Community Bancorp (CMTV) 10-Q 2005 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

[ x ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2005

OR

[   ]  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

COMMUNITY BANCORP.

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes (   )  No (X)

At August 10, 2005, there were 4,055,299 shares outstanding of the Corporation's common stock.

FORM 10-Q
Table of Contents
	Page
PART I  FINANCIAL INFORMATION
Item I  Financial Statements	4
Item 2  Management's Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3  Quantitative and Qualitative Disclosures About Market Risk	21
Item 4  Controls and Procedures	21
PART II  OTHER INFORMATION
Item 1  Legal Proceedings	21
Item 2  Unregistered Sales of Securities and Use of Proceeds	21
Item 4Submission of Matters to a Vote of Security Holders	22
Item 6  Exhibits	22
Signatures	23

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements (Unaudited)

The following are the consolidated financial statements for Community Bancorp. and Subsidiary, "the Company".

COMMUNITY BANCORP. AND SUBSIDIARY
Consolidated Balance Sheets
		June 30			December 31			June 30
		2005			2004			2004
		(Unaudited)						(Unaudited)
Assets
Cash and due from banks	$	8,626,094		$	8,390,806		$	12,529,172
Federal funds sold and overnight deposits		74,085			0			3,518,537
Total cash and cash equivalents		8,700,179			8,390,806			16,047,709
Securities held-to-maturity (fair value $18,387,000 at 06/30/05,
$31,587,658 at 12/31/04 and $21,522,492 at 06/30/04)		18,325,736			31,579,178			21,452,759
Securities available-for-sale		42,829,839			51,150,344			49,994,886
Restricted equity securities, at cost		3,015,750			2,315,450			2,310,650
Loans held-for-sale		868,597			1,833,397			1,509,863
Loans		233,864,129			227,799,788			206,914,372
Allowance for loan losses		(2,170,363	)		(2,153,372	)		(2,254,308	)
Unearned net loan fees		(695,466	)		(763,774	)		(774,697	)
Net loans		230,998,300			224,882,642			203,885,367
Bank premises and equipment, net		9,422,202			8,057,120			7,763,600
Accrued interest receivable		1,524,401			1,652,827			1,435,856
Other real estate owned, net		0			82,800			82,800
Other assets		4,765,294			4,891,930			4,135,774
Total assets	$	320,450,298		$	334,836,494		$	308,619,264
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing	$	44,801,154		$	42,725,604		$	39,011,142
NOW and money market accounts		68,872,277			94,502,798			67,205,425
Savings		47,233,747			47,288,161			46,681,757
Time deposits, $100,000 and over		22,651,208			21,804,521			21,968,820
Other time deposits		75,985,336			76,284,787			77,944,749
Total deposits		259,543,722			282,605,871			252,811,893
Federal funds purchased and other borrowed funds		17,899,000			6,407,000			13,380,000
Repurchase agreements		12,558,291			14,907,518			11,873,549
Accrued interest and other liabilities		1,955,273			2,872,659			3,033,139
Total liabilities		291,956,286			306,793,048			281,098,581
Shareholders' Equity
Common stock - $2.50 par value; 6,000,000 shares authorized
and 4,254,402 shares issued at 06/30/05, 4,037,548 shares
issued at 12/31/04 and 4,014,349 shares issued at 06/30/04		10,636,004			10,093,871			10,035,873
Additional paid-in capital		20,967,782			17,778,605			17,459,952
Retained (deficit) earnings		(387,121	)		2,776,011			2,260,788
Accumulated other comprehensive loss		(283,453	)		(168,679	)		(1,544	)
Less: treasury stock, at cost; 198,609 shares at 06/30/05, 198,444
shares at 12/31/04, and 185,938 shares at 06/30/04		(2,439,200	)		(2,436,362	)		(2,234,386	)
Total shareholders' equity		28,494,012			28,043,446			27,520,683
Total liabilities and shareholders' equity	$	320,450,298		$	334,836,494		$	308,619,264
The accompanying notes are an integral part of these consolidated financial statements.

COMMUNITY BANCORP. AND SUBSIDIARY
Consolidated Statements of Income
( Unaudited )
For The Second Quarter Ended June 30,		2005		2004
Interest income
Interest and fees on loans	$	3,752,190	$	3,369,169
Interest on debt securities
Taxable		376,879		521,559
Tax-exempt		259,420		269,598
Dividends		31,746		12,337
Interest on federal funds sold and overnight deposits		1,713		4,475
Total interest income		4,421,948		4,177,138
Interest expense
Interest on deposits		1,122,531		1,117,351
Interest on borrowed funds		148,798		80,307
Interest on repurchase agreements		47,582		28,607
Total interest expense		1,318,911		1,226,265
Net interest income		3,103,037		2,950,873
Provision for loan losses		37,500		34,000
Net interest income after provision		3,065,537		2,916,873
Non-interest income
Service fees		304,902		354,182
Security gains		0		18,631
Other income		491,401		511,339
Total non-interest income		796,303		884,152
Non-interest expense
Salaries and wages		1,134,134		1,034,579
Pension and other employee benefits		408,644		340,161
Occupancy expenses, net		497,646		519,013
Other expenses		913,311		883,346
Total non-interest expense		2,953,735		2,777,099
Income before income taxes		908,105		1,023,926
Applicable income taxes		151,061		204,725
Net Income	$	757,044	$	819,201
Earnings per share on weighted average		$0.19		$0.20
Weighted average number of common shares
used in computing earnings per share		4,047,504		4,009,254
Dividends declared per share		$0.17		$0.16
Book value per share on shares outstanding at June 30,		$7.03		$6.85
All per share data for prior periods have been restated to reflect a 5% stock dividend declared in May 2005.
The accompanying notes are an integral part of these consolidated financial statements.

COMMUNITY BANCORP. AND SUBSIDIARY
Consolidated Statements of Income
( Unaudited )
For The Six Months Ended June 30,		2005		2004
Interest income
Interest and fees on loans	$	7,445,551	$	6,682,771
Interest on debt securities
Taxable		786,728		1,114,698
Tax-exempt		484,884		510,412
Dividends		57,947		20,953
Interest on federal funds sold and overnight deposits		4,001		9,405
Total interest income		8,779,111		8,338,239
Interest expense
Interest on deposits		2,159,579		2,269,686
Interest on borrowed funds		257,802		153,637
Interest on repurchase agreements		81,416		58,762
Total interest expense		2,498,797		2,482,085
Net interest income		6,280,314		5,856,154
Provision for loan losses		75,000		85,000
Net interest income after provision		6,205,314		5,771,154
Non-interest income
Service fees		590,456		601,148
Security gains		0		18,631
Other income		900,436		927,582
Total non-interest income		1,490,892		1,547,361
Non-interest expense
Salaries and wages		2,272,605		2,065,336
Pension and other employee benefits		813,308		717,028
Occupancy expenses, net		1,011,553		1,013,433
Other expenses		1,808,084		1,721,741
Total non-interest expense		5,905,550		5,517,538
Income before income taxes		1,790,656		1,800,977
Applicable income taxes		303,471		217,934
Net Income	$	1,487,185	$	1,583,043
Earnings per share on weighted average		$0.37		$0.40
Weighted average number of common shares
used in computing earnings per share		4,041,566		3,999,987
Dividends declared per share		$0.33		$0.32
Book value per share on shares outstanding at June 30,		$7.03		$6.85
All per share data for prior periods have been restated to reflect a 5% stock dividend declared in May 2005.
The accompanying notes are an integral part of these consolidated financial statements.

COMMUNITY BANCORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended June 30,		2005			2004
Reconciliation of Net Income to Net Cash Provided by Operating Activities:
Net Income	$	1,487,185		$	1,583,043
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities:
Depreciation and amortization		382,887			387,960
Provision for loan losses		75,000			85,000
Provision (credit) for deferred income taxes		73,877			( 25,411	)
Net gain on sale of loans		( 181,526	)		( 230,173	)
Gain on sale of fixed assets		8,507			0
Net gain on sale of securities		0			( 18,631	)
Gains on sales of other real estate owned		( 7,710	)		( 6,314	)
(Gain) loss on Trust LLC		( 7,526	)		11,762
Amortization of bond premium, net		142,769			234,724
Proceeds from sales of loans held for sale		12,933,412			19,964,766
Originations of loans held for sale		( 11,787,086	)		( 18,991,305	)
(Decrease) increase in taxes payable		( 247,555	)		201,257
Decrease in interest receivable		128,426			240,334
Increase in mortgage servicing rights		( 78,353	)		( 103,105	)
(Increase) decrease in other assets		( 111,183	)		122,165
Decrease in unamortized loan fees		( 68,308	)		( 30,587	)
Increase (decrease) in interest payable		74,349			( 27,572	)
Increase (decrease) in accrued expenses		41,936			( 383,041	)
(Decrease) increase in other liabilities		( 35,957	)		12,296
Net cash provided by operating activities		2,823,144			3,027,168
Cash Flows from Investing Activities:
Investments - held to maturity
Maturities and paydowns		19,647,449			31,502,073
Purchases		( 6,390,171	)		( 11,410,436	)
Investments - available for sale
Sales and maturities		9,000,000			11,038,770
Purchases		( 1,000,000	)		( 5,680,000	)
Purchase of restricted equity securities		( 700,300	)		( 953,800	)
Investment in limited partnership, net		( 474,299	)		( 292,118	)
Increase in loans, net		( 6,166,023	)		( 2,770,261	)
Capital expenditures, net		( 1,756,476	)		( 336,637	)
Proceeds from sales of other real estate owned		100,510			39,678
Recoveries of loans charged off		33,673			75,812
Net cash provided by investing activities		12,294,363			21,213,081
Cash Flows from Financing Activities:
Net decrease in demand, NOW, money market and savings accounts		( 23,609,385	)		( 25,016,820	)
Net increase (decrease) in certificates of deposit		547,236			( 1,850,546	)
Net decrease in short-term borrowings and repurchase agreements		( 2,349,227	)		( 143,021	)
Net increase in borrowed funds and federal funds purchased		11,492,000			5,340,000
Payments to acquire treasury stock		( 2,838	)		( 49,881	)
Dividends paid		( 885,920	)		( 844,182	)
Net cash used in financing activities		( 14,808,134	)		( 22,564,450	)
Net increase in cash and cash equivalents		309,373			1,675,799
Cash and cash equivalents:
Beginning		8,390,806			14,371,910
Ending	$	8,700,179		$	16,047,709

Supplemental Schedule of Cash Paid During the Period
Interest	$	2,424,448		$	2,509,657
Income taxes	$	525,000		$	42,088
Supplemental Schedule of Noncash Investing and Financing Activities:
Change in unrealized gain on securities available-for-sale	$	( 173,900	)	$	( 769,015	)
Other real estate owned acquired in settlements of loans	$	10,000		$	27,887
Investments in limited partnerships
Decrease in limited partnerships	$	169,500		$	149,801
Decrease in contributions payable		( 643,799	)		( 441,919	)
	$	( 474,299	)	$	( 292,118	)
Dividends Paid
Dividends declared	$	1,339,986		$	1,294,125
Increase in dividends payable attributable to dividends declared		( 36,911	)		( 4,106	)
Dividends reinvested		( 417,155	)		( 445,837	)
	$	885,920		$	844,182

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, 2004, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2004.

NOTE 2. 5% STOCK DIVIDEND

     In May 2005, the Company declared a 5% stock dividend payable July 1, 2005 to shareholders of record as of June 15, 2005. As a result of this stock dividend, all per share data for prior periods have been restated.

NOTE 3.  RECENT ACCOUNTING DEVELOPMENTS

     Any accounting developments announced during the first six months of 2005 were not applicable, thereby requiring no disclosure by the Company.

NOTE 4. EARNINGS PER 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) and reduced for shares held in Treasury.

NOTE 5.  COMPREHENSIVE INCOME

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

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

For the second quarter ended June 30,		2005			2004
Net Income	$	757,044		$	819,201
Other comprehensive income, net of tax:
Change in unrealized holdings gains (losses) on available-for-sale
securities arising during the period		210,289			(1,120,082	)
Reclassification adjustment for gains (losses) realized in income		0			(18,631	)
Net unrealized gains (losses)		210,289			(1,138,713	)
Tax effect		(71,498	)		387,163
Other comprehensive income (loss), net of tax		138,791			(751,550	)
Total comprehensive income	$	895,835		$	67,651

For the six months ended June 30,		2005			2004
Net Income	$	1,487,185		$	1,583,043
Other comprehensive income, net of tax:
Change in unrealized holdings gains (losses) on available-for-sale
securities arising during the period		(173,900	)		(750,384	)
Reclassification adjustment for gains (losses) realized in income		0			(18,631	)
Net unrealized losses		(173,900	)		(769,015	)
Tax effect		59,126			261,465
Other comprehensive loss, net of tax		(114,774	)		(507,550	)
Total comprehensive income	$	1,372,411		$	1,075,493

NOTE 6. INCOME TAXES

     Provision for income taxes increased $85,537 to $303,471 for the first six months of 2005 versus $217,934 for the same period in 2004. Income taxes for 2005 are in line with net income for the first six months, while income taxes for the first six months of 2004 are lower due to the tax effect of a capital loss recognized in 2004 related to the Company's sale in 2003 of the Liberty Savings Bank charter.

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 June 30, 2005

FORWARD-LOOKING STATEMENTS

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

     Forward-looking statements are not guarantees of future performance. They necessarily involve risks, uncertainties and assumptions. Future results of the Company may differ materially from those expressed in these forward-looking statements. Examples of forward looking statements included in this discussion include, but are not limited to, management's expectations as to future asset growth, income trends, results of operations and other matters reflected in the Overview section, estimated contingent liability related to the Company's participation in the Federal Home Loan Bank (FHLB) Mortgage Partnership Finance (MPF) program, assumptions made within the asset/liability management process, and management's expectations as to the future interest rate environment and the Company's related liquidity level. Although these statements are based on management's current expectations and estimates, many of the factors that could influence or determine actual results are unpredictable an d 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 claims the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995.

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

OVERVIEW

     The following Management's Discussion and Analysis explains in detail the results of the second quarter and first six months of 2005.

     Net Income was down for the first half of 2005 as compared to 2004 by $95,858.This decline reflects the effect of a $116,540 capital loss recognized for tax purposes in 2004, resulting from the sale of our inactive bank franchise in New Hampshire. Without this transaction, earnings would have been higher in 2005 compared to 2004.

     In May 2005 the Company declared a 5% stock dividend to be paid in the third quarter of 2005, which required a charge to retained earnings for accounting purposes, resulting in negative retained earnings at June 30, 2005. All per share data for prior periods have been restated to reflect this stock dividend.

     Net interest income for the first six months of 2005 was $152,164 over net interest income for the first six months of 2004, however the flattening yield curve will continue to put pressure on our spreads. Short-term interest rates, which affect our deposit rates, continue to rise, but the long-term rates, which affect our lending rates, have stayed relatively flat. We expect this phenomenon to continue until some expectation of inflation introduces itself to the U.S. economy, thus driving long-term rates upward and creating a steepening yield curve.

     Total assets grew from June 30, 2004 to June 30, 2005 by $11,831,034, but fell from December 31, 2004 levels by $14,386,196. This loss of assets as of June 30 each year is typical of our cyclical growth pattern. Many of our municipal loans mature at the end of June and likely renew during the first weeks of the third quarter. This year, approximately $22,000,000 of municipal loans matured at the end of June, and at this time we have the same amount expected to close by August 15, 2005.

     Non-interest income was down year to date as compared to the first half of 2004 by $56,469. Service fees on deposit accounts are down by $10,692 as more people maintain sufficient balances to avoid service fees and over-draft fees. We had no security gains this year, and other income was down by $27,146. Non-interest expense increased by $388,012 this first half compared to last year. All of the recent corporate scandals such as Enron and the resulting Sarbanes Oxley Act have resulted in dramatic increases in the cost of regulation, particularly in legal and audit fees. An increase in staff required to report to the regulators has also increased the cost of doing business. We have also experienced higher losses due to the fraudulent use of our customers' debit cards.

     In October of 2004, we broke ground for the new 17,000 square foot addition to our main office in Derby, and work is progressing on schedule and on budget. We currently have 65 people working in space designed for 38, so the new space will be welcome. The result is the inclusion of a new drive up ATM. Additionally, a larger customer lobby with improved seating space will provide more privacy for our customers. This project is providing some construction jobs in the Northeast Kingdom and will allow us to fill two needed positions in the Bank. We continue to believe that the future of banking in the Northeast Kingdom is promising, and this expansion will assist us in maintaining our position as a community leader. The economy of our market area is stable, with neither booms nor busts happening with any degree of regularity.

     The following pages describe the financial results of our second quarter and the first six months of 2005 in much more detail. Please take the time to read them to more fully understand those results in relation to the 2004 three month and six month comparison periods. The discussion below should be read in conjunction with the Consolidated Financial Statements of the Company and related notes. This report includes forward-looking statements within the meaning of the Securities and Exchange Act of 1934 (the "Exchange Act").

CRITICAL ACCOUNTING POLICIES

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

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

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

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

RESULTS OF OPERATIONS

     The Company's net income for the second quarter of 2005 was $757,044, representing a decrease of 7.6% over net income of $819,201 for the second quarter of 2004. This resulted in earnings per share of $0.19 and $0.20, respectively, for the second quarter of 2005 and 2004. Net income for the first six months decreased $95,858, or by 6.1%, with net income for the first six months of 2005 reported at $1.49 million compared to $1.58 million for the same period in 2004. Although net income after taxes declined, core earnings (net interest income) for the first six months of 2005 increased $424,160, or 7.2% over the first six months of 2004.

     Return on average assets (ROA), which is net income divided by average total assets, measures how effectively a corporation uses its assets to produce earnings. Return on average equity (ROE), which is net income divided by average shareholders' equity, measures how effectively a corporation uses its equity capital to produce earnings. During the second quarter and first six months of 2005, average assets increased, while net income decreased resulting in lower ROA and ROE compared to the same periods in 2004.The following table shows these ratios annualized for the comparison periods.

For the second quarter ended June 30,	2005	2004
Return on Average Assets	.91%	1.00%
Return on Average Equity	10.73%	11.78%
For the first six months ended June 30,	2005	2004
Return on Average Assets	.90%	.96%
Return on Average Equity	10.56%	11.49%

INTEREST INCOME LESS INTEREST EXPENSE (NET INTEREST INCOME)

     Net interest income, the difference between interest income and expense, represents the largest portion of the Company's earnings, and is affected by the volume, mix, and rate sensitivity of earning assets as well as by interest bearing liabilities, market interest rates and the amount of non-interest bearing funds which support earning assets. The three tables below provide a visual comparison of the consolidated figures, and are stated on a tax equivalent basis assuming a federal tax rate of 34%.The Company's corporate tax rate is 34%, therefore, to equalize tax-free and taxable income in the comparison, we must divide the tax-free income by 66%, with the result that every tax-free dollar is equal to $1.52 in taxable income.

     The following table shows the reconciliation between reported net interest income and tax equivalent, net interest income for the six month comparison periods in 2005 and 2004:

For the six months ended June 30,		2005		2004
Net interest income as presented	$	6,280,314	$	5,856,154
Effect of tax-exempt income		249,789		262,939
Net interest income, tax equivalent	$	6,530,103	$	6,119,093

AVERAGE BALANCES AND INTEREST RATES

     The table below presents average earning assets and average interest-bearing liabilities supporting earning assets. Interest income (excluding interest on non-accrual loans) and interest expense figures are expressed on a tax equivalent basis, both in dollars and as a rate/yield for the 2005 and 2004 comparison periods. Loans are stated before deduction of non-accrual loans, unearned discount and allowance for loan losses.

	For the Six Months Ended June 30:
				2005					2004
		Average		Income/	Rate/		Average		Income/	Rate/
		Balance		Expense	Yield		Balance		Expense	Yield
INTEREST-EARNING ASSETS
Loans (gross)	$	230,948,196	$	7,445,551	6.50%	$	206,008,649	$	6,682,771	6.52%
Taxable Investment Securities		47,704,437		786,728	3.33%		60,888,762		1,114,698	3.68%
Tax Exempt Investment Securities		32,344,670		734,673	4.58%		40,266,513		773,351	3.86%
Federal Funds Sold		154,558		1,805	2.36%		1,245,753		4,845	0.78%
Sweep Account		181,674		2,196	2.44%		1,382,405		4,560	0.66%
Other Securities		2,780,033		57,947	4.20%		1,586,423		20,953	2.66%
TOTAL	$	314,113,568	$	9,028,900	5.80%	$	311,378,505	$	8,601,178	5.55%

INTEREST-BEARING LIABILITIES
Savings Deposits	$	47,071,363	$	81,526	0.35%	$	43,653,997	$	81,490	0.38%
NOW & Money Market Funds		88,697,030		679,328	1.54%		94,798,167		704,560	1.49%
Time Deposits		97,962,679		1,398,725	2.88%		101,530,835		1,483,636	2.94%
Federal Funds Purchased and
Other Borrowed Funds		14,006,824		256,490	3.69%		9,829,884		150,962	3.09%
Notes Payable		46,961		1,311	5.63%		97,527		2,675	5.52%
Repurchase Agreements		12,759,342		81,417	1.29%		11,831,849		58,762	1.00%
TOTAL	$	260,544,199	$	2,498,797	1.93%	$	261,742,259	$	2,482,085	1.91%
Net Interest Income			$	6,530,103				$	6,119,093
Net Interest Spread					3.87%					3.64%
Interest Differential					4.19%					3.95%

     An increase of $2.7 million is noted in the average volume of earning assets for the first six months of 2005 compared to the same period of 2004, with an increase of 25 basis points in the average yield. Interest earned on the loan portfolio accounts for approximately 82.5% of total interest income for 2005 and 77.7% for 2004.

     Interest paid on time deposits is the largest component of the Company's interest expense, comprising 56.0% and 59.8%, respectively, of total interest expense for the 2005 and 2004 comparison periods. The average volume of interest-bearing liabilities for the first six months of 2005 decreased approximately $1.2 million over the 2004 comparison period, while the rate paid on these accounts increased two basis points.

     The yield on loans has decreased slightly due to the lack of increase in long-term rates. The Company's balance sheet is slightly asset sensitive, therefore those loans that are tied to the Prime rate have repriced to a higher rate, however real estate loans are tied to long-term rates and the long-term rates have not increased, therefore yields are not increasing. On the liability side, the increase in short-term rates over the last six months has created pressure to increase rates on deposit products. The Company has resisted increasing rates on all the non-maturing products in order to manage spreads. The Company has however offered specials such as a high-yielding money market account for higher-balance accounts and various time-deposit specials. As time deposits mature, some are renewing at shorter terms with lower rates, while others are being shifted to other products or moved to other institutions. Managing the liability side of the balance sheet is a balancing act betwe en managing yields while retaining and attracting deposits for funding.

CHANGES IN INTEREST INCOME AND INTEREST EXPENSE

    The following table summarizes the variances in interest income and interest expense on a fully tax-equivalent basis for the first six months of 2005 and 2004 resulting from volume changes in average assets and average liabilities and fluctuations in rates earned and paid.

		Variance			Variance
RATE / VOLUME		Due to			Due to			Total
		Rate(1)			Volume(1)			Variance
Loans(2)	$	(45,806	)	$	808,586		$	762,780
Taxable Investment Securities		(110,255	)		(217,715	)		(327,970	)
Tax Exempt Investment Securities		141,241			(179,919	)		(38,678	)
Federal Funds Sold		9,730			(12,770	)		(3,040	)
Sweep Account		12,165			(14,529	)		(2,364	)
Other Securities		21,206			15,788			36,994
Total Interest Earnings	$	28,281		$	399,441		$	427,722
Savings Deposits	$	(6,422	)	$	6,458		$	36
NOW & Money Market Funds		21,361			(46,593	)		(25,232	)
Time Deposits		(33,952	)		(50,959	)		(84,911	)
Other Borrowed Funds		41,347			64,181			105,528
Notes Payable		48			(1,412	)		(1,364	)
Repurchase Agreements		18,043			4,612			22,655
Total Interest Expense	$	40,425		$	(23,713	)	$	16,712
Change in Net Interest Income	$	(12,144	)	$	423,154		$	411,010

(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

(2) Loans are stated before deduction of unearned discount and allowance for loan losses. The

    principal balances of non-accrual loans is included in calculations of the yield on loans, while

    the interest on these non-performing assets is excluded.

NON INTEREST INCOME AND NON INTEREST EXPENSE

     A decrease in non-interest income is noted for both the three month and six month comparison periods. The second quarter of 2005 decreased $87,849 compared to the same period of 2004, while the decrease for the first six months of 2005 compared to 2004 was $56,469. These decreases are attributable to many factors including the discontinuance of Generations Gold, a deposit product offering discounts on travel & tourism promotions, which generated fee income for the first six months of 2004 of just under $10,000, and a decrease in income from loans sold to the secondary market. Activity in the Company's investment portfolio in 2005 was limited to calls and maturities, thereby generating no income from gains, compared to $18,631 in 2004.

     Increases are noted in non-interest expense for both periods. Salaries and wages, and pension and benefits account for most of the increase, with an increase of $168,038 for the second quarter comparison periods and $303,549 for the six month comparison periods for 2005 versus 2004. This increase is the result of normal salary increases as well as increase in health care costs. The Company has experienced an increase in fraudulent activity related to its ATM and Debit cards, with total charge-offs for the first six months of 2005 of $23,701, compared to $5,623 for the first six months of 2004. Although the dollar amounts of these charge-offs are immaterial, this is a crime that is on the rise and a trend that the Company intends to monitor closely. Additionally, an increase in legal fees is recognized due to increased regulations, requiring the Company to seek legal advice on more issues than in the past. Compliance with the Sarbanes Oxley Act continues to impact both legal and audit fees as the Company prepares to meet the requirements of Section 404 of the Sarbanes Oxley Act. Additionally, increased reporting requirements through the Securities and Exchange Commission (SEC) have also had a financial impact on the Company's earnings.

     Management monitors all components of other non-interest expenses; however, a quarterly review is performed to assure that the accruals for these expenses are accurate. This helps alleviate the need to make significant adjustments to these accounts that in turn affect the net income of the Company.

APPLICABLE INCOME TAXES

     Provisions for income taxes for the second quarter comparison periods decreased $53,664 with figures of $151,061 for 2005 versus $204,725 for 2004, reflecting lower net income for the second quarter of 2005 as well as an increase in allowable tax credits. However, an increase of $85,537 in the provision for income taxes is noted for the first six months of 2005 versus 2004, with figures of $303,471 for 2005 compared to $217,934 for 2004. As indicated in the "Overview" above and in Note 6 of the Notes to the Financial Statements, the lower tax provision for the first six months of 2004 is attributable to the tax effect of a capital loss recognized in the first quarter of that year, related to the Company's sale in 2003 of the Liberty Savings Bank charter.

CHANGES IN FINANCIAL CONDITION

     The following table reflects the composition of the Company's major categories of assets and liabilities as of the dates indicated:

ASSETS		June 30, 2005			December 31, 2004			June 30, 2004
Loans (gross)*	$	234,732,726	73.25%	$	229,633,185	68.58%	$	208,424,235	67.53%
Available for Sale Securities		42,829,839	13.37%		51,150,344	15.28%		49,994,886	16.20%
Held to Maturity Securities		18,325,736	5.72%		31,579,178	9.43%		21,452,759	6.95%
*includes loans held for sale
LIABILITIES
Savings Deposits	$	47,233,747	14.74%	$	47,288,161	14.12%	$	46,681,757	15.13%
NOW & Money Market Funds		68,872,277	21.49%		94,502,798	28.22%		67,205,425	21.78%
Time Deposits		98,636,544	30.78%		98,089,308	29.29%		99,913,569	32.37%

     A new commercial loan program was introduced in the second half of 2004, contributing to the increase in loans in that year. These loans were partially funded with the sale of investments from our available for sale portfolio in 2004. Further funding was achieved in 2005 as investments either matured or call options were exercised, accounting for the decrease in the available for sale portfolio. The Company's held to maturity portfolio decreased from December 31, 2004 to June 30, 2005 due to the maturity of various municipal accounts. Approximately $22 million in short-term municipal borrowings matured on June 30, 2005 with renewals of approximately the same amount expected to be booked by August 15, 2005. NOW and money market accounts decreased due in part to the effects of stiffening competition for municipal account relationships, which are a component of money market accounts, as well as the maturities of the municipal account s mentioned in the prior sentence. Following the normal municipal funding cycle, funds from these accounts were used to pay-off the current borrowings during the second quarter of 2005. Savings accounts and time deposits have shown little activity, while time deposits decreased $1.8 million from June 30, 2004 to December 31, 2004, and then increased $547,236 to end at $98.6 million as of June 30, 2005.

RISK MANAGEMENT

Interest Rate Risk and Asset and Liability Management -Management actively monitors and manages its interest rate risk exposure and attempts to structure the balance sheet to maximize net interest income while controlling its exposure to interest rate risk. The Company's Asset/Liability Management Committee (ALCO) formulates strategies to manage interest rate risk by evaluating the impact on earnings and capital of such factors as current interest rate forecasts and economic indicators, potential changes in such forecasts and indicators, liquidity, and various business strategies. The ALCO meets monthly to review financial statements, liquidity levels, yields and spreads to better understand, measure, monitor and control the Company's interest rate risk. In the ALCO process, the committee members apply policy limits set forth in the Asset Liability, Liquidity and Investment policies approved by the Company's Board of Directors. The ALCO's methods for evaluating in terest 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 interest sensitive assets and liabilities 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 quarterly 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 reflec ted on the Company's balance sheet. Furthermore, the model simulates the balance sheet's sensitivity to a prolonged flat rate environment. All rate scenarios are simulated assuming a parallel shift of the yield curve; however further simulations are performed utilizing a flattening yield curve as well. This sensitivity analysis is compared to the ALCO policy limits which specify a maximum tolerance level for NII exposure over a 1-year horizon, assuming no balance sheet growth, given a 200 basis point (bp) shift upward and a 100 bp shift downward in interest rates. During the extended period where interest rates were at an all time low, the sensitivity analysis also provided a 400 bp shift upward scenario. 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 manage ment with an important tool for making sound economic decisions regarding the balance sheet.

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

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

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

		June 30, 2005				December 31, 2004
		Total Loans		% of Total		Total Loans		% of Total
Real Estate Loans
Construction & Land Development	$	13,610,448		5.80%	$	11,646,486		5.07%
Farm Land		2,547,947		1.09%		2,495,782		1.09%
1-4 Family Residential		122,901,183		52.36%		118,973,830		51.81%
Home Equity Lines		10,307,515		4.39%		8,580,929		3.74%
Commercial Real Estate		42,246,828		17.99%		43,609,781		18.99%
Loans to Finance Agricultural Production		274,305		0.12%		443,259		0.19%
Commercial & Industrial		21,281,582		9.07%		21,592,005		9.40%
Consumer Loans		21,029,995		8.96%		21,716,221		9.46%
All Other Loans		532,923		0.22%		574,892		0.25%
Gross Loans		234,732,726		100%		229,633,185		100%
Less:
Allowance for Loan Losses		(2,170,363	)	-0.92%		(2,153,372	)	-0.94%
Deferred Loan Fees		(695,466	)	-0.30%		(763,774	)	-0.33%
Net Loans	$	231,866,897		98.78%	$	226,716,039		98.73%

Allowance for loan losses and provisions -The Company continues to maintain an allowance for loan losses at a level that management believes is adequate to absorb losses inherent in the loan portfolio. As of June 30, 2005, the Company maintained a residential loan portfolio of $122.9 million, compared to $119.0 million at December 31, 2004, and a commercial real estate portfolio (including construction, land development and farm land loans) of $58.4 million and $57.8 million, respectively. Together this accounts for approximately 77.2% and 77.0%, respectively, of the total loan portfolio for June 30, 2005 and December 31, 2004. The Company's commercial loan portfolio includes loans that carry guarantees from government programs. At June 30, 2005, the Company had $14 million in guaranteed loans, compared to $14.6 million at December 31, 2004. The volume of residential and commercial loans secured by real estate, together with the low historical loan loss experience in these portfolios, helps to suppo rt the Company's basis for loan loss coverage.Furthermore, the Company is committed to a conservative lending philosophy and maintains high credit and underwriting standards. In establishing the ALL, management uses qualitative factors to simulate current lending conditions. The lending and credit administration staffs are highly skilled and dedicated to the high standards and expectations of the Company. The expansion into Central Vermont has given the Company an opportunity to diversify the geographic risk in the loan portfolio with loans from a stronger economic community. When the Company expanded into the new market in Central Vermont, experienced lenders were hired and trained to be sure that the same high level of standards would be followed for the loans originated in this new market; all credit administration and underwriting is centralized to ensure consistency. The following tables reflect the Company's success in managing the credit risk within the portfolio.

The following table summarizes the Company's loan loss experience for the six months ended June 30,

		2005		2004
Loans Outstanding End of Period	$	234,732,726	$	208,424,235
Average Loans Outstanding During Period	$	230,948,196	$	206,008,649
Loan Loss Reserve, Beginning of Period	$	2,153,372	$	2,199,110
Loans Charged Off:
Residential Real Estate		4,602		11,431
Commercial Real Estate		0		0
Commercial Loans not Secured by Real Estate		27,500		0
Consumer Loans		59,580		94,183
Total Loans Charged Off		91,682		105,614
Recoveries:
Residential Real Estate		910		1,045
Commercial Real Estate		0		55
Commercial Loans not Secured by Real Estate		4,330		8,421
Consumer Loans		28,433		66,291
Total Recoveries		33,673		75,812
Net Loans Charged Off		58,009		29,802
Provision Charged to Income		75,000		85,000
Loan Loss Reserve, End of Period	$	2,170,363	$	2,254,308

Non-performing assets for the comparison periods were as follows:

	June 30, 2005			December 31, 2004
			Percent				Percent
		Balance	of Total			Balance	of Total
Non-Accruing loans	$	661,829	85.82%		$	865,443	75.73%
Loans past due 90 days or more and still accruing		109,368	14.18%			194,594	17.03%
Other real estate owned		0	0%			82,800	7.24%
Total	$	771,197	100.00%		$	1,142,837	100.00%

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

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

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

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

     The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit and 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 six months of 2005, there has not been any activity that has created any additional types of off-balance-sheet risk.

     The Company generally requires collateral or other security to support financial instruments with credit risk. The Company's financial instruments whose contract amount represents credit risk as of June 30, 2005 are as follows:

	Contract or
	Notional Amount
Commitments to extend credit	$	29,872,069
Unused portions of home equity lines of credit		8,047,292
Unused portions of credit card lines		8,759,859
Standby letters of credit		680,930
MPF credit enhancement obligation, net of liability recorded		960,192

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

AGGREGATE CONTRACTUAL OBLIGATIONS

The following table presents, as of June 30, 2005, significant fixed and determinable contractual obligations to third parties, by payment date:

		Less than		2-3		4-5		More than
		1 year		years		years		5 years		Total
Operating Leases	$	165,404	$	334,717	$	361,048	$	851,640	$	1,712,809
Operations Center Project		3,370,826		0		0		0		3,370,826
Housing Limited Partnerships		62,349		0		0		0		62,349
FHLB Borrowings		12,859,000		30,000		0		5,010,000		17,899,000
Total	$	16,457,579	$	364,717	$	361,048	$	5,861,640	$	23,044,984

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 of 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.

     The Company's loan portfolio increased moderately during the first six months of 2005, while the investment portfolio has decreased considerably during the same time period. As mentioned in the section labeled "Changes in Financial Condition", this decrease is attributable to the maturity of various municipal investment accounts. Deposit accounts, primarily NOW and money market accounts have decreased $23.1 million, contributing to the increase in other borrowed funds of $11.5 million in order to fund loan demand, which has remained steady. Most of this decrease is from the municipal accounts. For each maturing municipal loan mentioned earlier in the report, is a corresponding money market account that is closed when the loan matures. These deposits are funded when the new loan is booked. This fluctuation is a cyclical pattern for the Company.

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

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

     The Company has a $4.3 million credit line with the Federal Home Loan Bank of Boston (FHLB) with an available balance of $2.4 million at June 30, 2005. Interest is chargeable at a rate determined daily, approximately 25 basis points higher than the rate paid on federal funds sold. Additional borrowing capacity of approximately $91.6 million through the FHLB is secured by the Company's qualifying loan portfolio.

     As of June 30, 2005, the Company had short-term advances of $11 million and long-term advances of $5.04 million against the $91.6 million and an advance of $1.9 million against the $4.3 million credit line. The advances with maturity dates greater than a year with higher interest rates are subject to a substantial pre-payment penalty. Although the rates are higher than the current market, the imposed penalty far outweighs the interest rate differential. The Company's outstanding advances consist of the following:

	Annual			Principal
Purchase Date	Rate	Maturity Date		Balance
May 16, 2005	3.15%	July 18, 2005	$	3,000,000
June 01, 2005	3.22%	August 01, 2005		4,000,000
May 16, 2005	3.30%	September 16, 2005		3,000,000
June 01, 2005	3.41%	October 03, 2005		1,000,000
Total Short-term Advances			$	11,000,000
November 16, 1992	7.57%	November 16, 2007		30,000
November 16, 1992	7.67%	November 16, 2012		10,000
January 16, 2001	4.78%	January 18, 2011		5,000,000
Total Long-term Advances			$	5,040,000
Federal Funds Purchased			$	1,859,000

     Under a separate agreement with FHLB, the Company has the authority to collateralize public unit deposits, up to its FHLB borrowing capacity ($91.6 million less outstanding advances noted above) with letters of credit issued by the FHLB. At June 30, 2005, approximately $53.5 million was pledged, under this agreement, as collateral for these deposits. Interest is charged to the Company quarterly based on the average daily balance for the quarter at an annual rate of 20 basis points. The average daily balance for the second quarter of 2005 was approximately $13.3 million.

     In December 2004, the Company declared a cash dividend of $0.16 per share, payable in the first quarter of 2005, requiring the bank to book an accrual of $650,449 during the fourth quarter. In March 2005, the Company declared a cash dividend of $0.17 per share, payable in the second quarter of 2005, requiring an accrual of $652,627 at March 31, 2005. In June 2005, the Company declared a cash dividend of $0.17 per share, payable in the third quarter of 2005, requiring an accrual of $687,360. Additionally, in the second quarter of 2005, the Company announced the intent to pay a 5% stock dividend on July 1, 2005. All per share data for prior periods have been restated to reflect this stock dividend.

     Due to the entries required to book the 5% stock dividend and the cash dividend declared in the second quarter of 2005, payable in the third quarter, Retained Earnings became a Retained Deficit at June 30, 2005. Management expects that, as the year progresses, this deficit will revert to earnings.

The following table illustrates the changes in shareholders' equity from December 31, 2004 to June 30, 2005:

Balance at December 31, 2004 (book value $6.96 per share)	$	28,043,446
Net income		1,487,185
Issuance of stock		420,979
Purchase of treasury stock (fractional share redemption)		(36	)
Purchase of treasury stock (fractional shares from 5% stock dividend)		(2,802	)
Total Dividends declared		(1,339,986	)
Change in unrealized gains on available-for-sale securities, net of tax		(114,774	)
Balance at June 30, 2005 (book value $7.03 per share)	$	28,494,012

     At June 30, 2005, of the 405,000 shares authorized for repurchase under the stock buyback plan, 167,993 shares had been purchased, leaving 237,007 shares available for repurchase. The repurchase price paid for these shares ranged from $9.75 per share in May of 2000 to $16.45 per share paid in March of 2004. During the first six months of 2005, the Company did not repurchase any shares pursuant to the buyback authority. The last purchase was October 12, 2004 in which 5,815 shares were repurchased at a price of $16.15 per share. For additional information on stock repurchases by the Company and affiliated purchasers (as defined in SEC Rule 10b-18) refer to Part II, Item 2 of this Report.

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

     Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Under current guidelines, banks must maintain a risk-based capital ratio of 8.0%, of which at least 4.0% must be in the form of core capital (as defined). The risk-based ratios of the Company and its Subsidiary exceeded regulatory guidelines at June 30, 2005 with reported risk-weighted assets of $200.1 million compared to $196.2 million at December 31, 2004 and total capital of $30.7 million and $30.0 million, respectively. The Company's total risk-based capital to risk-weighted assets was 15.35% and 15.45% at June 30, 2005 and December 31, 2004, respectively. The Company's Tier 1 capital to risk-weighted assets was 14.10% and 14.20% at June 30, 2005 and December 31, 2004, respectively . In addition to risk-based capital requirements, bank holding companies are required to maintain minimum leverage capital ratios of core capital to average assets of $4.0%. The Company exceeded these requirements with leverage ratios of 8.47% as of June 30, 2005, and 8.34% at December 31, 2004.

     Regulators have also established guidelines for minimum capital ratio requirements that define a bank as well-capitalized under prompt corrective action provisions. These minimums are risk-based capital ratio of 10.0% and Tier 1 capital ratio of 6.0%. As of June 30, 2005, the Company and its Subsidiary were deemed well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that time that management believes have changed the Company's classification.

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

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

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 caption "RISK MANAGEMENT", as well as in the Company's 2004 annual report on form 10-K. 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 such 10-K report.

ITEM 4. Controls and Procedures

     As required by Rule 13a-15 under the Securities Exchange Act of 1934, the Company has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's Chairman and Chief Executive Officer and its President and Chief Operating Officer (Chief Financial Officer). Based upon that evaluation, such officers concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. There were no changes during the Company's last fiscal quarter in the Company's internal control over financial reporting identified in connection with the evaluation of the Company's disclosure controls and procedures 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

     The Company and/or its Subsidiary are subject to various claims and legal actions that have arisen in the normal course of business. Management does not expect that the ultimate disposition of these matters, individually or in the aggregate, will have a material adverse impact on the Company's financial statements.

ITEM 2. Unregistered Sales of Securities and Use of Proceeds

The following table provides information as to purchases of the Company's common stock during the second quarter ended June 30, 2005, by the Company and by any affiliated purchaser (as defined in SEC Rule 10b-18):

				Maximum
				Number of Shares
			Total Number of	That May Yet Be
			Shares Purchased	Purchased Under
	Total Number of	Average Price	as Part of Publicly	the Plan at the
For the month ended:	Shares Purchased(1)(2)	Paid Per Share	Announced Plan(3)	End of the Period
April 1 -April 30	2,145	$17.16	0	237,007
May 1 - May 31	1,300	$16.85	0	237,007
June 1 - June 30	300	$16.90	0	237,007
Total	3,745	$17.03	0	237,007

(1)  All 3,745 shares were purchased by Community Financial Services Group, LLC ("CFSG"), which may be deemed to be an affiliate of the Company under Rule 10b-18, for the account of participants invested in the Company Stock Fund under the Company's Retirement Savings Plan. All purchases by CFSG were made in the open market in brokerage transactions reported on the OTC Bulletin Board©.

(2)  Shares purchased during the period do not include (1) fractional shares repurchased from time to time in connection with the participant's election to discontinue participation in the Company's Dividend Reinvestment Plan; or (2) settlement of fractional shares in connection with the payment of a 5% stock dividend declared in May 2005.

(3)  The Company's Board of Directors in April, 2000 initially authorized the repurchase from time to time of up to 205,000 shares of the Company's common stock in open market and privately negotiated transactions, in management's discretion and as market conditions may warrant. The Board extended this authorization on October 15, 2002 to repurchase an additional 200,000 shares, with an aggregate limit for such repurchases under both authorizations of $3.5 million. The approval did not specify a termination date.

ITEM 4. Submission of Matters to a Vote of Security Holders

     The following matters were submitted to a vote of security holders, at the Annual Meeting of Shareholders of Community Bancorp. on May 10, 2005:

To elect three directors to serve until the Annual Meeting of Shareholders in 2008;

To ratify the selection of the independent registered public accounting firm of Berry, Dunn, McNeil & Parker as the Corporation's external auditors for the fiscal year ending December 31, 2005;

The results are as follows:

			AUTHORITY
			WITHHELD/	BROKER
MATTER	FOR	AGAINST	ABSTAIN	NON-VOTE
Election of Directors:
Thomas E. Adams	2,824,555.6895	0.0000	4,935.0430	-0-
Jacques R. Couture	2,818,492.6895	6,063.0000	4,935.0430	-0-
Richard C. White	2,824,384.8049	170.8846	4,935.0430	-0-
Selection of Auditors
Berry, Dunn, McNeil & Parker	2,810,060.6493	2,639.0000	16,791.0832	-0-

ITEM 6. Exhibits

Exhibit 31.1 - Certification from the Chief Executive Officer of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Certification from the Chief Financial Officer of the Company pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 - Certification from the Chief Executive Officer of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*
Exhibit 32.2 - Certification from the Chief Financial Officer of the Company pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*

*This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Act of 1934.

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
COMMUNITY BANCORP.
DATED: August 10, 2005	By: /s/ Richard C. White
	Richard C. White, Chairman &
	Chief Executive Officer
DATED: August 10, 2005	By: /s/ Stephen P. Marsh
	Stephen P. Marsh, President &
	Chief Operating Officer
	(Chief Financial Officer)