt restructurings. The purpose of the delay is to ~~activity during~~make the disclosure requirements concurrent with the effective date of the FASB’s guidance on determining what constitutes a ~~reporting period will~~troubled debt restructuring. Currently, the guidance for determining what constitutes a troubled debt restructuring is anticipated to be ~~required~~effective for ~~the Company’s consolidated financial statements that include~~interim and annual periods ~~beginning on or~~ending after ~~January 1,~~June 15, 2011. Other than requiring additional disclosures, ~~the Company does not anticipate that~~ adoption of this ASU ~~will~~did not have a material impact on the Company’s consolidated financial ~~statements~~statements. On April 5, 2011, the FASB issued ASU 2011-02 “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”, which clarifies when creditors should classify loan modifications as troubled debt restructurings. The guidance is effective for interim and ~~accompanying footnotes.~~annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the year. The guidance on measuring the impairment of a receivable restructured in a troubled debt restructuring is effective on a prospective basis. The Company is currently evaluating the new guidance.

Note 3. 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 (retroactively adjusted for stock splits and stock dividends), including Dividend Reinvestment Plan shares issuable upon reinvestment of dividends, and reduced for shares held in treasury.

The following table illustrates the calculation for the periods ended ~~September 30,~~March 31, as adjusted for the cash dividends declared on the preferred stock:

Note 4. Comprehensive Income

Accounting principles generally require recognized revenues, 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-for-sale securities, are not reflected in the statement of income, 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 or loss). Other comprehensive income or loss, along with net income, comprises the Company's total comprehensive income.

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

Note 5. Investment Securities

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Securities HTM	Cost		Gains		Losses		Value*

March 31, 2011
States and political subdivisions	$	37,948,665	$	493,335	$	0	$	38,442,000

December 31, 2010
States and political subdivisions	$	37,440,714	$	716,286	$	0	$	38,157,000

March 31, 2010
States and political subdivisions	$	47,157,935	$	435,065	$	0	$	47,593,000

The scheduled maturities of debt securities held-to-maturity were as follows:

All debt securities with unrealized losses are presented in the table ~~below either as those with a continuous loss position for less than 12 months or as those with a continuous loss position for 12 months or more.~~below. The Company had no debt securities with an unrealized loss ~~at September 30, 2010 and September 30, 2009. The debt securities at December 31, 2009 had no unrealized loss position~~ of 12 months or ~~more.~~more for the periods presented.

At ~~September 30,~~March 31, 2011 and 2010 ~~and 2009~~ and December 31, ~~2009,~~2010, the Company’s available-for-sale portfolio included two classes of Fannie Mae preferred stock with an aggregate cost basis of $42,360 as of March 31, 2011 and December 31, 2010, and an aggregate cost basis of $68,164 ~~which reflected~~as of March 31, 2010. The cost basis of those shares reflects an other-than-temporary impairment write down of $25,804 recorded by the Company in the fourth quarter of 2010 and two other-than-temporary impairment write downs ~~on the investment~~recorded in prior periods. The fair market value of the Fannie Mae preferred stock as of ~~September 30, 2010~~March 31, 2011 was ~~$36,298, a decrease~~$142,039, an increase of ~~$35,190~~$99,679 from the December 31, ~~2009 fair market value of $71,488. The September 30, 2010 fair market value reflected an increase of $5,570 from the June 30,~~ 2010 fair market value of $30,728. The value of the stock had declined shortly before the end of the second quarter, after the Federal Housing Finance Agency ordered Fannie Mae to delist its common and preferred stock from th e New York Stock Exchange. Due to the fact that there was improvement in the stock’s market value during the third quarter and the Company has the ability and intention to hold the investment for the foreseeable future, management did not record an other-than-temporary impairment for the quarter ended September 30, 2010.$42,360.

At ~~December~~March 31, ~~2009,~~2011, there were seven U.S. GSE debt securities in an unrealized loss position compared to two U.S. ~~Government sponsored enterprise~~GSE debt securities and one U.S. Government ~~debt~~ security ~~in the investment portfolio~~ in an unrealized loss ~~position.~~position at December 31, 2010 and March 31, 2010. The seven U.S. GSE debt securities in an unrealized loss position at March 31, 2011 included the two GSE debt securities in an unrealized loss position at December 31, 2010, but those two debt securities were not the same two in an unrealized loss at March 31, 2010. These unrealized losses were principally attributable to changes in prevailing interest rates for similar types of securities, and not deterioration in the creditworthiness of the issuer.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions, 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 the carrying value, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by rating agencies or other adverse developments in the status of the securities have occurred, and the results of reviews of the issuer's financial condition.

Note 6. Loans, Allowance for Loan Losses and Credit Quality

The following is an age analysis of past due loans by class:

The allowance for loan losses is established through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance consists of specific, general and unallocated components. The specific component relates to the loans that are deemed impaired. A specific allowance is established when the loan’s impaired basis is less than the carrying value of that loan. The general component covers non-impaired loan pools and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. The entire allowance is available to absorb losses in the loan portfolio, regardless of specific, general and unallocated components considered in determining the amount of the allowance.

The general component of the allowance for loan losses is based on historical loss experience, adjusted for qualitative factors and stratified by the following loan segments: commercial, commercial real estate, residential real estate, and consumer loans. Management uses an average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels of and trends in delinquencies and non-performing loans, levels of and trends in loan risk groups, trends in volumes and terms of loans, effects of any changes in loan related policies, experience, ability and the depth of management, documentation and credit data exception levels, national and local economic trends, external factors such as competition and regulation and lastly concentrations of credit risk in a variety of areas, including portfolio product mix, the level of loans to individual borrowers and their related interests, loans to industry segments, and the geographic distribution of commercial real estate loans. This evaluation is inherently subjective as it requires estimates that are susceptible to revision as more information becomes available. There were no changes in the Company’s policies or methodology pertaining to the general component for loan losses during the first quarter of 2011.

The qualitative factors are determined based on the various risk characteristics of each loan segment. The Company has policies, procedures and internal controls commensurate with the risk profile of each of these segments. Risk characteristics relevant to each portfolio segment are as follows:

Commercial – Loans in this segment include commercial and industrial loans and to a lesser extent loans to finance agricultural production. Commercial loans are made to businesses and are generally secured by assets of the business, including trade assets and equipment. While not the primary collateral, in many cases these loans may also be secured by the real estate of the business. Repayment is expected from the cash flows of the business. A weakened economy, soft consumer spending, unfavorable foreign trade conditions and the rising cost of labor or raw materials are examples of issues that can impact the credit quality in this segment.

Commercial Real Estate – Loans in this segment are principally made to businesses and are generally secured by either owner-occupied, or non-owner occupied commercial real estate. A relatively small portion of this segment includes farm loans secured by farm land and buildings. As with commercial loans, repayment of owner-occupied commercial real estate loans is expected from the cash flows of the business and the segment would be impacted by similar issues. The non-owner occupied commercial real estate portion includes both residential and commercial construction loans, vacant land and real estate development loans and multi-family dwelling and commercial rental property loans. Repayment of construction loans is expected from permanent financing takeout; the Company generally requires a commitment or eligibility for the take-out financing prior to construction loan origination. Real estate development loans are generally repaid from the sale of the subject real property as the project progresses. Construction and development lending run additional risks, including the project exceeding budget, not being constructed according to plans, not receiving permits, or the pre-leasing or occupancy rate not meeting expectations. Repayment of multi-family loans and commercial rental property loans is expected from the cash flow generated by rental payments received from the individuals or businesses occupying the real estate. Commercial real estate loans are impacted by issues such as competitive market forces, vacancy rates, cap rates, net operating incomes, lease renewals and overall economic demand. In addition, loans in the recreational and tourism sector can be affected by weather conditions, such as unseasonably low winter snowfalls. Commercial real estate lending also carries a higher degree of environmental risk than other real estate lending.

Residential Real Estate – All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.

Consumer Loans – Loans in this segment are made to individuals for consumer and household purposes. This segment includes both loans secured by automobiles and other consumer goods, as well as loans that are unsecured. This segment also includes overdrafts, which are extensions of credit made to both individuals and business to cover temporary shortages in their deposit accounts and are generally unsecured. The Company maintains policies restricting the size and length of these extensions of credit. The overall health of the economy, including unemployment rates, has an impact on the credit quality of this segment.

A specific allowance is established when a loan’s impaired basis is less than the carrying value of the loan. A loan is considered impaired when, based on current information and events, in management’s estimation it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management evaluates the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and frequency of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis, by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Impaired loans may also include troubled loans that are restructured. A troubled debt restructuring occurs when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that would otherwise not be granted. Troubled debt restructurings may include the transfer of assets to the Company in partial satisfaction of a troubled loan, a modification of a loan’s terms, or a combination of the two.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment evaluation, unless such loans are subject to a restructuring agreement.

Unallocated component

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

The allowance for loan losses and select loan information by portfolio segment was as follows:

As of March 31, 2011 and December 31, 2010, the Company had no acquired loans with deteriorated credit quality.

Credit Quality Grouping

Credit quality grouping allows for the evaluation of trends in credit quality that are used in developing the allowance for loan losses. The Company groups credit risk into Groups A, B and C. The manner the Company utilizes to assign risk grouping is driven by loan purpose. Commercial purpose loans are individually risk graded while the retail portion of the portfolio is generally grouped by delinquency pool.

Group A loans - Acceptable Risk – are loans that are expected to perform as agreed under their respective terms. Such loans carry a normal level of risk that does not require management attention beyond that warranted by the loan or loan relationship characteristics, such as loan size or relationship size. Group A loans include commercial loans that are individually risk rated and retail loans that are rated by pool. Group A retail loans include both performing consumer and residential real estate loans. Residential real estate loans are loans to individuals secured by 1-4 family homes, including first mortgages, home equity and home improvement loans. Loan balances fully secured by deposit accounts or that are fully guaranteed by the Federal Government are considered acceptable risk.

Group B loans – Management Involved - are loans that require greater attention than the acceptable loans in Group A. Characteristics of such loans may include, but are not limited to, borrowers that are experiencing negative operating trends such as reduced sales or margins, borrowers that have exposure to adverse market conditions such as increased competition or regulatory burden, or that have had unexpected or adverse changes in management. These loans have a greater likelihood of migrating to an unacceptable risk level if these characteristics are left unchecked. Group B is limited to commercial loans that are individually risk rated.

Group C loans – Unacceptable Risk – are loans that have distinct shortcomings that require a greater degree of management attention. Examples of these shortcomings include a borrower's inadequate capacity to service debt, poor operating performance, or insolvency. These loans are more likely to result in repayment through collateral liquidation. Group C loans range from those that are likely to sustain some loss if the shortcomings are not corrected, to those for which loss is imminent and non-accrual treatment is warranted. Group C loans include individually rated commercial purpose loans, and retail loans adversely rated in accordance with the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification Policy. Group C retail loans include 1-4 family residential real estate loans and home equity loans past due 90 days or more with loan-to-value ratios greater than 60%, home equity loans 90 days or more past due where bank does not hold first mortgage, irrespective of loan-to-value, loans in bankruptcy where repayment is likely but not yet established, and lastly consumer loans that are 90 days or more past due.

Commercial purpose loan ratings are assigned by the commercial account officer; for larger and more complex commercial loans, the credit rating is a collaborative assignment by the lender and the credit analyst. The credit risk rating is based on the borrower's expected performance, i.e., the likelihood that the borrower will be able to service its obligations in accordance with the loan terms. Credit risk ratings are meant to measure risk versus simply record history. Assessment of expected future payment performance requires consideration of numerous factors. While past performance is part of the overall evaluation, expected performance is based on an analysis of the borrower's financial strength, and historical and projected factors such as size and financing alternatives, capacity and cash flow, balance sheet and income statement trends, the quality and timeliness of financial reporting, and the quality of the borrower’s management. Other factors influencing the credit risk rating to a lesser degree include collateral coverage and control, guarantor strength and commitment, documentation, structure and covenants and industry conditions. There are uncertainties inherent in this process.

Credit risk ratings are dynamic and require updating whenever relevant information is received. The risk ratings of larger or more complex loans, and Group B and C rated loans, are assessed at the time of their respective annual reviews, during quarterly updates, in action plans or at any other time that relevant information warrants update. Lenders are required to make immediate disclosure to the Chief Credit Officer of any increase in loan risk, even if considered temporary in nature.

Note 6.7. Goodwill and Other Intangible Assets

As a result of the merger with LyndonBank on December 31, 2007, the Company recorded goodwill amounting to ~~$11.6 million.~~$11,574,269. The goodwill is not amortizable and is not deductible for tax purposes.

The Company also recorded ~~$4.2 million~~$4,161,000 of acquired identified intangible assets representing the core deposit intangible which is subject to amortization as a non-interest expense over a ten year period using a double declining ~~method and is deductible for tax purposes.~~method.

Amortization expense for the core deposit intangible for the first ~~nine~~three months of ~~2010~~2011 was ~~$399,456.~~$106,522. As of ~~September 30, 2010,~~March 31, 2011, the remaining annual amortization expense related to core deposit intangible, absent any future impairment, is expected to be as follows:

Management evaluates goodwill for impairment annually and the core deposit intangible for impairment if conditions warrant. As of the date of the most recent ~~such evaluations~~evaluation (December 31, ~~2009)~~2010), management concluded that no impairment existed.

Note ~~7. Income Taxes~~

The Company receives tax credits for its investments in various low income housing partnerships which reduce taxes payable. Periodically the Company has the opportunity to participate in a low income housing project that offers one-time historic tax credits. In 2008, the Company was given this opportunity through a local project, with historic tax credit for 2009 amounting to $535,000, or $133,750 quarterly. This one-time historic tax credit is reflected in the negative variance between the tax expense for both of the 2010 interim periods presented and the tax benefit for the same periods presented for 2009.

~~Note~~ 8. Fair Value

FASB ASC Topic 820-10-20, Fair Value Measurements and Disclosures, provides a framework for measuring and disclosing fair value under U.S. Generally Accepted Accounting Principles (GAAP). The ASC Topic 820-10-20 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans).

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The ASC Topic 820-10-20 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2

Observable inputs other than Level 1 prices such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts, residential mortgage servicing rights, impaired loans, and ~~OREO which uses the market approach.~~OREO.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interest in securitizations, and highly-structured or long-term derivative contracts.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Assets measured at fair value on a recurring basis and reflected in the balance sheet at the dates presented are summarized below:

The fair value of loans held-for-sale is based upon an actual purchase and sale agreement between the Company and an independent market participant. The sale is executed within a reasonable period following quarter end at the stated fair value.

Real estate properties acquired through or in lieu of loan foreclosure are carried as OREO and are initially recorded at 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 estimated 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 deems significant, or evaluations may be performed by management on properties in the portfolio that are less vulnerable to market conditions. Subsequent write-downs are ~~rec orded~~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 estimated cost to sell.

There were no transfers between Levels 1 and 2 during the ~~nine~~three months ended ~~September 30,~~March 31, 2011. There were no Level 3 financial instruments at March 31, 2011, December 31, 2010, or March 31, 2010.

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: The fair value of securities available for sale equals quoted market prices, if available. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities. Level 1 securities include certain U.S. Government ~~Bonds~~securities and U.S. GSE preferred stock. Level 2 securities include asset-backed securities, including obligations of ~~government sponsored entities,~~U.S. GSEs and certain U.S Government ~~securities, mortgage-backed securities, municipal bonds and certain equity~~ securities.

Restricted equity securities: Restricted equity securities are comprised of Federal Reserve Bank of Boston (FRBB) stock and Federal Home Loan Bank of Boston (FHLBB) stock. These securities are carried at cost, which is believed to approximate fair value, based on the redemption provisions of the FRBB and the FHLBB. The stock is nonmarketable, and redeemable at par value.

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 analyses, 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 fair values. ~~Loans that are~~Loan impairment is deemed to ~~be impaired are valued at~~exist when full repayment of principal and interest according to the ~~lower~~contractual terms of the ~~loan’s carrying value or the loan’s impaired basis. The impaired basis~~loan is ~~measured using the impairment method that the Company has applied, be it~~no longer probable. Impaired loans are reported based on one of three measures: the present value of expected future cash flows discounted at the loan’s effective interest rate; the loan’s observable market ~~price,~~price; or the fair value of ~~collateral. The Company selects~~ the collateral if the loan is collateral dependent. If the fair value is less than an impaired loan’s recorded investment, an impairment loss is recognized as part of the ALL. Accordingly, certain impaired loans may be subject to measurement ~~method~~at fair value on a ~~loan-by-loan basis, except that when a foreclosure~~non-recurring basis. Management has estimated the fair values of ~~a collateral dependent loan is probable then~~these assets using Level 2 inputs, such as the fair value of collateral ~~method is used. The fair value of real estate collateral is usually determined using independent appraisals and evaluations. The Company considers impaired loans to be valued~~ based on ~~Level 2 inputs.~~independent third-party appraisals for collateral-dependent loans.

Mortgage servicing rights: Mortgage servicing rights are evaluated regularly for impairment based upon the fair value of the servicing rights as compared to their amortized cost. The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income, with loans divided into strata for valuation purposes based on their rates, terms and features. The Company obtains a third party valuation based upon loan level data, including note rate, type and term of the underlying loans. The model utilizes a variety of observable inputs for its assumptions, the most significant of which are loan prepayment assumptions and the discount rate used to discount future cash flows. Mortgage ~~s ervicing~~servicing rights are subject to measurement at fair value on a nonrecurring basis and are classified as Level 2 assets.

Deposits, federal funds purchased 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.

Junior subordinated debentures: Fair value is estimated using current rates for debentures of similar maturity.

Capital lease obligations: Fair value is determined using a discounted cash flow calculation using current rates. Based on current rates, carrying value approximates fair value.

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

Off-balance-sheet credit related instruments: 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.

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

The estimated fair values of commitments to extend credit and letters of credit were immaterial as of the dates presented in the above table.

Note 9. Mortgage Servicing Rights

The following table shows the changes in the carrying amount of the mortgage servicing rights for the periods indicated:

Note 10. Legal Proceedings

In the normal course of business the Company and its subsidiary are involved in litigation that is considered incidental to their business. Management does not expect that any such litigation will be material to the Company's consolidated financial condition or results of operations.

Note 11. Subsequent Event

The Company has evaluated events and transactions subsequent to ~~September 30, 2010~~March 31, 2011 for potential recognition or disclosure in these financial statements, as required by GAAP. On ~~September 14, 2010,~~March 22, 2011, the Company declared a cash dividend of ~~$0.12~~$0.14 per share payable ~~November~~May 1, ~~2010~~2011 to shareholders of record as of ~~October~~April 15, ~~2010.~~2011. This dividend, amounting to ~~$550,307,~~$647,865, was accrued at ~~September 30, 2010.~~March 31, 2011.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

for the Period Ended ~~September 30,~~March 31, 2011

The following discussion analyzes the consolidated financial condition of Community Bancorp. (the “Company”) and its wholly-owned subsidiary, Community National Bank, as of March 31, 2011, December 31, 2010 and March 31, 2009, and its consolidated results of operations for the periods then ended. The Company is considered a “smaller reporting company” under applicable regulations of the Securities and Exchange Commission (SEC) and is therefore eligible for relief from certain disclosure requirements. In accordance with such provisions, the Company has elected to provide its audited consolidated statements of income, cash flows and changes in shareholders’ equity for two, rather than three, years.

The following discussion should be read in conjunction with the Company’s audited consolidated financial statements and related notes.

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 ~~subsidiary that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995.~~subsidiary. When used therein, the words ~~such as~~ "believes," "expects," "anticipates," "intends," "estimates," ~~“assumes,”~~ "plans," "predicts," ~~“should,” “could,” “may,”~~ or similar expressions, ~~which predict or indicate future events, trends or expectations,~~ 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~~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 loan portfolio and its participation in the Federal Home Loan Bank of Boston (FHLBB) Mortgage Partnership Finance (MPF) program, and management's general outlook for the ~~loc al and national economy and the~~ future performance of the ~~Company.~~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 undue 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,~~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) general economic ~~or monetary~~ conditions, either nationally, regionally or ~~regionally,~~locally continue to deteriorate, resulting in a decline in credit quality or a diminished demand for the Company's products and services; (2) 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; (3) interest rates change in such a way as to reduce the ~~Company' s~~Company's margins; (4) enactment of new laws and adoption of new government regulations, including numerous regulations of various federal government agencies, such as a new Consumer Financial Protection Bureau, to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”); (5) changes in ~~existing~~ laws or ~~regulations,~~government rules, or the way in which courts and government agencies interpret or implement those laws or ~~regulations,~~rules, increase our costs of doing business or otherwise adversely affect the Company's business; ~~(6)~~(5) changes in federal or state tax policy; ~~(7)~~(6) changes in the level of nonperforming assets and charge-offs; ~~(8)~~(7) changes in estimates of future reserve requirements based upon relevant regulatory and accounting requirements; ~~(9)~~(8) changes in consumer and business spending, borrowing and savings habits; and ~~(10)~~(9) the effect of and changes in the United States monetary and fiscal policies, including the interest rate policies and regulation of the money supply by the ~~Feder al~~Federal Reserve Board, which, in turn, may result in inflation and interest rate, securities market and monetary ~~fluctuations.~~fluctuations and in changes in the demand for our loan and deposit products.

NON-GAAP FINANCIAL MEASURES

Under ~~Securities and Exchange Commission (SEC)~~SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with generally accepted accounting principles in the United States (U.S. GAAP or GAAP) must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, two non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent ~~ne t~~net interest income and tax-equivalent net interest margin, have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G.

Management believes that these non-GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.

OVERVIEW

The Company’s ~~total~~consolidated assets ~~at September 30, 2010~~on March 31, 2011 were ~~$526.9 million compared to $505.3 million at~~$532,838,138, a decrease of $13,094,511, or 2.4% from December 31, ~~2009~~2010, and ~~$496.0 million at September 30, 2010,~~ an increase of ~~4.3% and 6.2%, respectively.~~$24,766,633, or 4.9% from March 31, 2010. The ~~growth~~most significant change in assets in both comparison periods ~~is primarily from an increase~~was in ~~loans. Loans and loans held-for-sale totaled $390.0 million at September 30, 2010,~~cash with an increase of ~~$7.8 million~~$24,835,805 from ~~December 31, 2009. Loans held-for-sale contributed $3.4 million~~year to ~~the increase. Total deposits on September 30, 2010~~year and a decrease of ~~$419.7 million were only slightly higher than December 31, 2009; however, a shift occurred within~~$17,325,801 from year end. Much of the ~~different types of deposit accounts. Time deposits decreased $20.8 million; reflected in this~~ decrease in ~~time deposits was $15.1 mil lion maturing~~cash, during the first quarter of ~~2010~~2011 was attributable to the pay off of a Federal Home Loan Bank of Boston (FHLBB) advance that matured in ~~one way funds purchased~~January in the ~~Certificate~~amount of ~~Deposit Account Registry Service (CDARS) program of Promontory Interfinancial Network (PIN) (described below~~$15,000,000. The increase in cash when comparing the ~~Liquidity and Capital Resources section), which were replaced with long-term borrowings~~two quarters was from ~~the FHLBB. Also contributing to the decrease~~an increase in ~~time~~ deposits, ~~is the competitive interest rate environment for certificate of deposit specials, resulting~~particularly in ~~a decrease in certificates of deposit of $5.6 million. In spite of a cyclical decrease in municipal demand~~NOW and money market ~~deposits of $15.0 million, the Company grew core deposit~~ accounts, ~~$21.7 million, which includes~~without a ~~new NOW account~~significant increase in loans and investments. Approximately $19,000,000 of the ~~Company's trust company~~increase in NOW accounts came from an increase in an account with the Company’s affiliate, Community Financial ~~Service~~Services Group (CFSG) which was opened at the end of ~~$19.1 million. The~~the first quarter in 2010. While there was a slight increase in municipal deposits year over year, the Company ~~is now offering~~also experienced an insured cash sweep account (ICS) through PIN. The ICS is a money market account that is fully insured by the Federal Deposit Insurance Corporation (FDIC), provided through PIN’s reciprocal deposit sweep service. The Company considers these increasesincrease in core deposits ~~as significant~~of approximately $8,000,000 or 4.0% for the same period. Although gross loans increased $3,874,537 or 1.0% when comparing the first quarter 2010 to the ~~overall balance sheet~~first quarter 2011, there was a decrease of $3,425,043 or 0.9% from year end 2010 to March 31, 2011. Demand for 1-4 family residential loans was strong in 2011, with most of these loans sold in the secondary market. Some of the liquidity was used to increase the available-for-sale securities portfolio. The decrease in the securities held-to-maturity portfolio from March 31, 2010 to March 31, 2011, which is the municipal portfolio, is a result of the competitive nature of this business; the decrease was attributed primarily to two relationships each equal to approximately $5,000,000.

Total liabilities increased $36,135,602, or 7.7%, from March 31, 2010 to December 31, 2010, but then decreased $13,521,682 or 2.7% by March 31, 2011 due to the pay down of the matured FHLBB advance. Positive earnings, net of dividends declared, have resulted in increases in retained earnings and shareholders’ equity of $39,554,840 as ~~a stable source~~ of ~~funding~~March 31, 2011 compared to ~~support asset growth. Nevertheless, management recognizes that the low interest rates being paid~~$39,127,669 on ~~certificates~~December 31, 2010 and $37,402,127 on March 31, 2010, increases of ~~deposits~~1.1% and ~~other investment products have caused some depositors to place their money in non-maturing products such as money market and savings accounts.~~5.8% respectively.

Net income for the ~~third~~first quarter of ~~2010~~2011 was ~~$787,805~~$944,868 or $0.19 per common share compared to ~~$1.0 million~~$938,912 or $0.20 per common share for the ~~third~~first quarter of ~~2009, resulting~~2010. Although earnings increased over the 2010 comparison period, an increase in the weighted average number of common shares of 77,126 resulted in a decrease of $0.01 in earnings per common ~~share of $0.16 and $0.21 for the respective quarters.~~share. Net interest income ~~increased by $243,009 but~~ was ~~offset by a combination of an increase of $258,333~~lower in the ~~provision for loan losses, a decrease in non-interest income~~first quarter of ~~$150,975 and a decrease in non-interest expenses and~~2011 compared to the ~~provision for income taxes~~first quarter of ~~$31,205 and $90,323, respectively, resulting in a decrease in net income of $225,317. Interest rates have remained low with~~2010 due to the ~~prime rate unchanged since January of 2009 and mortgage rates hitting record lows at quarter end. The~~ prolonged low interest rate ~~environment makes it challenging to grow net interest income from the growth of the balance sheet. Commercial and consumer loans that are tied to the prime rate continue~~environment. The asset base continues to be replaced ~~and~~or repriced at lower rates ~~reducing~~while the opportunity to decrease interest rates on deposits is limited. Non-interest income ~~by $34,654 for~~was also greater during the first quarter of 2011 than the first quarter 2010, due to fee income from the sale of residential loans, in the secondary market. One of the more significant items that contributed to the positive variance was the valuation adjustment to mortgage servicing rights. The increase in residential mortgage rates at the end of the quarter, ~~ended September 30, 2010 compared to~~together with normal net growth in the ~~same quarter last year. Although the reduced rates on deposit accounts~~servicing portfolio, partially offset by amortization of servicing rights resulted in a ~~decrease~~net increase of $151,662 in ~~interest expense~~servicing rights as of ~~$277,663,~~March 31, 2011 versus a net increase of $104,179 as of March 31, 2010. Income generated from the ~~longer rates remain low, the less opportunity there will be to reduce funding cost in the future.~~

The low mortgage interest rates fueled another round of refinancing activity in 2010. The activity for the first nine months of 2010 has not been as robust as in 2009, with $26.9 million in mortgages soldservicing rights during the first ~~nine months~~quarter of ~~2010,~~2011 was $24,944, compared to ~~$59.6 million for~~an expense of $46,447 during the ~~same period in 2009. Sales for the third~~first quarter of 2010, ~~were strong with $10.5 million, compared to $12.9 million~~creating a variance of $118,873 in ~~the third quarter of 2009. The Company reported~~mortgage servicing rights impairment adjustments and net gains from the sales of these mortgages of $216,788 for the quarter compared to $207,953 for the third quarter of 2009. This income is a component of non-interest income, which was $1.2 million for the quarter ended September 30, 2010 compared to $1.4 million for the quarter ended September 30, 2009. Other compone nts of non-interest income that varied in comparison to 2009 were related to the Supplemental Executive Retirement Program (SERP) and income from the conversion of Canadian funds. A decline in the stock market at quarter end resulted in a fair market value negative adjustment to the SERP of $60,768 for the quarter ended September 30, 2010 compared to a gain of $70,923 for the quarter ended September 30, 2009. Fluctuations in the value of the Canadian dollar versus the U.S. dollar resulted in income of $35,000 for the quarter ended September 30, 2010 compared to income of $73,000 for the quarter ended September 30, 2009.

~~Non-interest expense for the quarter ended September 30, 2010 was $4.3 million compared to $4.4 million for the same period in 2009. Salaries, benefits and occupancy~~revenues between periods. Operating expenses ~~have been manageable, increasing less than 5% combined when comparing the two quarters. Expenses related to collections of past due and non-accruing loans have~~ increased ~~from $112,129 in the third quarter of 2009 to $169,431 for the third quarter ended September 30, 2010, an increase of 51.1%. Other expenses declined~~$60,693, or 1.4% when comparing the two quarters, ~~by $145,949. During the quarter ended September 30, 2010, the Company recorded~~ a loss on limited partnerships of $123,897 versus $248,148 in 2009, a decrease of $124,251. The difference was due to a significant investment made by the Co mpany in a local senior housing project in 2009level that increased the losses in those partnerships for the year. The amortization of the core deposit intangible from the acquisition of LyndonBank decreases every year, decreasing $33,288 for the third quarter of 2010 compared to the same period last year.management considers manageable.

AnOn March 22, 2011, the Company's Board of Directors declared a quarterly cash dividend of $0.14 per common share, payable on May 1, 2011 to shareholders of record on April 15, 2011. This represented an increase of $0.02 per share in ~~non-performing loans and charge off activity required a provision for loan losses for~~ the ~~third quarter of 2010 of $433,334 compared to $175,001 for the third quarter~~quarterly cash dividend paid in 2009. Despite trending higher, the Company’s level of non-performing assets, net of government guarantees, remains well below the Company’s national peer group. The effects of the recession and the stagnant recovery continue to have a negative impact on the local economy. Sectors of the loan portfolio most affected by the recession are construction and dairy farming. Construction activity continues to be slow for commercial and residential markets and milk prices have yet to stabilize at a level sufficient to allow struggling farmers to recover. On the positi ve side, there has been some improvement in manufacturing with some of the local furniture manufacturers hiring additional workers and increasing work hours.recent prior quarters.

~~While there are signs~~The Company is focused on increasing the profitability of the balance sheet, improving expense efficiency, and prudently managing risk, particularly as it pertains to credit in order to remain a well-capitalized bank in this challenging economic ~~growth~~environment.

Global economic indicators point toward a recovering U.S. economy; consumer confidence has improved and ~~some evidence~~household spending is increasing at a moderate pace. Economic and labor market information indicates that the ~~labor market may be stabilizing,~~State of Vermont is recovering, however slowly and cautiously. Employers in the ~~economic picture remains uncertain~~manufacturing, professional and ~~housing markets remain soft, indicating that~~business services and tourism industries are reporting significant over-the-year increases in employment. While these trends are encouraging, it will take time before enough jobs are added to recoup the ~~recovery shows substantive signs~~number of ~~expansion. The Company expects~~jobs that were lost during the ~~Federal Reserve will maintain the low levels of the federal funds rate~~economic downturn. Particularly hard hit are those who have been unemployed for an extended period of time. ~~In this uncertain economic environment, unforeseen losses could present a challenge~~The seasonally adjusted unemployment rate in Vermont in March 2011 was 5.4% compared to 6.6% in March 2010. Conditions are generally better than 2010, however of great concern is the rising price of fuel and the impact it will have to the ~~Company’s future core earnings.~~

~~Local economic conditions are similar to national conditions. While~~consumer and all sectors of the economy. The manufacturing industry was hardest hit early in ~~2010~~ the ~~commercial pipeline showed strong demand, due to the sluggish economy, many~~recession, however reports from two local manufacturers of ~~the transactions did not materialize~~wood products indicate that production has increased and demand for commercial real estate loans has been low. During the third quarter 2010, residential mortgage loan activity increased somewhat and is expected to continue into the fourth quarter, based on a strong pipeline of mortgage applications at the end of the quarter, although the refinancing activity is not expected to reach the levels of 2009. Jobless claims in the local manufacturing sector have subsided and some factoriesthey have increased work hours for production ~~crews;~~crews. In the farming sector, milk prices increased during 2010 and are projected to remain at these levels for at least the first half of 2011; however production costs are a challenge with the ~~dairy industry continues to struggle. A positive summer~~rising cost of fuel and feed. The 2010 construction season was very slow for ~~local t ourism was beneficial to~~both commercial and residential contractors, leaving many with depleted financial resources and less prepared for the slow winter season and their 2011 startup. Some commercial contractors have found work at the local ~~economy. A~~ski resort that is undergoing a major expansion. Tourism activity during the 2010 fall foliage season and the 2010-11 winter season was good with local hotels reporting stable bookings. The local real estate markets improved somewhat during 2010, sparked by the low interest rate environment. Local real estate agents report that sales have increased across all price points. Another positive note for the northeastern Vermont market area is athe local multi-phase ski area expansion project, ~~of a local ski area,~~referred to above, where construction of two hotels, a hockey arena, an indoor water park and a golf ~~club house~~clubhouse are expected to transform the ski resort to a year-round indoor and outdoor recreation destination resort. This project is expected to inject $90 million of construction funding into the local economy over the next two years utilizing Federal EB5 program capital from foreign investors.

While there are some signs of a recovery, the ~~number of people unemployed and the limited new job opportunities suggest that the recovery will be slow and the economy in the Company’s markets will remain constrained for the time being. The~~ recent ~~poor economic conditions~~recession may continue to have a negative impact on the consumer, particularly as it relates to credit performance, which tends to lag economic cycles. ~~The~~Although the Company saw an increase in past dues and non-performing loans during ~~the first nine months of~~ 2010 ~~compared to 2009 indicates that~~while customers ~~continue to struggle~~struggled to make their mortgage payments ~~not only~~ due to layoffs, ~~and~~ reduced income ~~but in some instances due to~~and high levels of other consumer debt, ~~as well.~~the situation moderated slightly during the first quarter of 2011, with the ratio of past dues and nonperforming loans to gross loans decreasing from 1.6% at the end of the first quarter 2010 to 1.3% at March 31, 2011. These economic factors ~~among others,~~ are considered in assessing ~~t he~~the level of the Company’s reserve for loan losses in an effort to adequately reserve for probable losses due to ~~the~~ consequences of the recession. The Company recorded a provision for loan losses of $125,001 in the first quarter of 2010 compared to $187,500 in the first quarter of 2011.

~~Recently major~~There were significant regulatory changes affecting banks in 2010, which are likely to impact all aspects of the financial services industry for many years to come. In particular, the comprehensive Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) enacted in July 2010 contains many new requirements and mandates applicable to banking institutions and authorizes numerous rulemakings by various agencies to implement its provisions. Among other things, the Dodd-Frank Act: creates a new Consumer Financial Protection Bureau as an independent agency to implement and (with respect to larger institutions) enforce federal consumer protection laws; changes the method for calculating regulatory capital by bank holding companies and restricts the use of trust preferred securities as Tier 1 capital (subject to certain grandfathering); imposes new price controls on debit card interchange fees; imposes new disclosure, escrow, appraisal and other requirements applicable to mortgage ~~servicers’ foreclosure procedures have come under scrutiny by federal agencies, resulting~~lending; adopts new disclosure and voting requirements for public companies relating to executive compensation arrangements (subject to a delayed effective date for smaller reporting companies); makes permanent the increase to $250,000 in the ~~imposition~~amount of ~~a voluntary moratorium~~maximum FDIC insurance coverage; changes the assessment formula for FDIC insurance premiums from one based on ~~foreclosures by some~~deposits to one based on assets; provides permanent relief for smaller reporting companies such as the Company from the auditor attestation requirements of section 404 of the ~~larger national financial institutions until it can be determined that borrowers are not being evicted from their homes unfairly due~~Sarbanes-Oxley Act; and extends through 2012 the temporary unlimited deposit insurance coverage for non-interest bearing accounts. An amendment to ~~improper documentation and foreclosure proceedings. So far~~ the ~~interagency reviews by~~Federal Deposit Insurance Act enacted in December 2010 included interest on lawyer trust accounts (IOLTAs) within the ~~federal banking regulators have not identified any industry-wide systemic issues; rather~~definition of “non-interest bearing transaction account” for purposes of the issues appear to stem from the extreme volumes of foreclosures that the large services are experiencing. Recognizing the trends that have led to an increase in foreclosures, the Company allocated additional resources and experienced staff to handle the increased activity without s acrificing due diligence and proper procedures required in foreclosure proceedings.Dodd-Frank Act’s unlimited deposit insurance coverage.

~~On April 13, 2010,~~In the Board of Directors of the FDIC approved an interim rule to extend the Transaction Account Guarantee (TAG) program to December 31, 2010. Under the current TAG program, customers of participating insured depository institutions are provided full deposit insurance coverage on noninterest-bearing transaction accounts, as well as NOW accounts where the interest rate is contractually limited to no more than 25 basis points and Interest on Lawyers Trust Accounts (IOLTAs). In addition,short-term, the Dodd-Frank ~~Act provides~~Act’s price controls on interchange fees, scheduled for ~~unlimited FDIC insurance~~implementation by Federal Reserve Board rule in July 2011, are likely to have an adverse impact on bank fee income, even for ~~noninterest-bearing transaction accounts in all banks effective December 31, 2010, through December 31, 2012. However, this extended TAG coverage will~~smaller institutions like the Company that are not ~~apply~~directly subject to ~~interest-bearing NOW accounts or IOLTAs. T he cost of this TAG deposit insurance coverage will be included~~the rule as ~~part of the regular quarterly FDIC assessments, rather than through special assessments. The TAG program gives financial institutions who are participating~~competitive pricing pressures in the ~~TAG program an option~~market place effectively drive down interchange fees for ~~their customers with large dollar accounts who are looking for insured funds beyond the current FDIC coverage of $250,000.~~all banks.

The regulatory environment continues to increase operating costs and place extensive burden on personnel resources to comply with ~~rules such as~~a myriad of legal requirements, including those under the Dodd-Frank Act, the Sarbanes-Oxley Act of 2002, the USA Patriot Act, the Bank Secrecy Act, the Real Estate Settlement Procedures Act and the Truth in Lending ~~Act,~~Act. It is unlikely that these administrative costs and ~~most recently~~burdens will moderate in the Dodd-Frank Act, which creates a new Consumer Financial Protection Bureau with comprehensive rulemaking authority. Various federal agencies including the banking regulators and the SEC are charged with undertaking numerous administrative rulemakings under the Dodd-Frank Act that could take years to implement.

On September 14, 2010, the Company's Board of Directors declared a quarterly cash dividend of $0.12 per common share, payable on November 1, 2010 to shareholders of record on October 15, 2010. The Company is focused on increasing the profitability of the balance sheet, improving expense efficiency, and prudently managing risk, particularly as it pertains to credit in order to remain a well-capitalized bank in this challenging economic environment.

The following pages describe our third quarter financial results in more detail. Please take the time to read them to more fully understand the quarter and nine months ended September 30, 2010 in relation to the 2009 comparison periods. The discussion below should be read in conjunction with the Consolidated Financial Statements of the Company and related notes included in this report and with the Company's Annual Report on Form 10-K/A for the year ended December 31, 2009.

~~This report includes forward-looking statements within the meaning of the Securities and Exchange Act of 1934 (the “Exchange Act”).~~future.

CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared according to ~~U.S.~~US GAAP. 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 SEC has defined a ~~Company’s~~company’s critical accounting policies as those 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 ~~esti mates~~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.

Allowance for Loan Losses - 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 qualitative factors, including the effect of current economic indicators and their probable impact on borrowers and collateral, trends in delinquent and non-performing loans, trends in criticized and classified assets, concentrations of credit, levels of exceptions, and the impact of competition in the market. 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~~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.

Other Real Estate Owned - Occasionally, the Company acquires property in connection with foreclosures or in satisfaction of debts previously contracted, ~~known as~~ other real estate owned (OREO). Such properties are ~~initially recorded~~carried at fair value, which is the market value less estimated cost of disposition, i.e., sales commissions and costs associated with the sale. Market value is defined as the cash price that might reasonably be anticipated in a current sale that is within 12 months, under all conditions requisite to a fair sale. A fair sale means that a buyer and seller are each acting prudently, knowledgeably, and under no necessity to buy or sell. Market value is determined, as appropriate, either by obtaining a current appraisal or evaluation prepared by an independent, qualified appraiser, ~~by obtaining a Broker’s Price Opinion,~~ or third-party valuation firm, and finally if the Company has limited exposure and limited risk of loss, by the opinion of management as supported by an inspection of the property and its most recent tax valuation. If the Company has a valid appraisal or an appropriate evaluation obtained in connection with the real estate loan, and there has been no obvious and material change in market conditions or physical aspects of the property, then the Company need not obtain another appraisal or evaluation when it acquires ownership of the property. Under recent and current market conditions, and ~~during~~ periods of declining market values, the Company will generally obtain a new appraisal or evaluation.

The amount, if any, by which the recorded amount of the loan exceeds the fair value, less cost to sell, is a loss which is charged to the allowance for loan losses at the time of foreclosure or repossession. The recorded amount of the loan is the loan balance adjusted for any unamortized premium or discount and unamortized loan fees or costs, less any amount previously charged off, plus recorded accrued interest.

~~The Company performs~~Other Than Temporary Impairment of Investment Securities - Companies are required to perform quarterly reviews of individual debt and equity securities in ~~the~~their investment ~~portfolio~~portfolios to determine whether a decline in the value of a security is other than temporary. A review of other-than-temporary impairment requires companies to make certain judgments regarding the materiality of the decline and the probability, extent and timing of a valuation recovery, the company’s intent to continue to hold the security and, in the case of debt securities, the likelihood that the company will not have to sell the security before recovery of its cost basis. Pursuant to these requirements, management assesses valuation declines to determine the extent to which such changes are attributable to fundamental factors specific to the issuer, such as financial condition and business prospects, or to market-related or other factors, such as interest rates, and in the case of debt securities, the extent to which the impairment relates to credit losses of the issuer, as compared to other factors. Declines in the fair value of securities below their cost that are deemed in accordance with GAAP to be other than temporary, and declines in fair value of debt securities below their cost that are related to credit losses, are recorded in earnings as realized losses. The non-credit loss portion of an other than temporary decline in the fair value of debt securities below their cost basis (generally, the difference between the fair value and the estimated net present value of the debt security) is recognized in other comprehensive income as an unrealized loss.

Mortgage Servicing Rights - Mortgage servicing rights associated with loans originated and sold, where servicing is retained, are required to be initially capitalized at fair value and subsequently accounted for using the “fair value method” or the “amortization method”. Capitalized mortgage servicing rights are included in other assets in the consolidated balance sheet. Mortgage servicing rights are amortized into non-interest income in proportion to, and over the period of, estimated future net servicing income of the underlying financial assets. The value of capitalized servicing rights represents the estimated present value of the future servicing fees arising from the right to service loans in the portfolio. The carrying value of the mortgage servicing rights is periodically reviewed for ~~impair ment~~impairment based on a determination of fair value compared to amortized cost, and impairment, if any, is recognized through a valuation allowance and is recorded as amortization of other assets. Subsequent improvement (if any) in the estimated fair value of impaired mortgage servicing rights is reflected in a positive valuation adjustment and is recognized in other income up to (but not in excess of) the amount of ~~any~~the prior impairment. Critical accounting policies for mortgage servicing rights relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of mortgage servicing rights requires the development and use of a number of estimates, including anticipated principal amortization ~~movement of principal balance within interest rate stratas,~~ and prepayments of that principal balance. Factors that may significantly affect the estimates used are changes in interest rates and the payment performance of the underlying loans. The Company ~~analyz es~~analyzes and accounts for the value of its servicing rights with the assistance of a third party consultant.

~~The Company’s 2007~~Goodwill - Management utilizes numerous techniques to estimate the value of various assets held by the Company, including methods to determine the appropriate carrying value of goodwill. In addition, goodwill from a purchase acquisition ~~of LyndonBank required the application~~is subject to ongoing periodic impairment tests, which include an evaluation of the ~~purchase method of accounting. Under the purchase method, the Company is required to record the net~~ongoing assets, liabilities and ~~liabilities acquired through~~revenues from the acquisition ~~at fair value, with the excess~~and an estimation of the ~~purchase price over the fair value~~impact of the net assets recorded as goodwill and evaluated annually for impairment based on its fair value. The determination of fair value requires the use of assumptions, including future profitability and discount rates, changes in which could significantly affect assigned fair values.business conditions.

Other - Management utilizes numerous techniques to estimate the carrying value of various assets held by the Company, including, but not limited to, bank premises and equipment 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. The use of different estimates or assumptions could produce different estimates of carrying values and those differences could be material in some circumstances.

RESULTS OF OPERATIONS

The Company’s net income for the ~~third~~first quarter of ~~2010~~2011 was ~~$787,805,~~$944,868, representing ~~a decrease~~an increase of ~~$225,417~~$5,956 or ~~22.3% from~~0.6% over net income of ~~$1.0 million~~$938,912 for the ~~third~~first quarter of ~~2009.~~2010. This resulted in earnings per share of ~~$0.16~~$0.19 and ~~$0.21,~~$0.20, respectively, for the ~~third~~first quarters of ~~2010~~2011 and ~~2009. Net income~~2010. Core earnings (net interest income) for the first nine months of 2010 was $2.5 million, compared to $2.7 million for the same period in 2009, representing a decrease of $244,790 or 9.1%. This resulted in earnings per share for the nine month periods of $0.51 for 2010 and $0.57 for 2009. This decline in net income occurred despite an increase in net interest income for the third quarter of ~~2010 of $243,009~~2011 decreased $77,501 or ~~5.9%~~1.8% over the ~~third~~first quarter of ~~2009.~~2010. Although ~~total~~ interest income decreased ~~$34,654~~$210,127 or ~~jus t over 0.5%~~3.6%, this decrease was ~~more than~~partially offset by a decrease in interest expense of ~~$277,663~~$132,626 or 14.7% quarter over quarter, accounting for the overall increase in net interest income. Net interest income for the first nine months of 2010 increased $733,589 or 6.1% over the first nine months of 2009. Interest income decreased $302,163 or 1.7% but that decrease was more than offset by a decrease in interest expense of just over $1.0 million or 17.4%8.1% year over year. Despite a ~~$17.5 million~~$3,874,537 increase in loans ~~at September 30, 2010 and compared to September 30, 2009,~~between periods, interest and fees on loans, the major component of interest income, ~~showed only~~decreased by $147,156 or 2.7% due to a ~~moderate increase of $128,497 or 0.8%~~decrease in rates between periods. Interest on taxable investments which consisted of U.S. Government sponsored enterprise securities and U.S. Government securities decreased $382,038 or 58.4% year over year due to declining rates on securities purchased to replace maturing securities. Interest p aidexpense on deposits, the major component of interest expense, decreased ~~$1.2 million~~$101,697 or ~~25.1%~~8.4% between ~~the first nine months of 2010 and 2009, reflecting the combined effect of~~periods, attributable in part to a decrease of ~~$20.8 million~~$8,804,187 in time deposits as well as a decrease in the rates paid on these deposit accounts. ~~The Company has chosen to not compete as aggressively for time deposits as in~~NOW and money market accounts increased $38,230,128 or 27.2% while the ~~past due to the availability of low~~ rate ~~funds through FHLBB borrowings. This funding strategy has contributed~~paid on these accounts decreased, contributing to the decrease in time deposits and the increase in borrowed funds of $9.5 million or 40.7% year over year. Additionally, when $15.1 million in one-way CDARS funds matured during the first quarter of 2010, the Company replaced them with long-term borrowings through FHLBB.interest expense on deposits.

As a result of the 2007 LyndonBank merger, the Company is required to amortize the fair value adjustments of the acquired loans and time deposits against net interest income and the core deposit intangible against non-interest expense. The loan fair value adjustment was a net premium, creating a decrease in interest income of ~~$11,662~~$12,716 for the ~~third quarter~~first three months of ~~2010~~2011 compared to a decrease of ~~$41,359~~$11,978 recorded for the ~~third quarter~~first three months of ~~2009 and year to date decreases of $44,396 and $103,422, respectively, for 2010 and 2009.~~2010. The certificate of deposit fair value adjustment was fully amortized as of ~~July,~~December 31, 2010, thus resulting in no earnings impact in the first quarter of 2011, compared to an interest expense of ~~$26,000 for the third quarter of 2010, compared to $65,000~~$78,000 for the same period ~~in 2009 and year to date interest expense of $182,000 and $195,000, respectively, for 2 010 and 2009.~~last year. The amortization of the core deposit intangible amounted to a non-interest expense of $106,522 for the first three months of 2011, compared to $133,152 for the ~~third~~first three months of 2010.

Other income, a component of non-interest income, increased $170,799 or 33.8% for the first three months of 2011, compared to the first three months of 2010. Mortgage servicing rights was the major component of the increase, with a net increase of $118,873 year over year. The Company recognized income of $80,513 from its Supplemental Executive Retirement Program (SERP) investment assets during the first quarter of 2011, compared to income of $32,934 for the first quarter of 2010, reflecting improved market conditions between periods. Salaries and wages, a component of non-interest expense, increased $74,145 due to normal salary increases during the first three months of 2011, compared to ~~$166,440 for the third quarter of 2009 and year to date non-interest expense of $399,456 for 2010 and $499,320 for the same period in 2009.~~

~~The Company sold its entire portfolio of mortgage backed securities (MBS) in~~ the first half of 2009, resulting in net realized gains of $471,055 for the first nine months of 2009 compared to no gains or losses in the first nine months of 2010, contributing to a major portion of the decrease in non-interest income. The decrease in non-interest expense is attributable not only to a $170,113 decrease in FDIC insurance premiums (discussed in the non-interest income and non-interest expense section) but also to a $366,237 decrease in the loss on limited partnerships. Loss on limited partnerships totaled $737,928 for the first nine months of 2009 compared to $371,691 for the first nine months of 2010. This decrease in expense from 2009 to 2010 was due to one-time losses on one of the partne rships totaling $533,317 that the Company amortized over the 2009 calendar year. The Company also recorded a one-time tax benefit of $549,378 on the same partnership over the 2009 calendar year, resulting in a tax benefit of $286,696 for the first nine months of 2009 compared to a tax expense of $158,751 for the first ninethree months of 2010.

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 Company’s ROA and ROE ~~began~~have remained fairly level over the past year with slight decreases for March 31, 2011 compared to return to more normal levels in 2009 following the immediate impact of the LyndonBank acquisition in 2007, but have decreased during the third quarter of 2010 as a result of the decrease in income in both periods.March 31, 2010. The following table shows these ratios annualized for the comparison periods.

For the third quarter ended September 30,	2010	2009
For the quarter ended March 31,			2011	2010

Return on Average Assets	0.60%	0.81%	0.70%	0.76%
Return on Average Equity	8.19%	11.07%	9.67%	10.18%

For the nine months ended September 30, 2010 2009

Return on Average Assets 0.65% 0.74%
Return on Average Equity 8.70% 10.16%

INTEREST INCOME ~~LESS~~VERSUS INTEREST EXPENSE (NET INTEREST INCOME)

~~Net~~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 ~~interest expense, represents the largest portion of the Company's earnings, and is affected by the volume,~~ mix ~~and rate sensitivity~~ of earning assets, and ~~interest bearing liabilities, market interest rates~~sources of funds (volume) and from changes in the ~~amount~~yield earned and costs of ~~non-interest bearing~~ funds ~~which support earning assets. The three~~(rate). 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 year-to-year, to improve comparability of information across years, the non-taxable income shown in the tables below ~~provide a visual comparison of the consolidated figures, and are stated on~~have been converted to a tax equivalent ~~basis assuming a federal tax rate of 34%.~~basis. The Company’s corporate tax rate is 34%; therefore, to equalize tax-free and taxable income in the comparison, we divide the tax-free income ~~is divided~~ by 66%, with the result that every tax-free dollar is ~~equal~~equivalent to $1.52 in taxable income.

Tax-exempt income is derived from municipal investments which comprised the entire held-to-maturity portfolio of ~~$53.1 million~~$37,948,665 at ~~September 30, 2010,~~March 31, 2011, and ~~$49.8 million~~$47,157,935 at September 30, 2009. The Company acquired municipal investments through the merger with LyndonBank amounting to approximately $1.1 million, which were sold in January 2009, for a net loss of $12,122. Included in the Company’s available-for-sale portfolio at both September 30, 2009 and 2010 are two classes of Fannie Mae preferred stock acquired in the merger, which, until the last quarter of 2008, carried a 70% tax exemption on dividends received. Dividend payments on the Fannie Mae preferred stock ceased following the federal government’s action in September 2008, placing Fannie Mae under conser vatorship. Dividend payments on the Company’s holdings of FHLBB stock also ceased during the last quarter of 2008, as the FHLBB adopted measures to conserve its capital, including suspension of dividend payments. Resumption of dividend payments on the Fannie Mae and FHLBB stock in 2010, and possibly beyond, is unlikely.March 31, 2010.

The following table shows the reconciliation between reported net interest income and tax equivalent, net interest income for the ~~nine~~three month comparison periods of ~~2010~~2011 and ~~2009.~~2010.

The following table presents average earning assets and average interest-bearing liabilities supporting earning assets. Interest income (excluding interest on non-accrual loans) and interest expense are both expressed on a tax equivalent basis, both in dollars and as a rate/yield for the ~~2010~~2011 and ~~2009~~2010 comparison periods.

The average volume of earning assets for the first ~~nine~~three months of ~~2010~~2011 increased ~~$18.6 million~~$37,618,565 or ~~4.2%~~8.3% compared to the same period of ~~2009,~~2010, while the average yield decreased 3260 basis points. The average volume of loans increased ~~$17.9 million~~$6,189,821 or ~~4.9%~~1.6%, while the average yield decreased 2324 basis points. Interest earned on the loan portfolio comprised ~~90.2%~~91.3% of total interest income for the first ~~nine~~three months of ~~2010~~2011 and ~~87.9%~~90.2% for the ~~2009~~2010 comparison period. Loan activity was steady during the latter part of 2009 and into the first nine months of 2010, primarily in the residential and commercial real estate portfolios, contributing to the increase in the average loan portfolio. The average volume of sweep and interest earning accounts increased $37,430,112. Sweep and interest earning assets consists primarily of excess funds held in the ~~taxable investme nt portfolio (classified as available-for-sale) decreased approximately $3.4 million or 12.8% between periods, and~~Company’s account at the ~~average yield decreased 174 basis points.~~FRBB. The FRBB began paying interest to financial institutions on balances left in their accounts overnight at a much higher rate than that of the Company’s other correspondent banks causing the Company ~~sold its entire collateralized mortgage obligation and MBS investment portfolio classified as available-for-sale, for approximately $14.6 million during~~to leave the funds in this account instead of selling the funds overnight to these other correspondent banks. Other investments now include FHLBB stock which began paying a modest dividend in the first ~~half~~quarter of ~~2009, and replaced it with $13.0 million in U.S. Government Agency securities, accounting~~2011 after not paying dividends for ~~a portion of~~ the decrease in the average balances of the investment portfolio. All maturities during 2010 were replaced with similar investments but with lower yields, contributing to the decrease in the average yield year over year.past two years. The average volume of the tax exempt investment portfolio (classified as held-to-maturity) ~~increased $4.2 million~~decreased $9,818,822 or ~~9.5%~~21.1%, ~~due to new municipal investment for the Company,~~ and the average tax equivalent yield ~~decreased 60~~increased 33 basis points. Interest earned on tax exempt investments (which is presented on a tax equivalent basis) comprised ~~8.1%~~6.8% of total interest income for the first ~~nine~~three months of ~~2010~~2011 compared to ~~8.3%~~7.7% for the same period in ~~2009.~~2010. The Company has experienced additional competition from other local financial institutions in our municipal market, which is reflected in the decrease of our tax exempt investment portfolio.

In comparison, the average volume of interest bearing liabilities for the first ~~nine~~three months of ~~2010~~2011 increased ~~$19.3 million~~$22,061,616 or ~~4.8%~~5.3% over the ~~2009~~2010 comparison period, while the average rate paid on these accounts decreased 4221 basis points. The average volume of NOW and money market funds increased ~~$23.7 million~~$41,168,201 or ~~19.5%~~30.1% and the average rate paid decreased 1514 basis points. This increase ~~in volume~~ was due in large part to a new NOW account held by the Company’s affiliate, CFSG, which had an ~~increase in municipal deposits that correspond to~~average balance of $24,964,005 during the ~~new municipal investments mentioned in the prior paragraph.~~first quarter of 2011. The Company began offering a new money market product, ~~ICS,~~insured cash sweep account (ICS), during the second half of 2010 which ~~gives customers more than~~at March 31, 2011 carried an average balance of $8,422,550, contributing to the ~~standard $250,000 FDIC coverage with rates higher than our regular~~increase in NOW and money market ~~accounts.~~funds. This product has ~~brough t~~brought in new funds but most of the interest has come from the Company’s CDARS customers who are looking for alternatives to placing their money in time deposit accounts that are not as easily accessible. For the nine months ended September 30, 2010, the average volume of ICS accounts totaled $678,233 with an actual balance of just over $3.0 million. Additionally, the new money market account established in the first quarter of 2010 by the Company’s affiliate, CFSG, had an average balance of $10.6 million for the nine months ended September 30, 2010.liquid. The average volume of time deposits decreased ~~$20.4 million,~~$13,185,771 or ~~11.9%~~8.4%, and the average rate paid on time deposits decreased 7115 basis points. ~~As mentioned earlier~~Of the decrease in ~~this discussion,~~time deposits, $6,730,321 was due to the ~~Company has chosen to not pay up on these deposits and instead to replace them with other funding sources, primarily borrowings~~shift of customer’s from the ~~FHLBB. The Company also chose~~CDARS program to ~~replace $15.1 million in one-way CDARS funds at maturity du ring~~ the ~~first quarter with FHLBB advances.~~ICS program. The average volume of federal funds purchased and other borrowed funds ~~increased $12.7 million~~decreased $11,560,678 or ~~59.2%~~34.0% from an average volume of ~~$21.4 million~~$33,970,678 for the first ~~nine~~three months of ~~2009~~2010 to ~~$34.1 million~~$22,410,000 for the same period in ~~2010. Given~~2011. As the borrowings have matured, the funds held at our FRBB account were used to pay off these borrowings.

The prolonged low interest rate environment has resulted in the Company’s earning assets being replaced and repriced to lower interest rates, while the opportunity to reduce rates on ~~borrowed funds, both~~interest-bearing deposits is more limited which is evident in ~~overnight funds purchased and in long-term borrowings,~~ the ~~Company extended some~~decrease of ~~its overnight funds into two, three and five year advances~~60 basis points on the average yield on earning assets versus a decrease of 21 basis points on the average rate paid on the interest bearing liabilities during the first quarter of 2011 compared to ~~supplement its deposit funding.~~

the same period last year. The cumulative result of all these changes was ~~an increase~~a decrease of 1039 basis points in the net interest spread and ~~an increase~~a decrease of ~~five~~38 basis points in the net interest margin. ~~The increase in~~Further opportunity does exist to reallocate the ~~loan portfolio and~~excess funds held at the ~~change in~~FRBB to fund loans with would improve both the ~~mix of interest bearing liabilities, primarily time deposits versus borrowed funds, helped to increase net interest income and maintain a positive~~ net interest spread and net interest ~~margin despite a sustained low rate environment.~~margin.

The following table summarizes the variances in interest income and interest expense on a fully tax-equivalent basis for the first ~~nine~~three months of ~~2010~~2011 and ~~2009~~2010 resulting from volume changes in average assets and average liabilities and fluctuations in rates earned and paid.

~~(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~~

~~Variances due to volume = Change in volume x new rate~~

Changes in Interest Income and Interest Expense

	Variance			Variance
Rate / Volume	Due to			Due to			Total
	Rate (1)			Volume (1)			Variance
Interest-Earning Assets
Loans	$	(235,221	)	$	88,065		$	(147,156	)
Taxable investment securities		(41,933	)		462			(41,471	)
Tax exempt investment securities		37,496			(106,527	)		(69,031	)
Sweep and interest earning accounts		(96,834	)		118,136			21,302
Other investments		(58,796	)		61,555			2,759
Total	$	(395,288	)	$	161,691		$	(233,597	)

Interest-Bearing Liabilities
NOW and money market funds	$	(62,118	)	$	96,435		$	34,317
Savings deposits		(13,945	)		3,546			(10,399	)
Time deposits		(58,964	)		(66,651	)		(125,615	)
Federal funds purchased and other borrowed funds		32,725			(51,881	)		(19,156	)
Repurchase agreements		(13,560	)		2,623			(10,937	)
Capital lease obligations		10			(846	)		(836	)
Junior subordinated debentures		0			0			0
Total	$	(115,852	)	$	(16,774	)	$	(132,626	)

Changes in net interest income	$	(279,437	)	$	178,465		$	(100,971	)

(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
Variances due to volume = Change in volume x new rate

NON-INTEREST INCOME AND NON-INTEREST EXPENSE

Non-interest Income: The Company's non-interest income ~~decreased $150,975~~increased $227,668 or ~~10.9%~~18.5% for the ~~third~~first quarter of ~~2010~~2011 compared to the third quarter of 2009, from $1.4 million to $1.2 million. Currency exchange income of $35,000 was reported for the third quarter of 2010 versus $73,000 for the third quarter of 2009. The Company recognized a loss of $60,768 for the thirdfirst quarter of 2010, from ~~its SERP investment assets compared~~$1,231,801 to ~~a gain of $70,923 in the third quarter of 2009. Both changes in SERP~~$1,459,469. The income ~~(loss) reflect the volatile movements with stock market conditions between periods. Non-interest income decreased $736,749~~from loan sales increased $64,859 or ~~16.8%~~47.6% for the first ~~nine~~three months of ~~2010 compared to~~2011, with income from sold loans totaling $201,141 versus $136,282 for the same period in ~~2009 from $4.4 million~~2010. The volume of loans sold during the first three months of 2011 was $11,332,576 compared to ~~$3.6 million.~~$6,414,847 in the same period in 2010. The low interest rate environment ~~that prevailed througho ut 2009 and into 2010~~continued to not only ~~helped~~help the Company build its commercial and residential real estate mortgage loan portfolios, but also generated secondary market residential mortgage loan activity. Although secondary market activity was not as strong as a year ago, non-interest income from loan sales was still significant reporting an increase of $8,835 or 4.3% for the third quarter of 2010 with income of $216,788 compared to $207,953 for the same period in 2009. Income from loans sold in the secondary market for the first nine months of 2010 decreased $365,026 or 40.5% with $536,471 reported compared to $901,497 for the first nine months in 2009. The volume of loans sold during the first nine months of 2009 was $60.5 million compared to $27.4 million in the same period in 2010. This decrease in income from the sale of loans in the secondary market, together with the absence of any gain from the sale of investments from the Company’s investment portfolio, supp orts the overall decrease in non-interest income.

Non-interest expense decreased $31,205 or 0.7% to $4.3 million for the third quarter of 2010 compared to $4.4 million for the second quarter of 2009. A combined increase of $109,791 or 5.6% in salaries and employee benefits for the third quarter of 2010 compared to the third quarter in 2009 was more than offset by a decrease of $145,949 or 10.7% in other expenses for the same comparison periods. Loss on limited partnerships,Mortgage servicing rights, a component of other ~~expenses, decreased $124,251~~income, increased $118,873 or ~~50.1% accounting for most~~205.9% year over year, due in part to a positive valuation adjustment of ~~the decrease for the third quarter of 2010~~$151,662 at March 31, 2011 compared to ~~the third quarter~~a positive valuation adjustment of ~~2009.~~ $104,179 at March 31, 2010. Another component of other income, investment income on SERP assets held in a rabbi trust, increased $47,579 or 144.5% from $32,934 in 2010 to $80,513 in 2011.

Non-interest Expense: The Company's non-interest expense increased $60,693 or 1.4% to $4,349,514 for the first ~~nine~~quarter of 2011 compared to $4,288,821 for the 2010 comparison period. Salaries and wages increased from $1,392,671 to $1,466,816, accounting for the largest increase in non-interest expense at $74,145 or 5.3% during the first three months of ~~2010 decreased $637,148 or 4.7%~~2011, compared to the first nine months of 2009 with expense figures of $13.0 million and $13.6 million, respective ly. Decreases were noted in most of the components of non-interest expense for this comparison period with the most significant decreases noted in FDIC insurance expense with a decrease of $170,113 or 26.4% and loss on limited partnerships with a decrease amounting to $366,237 or 49.6%. During the first nine months of 2009, the Company recorded a special FDIC assessment fee of $233,500 in addition to the regular FDIC insurance expense of $410,878, compared to FDIC insurance expense of $474,265 during the first ninethree months of 2010. ~~There~~Occupancy expenses increased $28,437 or 3.7% from $779,175 to $807,612 year over year. This increase was ~~no special FDIC assessment during~~due primarily to maintenance on buildings, which includes heating and snow removal, attributable to the severe weather conditions experienced in the Northeast Kingdom this winter. The amortization of the core deposit intangible associated with the LyndonBank acquisition decreased $26,603 or 20.0% to $106,522 for the first ~~nine months~~quarter of ~~2010. The decrease in~~2011 compared to $133,152 for the ~~loss in limited partnerships was due to~~first quarter of 2010, offsetting a ~~one-time loss expensed monthly during the 2009 calendar year on one~~portion of the ~~newer investments the Company holds.~~increases noted above.

~~Management monitors all components~~Total losses relating to various limited partnership investments for affordable housing in our market area constitute a portion of other ~~non-interest expense; additionally, a quarterly review is performed~~expenses. These losses amounted to ~~assure that~~$122,147 in the ~~accruals for~~first quarter of 2011 compared to $123,897 in the first quarter of 2010. These investments provide tax benefits, including tax credits, and are designed to yield between 8% and 10%.The Company amortizes its investments in these ~~expenses are accurate and timely. This helps alleviate~~limited partnerships under the ~~need to make significant adjustments to these accounts that~~effective yield method, resulting in ~~turn affect~~ the ~~net income of~~asset being amortized consistent with the ~~Company.~~periods in which the Company receives the tax benefit.

APPLICABLE INCOME TAXES

~~A tax benefit of $65,858 versus a tax~~The provision for income taxes expense of $24,465 was reported for the third quarter of 2009 and 2010, respectively. Figures for the nine month comparison period include a tax benefit of $286,696 for 2009 and a tax expense of $158,751 for 2010. The Company receives tax credits for its investments in various low income housing partnerships which reduce taxes payable. From timeincreased to time, the Company has the opportunity to participate in a low income housing project that offers one-time historic tax credits. In 2008, the Company was given this opportunity through a local project, with historic tax credits for 2009 amounting to $535,000, or $133,750 quarterly. Total tax credits, including the one-time historic tax credit, recorded for the third quart er of 2009 and$143,229 for the first ~~nine months amounted to $263,343 and $766,719, respectively,~~quarter of 2011 compared to ~~regular~~$122,210 for the first quarter of 2010, an increase of $21,109 or 17.2%. This increase is due primarily to the lower proportion of tax exempt income. Although in prior periods the limited partnership tax credits have been contributing factors to the shift between tax benefit and expense, no such shifts occurred between comparison periods, with tax credits for the ~~third~~first quarter of ~~2010 and~~2011 of $133,518, compared to $133,701 for the first ~~nine months~~quarter of ~~$133,701 and $401,103, respectively.~~2010.

CHANGES IN FINANCIAL CONDITION

The following table reflects the composition of the Company's major categories of assets and liabilities as a percent of total assets or liabilities and shareholders’ equity, as the case may be, as of the dates indicated:

The Company's loan portfolio ~~increased $7.8 million,~~decreased $3,425,043 or ~~2.0%~~0.9%, from December 31, ~~2009~~2010 to ~~September 30, 2010,~~March 31, 2011, and ~~$17.5 million, or 4.7%~~increased $3,874,537or 1.0%, from ~~September 30, 2009~~March 31, 2010 to ~~September 30, 2010.~~March 31, 2011. A portion of the decrease is attributable to in-house residential loans that were refinanced and sold in the secondary market. Securities available-for-sale increased $7,030,252 or 32.8% through purchases from December 31, 2010 to March 31, 2011, and $5,588,568 or 24.4% year over year. The ~~decrease~~Company has begun purchasing investments to cover future maturities that will occur over the next several months of 2011. Securities held-to-maturity increased $507,951 or 1.4% during the first three months of 2011, and decreased $9,209,270 or 19.5% year to year. As noted earlier in ~~mortgage interest rates throughout 2009 triggered~~this discussion, an increase in new loan activity during 2009, with an even larger increase in refinancing activity, especially in the residential loan portfolio. During the last quarter of 2009 and into the first quarter of 2010, the Company experienced an increase in loan activity within the commercial and residential mortgage loan portfolio that the Company retains in-house. Residential mortgage loan activity decreased briefly during the second quarter of 2010 but has picked up during the third quarter of 2010 and into the current quarter, whil e commercial mortgage loan activity remained steady throughout the first half of 2010 but has now decreased. Available-for-sale investments decreased $1.5 million or 6.1% through maturities from December 31, 2009 to September 30, 2010, and $616,638 or 2.7% year over year. Most of the maturities and sales during 2009 were used to fund loan growth and reinvestment in U.S. Government Agency securities while most maturities in 2010 funded reinvestment in U.S. Government Agency securities. Held-to-maturity securities increased $8.4 million or 18.7% during the first nine months of 2010, and $3.4 million or 6.8% year to year. The increase in the held-to-maturity portfolio, which consists entirely ofcompetition for municipal investments is ~~due~~the primary reason for the decrease year to ~~the renewal early~~year in ~~the third quarter of 2010 of municipal investments that matured at the end of the second quarter of 2010, as well as to the addition of some new municipal investments.~~this portfolio.

Time deposits ~~decreased $20.8 million~~increased $140,493 or ~~12.4%~~0.1% from December 31, ~~2009~~2010 to ~~September 30,~~March 31, 2011 and decreased $8,804,187 or 5.8% from March 31, 2010 ~~and $24.6 million or 14.4% from September 30, 2009~~ to September 30, 2010. Competitive interest rate programs at other financial institutions accounted for some of the decrease as the Company chose to seek alternate sources of funding (primarily FHLBB borrowings) to replace these higher cost deposits. Also affecting the time deposit balances in the comparison was the decline in the balance of one-way purchased funds in the CDARS program. At September 30, 2010, there were no funds in the one-way purchased funds program compared to $15.1 million on DecemberMarch 31, 2009 and $5.4 million on September 30, 2009. During the first quarter of 2010, as $15.1 million in purchased CDARS f unds matured, they were replaced with FHLBB advances, which are included in the $23.0 million increase in long-term borrowings compared to year end 2009. The new ICS deposit product mentioned throughout various sections of this discussion also contributed2011 due primarily to the ~~decrease in time deposits as customers currently in~~shift of customer’s from the CDARS program ~~chose~~ to ~~shift their maturing funds into~~the ICS ~~accounts.~~program. Savings deposits increased ~~$4.5 million~~$4,690,350 or ~~8.6%~~8.3% during the first ~~nine~~three months of ~~2010~~2011 and ~~$3.4 million~~$5,892,256 or ~~6.4%~~10.7% year to year. Demand deposits ~~increased $4.0 million~~decreased $1,652,975 or ~~7.6%~~3.0% during the first ~~nine~~three months of ~~2010, and $3.5 million~~2011, compared to an increase of $2,252,891 or ~~6.5%~~4.4% year to year. NOW and money market funds reported ~~an increase~~a decrease of ~~$13.2 million~~$3,812,784 or ~~just over 9.0%~~2.1% for the first ~~nine~~three months of ~~2010, and~~2011, while year over year an increase of ~~$34.8 million~~$38,230,128 or ~~27.9%~~27.2% was ~~reported. The~~reported due primarily to the NOW account held by the Company’s ~~municipal accounts, which are primarily a component of NOW and money market funds, tend to increase during~~affiliate, CFSG. Long-term borrowings as presented for the last part of the calendar year due to normal cyclical activity and then during the first six months of the year they gradually decrease to volumes well below the year end totals accounting for a portion of the changetable above decreased $15,000,000 or 45.4% in both comparison periods. In the first quarter 2010, the Company established a new money market account with its affiliate, CFSG, which at September 30, 2010 had a balance of $19.1 million, accounting for more than half of the increase year over year. The new ICS product also accounted for a portion of this increase with a balance as of September 30, 2010 of just over $3.0 million. Federal funds purchased started with a balance of $13.5 million at September 30, 2009, decreased $10.1 million or 74.7% to $3.4 million at December 31, 2009 and then decreased to $0 as of September 30, 2010. Long-term borrowings increased $23.0 million or 229.8% compared to December 31, and September 30, 2009. The average cost of funds from FHLBB during 2009 and into 2010 w as approximately 0.31%, causing the Company to rely more heavily on this source of funding as opposed to offering higher rates in order to replace maturing time deposits, including the $15.1 million in purchased CDARS deposits. While the Company strives to keep its core customers, there was not as much emphasis placed on attracting rate shoppers during 2010.

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 ~~A LCO~~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 and periodically reviewed 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 inon 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 ~~and steepening~~ 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 ~~shifts~~ in interest ~~rates depending on the current rate environment.~~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 ~~m anagement~~management with an important tool for making sound economic decisions regarding the balance sheet.

The Company’s Asset/Liability Policy has been enhanced with a contingency funding plan to help management prepare for unforeseen liquidity ~~challenges, with modeling based on~~restrictions to include hypothetical severe liquidity ~~crisis scenarios.~~crises.

While management’s 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. ~~This is especially true in light of the continued significant market volatility since the collapse of the financial markets in 2008 and the unprecedented, sustained low interest rate environment.~~

Credit Risk - A primary challenge of management is to reduce the exposure to credit loss within the loan portfolio. Management follows ~~loan policy and~~established underwriting guidelines, and exceptions to the policy must be approved in accordance with limits prescribed by the Board of Directors. The adequacy of the loan loss coverage is reviewed quarterly by the risk management committee of the Board of Directors and then presented to the full Board of Directors for approval. This committee meets to discuss, among other matters, potential exposures, historical loss experience, and overall economic conditions. Existing or potential ~~pr oblems~~problems are noted and addressed by senior management in order to assess the risk of probable ~~loss.~~loss or delinquency. A variety of loans are reviewed periodically by an independent loan review 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~~and regulatory ~~authorities.~~guidance. The Company ~~also has~~maintains a Credit Administration department whose function includes credit analysis and monitoring and reporting on the status of the loan portfolio, including delinquent and non-performing loans. ~~Credit risk may~~The Company also ~~arise from geographic~~monitors concentration of ~~loans. While the Company’s loan~~credit risk in a variety of areas, including portfolio is derived primarily from its primary market area in northern Vermont, geographic concentration is partially mitigated by the continued growth of the Company’s loan portfolio in central Vermont, and through the year-end 2007 LyndonBank acquisition, which increasedproduct mix, the level of loans ~~particularly in Caledonia County, and to a lesser extent in Lamoille and Franklin Counties. The Company also monitors concentrations of credit~~ to individual borrowers and their related interests, loans to ~~various industries,~~industry segments, and ~~to owner and non-owner occupied~~the geographic distribution of commercial real ~~estate.~~estate loans. The Company has seen an increase in commercial loans as a percent of the total loan portfolio, intends to continue this strategy of commercial portfolio growth, and is committed to adding additional resources to the commercial credit function to manage the risk as this growth materializes.

The following table reflects the composition of the Company's loan portfolio as of the dates indicated:

	March 31, 2011					December 31, 2010
	Total Loans		% of Total			Total Loans		% of Total

Construction & land development	$	17,747,597		4.57	%	$	19,125,953		4.89	%
Secured by farm land		10,585,319		2.73	%		10,555,596		2.70	%
1 - 4 family residential		209,107,512		53.89	%		213,834,818		54.61	%
Commercial real estate		105,839,972		27.28	%		103,812,882		26.52	%
Loans to finance agricultural production		1,230,728		0.32	%		1,158,201		0.30	%
Commercial & industrial loans		30,981,560		7.98	%		29,887,223		7.64	%
Consumer loans		12,515,066		3.23	%		13,058,124		3.34	%
Total gross loans		388,007,754		100.00	%		391,432,797		100.00	%
Deduct:
Reserve for loan losses		3,709,918					3,727,935
Unearned loan fees		50,871					74,351
Loans held-for-sale		1,054,416					2,363,938
		4,815,205					6,166,224
Net loans	$	383,192,549				$	385,266,573

Allowance for ~~Loan Losses~~loan losses and ~~Provisions~~provisions - The Company maintains an allowance for loan losses at a level that management believes is appropriate to absorb losses inherent in the loan portfolio (See “Critical Accounting ~~Policies”)~~Policies). Although the Company, in establishing the allowance, considers the inherent losses in individual loans and pools of loans, the allowance is a general reserve available to absorb all credit losses in the loan portfolio. No part of the allowance is segregated for, or allocated to, any particular loan or pools of loans.

When establishing the allowance each quarter the Company applies a combination of historical loss factors and qualitative factors to ~~pools~~segments of loans, including the residential mortgage, commercial real estate, commercial and industrial, and consumer loan ~~and overdraft~~ portfolios. The Company will shorten or lengthen its look back period for determining average portfolio historical loss rates as the economy either contracts or expands; during a period of economic contraction a shortening of the look back period may more conservatively reflect the current economic climate. In light of the recent recession, in late 2008 the Company modified its allowance methodology by shortening its historical look back period from five years to one to two years, and by also comparing loss rates to losses experienced during the last economic downturn, from 1999 to 2002. The highest loss rates experienced for these look back periods are applied to the various pools in establishing the allowance.

The Company then applies numerous qualitative factors to each of these segments of the loan portfolio. Those factors include the levels of and trends in delinquencies and non-accrual ~~loans;~~loans, criticized and classified ~~assets;~~loans, volumes and terms of ~~loans;~~loans, and the impact of any loan policy changes. Experience, ability and depth of lending personnel, levels of policy and documentation exceptions, national and local economic trends, the competitive environment, and ~~regulatory environments,~~geographic and industry concentrations of credit are also factors considered.

Specific allocations to the reserve are made for impaired loans. Impaired loans are those that have been placed in non-accrual status. Commercial and commercial real estate loans are placed in non-accrual status when there is deterioration in the financial position of the borrower, payment in full of principal and interest is not expected, and/or principal or interest has been in default for 90 days or more. Such a loan need not be placed in non-accrual status if it is both well secured and in the process of collection. Residential mortgages and home equity loans are considered for non-accrual status at 90 days past due and are evaluated on a case by case basis to assure that the Company’s net income is not materially overstated. ~~Once the loan is deemed impaired, the~~The Company ~~obt ains~~obtains current property appraisals and valuations ~~on significant properties~~ and considers the cost to carry and sell collateral in order to assess the level of specific ~~allocation~~allocations required. Consumer loans are generally not ~~normally~~ placed in non-accrual but are charged off by the time they reach 120 days past due.

~~The Company’s impaired loans increased $772,762 or 20.1% during~~A portion of the ~~first nine months from $3.8 million at December 31, 2009~~allowance (termed "unallocated") is established to ~~$4.6 million~~absorb inherent losses that exist as of ~~September 30, 2010, reflecting~~ the ~~recent recession and measured recovery. The Company was encouraged~~valuation date although not specifically identified through management's process for estimating credit losses. While the allowance is described as consisting of separate allocated portions, the entire allowance is available to ~~report that although this is a year to date increase, $4.6 million in impaired loans represents a decrease~~support loan losses, regardless of approximately $400,000 over the figure reported for June 30, 2010 of $5.0 million. The increase is principally related to two commercial real estate loans to one borrower totaling approximately $1.1 million. The two loans carry 90% USDA Rural Development government guarantees amounting to $998,699. Specific allocations to the reserve increased for the same period, from $232,900 to $423,400. While sever al impaired loans were resolved during the third quarter through a combination of property liquidations and further write downs, those were replaced in the impaired portfolio with several newly impaired residential real estate loans carrying specific allocations that reflect real estate values at recessionary market value lows. The impaired portfolio mix as of September 30, 2010 includes approximately 74% in residential real estate and 25% in commercial real estate compared to December 31, 2009 totals of approximately 65% residential real estate and 30% commercial real estate. The increase in the percentage of residential impaired loans was principally driven by the reclassification of a commercial real estate loan to residential after the sale of underlying commercial real estate. Loans rewritten through a troubled debt restructuring in 2009 consisted of three loans to one borrower with a balance of $629,457 as of December 31, 2009 and $573,919 as of September 30, 2010. The combined re structured loan is being repaid according to the restructured terms. One loan was restructured during the third quarter of 2010 with an outstanding balance of $1,130,516 and repayment under the new terms scheduled to commence in February, 2011. Troubled debt restructurings totaled $1,704,435 as of September 30, 2010.category.

~~Management reports~~The Company works actively with customers early in the delinquency process to help them to avoid default and foreclosure. As a result of the recession that began in 2008, the Company has experienced increasing trends in delinquencies and the levels of non-performing loans and criticized and classified assets, ~~in 2010,~~ which is consistent with the length and depth of the most recent economic recession and the current measured recovery. ~~Delinquency levels on~~Accordingly, during 2009 the ~~other hand have remained relatively stable during 2010. Management believes~~Company had carried the maximum qualitative factor adjustment for economic conditions and is now slowly decreasing that factor as the ~~manageable level of impaired~~recovery progresses. The factors for trends in delinquency and non-accrual loans and ~~delinquency levels are in part~~criticized and classified assets were similarly increased and have now leveled off as the ~~result~~recovery takes hold. The sluggish pace of ~~collection efforts and problem loan resolutions including collateral liquidations~~the economic recovery and the ~~recognition~~lack of ~~related losses. The related qualitative factors~~national economic stimulus funding in 2011 will likely translate into a slow and measured reversal of the negative trends experienced in the loan ~~loss~~portfolio since the onset of the 2008 recession.

The Company’s non-performing assets decreased $1,170,798 or 16.7% during the quarter from $6,994,117 at December 31, 2010 to $5,823,319 as of March 31, 2011. The improvement is due to several factors, including the sale of two residential OREO properties that had combined carrying values of $445,800 at December 31, 2010, a $164,800 partial charge off of a residential mortgage loan, and the improved payment performance of several residential mortgage loans, which typically occurs during income tax refund season.

The Company’s non-accruing loans increased $63,767 or 1.4% during the quarter from $4,426,331 at December 31, 2010 to $4,490,098 as of March 31, 2011. Specific allocations to the reserve ~~analysis have been adjusted accordingly.~~decreased for the same period, from $392,700 to $319,800 largely due to the $164,800 residential loan partial charge off. Non-accrual loans include 5 loans totaling $2,612,275 classified as Troubled Debt Restructurings (“TDRs”), down from $2,795,588 at December 31, 2010. The reduction in TDR balances is principally due to the default of two of those loans totaling $965,716 and the related partial charge off of $164,800. Two other loans totaling $1,109,655 are scheduled to begin payments in April 2011 after completing a forbearance period; the last TDR loan is performing as agreed under its restructured terms. The impaired portfolio mix as of December 31, 2010 includes approximately 68% residential real estate, 30% commercial real estate, and 2% in commercial or installment loans not secured by real estate, compared to 73%, 26%, and 1%, at December 31, 2010.

The Company is not contractually committed to lend additional funds to debtors with impaired, non-accrual or modified loans.

As of ~~September 30, 2010~~March 31, 20011 and December 31, ~~2009,~~2010, the OREO balance was ~~$1,070,500~~$764,500 and ~~$743,000,~~$1,210,300 respectively. The Company’s OREO portfolio at ~~September 30, 2010~~March 31, 2011 consisted of three properties acquired through the normal foreclosure process, ~~amounting to $510,500~~with a carrying value of $271,000 and one former LyndonBank branch property in Derby, Vermont with ~~a carrying~~an estimated fair value of $560,000. During the first nine months of 2010 the Company sold two foreclosed OREO properties that had carrying values totaling $181,650 and recorded a loss on one of the properties of $10,807. At December 31, 2009, the OREO portfolio consisted of two properties acquired through the normal foreclosure process amounting to $158,000 and the former LyndonBank branch property in Derby, Vermont.$493,500. This property was placed in OREO a short time ~~afte r~~after the merger, when that branch was consolidated with the Company’s ~~main office.~~other offices located in close proximity.

During the first quarter of 2011, the Company sold two OREO properties for $444,500 and has entered into purchase and sale agreements on the former LyndonBank property, one residential property and one commercial property. The ~~September 30, 2010~~Company recorded an additional $10,000 write-down in 2011 as a result of one of the 2011 sales and does not expect further write-downs in connection with the other purchase and sale agreements. Upon closing of these transactions the Company expects to be left with one of the properties that it held at March 31, 2011, a residential OREO property with a carrying value of ~~the former branch property reflects a first quarter write down of $25,000. The property is being actively marketed for sale.~~$58,000.

The Company is committed to a conservative lending philosophy and maintains high credit and underwriting standards. As of ~~September 30, 2010,~~March 31, 2011, the Company maintained a residential loan portfolio of ~~$219.6 million~~$209,107,512 compared to ~~$216.5 million~~$213,834,818 as of December 31, ~~2009~~2010 and a commercial real estate portfolio (including construction, land development and farm land loans) of ~~$127.3 million~~$134,172,888 as of ~~September 30, 2010~~March 31, 2011 and ~~$124.5 million~~$133,494,431 as of December 31, ~~2009,~~2010, together accounting for approximately 90% of the total loan portfolio ~~as of~~for each ~~date.~~period.

The residential mortgage portfolio makes up the largest ~~part~~segment of the ~~overall~~ loan portfolio and ~~while it continues to have the lowest historical loss ratio~~as a result of the ~~portfolio segments, portfolio~~severity and depth of the recent recession it has recently seen the greatest degree of collection and foreclosure activity and losses. The Company however, has not experienced delinquencies and losses ~~have been increasing with higher delinquencies, foreclosures and lower property values. The~~to the extent of national peers as the Company maintains a mortgage loan portfolio of traditional mortgage products and has not engaged in higher risk loans such as option ~~adjustable rate mortgage~~ARM products, high loan-to-value products, interest only mortgages, subprime loans and products with deeply discounted teaser rates. In areas of the country where such risky products were originated, borrowers with little or no equity in their property have been defaulting on mortgages they can no longer afford, and ~~are~~ walking away from those ~~pro perties~~properties as real estate values have fallen precipitously. While real estate values have declined in the Company’s market area, the sound underwriting standards historically employed by the Company have mitigated the trends in defaults and property surrenders ~~to the extent~~ experienced elsewhere. ~~The Company generally requires private mortgage insurance (PMI) on residential~~Residential mortgages with loan-to-values exceeding 80% are generally covered by private mortgage insurance (PMI). A 90% loan-to-value residential mortgage product without PMI is only available to borrowers with excellent credit and low debt-to-income ratios and has not been widely originated. Junior lien home equity products make up 22% of the ~~Company’s~~ residential mortgage portfolio with maximum loan-to-value ratios (including ~~senior~~prior liens) of 80%. ~~While experiencing increasing delinquency and losses in this area, the~~The residential mortgage portfolio has performed well in light of the ~~extent~~depth of the ~~severity of the~~recent recession and ~~problem loan lev els remain manageable.~~the slow recovery.

Risk in the Company’s commercial and commercial real estate loan portfolios is mitigated in part by using government guarantees issued by federal agencies such as the US Small Business Administration and USDA Rural Development. At ~~September 30, 2010,~~March 31, 2011 the Company had ~~$21.3 million~~$22,343,004 in guaranteed loans, compared to ~~$17.8 million~~$22,074,715 at December 31, ~~2009.~~2010.

*The percentage ~~for 2010~~ includes two loans that were transferred to non-accrual status during the first quarter of 2010 carrying 90% guarantees by USDA Rural Development which, if the guaranteed portion were deducted, would increase the coverage to ~~102.4%~~106.3% as of ~~September 30,~~March 31, 2011 and 82.3% as of March 31, 2010.

Given loan portfolio trends and the recent recession and ~~stagnant~~measured recovery, the provision for loan losses was ~~$858,334~~$187,500 for the ~~nine~~three months ended ~~September 30, 2010~~March 31, 2011 compared to ~~$425,003~~$125,001 for the ~~nine~~three months ended ~~September 30, 2009.~~March 31, 2010. Charge offs during the first quarter of 2011 totaled $227,090, compared to $44,470 for the same period last year. The higher level of ~~2010~~2011 charge off activity is attributable largely to ~~the resolution of numerous non-performing loans. The higher provision takes into account both the higher level of~~one residential loan charge off ~~activity and the increased level~~ of ~~specific allocations attributable to impaired loans.~~$168,400. Management will continue to monitor the activity of non-performing loans, carefully assess the reserve requirement and adjust the provision in future periods as circumstances warrant. The Company has an experienced collections department that continues to actively work with borrowers to ~~r esolve~~resolve problem loans.

Market Risk - In addition to credit risk in the Company’s loan portfolio and liquidity risk in its loan and deposit-taking operations, 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. ~~Changes~~Declining capital markets can result in fair value adjustments necessary to record decreases in the ~~capital markets result from events and conditions outside~~value of the ~~Company’s control or ability to predict with~~investment portfolio for other-than-temporary-impairment. The Company does not have any certainty, such as changes in general economic conditions of growth or recession, inflation, regulatory or other government actions and changes in interest rates and government monetary policy. Marke tmarket risk ~~comprises many individual risks that, when combined, create a macroeconomic impact.~~

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. During times of recessionary periods, a declining housing market can result in an increase in loan loss reserves or ultimately an increase in foreclosures. 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. The ~~recent~~ deterioration of the economy and disruption in the financial markets ~~has heightened~~during recent years may heighten the Company’s market risk. ~~The~~As discussed above under "Interest Rate Risk and Asset and Liability Management", the Company actively monitors and manages its ~~inter est~~interest rate risk through the ALCO process.

Early in 2010, the market rates used to determine the fair value of the Company’s mortgage servicing rights remained relatively stable and at levels which indicated fair values were higher than at the end of 2009. Subsequently, mortgage interest rates decreased throughout the second and third quarter and hit record low levels by September 30, 2010. The low interest rates spurred another round of refinancing activity which resulted in a shift of the loans within the portfolio of sold mortgages to lower interest rates, thereby reducing prepayment speeds and bringing the value of the servicing rights of those loans closer to market rates. Given this factor and the secondary market volume within the residential mortgage loan portfolio, the Company recorded a net increase in market value since December 31, 2009 of $104,812, which reflects a third quarter increase of $67,633.

At September 30, 2010 and December 31, 2009, the Company’s available-for-sale portfolio included two classes of Fannie Mae preferred stock with an aggregate book value of $68,164, which reflected two other-than-temporary impairment write downs on the investment in prior periods. The fair market value of the Fannie Mae preferred stock as of September 30, 2010 was $36,298, a decrease of $35,190 from the December 31, 2009 fair market value of $71,488. The September 30, 2010 fair market value reflected an increase of $5,570 from the June 30, 2010 fair market value of $30,728. The value of the stock had declined shortly before the end of the second quarter, after the Federal Housing Finance Agency ordered Fannie Mae to delist its common and preferred stock from the New Yor k Stock Exchange. Due to the fact that there was improvement in the stock’s market value during the third quarter and the Company has the ability and intention to hold the investment for the foreseeable future, management did not record an other-than-temporary impairment on September 30, 2010.

FINANCIAL INSTRUMENTS WITH ~~OFF-BALANCE-SHEET~~OFF-BALANCE SHEET RISK

The Company is a party to financial instruments with ~~off-balance-sheet~~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. During the first three months of 2011, the Company did not engage in any activity that created any additional types of 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 (including commercial and construction lines of 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. ~~During the first nine months of 2010, the Company did not engage in any activity that 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 or commitments whose contract amount represents credit risk as of ~~September 30, 2010~~March 31, 2011 were as follows:

Since some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The recourse provision under the terms of the sale of the Company’s credit card portfolio in 2007 is based on total lines, not balances outstanding. The remaining recourse, which consists of business customers and Canadian customers, is subject to increase, but only to the extent that the Company, in its discretion, approves a requested increase by a customer whose credit line ~~was~~is still active and included in the recourse portfolio. Based on historical losses, and adjusting for current economic conditions, the Company does not expect any significant losses from this commitment.

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, competitively 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 ofrequirements 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. When funding needs, including loan demand, outpace deposit growth,~~funds; however, it is ~~necessary for~~increasingly more challenging to fund the ~~Company to use alternative funding sources, such as investment portfolio maturities, FHLBB borrowings and outside deposit funding such as CDARS deposits (described below), to meet these funding needs.~~balance sheet with core deposits.

In order to attract deposits, the Company has from time to time 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 recognizes that with increasing competition for deposits, it may at times be desirable to utilize alternative sources of deposit funding to augment retail deposits and borrowings. One-way deposits purchased through the ~~CDARS~~Certificate of Deposit Account Registry Service (CDARS) of Promontory Interfinancial Network provide an alternative funding source when needed. Such deposits are generally considered a form of brokered deposits. ~~The Company had no one-way funds on September 30, 2010 and $15.1 million on D ecember 31, 2009.~~ In addition, two-way CDARS deposits allow the Company to provide FDIC deposit insurance to its customers in excess of account coverage limits by exchanging deposits with other CDARS members. At ~~September 30, 2010,~~March 31, 2011, the ~~entire balance of $1.5 million~~Company reported $1,216,381 in CDARS deposits, ~~represented~~representing exchanged deposits with other CDARS participating banks compared to ~~$2.1 million~~$1,313,834 in exchange deposits at December 31, 2009. During the first quarter of 2010, as the $15.1 million in purchased deposits matured, they were replaced with FHLBB advances, which are included in the $19.6 million increase in borrowed funds compared to year end 2009. Anticipating a possible increase in long-term rates due to a steepening yield curve, the Company extended $18.0 million of short-term funding into longer-term FHLBB advances with two, three and five year maturities. Management believes this will help protect the balance sheet from interest-rate risk in the event of a rising rate environment. This reall ocation of funds contributed to the decrease in certificates of deposit during the comparison period.

During the first nine months of 2010, the Company's loan portfolio increased $7.8 million or 2.0%. Demand for residential mortgages has increased steadily during the first nine months of 2010 including refinancing within the in-house loan portfolio while commercial mortgage demand increased during the beginning of 2010, but moderated during the second and third quarters of 2010. The available-for-sale investment portfolio decreased $1.5 million or 6.1% and the held-to-maturity investment portfolio increased $8.4 million or 18.7% compared to 2009 year end levels. Maturities in the available-for-sale portfolio were primarily reinvested into US Government Agency securities. The increase in the held-to-maturity investments, which are municipal investments, is attribu table to the annual municipal finance cycle. Short-term municipal investments generally mature at the end of the second quarter and are then replaced in the beginning of the third quarter. During July, these investments increased approximately $22 million with both renewals and new municipal investments.

On the liability side, savings deposits increased $4.5 million or 8.6%, and NOW and money market accounts increased $13.2 million or just over 9.0% while time deposits decreased $20.8 million or 12.4%. Aggressive pricing from other financial institutions for time deposits, as well as a shift of maturing one-way CDARS to alternate sources of funding, were both factors in the decrease in time deposits, while the new ICS product contributed to a portion of the increase in money market accounts and the decrease in time deposits. Other borrowed funds (the alternate funding source) increased $19.6 million or 146.1% for the first nine months of 2010. The low cost of funds at FHLBB, which remains at approximately 0.31%, caused the Company to utilize this source of funding over the higher cost time deposits.

In 2009 the Company established a borrowing line with the ~~Federal Reserve Bank of Boston (FRBB)~~FRBB to be used as a contingency funding source. ~~To secure~~For this Borrower-in-Custody arrangement, the Company pledged eligible commercial loans, commercial real estate loans and home equity loans, resulting in an available line of ~~$66.5 million as of September 30, 2010~~$71,944,928 and ~~$71.0 million as of~~$70,695,535, respectively at March 31, 2011 and December 31, ~~2009.~~2010. Credit advances in the FRBB lending program are overnight advances with interest chargeable at the ~~Primary Credit~~primary credit rate (generally referred to as the discount rate), currently 75 basis points. ~~As of September 30, 2010~~At March 31, 2011 and December 31, ~~2009,~~2010, the Company ~~did not have any~~had no outstanding ~~borrowings~~advances against this line.

~~As a member of the FHLBB, the~~The Company has ~~access to pre-approved lines of credit. The Company had a $500,000~~an unsecured Federal Funds line with the FHLBB with an available balance of ~~the same amount~~$500,000 at ~~September 30, 2010~~March 31, 2011 and year end ~~2009.~~2010. Interest is chargeable at a rate determined daily approximately 25 basis points higher than the rate paid on federal funds sold. As of ~~September 30, 2010~~March 31, 2011 and December 31, ~~2009,~~2010, additional borrowing capacity of approximately ~~$88.3 million~~$86,663,490 and ~~$90.9 million,~~$85,552,034, respectively, ~~less outstanding advances,~~was available through the FHLBB ~~was~~ secured by the Company's qualifying loan ~~portfolio.~~portfolio (generally, residential mortgages).

The following table reflects the Company’s outstanding FHLBB advances against the respective lines as of the dates indicated:

Under a separate agreement, ~~with the FHLBB,~~ the Company has the authority to collateralize public unit deposits up to its FHLBB borrowing capacity ($~~88.3 million~~86,663,490 and $85,552,034 at ~~September 30,~~March 31, 2011 and December 31, 2010, respectively, less outstanding ~~advances noted above),~~advances) with letters of credit issued by the FHLBB. The Company offers a Government Agency Account to the municipalities collateralized with these FHLBB letters of credit. At ~~September 30,~~March 31, 2011 and December 31, 2010, approximately ~~$19.3 million~~$18,600,000 and $40,550,000, respectively, of ~~eligible collateral~~qualifying residential real estate loans was pledged as collateral to the FHLBB ~~to secure the Company’s obligations relating to~~for these ~~letters of credit.~~collateralized governmental unit deposits.

~~Other alternative sources~~On March 22, 2011, the Company declared a cash dividend of ~~funding come from unsecured Federal Funds lines with one unaffiliated correspondent bank~~$0.14 on common stock payable on May 1, 2011, to shareholders of record as of April 15, 2011, which was accrued in the ~~amount of $3.5 million. There was no balance outstanding on this line~~financial statements at ~~September 30, 2010 and December~~March 31, ~~2009.~~2011.

The following table illustrates the changes in shareholders' equity from December 31, ~~2009~~2010 to ~~September 30, 2010:~~March 31, 2011:

Balance at December 31, 2009 (book value $7.56 per common share) $ 36,889,838
    Net income 2,459,250
    Issuance of stock through the Dividend Reinvestment Plan 533,808
    Dividends declared on common stock (1,644,628 )
    Dividends declared on preferred stock (140,625 )
    Change in unrealized gain on available-for-sale securities, net of tax (22,578 )
       Balance at September 30, 2010 (book value $7.73 per common share) $ 38,075,065

On September 14, 2010, the Company declared a cash dividend of $0.12 on common stock payable on November 1, 2010, to shareholders of record as of October 15, 2010, which was accrued in the financial statements at September 30, 2010.

Balance at December 31, 2010 (book value $7.63 per common share)	$	39,127,669
Net income		944,868
Issuance of stock through the Dividend Reinvestment Plan		178,597
Dividends declared on common stock		(647,865	)
Dividends declared on preferred stock		(46,875	)
Change in unrealized gain on available-for-sale securities, net of tax		(1,554	)
Balance at March 31, 2011 (book value $7.97 per common share)	$	39,554,840

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 ~~certain~~the dividend restrictions ~~under~~contained in the National Bank ~~Act and regulations of the Comptroller of the Currency (OCC).~~Act. Under such restrictions, the Bank may not, without the prior approval of the ~~OCC,~~Comptroller of the Currency (“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.

The Company is(on a consolidated basis) and the 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 ~~regulatory restrictions~~qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action capital requirements are applicable to ~~payment of dividends by~~banks, but not bank holding ~~companies, some circumstances, such as where dividends would exceed current period earnings, or where the bank holding company is in a troubled financial condition.~~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 ~~a so-called leverage ratio~~ of Tier 1 capital (as defined) to average assets (as defined). ~~Under current guidelines, banks must maintain a risk-based~~The Company’s Series A preferred stock ($2,500,000 liquidation preference) is includable without limitation in its Tier 1 capital. For 2010 and prior annual and quarterly periods the Company’s trust preferred junior subordinated debentures have been includable in Tier 1 capital ~~ratio of 8.0%, of which at least 4.0% must be in the form~~up to 25% of core capital ~~(as defined).~~elements, with the balance includable in Tier 2 capital.

~~Regulators~~In accordance with changes in the regulatory requirements for calculating capital ratios, beginning March 31, 2011, the Company is required to deduct the amount of goodwill, net of deferred tax liability ($2,061,772 at March 31, 2011), for purposes of calculating the amount of trust preferred junior subordinated debentures includable in Tier 1 capital ($10,004,100). Under the previous method the amount of trust preferred junior subordinated debentures includable in Tier 1 capital would have ~~also established minimum capital ratio guidelines for FDIC-insured banks under the prompt corrective action provisions of the Federal Deposit Insurance Act, as amended. These minimums are~~been $12,887,000, resulting in a ~~total risk-based capital~~ ratio of ~~10.0%,~~Tier 1 capital to risk-weighted assets of 11.39% and a ~~Tier I risk-based capital~~ ratio of ~~6%,~~Tier 1 capital to average assets of 7.64%. Management believes, as of March 31, 2011, that the Company and ~~a leverage ratio of 5%.~~the Bank met all capital adequacy requirements to which they are subject.

As of ~~September 30, 2010,~~March 31, 2011 the ~~Company’s Subsidiary~~Bank was ~~deemed~~considered well capitalized under the regulatory capital framework for ~~prompt corrective action. There are no conditions or events since that time that management believes have changed~~Prompt Corrective Action and the ~~Subsidiary's classification.~~Company exceeded applicable consolidated regulatory capital guidelines.

The regulatory capital ratios of the Company and its subsidiary as of ~~September 30, 2010~~March 31, 2011 and December 31, ~~2009~~2010 exceeded regulatory guidelines and are presented in the following table.

Minimum
Minimum To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
As of September 30, 2010:
Total capital (to risk-weighted assets)
   Consolidated $42,532 11.93% $28,522 8.00% N/A N/A
   Bank $41,932 11.79% $28,464 8.00% $35,580 10.00%
Tier I capital (to risk-weighted assets)
   Consolidated $38,800 10.88% $14,261 4.00% N/A N/A
   Bank $38,199 10.74% $14,232 4.00% $21,348 6.00%
Tier I capital (to average assets)
   Consolidated $38,800 7.66% $20,255 4.00% N/A N/A
   Bank $38,199 7.55% $20,228 4.00% $25,285 5.00%

As of December 31, 2009:
Total capital (to risk-weighted assets)
   Consolidated $40,326 11.57% $27,877 8.00% N/A N/A
   Community National Bank $40,336 11.60% $27,811 8.00% $34,764 10.00%
Tier I capital (to risk-weighted assets)
   Consolidated $36,875 10.58% $13,939 4.00% N/A N/A
   Community National Bank $36,885 10.61% $13,906 4.00% $20,858 6.00%
Tier I capital (to average assets)
   Consolidated $36,875 7.50% $19,674 4.00% N/A N/A
   Community National Bank $36,885 7.51% $19,643 4.00% $24,554 5.00%

					Minimum
			Minimum		To Be Well
			For Capital		Capitalized Under
			Adequacy		Prompt Corrective
	Actual		Purposes:		Action Provisions:
	Amount	Ratio	Amount	Ratio	Amount	Ratio
	(Dollars in Thousands)
As of March 31, 2011:
Total capital (to risk-weighted assets)
Company	$44,584	12.45%	$28,648	8.00%	N/A	N/A
Bank	$43,985	12.30%	$28,609	8.00%	$35,762	10.00%

Tier I capital (to risk-weighted assets)
Company	$37,920	10.59%	$14,324	4.00%	N/A	N/A
Bank	$40,204	11.24%	$14,305	4.00%	$21,457	6.00%

Tier I capital (to average assets)
Company	$37,920	7.25%	$20,926	4.00%	N/A	N/A
Bank	$40,204	7.69%	$20,909	4.00%	$26,137	5.00%

As of December 31, 2010:
Total capital (to risk-weighted assets)
Company	$43,942	12.33%	$28,505	8.00%	N/A	N/A
Bank	$43,364	12.20%	$28,439	8.00%	$35,549	10.00%

Tier I capital (to risk-weighted assets)
Company	$40,187	11.28%	$14,253	4.00%	N/A	N/A
Bank	$39,610	11.14%	$14,220	4.00%	$21,329	6.00%

Tier I capital (to average assets)
Company	$40,187	7.52%	$21,376	4.00%	N/A	N/A
Bank	$39,610	7.42%	$21,345	4.00%	$26,681	5.00%

The Company intends to ~~maintain~~continue the past policy of maintaining a strong capital resource position ~~in excess~~to support its asset size and level of ~~the minimums shown above.~~operations. Consistent with that policy, management will continue to anticipate the Company's future capital needs and will adjust its dividend payment practices consistent with those 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.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

The Company's management of the credit, liquidity and market risk inherent in its business operations is discussed in Part 1, Item 2 of this report under the captions "RISK MANAGEMENT" and “FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK”, which are incorporated herein by reference. Management does not believe that there have been any material changes in the nature or categories of the Company's risk exposures from those disclosed in the Company’s ~~2009~~2010 annual report on form ~~10-K/A.~~10-K.

Disclosure Controls and Procedures

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). As of ~~September 30, 2010,~~March 31, 2011, an evaluation was performed under the supervision and with the participation of management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, management concluded that its disclosure controls and procedures as of ~~September 30, 2010~~March 31, 2011 were effective in ensuring that material information required to be disclosed in the reports it files with the Commission under the Exchange Act was recorded, processed, , summarized, and reported on a timely basis.

For this purpose, the term “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and ~~principa l~~principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended ~~September 30, 2010~~March 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information as to purchases of the Company’s common stock during the quarter ended ~~September 30, 2010,~~March 31, 2011, by the Company and by any affiliated purchaser (as defined in SEC Rule 10b-18):

Maximum Number of

Total Number of

Shares That May Yet

Total Number

Average

Shares Purchased

Be Purchased Under

of Shares

Price Paid

as Part of Publicly

the Plan at the End

For the period:

Purchased(1)(2)

Per Share

Announced Plan

of the Period

January 1 – January 31

0.00

N/A

February 1 – February 28

14,423

8.85

N/A

March 1 – March 31

9,228

8.82

N/A

Total

23,651

8.84

N/A

(1) All ~~5,900~~23,651 shares were purchased for the account of participants invested in the Company Stock Fund under the Company’s Retirement Savings Plan by or on behalf of the Plan Trustee, the Human Resources Committee of Community National Bank. Such share purchases were facilitated through CFSG, which provides certain investment advisory services to the Plan. Both the Plan Trustee and CFSG may be considered affiliates of the Company under Rule 10b-18.

FORM 10-Q
Index
		Page
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements	4
Item 2	~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	1822
Item 3	Quantitative and Qualitative Disclosures About Market Risk	3539
Item 4	Controls and Procedures	3639

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	3639
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	3639
Item 6	Exhibits	3740
	Signatures	3841

Community Bancorp. and Subsidiary	September 30			December 31			September 30				March 31			December 31			March 31
Consolidated Balance Sheets	2010			2009			2009				2011			2010			2010
	(Unaudited)						(Unaudited)				(Unaudited)						(Unaudited)
Assets
Cash and due from banks	$	16,991,944		$	9,598,107		$	8,504,893			$	34,115,851		$	51,441,652		$	9,280,046
Federal funds sold and overnight deposits		9,018			5,036			7,736				5,553			6,635			1,213
Total cash and cash equivalents		17,000,962			9,603,143			8,512,629				34,121,404			51,448,287			9,281,259
Securities held-to-maturity (fair value $53,734,000 at 09/30/10,
$45,543,000 at 12/31/09 and $51,076,000 at 09/30/09)		53,146,028			44,766,250			49,769,540
Securities held-to-maturity (fair value $38,442,000 at 03/31/11,
$38,157,000 at 12/31/10 and $47,593,000 at 03/31/10)												37,948,665			37,440,714			47,157,935
Securities available-for-sale		22,514,018			23,974,830			23,130,656				28,460,688			21,430,436			22,872,120
Restricted equity securities, at cost		3,906,850			3,906,850			3,906,850				4,308,550			4,308,550			3,906,850
Loans held-for-sale		3,687,530			321,983			254,320				1,054,416			2,363,938			460,795
Loans		386,332,598			381,937,123			372,288,376				386,953,338			389,068,859			383,672,422
Allowance for loan losses		(3,706,434	)		(3,450,542	)		(3,481,663	)			(3,709,918	)		(3,727,935	)		(3,545,807	)
Unearned net loan fees		(85,539	)		(152,188	)		(183,683	)			(50,871	)		(74,351	)		(123,171	)
Net loans		382,540,625			378,334,393			368,623,030				383,192,549			385,266,573			380,003,444
Bank premises and equipment, net		12,961,952			13,637,414			13,815,601				12,747,376			12,791,971			13,247,973
Accrued interest receivable		1,926,729			1,895,313			1,876,058				1,966,089			1,789,621			2,118,425
Bank owned life insurance		3,902,422			3,813,016			3,782,011				3,965,349			3,933,331			3,842,739
Core deposit intangible		2,263,584			2,663,040			2,829,480				2,023,910			2,130,432			2,529,888
Goodwill		11,574,269			11,574,269			11,574,269				11,574,269			11,574,269			11,574,269
Other real estate owned (OREO)		1,070,500			743,000			585,000				764,500			1,210,300			718,000
Prepaid expense Federal Deposit Insurance Corporation (FDIC)		1,667,372			2,105,565			0
Prepaid expense - Federal Deposit Insurance Corporation (FDIC)												1,379,677			1,533,157			1,959,157
Other assets		8,750,824			7,948,031			7,370,455				9,330,696			8,711,070			8,398,651
Total assets	$	526,913,665		$	505,287,097		$	496,029,899			$	532,838,138		$	545,932,649		$	508,071,505

Liabilities and Shareholders' Equity
Liabilities
Deposits:
Deposits
Demand, non-interest bearing	$	56,816,997		$	52,821,573		$	53,332,196			$	53,917,918		$	55,570,893		$	51,665,027
NOW and money market accounts		159,469,342			146,244,454			124,654,825				178,615,118			182,427,902			140,384,990
Savings		56,933,717			52,448,863			53,487,971				61,151,720			56,461,370			55,259,464
Time deposits, $100,000 and over		52,439,732			63,261,583			58,488,968				51,902,372			52,014,363			53,689,519
Other time deposits		94,024,242			104,009,257			112,581,504				91,970,219			91,717,735			98,987,259
Total deposits		419,684,030			418,785,730			402,545,464				437,557,347			438,192,263			399,986,259

Federal funds purchased and other borrowed funds		33,010,000			13,411,000			23,467,000				18,010,000			33,010,000			36,022,000
Repurchase agreements		19,446,876			19,042,214			17,110,010				21,479,815			19,107,815			17,815,163
Capital lease obligations		845,576			876,536			886,454				823,886			834,839			866,420
Junior subordinated debentures		12,887,000			12,887,000			12,887,000				12,887,000			12,887,000			12,887,000
Accrued interest and other liabilities		2,965,118			3,394,779			2,779,934				2,525,250			2,773,063			3,092,536
Total liabilities		488,838,600			468,397,259			459,675,862				493,283,298			506,804,980			470,669,378

Shareholders' Equity
Preferred stock, 1,000,000 shares authorized, 25 shares issued
and outstanding ($100,000 liquidation value)		2,500,000			2,500,000			2,500,000				2,500,000			2,500,000			2,500,000
Common stock - $2.50 par value; 10,000,000 shares authorized,
4,813,289 shares issued at 09/30/10, 4,759,913 shares
issued at 12/31/09 and 4,737,070 shares issued at 09/30/09		12,033,223			11,899,783			11,842,675
4,860,113 shares issued at 03/31/11, 4,834,615 shares
issued at 12/31/10, and 4,782,483 shares issued at 03/31/10												12,150,283			12,086,538			11,956,208
Additional paid-in capital		26,592,727			26,192,359			26,068,637				26,833,255			26,718,403			26,308,634
Accumulated deficit		(518,412	)		(1,192,409	)		(1,645,862	)
Retained earnings (accumulated deficit)												618,976			368,848			(843,864	)
Accumulated other comprehensive income		90,304			112,882			211,364				75,103			76,657			103,926
Less: treasury stock, at cost; 210,101 shares at 09/30/10,
12/31/09 and 09/30/09		(2,622,777	)		(2,622,777	)		(2,622,777	)
Less: treasury stock, at cost; 210,101 shares at 03/31/11,
12/31/10 and 03/31/10												(2,622,777	)		(2,622,777	)		(2,622,777	)
Total shareholders' equity		38,075,065			36,889,838			36,354,037				39,554,840			39,127,669			37,402,127
Total liabilities and shareholders' equity	$	526,913,665		$	505,287,097		$	496,029,899			$	532,838,138		$	545,932,649		$	508,071,505

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

Community Bancorp. and Subsidiary
Consolidated Statements of Income
(Unaudited)
For The First Quarter Ended March 31,	2011		2010

Interest income
Interest and fees on loans	$	5,303,865	$	5,451,021
Interest on debt securities
Taxable		70,810		112,281
Tax-exempt		261,889		307,450
Dividends		18,896		16,137
Interest on federal funds sold and overnight deposits		21,652		350
Total interest income		5,677,112		5,887,239

Interest expense
Interest on deposits		1,112,783		1,214,480
Interest on federal funds purchased and other borrowed funds		117,209		137,201
Interest on repurchase agreements		37,914		48,851
Interest on junior subordinated debentures		243,564		243,564
Total interest expense		1,511,470		1,644,096

Net interest income		4,165,642		4,243,143
Provision for loan losses		187,500		125,001
Net interest income after provision for loan losses		3,978,142		4,118,142

Non-interest income
Service fees		550,518		560,804
Income from sold loans		201,141		136,282
Income on bank owned life insurance		32,019		29,723
Other income		675,791		504,992
Total non-interest income		1,459,469		1,231,801

Non-interest expense
Salaries and wages		1,466,816		1,392,671
Employee benefits		540,437		555,856
Occupancy expenses, net		807,612		779,175
FDIC insurance		170,297		158,368
Amortization of core deposit intangible		106,522		133,152
Other expenses		1,257,830		1,269,599
Total non-interest expense		4,349,514		4,288,821

Income before income taxes		1,088,097		1,061,122
Income tax expense		143,229		122,210
Net income	$	944,868	$	938,912

Earnings per common share	$	0.19	$	0.20
Weighted average number of common shares
used in computing earnings per share		4,635,324		4,558,198
Dividends declared per common share	$	0.14	$	0.12
Book value per share on common shares outstanding at March 31,	$	7.97	$	7.63

Community Bancorp. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
For The Years Ended March 31,	2011			2010

Cash Flow from Operating Activities:
Net income	$	944,868		$	938,912
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation and amortization, bank premises and equipment		253,061			264,548
Provision for loan losses		187,500			125,001
Deferred income tax		13,540			(86,466	)
Net gain on sale of loans		(201,141	)		(136,282	)
Gain on sale of bank premises and equipment		0			(9,649	)
Gain on Trust LLC		(42,372	)		(16,296	)
Amortization of bond premium, net		87,668			95,390
Write down of OREO		10,000			25,000
Proceeds from sales of loans held for sale		11,332,576			6,414,847
Originations of loans held for sale		(9,821,913	)		(6,417,377	)
Decrease in taxes payable		(370,310	)		(291,324	)
Increase in interest receivable		(176,468	)		(223,112	)
Amortization of FDIC insurance assessment		153,480			146,408
Increase in mortgage servicing rights		(176,605	)		(57,733	)
Increase in other assets		(165,224	)		(118,085	)
Increase in cash surrender value of bank owned life insurance		(32,018	)		(29,723	)
Amortization of core deposit intangible		106,522			133,152
Amortization of limited partnerships		122,147			123,897
Decrease in unamortized loan fees		(23,480	)		(29,017	)
Decrease in interest payable		(16,415	)		(24,620	)
Decrease in accrued expenses		(325,850	)		(298,487	)
(Decrease) increase in other liabilities		(760	)		23,116
Net cash provided by operating activities		1,858,806			552,100

Cash Flows from Investing Activities:
Investments - held-to-maturity
Maturities and pay downs		7,121,895			9,092,359
Purchases		(7,629,846	)		(11,484,044	)
Investments - available-for-sale
Maturities, calls, pay downs and sales		4,000,000			2,000,000
Purchases		(11,120,276	)		(1,006,250	)
Decrease (increase) in loans, net		1,888,431			(1,698,119	)
Proceeds from sales of bank premises and equipment,
net of capital expenditures		(208,466	)		134,543
Proceeds from sales of OREO		435,800			(81,650	)
Recoveries of loans charged off		21,573			14,734
Net cash used in investing activities		(5,490,889	)		(3,028,427	)

Community Bancorp. and Subsidiary
Consolidated Statements of Income
(Unaudited)
For The Third Quarter Ended September 30,	2010		2009

Interest income
Interest and fees on loans	$	5,514,561	$	5,439,689
Interest on debt securities
Taxable		73,272		155,964
Tax-exempt		347,666		375,155
Dividends		16,139		16,138
Interest on federal funds sold and overnight deposits		1		(653	)
Total interest income		5,951,639		5,986,293

Interest expense
Interest on deposits		1,163,470		1,498,395
Interest on federal funds purchased and other borrowed funds		161,640		88,254
Interest on repurchase agreements		41,584		57,708
Interest on junior subordinated debentures		243,564		243,564
Total interest expense		1,610,258		1,887,921

Net interest income		4,341,381		4,098,372
Provision for loan losses		433,334		175,001
Net interest income after provision for loan losses		3,908,047		3,923,371

Non-interest income
Service fees		577,514		580,293
Income from sold loans		216,788		207,953
Income on bank owned life insurance		29,797		30,845
Other income		406,683		562,666
Total non-interest income		1,230,782		1,381,757

Non-interest expense
Salaries and wages		1,521,763		1,467,638
Employee benefits		556,331		500,665
Occupancy expenses, net		738,838		715,773
FDIC insurance		158,031		142,855
Amortization of core deposit intangible		133,152		166,440
Other expenses		1,218,444		1,364,393
Total non-interest expense		4,326,559		4,357,764

Income before income taxes		812,270		947,364
Income tax expense (benefit)		24,465		(65,858	)
Net income	$	787,805	$	1,013,222

Earnings per common share	$	0.16	$	0.21
Weighted average number of common shares
used in computing earnings per share		4,591,530		4,514,460
Dividends declared per common share	$	0.12	$	0.12
Book value per share on common shares outstanding at September 30,	$	7.73	$	7.48

For the Nine Months Ended September 30,	2010		2009

Net income, as reported	$	2,459,250	$	2,704,040
Less: dividends to preferred shareholders		140,625		140,625
Net income available to common shareholders	$	2,318,625	$	2,563,415
Weighted average number of common shares
used in calculating earnings per share		4,574,857		4,494,448
Earnings per common share	$	0.51	$	0.57

	Less than 12 months				Less than 12 months
	Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss
December 31, 2009
March 31, 2011
U.S. GSE debt securities					$	10,089,293	$	71,815

December 31, 2010
U.S. GSE debt securities	$	2,055,018	$	18,582	$	2,037,894	$	9,377
U.S. Government securities		1,003,233		764		1,007,225		232
	$	3,058,251	$	19,346	$	3,045,119	$	9,609

March 31, 2010
U.S. GSE debt securities					$	2,057,787	$	6,323
U.S. Government securities						1,002,445		3,532
					$	3,060,232	$	9,855

	March 31,		December 31,
	2011		2010

Commercial	$	32,212,288	$	31,045,424
Commercial real estate		134,172,888		133,494,431
Residential real estate		209,107,512		213,834,818
Consumer		12,515,066		13,058,124
		388,007,754		391,432,797
Deduct:
Allowance for loan losses		3,709,918		3,727,935
Unearned net loan fees		50,871		74,351
Loans held for sale		1,054,416		2,363,938
		4,815,205		6,166,224
Net Loans	$	383,192,549	$	385,266,573

			90 Days		Total						Over 90 Days
March 31, 2011	30-89 Days		or More		Past Due		Current		Total Loans		and Accruing

Commercial	$	921,982	$	7,177	$	929,159	$	31,283,129	$	32,212,288	$	7,177
Commercial real estate		599,903		446,842		1,046,745		133,126,143		134,172,888		231,237
Residential real estate		6,246,153		1,151,442		7,397,595		200,655,501		208,053,096		292,060
Consumer		133,522		38,201		171,723		12,343,343		12,515,066		38,201
Total	$	7,901,560	$	1,643,662	$	9,545,222	$	377,408,116	$	386,953,338	$	568,675

			90 Days		Total						Over 90 Days
December 31, 2010	30-89 Days		or More		Past Due		Current		Total Loans		and Accruing

Commercial	$	915,924	$	54,376	$	970,300	$	30,075,124	$	31,045,424	$	29,446
Commercial real estate		939,910		130,512		1,070,422		132,424,009		133,494,431		94,982
Residential real estate		6,117,292		2,108,870		8,226,162		203,244,718		211,470,880		1,194,477
Consumer		242,742		38,466		281,208		12,776,916		13,058,124		38,466
Total	$	8,215,868	$	2,332,224	$	10,548,092	$	378,520,767	$	389,068,859	$	1,357,371

	2011			2010

Balance at beginning of year	$	3,727,935		$	3,450,542
Provision for loan losses		187,500			125,001
Recoveries of amounts charged off		21,573			14,734
		3,937,008			3,590,277
Amounts charged off		(227,090	)		(44,470	)
Balance at end of period	$	3,709,918		$	3,545,807

				Commercial		Residential
March 31, 2011	Commercial			Real Estate		Real Estate			Consumer			Unallocated		Total

Allowance for loan losses
Beginning balance	$	302,421		$	1,391,898	$	1,830,816		$	151,948		$	50,852	$	3,727,935
Charge-offs		(700	)		0		(188,800	)		(37,590	)		0		(227,090	)
Recoveries		8,106			1,090		0			12,377			0		21,573
Provision		(53,379	)		3,958		114,103			25,130			97,688		187,500
Ending balance	$	256,448		$	1,396,946	$	1,756,119		$	151,865		$	148,540	$	3,709,918

Individually evaluated for impairment	$	14,500		$	51,200	$	254,100		$	0		$	0	$	319,800
Collectively evaluated for impairment		241,948			1,345,746		1,502,019			151,865			148,540		3,390,118
Total	$	256,448		$	1,396,946	$	1,756,119		$	151,865		$	148,540	$	3,709,918

Loans
Individually evaluated for impairment	$	92,215		$	1,325,271	$	3,072,612		$	0				$	4,490,098
Collectively evaluated for impairment		32,120,073			132,847,617		206,034,900			12,515,066				$	383,517,656
Total	$	32,212,288		$	134,172,888	$	209,107,512		$	12,515,066				$	388,007,754

			Unpaid				Average		Interest
March 31, 2011	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded
Commercial	$	2,427	$	2,531			$	13,679	$	0
Commercial real estate		180,077		180,077				90,038		0
Residential real estate		1,966,456		2,634,063				1,552,373		0

With an allowance recorded
Commercial		89,788		95,034		14,500		63,042		0
Commercial real estate		1,145,194		1,145,672		51,200		1,145,195		0
Residential real estate		1,106,156		1,264,496		254,100		1,593,889		0

Total
Commercial	$	92,215	$	97,565	$	14,500	$	76,721	$	0
Commercial real estate	$	1,325,271	$	1,325,749	$	51,200	$	1,235,233	$	0
Residential real estate	$	3,072,612	$	3,898,559	$	254,100	$	3,146,262	$	0

Total	$	4,490,098	$	5,321,873	$	319,800	$	4,458,216	$	0

Retail Loans

			Residential
March 31, 2011	Consumer		Real Estate		Total

Group A	$	12,456,909	$	195,142,982	$	207,599,891
Group C		58,157		3,024,408		3,082,565
Total	$	12,515,066	$	198,167,390	$	210,682,456

Commercial Purpose Loans

	Residential				Commercial
March 31, 2011	Real Estate		Commercial		Real Estate		Total

Group A	$	14,831,026	$	29,165,570	$	112,424,825	$	156,421,421
Group B		276,372		914,995		6,464,176		7,655,543
Group C		2,235,214		2,131,723		8,881,397		13,248,334
Total	$	17,342,612	$	32,212,288	$	127,770,398	$	177,325,298

September 30, 2010	Level 1		Level 2		Total
March 31, 2011							Level 1		Level 2		Total
Assets:
U.S. GSE debt securities	$	0	$	17,397,920	$	17,397,920	$	0	$	23,263,005	$	23,263,005
U.S. Government securities		3,034,600		2,045,200		5,079,800		4,030,003		1,025,641		5,055,644
U.S. GSE preferred stock		36,298		0		36,298		142,039		0		142,039
Total	$	3,070,898	$	19,443,120	$	22,514,018

December 31, 2009
December 31, 2010
Assets:
U.S. GSE debt securities	$	0	$	18,806,650	$	18,806,650	$	0	$	16,313,390	$	16,313,390
U.S. Government securities		1,003,233		4,093,459		5,096,692		4,038,740		1,035,946		5,074,686
U.S. GSE preferred stock		71,488		0		71,488		42,360		0		42,360
Total	$	1,074,721	$	22,900,109	$	23,974,830

September 30, 2009
March 31, 2010
Assets:
U.S. GSE debt securities	$	0	$	18,881,629	$	18,881,629	$	0	$	17,717,687	$	17,717,687
U.S. Government securities		4,122,592		0		4,122,592		2,006,935		3,075,026		5,081,961
U.S. GSE preferred stock		126,435		0		126,435		72,472		0		72,472
Total	$	4,249,027	$	18,881,629	$	23,130,656

2010	$	133,152
2011		426,086	$	319,564
2012		340,869		340,869
2013		272,695		272,695
2014		272,695		272,695
2015				272,695
Thereafter		818,087		545,392
Total	$	2,263,584	$	2,032,910

	September 30, 2010				December 31, 2009				September 30, 2009				March 31, 2011				December 31, 2010				March 31, 2010
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value		Amount		Value		Amount		Value		Amount		Value		Amount		Value
	(in thousands)												(Dollars in Thousands)
Financial assets:
Cash and cash equivalents	$	17,001	$	17,001	$	9,603	$	9,603	$	8,513	$	8,513	$	34,121	$	34,121	$	51,448	$	51,448	$	9,281	$	9,281
Securities held-to-maturity		53,146		53,734		44,766		45,543		49,770		51,076		37,949		38,442		37,441		38,157		47,158		47,593
Securities available-for-sale		22,514		22,514		23,975		23,975		23,131		23,131		28,461		28,461		21,430		21,430		22,872		22,872
Restricted equity securities		3,907		3,907		3,907		3,907		3,907		3,907		4,309		4,309		4,309		4,309		3,907		3,907
Loans and loans held-for-sale, net		386,228		400,373		378,656		388,199		368,877		380,012		384,247		393,310		387,631		397,123		380,464		390,874
Mortgage servicing rights		946		963		933		1,011		969		969		1,253		1,362		1,077		1,056		991		1,030
Accrued interest receivable		1,927		1,927		1,895		1,895		1,876		1,876		1,966		1,966		1,790		1,790		2,118		2,118

Financial liabilities:
Deposits		419,684		422,897		418,786		420,933		402,545		405,148		437,557		439,994		438,192		440,913		399,986		402,241
Federal funds purchased and other
borrowed funds		33,010		33,481		13,411		13,549		23,467		23,623		18,010		18,240		33,010		33,250		36,022		35,991
Repurchase agreements		19,447		19,447		19,042		19,042		17,110		17,110		21,480		21,480		19,108		19,108		17,815		17,815
Capital lease obligations		846		846		877		877		886		886		824		824		835		835		866		866
Subordinated debentures		12,887		12,324		12,887		11,370		12,887		10,332		12,887		13,366		12,887		13,155		12,887		12,541
Accrued interest payable		202		202		234		234		277		277		175		175		192		192		209		209

	September 30,			December 31,			September 30,			March 31,			December 31,			March 31,
	2010			2009			2009			2011			2010			2010

Balance at beginning of year	$	932,961		$	960,110		$	960,110
Balance at beginning of period										$	1,076,708		$	932,961		$	932,961
Mortgage servicing rights capitalized		203,417			584,004			514,181			107,216			403,026			48,222
Mortgage servicing rights amortized		(295,124	)		(363,755	)		(258,029	)		(82,273	)		(392,233	)		(94,668	)
Increase (decrease) in market value		104,812			(247,398	)		(247,398	)
Change in valuation allowance											151,662			132,954			104,179
Balance at end of period	$	946,066		$	932,961		$	968,864		$	1,253,313		$	1,076,708		$	990,694

SELECTED FINANCIAL DATA

Balance Sheet Data	March 31,		December 31,
	2011		2010

Net loans	$	384,246,965	$	387,630,511
Total assets		532,838,138		545,932,649
Total deposits		437,557,347		438,192,263
Federal funds purchased and other borrowed funds		18,010,000		33,010,000
Total liabilities		493,283,298		506,804,980
Total shareholders' equity		39,554,840		39,127,669

Three Months Ended March 31,		2011		2010

Total interest income	$	5,677,112	$	5,887,239
Less:
Total interest expense		1,511,470		1,644,096
Net interest income		4,165,642		4,243,143
Less:
Provision for loan losses		187,500		125,001

Non-interest income		1,459,469		1,231,801
Less:
Non-interest expense		4,349,514		4,288,821
Income before income taxes		1,088,097		1,061,122
Less:
Applicable income tax expense		143,229		122,210

Net Income	$	944,868	$	938,912

Per Share Data

Earnings per common share	$	0.19	$	0.20
Dividends declared per common share	$	0.14	$	0.12
Book value per common shares outstanding	$	7.97	$	7.63
Weighted average number of common shares outstanding		4,635,324		4,558,198
Number of common shares outstanding		4,650,012		4,572,382

Average Balances and Interest Rates	Average Balances and Interest Rates															Average Balances and Interest Rates

		For the Nine Months Ended September 30:															For the Three Months Ended March 31:
				2010							2009								2011							2010
		Average		Income/		Rate/			Average		Income/		Rate/				Average		Income/		Rate/			Average		Income/		Rate/
		Balance		Expense		Yield			Balance		Expense		Yield				Balance		Expense		Yield			Balance		Expense		Yield
Interest-Earning Assets

Loans (1)		$	386,040,376	$	16,446,720		5.70	%	$	368,182,304	$	16,318,223		5.93	%		$	389,001,889	$	5,303,865		5.53	%	$	382,812,068	$	5,451,021		5.77	%
Taxable investment securities			22,910,411		272,026		1.59	%		26,271,374		654,064		3.33	%			23,703,792		70,810		1.21	%		23,606,738		112,281		1.93	%
Tax exempt investment securities			48,582,239		1,470,623		4.05	%		44,366,863		1,544,252		4.65	%			36,604,441		396,802		4.40	%		46,423,263		465,833		4.07	%
Federal funds sold and overnight deposits			68,891		228		0.44	%		185,923		404		0.29	%
Sweep and interest earning accounts																		37,541,055		21,652		0.23	%		110,943		350		1.28	%
Other investments			975,150		48,415		6.64	%		975,150		48,413		6.64	%			4,695,550		18,896		1.63	%		975,150		16,137		6.71	%
Total		$	458,577,067	$	18,238,012		5.32	%	$	439,981,614	$	18,565,356		5.64	%		$	491,546,727	$	5,812,025		4.80	%	$	453,928,162	$	6,045,622		5.40	%

Interest-Bearing Liabilities

NOW and money market funds		$	144,877,709	$	992,733		0.92	%	$	121,217,130	$	969,134		1.07	%		$	177,943,228	$	353,516		0.81	%	$	136,775,027	$	319,199		0.95	%
Savings deposits			55,861,326		128,634		0.31	%		53,348,406		121,477		0.30	%			57,848,479		30,170		0.21	%		53,209,384		40,569		0.31	%
Time deposits			151,045,760		2,489,149		2.20	%		171,444,792		3,728,674		2.91	%			144,073,247		729,097		2.05	%		157,259,018		854,712		2.20	%
Federal funds purchased and other borrowed funds			34,074,183		404,471		1.59	%		21,401,855		172,925		1.08	%			22,410,000		100,416		1.82	%		33,970,678		119,572		1.43	%
Repurchase agreements			19,161,995		136,886		0.96	%		18,231,292		193,052		1.42	%			20,379,073		37,914		0.75	%		19,336,027		48,851		1.02	%
Capital lease obligations			859,500		52,276		8.11	%		899,311		54,639		8.12	%			827,642		16,793		8.12	%		869,919		17,629		8.11	%
Junior subordinated debentures			12,887,000		730,693		7.58	%		12,887,000		730,693		7.58	%			12,887,000		243,564		7.66	%		12,887,000		243,564		7.66	%
Total		$	418,767,473	$	4,934,842		1.58	%	$	399,429,786	$	5,970,594		2.00	%		$	436,368,669	$	1,511,470		1.40	%	$	414,307,053	$	1,644,096		1.61	%

Net interest income				$	13,303,170						$	12,594,762							$	4,300,555						$	4,401,526
Net interest spread (2)							3.74	%						3.64	%							3.40	%						3.79	%
Net interest margin (3)							3.88	%						3.83	%							3.55	%						3.93	%

(1) Included in gross loans are non-accrual loans with an average balance of $4,962,392 and $2,884,849 for the nine months ended
2010 and 2009, respectively. Loans are stated before deduction of unearned discount and allowance for loan losses.
(1) Included in gross loans are non-accrual loans with an average balance of $4,594,164 and $4,719,812 for the three months ended																(1) Included in gross loans are non-accrual loans with an average balance of $4,594,164 and $4,719,812 for the three months ended
March 31, 2011 and 2010, respectively. Loans are stated before deduction of unearned discount and allowance for loan losses.																March 31, 2011 and 2010, respectively. Loans are stated before deduction of unearned discount and allowance for loan losses.
(2) Net interest spread is the difference between the yield on earning assets and the rate paid on interest-bearing liabilities.	(2) Net interest spread is the difference between the yield on earning assets and the rate paid on interest-bearing liabilities.															(2) Net interest spread is the difference between the yield on earning assets and the rate paid on interest-bearing liabilities.
(3) Net interest margin is net interest income divided by average earning assets.	(3) Net interest margin is net interest income divided by average earning assets.															(3) Net interest margin is net interest income divided by average earning assets.

	2010			2009

Loans Outstanding End of Period	$	390,020,128		$	372,542,696
Average Loans Outstanding During Period	$	386,040,376		$	368,182,304
Non-Accruing Loans	$	4,616,582		$	4,550,489

Loan Loss Reserve, Beginning of Period	$	3,450,542		$	3,232,932
Loans Charged Off:
Residential Real Estate		402,441			57,214
Commercial Real Estate		148,605			5,063
Commercial Loans not Secured by Real Estate		32,266			59,118
Consumer Loans		67,277			115,587
Total Loans Charged Off		650,589			236,982
Recoveries:
Residential Real Estate		4,065			1,028
Commercial Real Estate		7,104			17,337
Commercial Loans not Secured by Real Estate		9,033			9,665
Consumer Loans		27,945			32,680
Total Recoveries		48,147			60,710
Net Loans Charged Off		602,442			176,272
Provision Charged to Income		858,334			425,003
Loan Loss Reserve, End of Period	$	3,706,434		$	3,481,663

Net Charge Offs to Average Loans Outstanding		0.156	%		0.048	%
Provision Charged to Income as a Percent of Average Loans		0.222	%		0.115	%
Loan Loss Reserve to Average Loans Outstanding		0.960	%		0.946	%
Loan Loss Reserve to Non-Accruing Loans*		80.285	%		76.512	%

	Contract or		Contract or
	Notional Amount		Notional Amount

Unused portions of home equity lines of credit	$	18,471,161	$	18,752,616
Other commitments to extend credit		40,167,170		34,569,549
Residential construction lines of credit		2,159,577		1,225,874
Commercial real estate and other construction lines of credit		9,884,234		8,634,518
Standby letters of credit and commercial letters of credit		1,231,100		1,222,459
Recourse on sale of credit card portfolio		383,130		401,500
MPF credit enhancement obligation, net of liability recorded		1,645,552		1,876,364

DATED: ~~November~~May 10, ~~2010~~2011	/s/ Stephen P. Marsh
	Stephen P. Marsh, President &
	Chief Executive Officer

DATED: ~~November~~May 10, ~~2010~~2011	/s/ Louise M. Bonvechio
	Louise M. Bonvechio, Vice President
	& Chief Financial Officer