CONFORMED COPY SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Nine Months Ended September 30, 1999 Commission File Number 000-16435 COMMUNITY BANCORP. (Exact Name of Registrant as Specified in its Chapter) Vermont 03-0284070 (State of Incorporation) (IRS Employer Identification Number) Derby Road, Derby, Vermont 05829 (Address of Principal Executive Offices) (zip code) Registrant's Telephone Number: (802) 334-7915 Not Applicable Former Name, Former Address and Formal Fiscal Year (If Changed Since Last Report) 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 ( ) At November 4, 1999 there were 3,358,507 shares outstanding of the Corporation's common stock. Total Pages - 24 Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements COMMUNITY BANCORP. AND SUBSIDIARIES Consolidated Statement of Condition ( Unaudited ) September 30 December 31 September 30 1999 1998 1998 Assets Cash and due from banks 6,347,127 4,896,947 4,862,928 Federal funds sold and overnight deposits 5,078,454 15,527,141 3,574,757 Total cash and cash equivalents 11,425,581 20,424,088 8,437,685 Securities held-to-maturity (fair value $36,875,241 at 09/30/99, $30,038,323 at 12/31/98, and $38,708,948 at 09/30/98) 37,137,179 29,877,851 38,465,409 Securities available-for-sale 29,260,313 20,590,000 20,714,375 Restricted equity securities 1,141,650 1,141,650 1,141,650 Loans 151,781,718 148,335,346 150,599,826 Allowance for loan losses (1,714,364) (1,658,967) (1,652,776 Unearned net loan fees (885,233) (848,963) (856,840) Net loans 149,182,121 145,827,416 148,090,210 Bank premises and equipment, net 4,327,535 3,010,041 3,064,566 Accrued interest receivable 1,922,636 1,460,671 1,730,111 Other real estate owned, net 651,655 541,903 592,114 Other assets 2,214,908 2,177,043 2,002,537 Total assets $237,263,578 $225,050,663 $224,238,657 Liabilities and Stockholders' Equity Liabilities Deposits: Demand, non-interest bearing 24,955,211 21,743,065 22,273,432 NOW and money market accounts 54,785,715 49,939,162 44,774,125 Savings 34,403,769 30,512,230 31,525,967 Time deposits, $100,000 and over 16,952,292 17,874,124 19,191,274 Other time deposits 77,220,033 77,728,713 79,709,528 Total deposits $208,317,020 $197,797,294 $197,474,326 Borrowed funds 4,060,000 4,060,000 4,060,000 Repurchase agreements 1,459,358 288,241 78,320 Accrued interest and other liabilities 996,711 883,069 918,510 Subordinated convertible debentures 20,000 20,000 20,000 Total liabilities $214,853,089 $203,048,604 $202,551,156 Stockholders' Equity Common stock - $2.50 par value; 6,000,000 shares authorized and 3,362,022 shares issued at 09/30/99, 3,296,154 issued at 12/31/98, and 3,278,036 issued at 09/30/98 8,405,054 7,851,516 7,808,378 Additional paid-in capital 10,766,836 8,756,453 8,584,444 Retained earnings 3,780,301 5,604,096 5,405,536 Accumulated other comprehensive income (93,490) 235,375 334,477 Less: treasury stock, at cost; 29,886 shares at 09/30/99, 29,646 shares at 12/31/98, and 29,643 shares at 09/30/98 (448,212) (445,381) (445,334) Total stockholders' equity $22,410,489 $22,002,059 $21,687,501 Total liabilities and stockholders' equity $237,263,578 $225,050,663 $224,238,657 COMMUNITY BANCORP. AND SUBSIDIARIES Statements of Income ( Unaudited ) For The Third Quarter Ended September 30, 1999 1998 1997 Interest income Interest and fees on loans 3,294,974 3,483,609 3,504,235 Interest and dividends on investment securities U.S. Treasury securities 554,450 537,196 509,578 U.S. Government agencies 133,946 42,301 21,192 States and political subdivisions 196,180 170,690 173,647 Dividends 20,556 18,162 17,921 Interest on federal funds sold and overnight deposits 47,549 72,490 26,250 Total interest income $4,247,655 $4,324,448 $4,252,823 Interest expense Interest on deposits 1,831,568 1,992,663 1,894,888 Interest on borrowed funds 51,495 51,124 101,016 Interest on repurchase agreements 13,647 929 0 Interest on subordinated debentures 550 229 2,584 Total interest expenses $1,897,260 $2,044,945 $1,998,488 Net interest income 2,350,395 2,279,503 2,254,335 Provision for loan losses (115,000) (150,000) (215,000) Net interest income after provision $2,235,395 $2,129,503 $2,039,335 Other operating income Trust department income 62,054 43,486 29,028 Service fees 176,797 170,762 181,434 Security gains (losses) 0 0 0 Other 165,765 167,946 141,124 Total other operating income $404,616 $382,194 $351,586 Other operating expenses Salaries and wages 724,113 708,689 728,382 Pension and other employee benefits 205,874 192,326 203,274 Occupancy expenses, net 280,158 323,744 332,987 Trust Department Expenses 13,080 9,389 11,043 Other 603,047 533,566 539,341 Total other operating expenses $1,826,272 $1,767,714 $1,815,027 Income before income taxes 813,739 743,983 575,894 Applicable income taxes (credit) 209,833 181,844 124,725 Net Income $603,906 $562,139 $451,169 Earnings per share on weighted average $0.18 $0.17 $0.14 Weighted average number of common shares Used in computing earnings per share 3,332,139 3,247,388 3,141,331 Dividends per share $0.16 $0.15 $0.14 Per share data for 1998 and 1997 restated to reflect a 100% stock dividend paid on June 1, 1998, and a 5% stock dividend paid on February 1, 1999. COMMUNITY BANCORP. AND SUBSIDIARIES Statements of Income ( Unaudited ) For the Nine Months Ended September 30, 1999 1998 1997 Interest income Interest and fees on loans 9,748,162 10,352,917 10,283,050 Interest and dividends on investment securities U.S. Treasury securities 1,684,898 1,525,088 1,568,142 U.S. Government agencies 401,999 83,380 62,758 States and political subdivisions 447,769 462,851 455,431 Dividends 59,405 55,566 52,724 Interest on federal funds sold and overnight deposits 159,082 276,518 42,990 Total interest income $12,501,315 $12,756,320 $12,465,095 Interest expense Interest on deposits 5,483,598 5,933,489 5,642,542 Interest on borrowed funds 150,567 147,367 168,533 Interest on repurchase agreements 22,957 3,122 0 Interest on subordinated debentures 1,650 4,047 9,007 Total interest expense $5,658,772 $6,088,025 $5,820,082 Net interest income 6,842,543 6,668,295 6,645,013 Provision for loan losses (415,000) (510,000) (525,000) Net interest income after provision $6,427,543 $6,158,295 $6,120,013 Other operating income Trust department income 167,563 109,326 85,452 Service fees 520,060 503,305 519,993 Security gains (losses) 0 0 0 Other 540,556 580,099 659,266 Total other operating income 1,228,179 1,192,730 1,264,711 Other operating expenses Salaries and wages 2,131,401 2,117,596 2,125,586 Pension and other employee benefits 604,324 544,062 519,764 Occupancy expenses, net 923,954 967,674 933,466 Trust Department Expenses 41,082 36,805 22,797 Other 1,801,701 1,672,431 1,680,679 Total other operating expenses $5,502,462 $5,338,568 $5,282,292 Income before income taxes 2,153,260 2,012,457 2,102,432 Applicable income taxes (credit) 572,069 484,698 519,536 Net Income $1,581,191 $1,527,759 $1,582,896 Earnings per share on weighted average $0.48 $0.48 $0.51 Weighted average number of common shares Used in computing earnings per share 3,292,879 3,217,343 3,111,702 Book value per share on shares outstanding $6.73 $6.68 $6.40 Per share data for 1998 and 1997 restated to reflect a 100% stock dividend paid on June 1, 1998, and a 5% stock dividend paid on February 1, 1999. COMMUNITY BANCORP. AND SUBSIDIARIES Statement of Cash Flows For the Nine Months Ended September 30, 1999 1998 1997 Reconciliation of net income to net cash provided by operating activities: Net Income 1,581,191 1,527,759 1,582,896 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 304,786 303,012 299,171 Provisions for possible loan losses 415,000 510,000 525,000 Provisions for deferred income taxes (30,150) (70,245) 52,121 (Gain) loss on sale of loans (89,534) (118,886) (17,701) Securities losses 0 0 0 Loss (gain) on sales of OREO 6,244 (2,712) (7,920) OREO writedowns 19,590 26,592 29,446 Amortization of bond premium, net 240,582 35,412 11,111 Proceeds from sales of loans held for sale 9,424,068 3,489,568 670,591 Originations of loans held for sale (9,467,687) (4,600,524) (921,532) Increase (decrease) in taxes payable 28,240 15,944 (230,350) (Increase) decrease in interest receivable (461,965) (269,813) (85,964) Increase in mortgage service rights (32,119) (63,190) (16,715) Decrease (Increase) in other assets 201,483 (126,978) (399,040) (Decrease) increase in unamortized loan fees 36,270 (9,749) (35,441) (Decrease) increase in interest payable (29,686) (9,725) 77,213 (Decrease) increase in accrued expenses 1,229 56,345 78,718 Increase (decrease) in other liabilities 120,326 148,160 (13,059) Net cash provided by operating activities 2,267,868 840,970 1,698,545 Cash Flows from investing activities: Investments - held to maturity Maturities and paydowns 18,936,104 12,861,980 8,675,068 Purchases (26,313,397) (17,220,197) (14,271,814) Investments - available for sale Maturities and paydowns 0 2,000,000 0 Purchases (9,291,211) (14,236,406) 0 Purchase of restricted equity securities 0 (41,900) (36,700) Investment in limited partnership (14,130) (40,312) 282 Increase in Loans, Net of Payments (4,337,162) (78,380) (6,524,844) Capital Expenditures (1,622,280) (81,917) (177,604) Recoveries of loans charged off 74,913 165,911 108,837 Proceeds from sales of OREO 453,841 771,784 415,273 Net Cash Used in Investing Activities (22,113,322) (15,899,437) (11,811,502) Cash Flows from Financing Activities: Net increase in demand deposits, NOW, MMA and savings 11,950,238 7,660,272 969,089 Net increase in certificates of deposit (1,430,512) 2,233,653 2,348,708 Net increase (decrease) in short-term borrowings and repurchase agreements 1,171,117 0 0 Net increase in borrowed funds 0 0 6,400,000 Payments to acquire treasury stock (2,831) (197) (4,888) Dividends paid (841,065) (705,186) (645,671) Net cash provided by financing activities 10,846,947 9,188,542 9,067,238 Net increase in cash and cash equivalents (8,998,507) (5,869,925) (1,045,719) Cash and cash equivalents: Beginning 20,424,088 14,307,610 8,245,398 Ending 11,425,581 8,437,685 7,199,679 Supplemental Schedule of Cash Paid During the Year Interest paid 5,687,724 6,096,466 5,741,771 Income Taxes Paid 573,980 538,999 697,765 Supplemental schedule of noncash investing and financing activities: Net change in securities valuation (498,281) 455,709 30,873 OREO acquired in settlements of loans 589,427 318,577 1,438,812 Debentures converted to common stock 0 84,000 65,000 Stock dividends 1,851,338 3,823,576 1,294,006 Dividends paid Dividends payable 1,553,648 1,369,090 1,233,310 Dividends reinvested (712,583) (663,904) (587,639) 841,065 705,186 645,671 AVERAGE BALANCES AND INTEREST RATES The table below presents the following information: Average earning assets (including non-accrual loans) Average interest bearing liabilities supporting earning assets Interest income and interest expense as a rate/yield For the First Nine Months Ended: 1999 1998 Average Income/ Rate/ Average Income/ Rate/ Earning Assets Balance Expense Yield Balance Expense Yield Loans (gross) 148,626,379 9,748,162 8.77% 150,459,708 10,352,917 9.20% Taxable Investment Securities	 51,170,109 2,086,899 5.45% 37,556,080 1,608,368 5.73% Tax Exempt Investment Securities (1) 13,349,015 672,198 6.73% 12,936,310 692,221 7.15% Federal Funds Sold 2,271,978 75,689 4.45% 3,829,560 132,094 4.61% Overnight Deposits 2,271,173 83,393 4.91% 3,197,058 144,424 6.04% Other Securities(2) 1,257,359 63,523 6.75% 1,268,761 61,550 6.49% TOTAL 218,946,013 12,729,864 7.77% 209,247,477 12,991,574 8.29% Interest Bearing Liabilities Savings Deposits 32,548,493 564,046 2.32% 30,763,292 616,294 2.68% NOW & Money Market Funds 50,786,777 1,225,765 3.23% 43,275,589 1,161,619 3.59% Time Deposits 95,272,339 3,693,788 5.18% 98,425,080 4,150,058 5.64% Other Borrowed Funds 4,060,000 150,567 4.96% 4,060,000 147,367 4.85% Repurchase Agreements 774,618 22,957 3.96% 39,939 1,324 4.43% Subordinated Debentures 20,000 1,650 11.03% 50,000 4,047 10.82% TOTAL 183,462,227 5,658,773 4.12% 176,613,900 6,080,709 4.60% Net Interest Income 7,071,091 6,910,865 Net Interest Spread(3) 3.64% 3.69% Interest Differential(4) 4.32% 4.42% <FN> <f01> Income on investment securities of state and political subdivisions is stated on a fully taxable basis (assuming a 34 percent tax rate). <f02>	Included in other securities are taxable industrial development bonds (VIDA), with income of approximately $4,119 for 1999 and $5,985 for 1998. <f03> Net interest spread is the difference between the yield on earning assets and the rate paid on interest bearing liabilities. <f04> Interest differential is net interest income divided by average earning assets. CHANGES IN INTEREST INCOME AND INTEREST EXPENSE The following table summarizes the variances in income for the first nine months of 1999 and 1998 resulting from volume changes in assets and liabilities and fluctuations in rates earned and paid. Variance Variance RATE / VOLUME Due to Due to Total Rate(1) Volume(1) Variance Earning Assets Loans (gross) (484,510) (120,245) (604,755) Taxable Investment Securities (104,500) 583,031 478,531 Tax Exempt Investment Securities (1) (42,107) 22,084 (20,023) Federal Funds Sold (4,515) (51,890) (56,405) Overnight Deposits (27,034) (33,997) (61,031) Other Securities (2) 2,549 (576) 1,973 Total Interest Earnings (660,117) 398,407 (261,710) Interest Bearing Liabilities Savings Deposits (88,012) 35,764 (52,248) NOW & Money Market Funds (137,472) 201,618 64,146 Time Deposits (334,036) (122,234) (456,270) Other Borrowed Funds 3,200 0 3,200 Repurchase Agreements (2,722) 24,355 21,633 Subordinated Debentures 78 (2,475) (2,397) Total Interest Expense (558,964) 137,028 (421,936) <FN> <f01> Items which have shown a year-to-year increase in volume have variances allocated as follows: Variance due to rate = Change in rate x new volume Variance due to volume = Change in volume x old rate Items which have shown a year-to-year decrease in volume have variances allocated as follows: Variance due to rate = Change in rate x old volume Variance due to volume = Change in volume x new rate <f02> Income on tax exempt securities is stated on a fully taxable basis. The assumed rate is 34%. COMMUNITY BANCORP. PRIMARY EARNINGS PER SHARE For The Third Quarter Ended September 30, 1999 1998 1997 Net Income $603,906 $562,139 $451,169 Average Number of Common Shares Outstanding. 3,332,139 3,247,388 3,141,331 Earnings Per Common Share $0.18 $0.17 $0.14 For the First Nine Months Ended September 30, 1999 1998 1997 Net Income $1,581,191 $1,527,759 $1,582,896 Average Number of Common Shares Outstanding. 3,292,879 3,217,343 3,111,702 Earnings Per Common Share $0.48 $0.48 $0.51 All 1998 and 1997 per share data restated to reflect 100% stock dividend paid on June 1, 1998, and a 5% stock dividend paid on February 1, 1999. 		GRAPHICS GRAPHICS COMMUNITY BANCORP. FULLY DILUTED EARNINGS PER SHARE For The Third Quarter Ended September 30, 1999 1998 1997 Net Income $603,906 $562,139 $451,169 Adjustments to Net Income (Assuming Conversion of Subordinated Convertible Debentures). 363 151 1,705 Adjusted Net Income $604,269 $562,290 $452,874 Average Number of Common Shares Outstanding. 3,332,139 3,247,388 3,141,331 Increase in Shares (Assuming Conversion of Subordinated Convertible Debentures). (230,277) (145,526) 29,752 Average Number of Common Shares Outstanding (Fully Diluted). 3,101,862 3,101,862 3,171,083 Earnings Per Common Share Assuming Full Dilution.$0.19 $0.18 $0.14 For the First Nine Months Ended September 30, 1999 1998 1997 Net Income $1,581,191 $1,527,759 $1,582,896 Adjustments to Net Income (Assuming Conversion of Subordinated Convertible Debentures). 1,089 2,671 5,945 Adjusted Net Income $1,582,280 $1,530,430 $1,588,841 Average Number of Common Shares Outstanding. 3,292,879 3,217,343 3,111,702 Increase in Shares (Assuming Conversion of Subordinated Convertible Debentures). 8,557 19,422 35,868 Average Number of Common Shares Outstanding (Fully Diluted). 3,301,436 3,236,765 3,147,570 Earnings Per Common Share Assuming Full Dilution.$0.48 $0.47 $0.50 All 1998 and 1997 per share data restated to reflect 100% stock dividend paid on June 1, 1998, and a 5% stock dividend paid on February 1, 1999. GRAPHICS GRAPHICS PART I. Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS For the Nine Months Ended September 30, 1999 Community Bancorp. (the "Company") is a bank holding company whose subsidiaries include Community National Bank and Liberty Savings Bank. Community National Bank ("the Bank") is a full service institution operating in the state of Vermont. The Bank has seven offices, five of which are located in Orleans County, one in Essex County, and one in Caledonia County. Liberty Savings Bank ("Liberty") is a New Hampshire guaranty savings bank acquired by Community Bancorp. on December 31, 1997. Currently this bank is inactive and does not have any offices or deposit taking authority, and shares the mailing address of Community Bancorp. Once a suitable location is identified, it is anticipated that Liberty will initially operate as a lending facility, and may expand in the future into a full service financial institution. Management is working with the board of directors to find a suitable location in the northern part of New Hampshire for this endeavor. Community National Bank has a small customer base in the state of New Hampshire and hopes to broaden its base through Liberty Savings Bank. Most of the Bancorp's business is conducted through the Bank, therefore, the following narrative is based primarily on this Bank's operations. The Balance Sheet and Statements of Income preceding this section are consolidated figures for Community Bancorp. and subsidiaries ("the Company"), and can be used in conjunction with the other reports following them to provide a more detailed comparison of the information disclosed in the following narrative. OVERVIEW Net income for the third quarter ended September 30, 1999 was $603,906, representing an increase of 7.4% and 33.9%, respectively, over the net income figures of $562,139 for the third quarter ended September 30, 1998, and $451,169 for the same period in 1997. The results of this are earnings per share of $0.18 for the third quarter of 1999, $0.17 for the third quarter GRAPHICS of 1998 and $0.14 for the third GRAPHICS quarter of 1997. The Company declared a cash dividend of $0.16 per share payable November 1, 1999 to shareholders of record as of October 15, 1999. A two-for-one stock split was declared in 1998, to be accomplished by a 100% stock dividend, payable June 1, 1998, to shareholders of record as of May 15, 1998. This transaction was contingent upon the approval by the Company's shareholders of a proposal to increase the number of shares the Company may issue. This proposal was voted on and passed at the annual shareholders meeting held May 5, 1998. As a result of the stock split, all per share data has been restated for all periods in 1997 and for the first quarter of 1998. Net income for the first nine months of 1999 was $1.581 million compared to $1.528 million for the first nine months of 1998, and $1.583 million for the first nine months of 1997, representing an increase of 3.5% for 1999 versus 1998, and a decrease of .11% for 1999 versus 1997. Earnings per share for the first nine months were $0.48 for 1999 and 1998 and $0.51 for 1997. The third quarter of 1999 was better than 1998 and 1997 due in part to a decrease in the provision for loan losses. Management felt that the level of the reserve for loan loss was in line at the end of August, thereby reducing the amount expensed during the month of September. A decrease in the interest paid on deposit accounts serves as another reason for the overall increase in net income. Net income for the nine months comparison periods followed a different pattern with an increase for 1999 versus 1998 and a decrease for 1999 versus 1997. Again, the decrease in the expense for provision for loan losses played a role in the increase for 1999 versus 1998, and an increase in income from our trust department contributed just over $58 thousand. A substantial gain on the sale of an OREO property in 1997 was a major factor in the decrease in other income for 1998 versus 1997. 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, rate sensitivity of earning assets as well as interest bearing liabilities, market interest rates and the amount of non-interest bearing funds which support earning assets. Net interest income for the third quarter comparison period started at $2.25 million for 1997 and increased to $2.28 million for 1998, and then increased to $2.35 million for 1999, resulting in an increase of 3.1% for 1999 versus 1998, and 1.1% for 1998 versus 1997. Total interest income for the third quarter of 1999 decreased $76,793 or 1.8% compared to 1998, while an increase of $71,625 or 1.7% is noted for the third quarter of 1998 compared to 1997. Interest expense decreased for the third quarter of 1999 compared to the third quarter of 1998 by $147,685 or 7.2%, while an increase of $46,457 or 2.3% was recognized for 1998 versus 1997. Net interest income for the first nine months started at $6.65 million for 1997, and increased to $6.67 million at the end of the first nine months of 1998, and then increased $174,248 or 2.6% to end the first nine months of 1999 at $6.8 million. Total interest income for the first nine months increased $291,225 or 2.34% for 1998 versus 1997, while a decrease of $255,005 or 2% is noted for 1999 versus 1998. Total interest expense increased $267,943 or 4.6% for the first nine months of 1998 compared to 1997 while a decrease of $429,253 or 7.1% is noted for the first nine months of 1999 versus 1998. A review of the nine month figures for interest earned on loans, the major source of interest income, reveals an increase of just under 1% for 1998 compared to 1997, and a decrease of 5.8% for 1999 compared to 1998. In comparison, interest paid on deposits, the major source of interest expense, shows an increase of 5.2%, and a decrease of 7.6% respectively. As the loan portfolio matures or reprices, decreases are noted in the rates for these earning assets. Interest bearing deposit accounts are also repricing at a lower rate creating less expense on these liabilities. The result is a tax equivalent spread for the first nine months equaling 3.64% for 1999 versus 3.69% for 1998 and 3.96% for 1997. CHANGES IN FINANCIAL CONDITION The Company had total assets of $237 million at September 30, 1999 and $225 million at December 31, 1998. Average earning assets were $219 million for the first nine months ended September 30, 1999, including average loans of $149 million and average investment securities of approximately $66 million. Average earning assets were $209 million for the year ended December 31, 1998 including average loans of $148 million and average investment securities of $53 million. The Company attributes the desire to increase the investment portfolio of available for sale securities for the substantial increase in average investment securities. Taxable investments, which include available for sale securities increased from an average volume of $38.8 million as of year end 1998 to $51.2 million as of the end of the first nine months of 1999, an increase of approximately $12.4 million or 32%. Available for sale securities averaged $27.3 million and $16.2 million, respectively, as of September 30, 1999 and December 31, 1998, accounting for most of the $12.2 million increase. Average interest bearing liabilities at September 30, 1999 were $183.5 million, with average time deposits reported totaling $95 million and NOW & money market funds of $51 million. At December 31, 1998, average interest bearing liabilities of $178 million were reported including average time deposits of $98 million and NOW & money market funds at an average volume of $45 million. Repurchase agreements have experienced a steady increase starting at an average volume of $93,183 at December 31, 1998, and increasing $681,435 to end at a nine month average balance of $774,618. These accounts were introduced during the 1998 calendar year and have been successful in attracting new business customers, and retaining current business customers. RISK MANAGEMENT Liquidity Risk - 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 repayment of loans and growth in deposits are two of the major sources of liquidity. Our time deposits greater than $100,000 decreased $921,832 or 5.2% to end the first nine months of 1999 at a volume of approximately $17 million compared to $17.7 million at the end of the 1998 calendar year. Other time deposits decreased $508,680 from December 31, 1998 to September 30, 1999. A review of these deposits, primarily the time deposits over $100,000 indicates that they are primarily generated locally and regionally and are established customers of the Company. The Company has no brokered deposits. Savings accounts increased $3.9 million to end the first nine months of 1999 at $34.4 million compared to $30.5 million as of the end 1998. Unfavorable rates on time deposit generated a stronger demand for savings accounts as customers wait for more favorable rates on these funds. Our gross loan portfolio increased 2.3% from $148.3 million at the end of 1998 to $151.8 million at the end of the first nine months of 1999. More fixed rate "in- house" loans were generated this year in an effort to increase our loan portfolio. Federal funds sold and overnight deposits decreased dramatically to end the first nine months of 1999 at just over $5 million compared to $15.5 million as of the end of the 1998 calendar year. An increase in the Company's investment portfolio is a direct result of this decrease. As of the end of the first nine months of 1999, the Company held in it's investment portfolio treasuries classified as "Available for Sale" at a market price of $29.3 million, compared to $20.6 million as of December 31, 1998, an increase of $8.7 million or 42%. Securities classified as "Held to Maturity" ended the first nine months of 1999 at a balance of $37 million compared to $29.9 million as of the end of the 1998 calendar year. Both of these types of investments mature at monthly intervals as shown on the gap report at the end of this section. Securities classified as "Restricted Equity Securities" are made up of equity securities the Company is required to maintain in the form of Federal Home Loan Bank of Boston (FHLB) and Federal Reserve stock. These securities remain at a balance totaling $1.14 million as of September 30, 1999. The Company currently has an advance of just over $4 million against an available line of $96.4 million, with an additional $2 million and $4.1 million, respectively, at First Boston and FHLB. Credit Risk - Management follows strict underwriting guidelines, and has established a thorough loan-by-loan review policy. These measures help to insure the adequacy of the loan loss coverage. The Executive Officers and Board of Directors conduct an ongoing review of the loan portfolio, which meets to discuss, among other matters, potential exposures. Factors considered are each borrower's financial condition, the industry or sector for the economy in which the borrower operates, 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 and compliance with various policies and procedures set by the regulatory authorities. The Company also employs a Credit Administration Officer whose duties include, among others, a review of the loan portfolio including delinquent and non- performing loans. Specific Allocations are made in situations management feels are at a greater risk for loss. A quarterly review of the Qualitative Factors, which among others are "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 first mortgage loans make up the largest part of the loan portfolio and have the lowest historical loss ratio helping to alleviate the overall risk. Allowance for loan losses and provisions - The valuation allowance for loan losses increased to $1.7 million as of September 30, 1999 composing 1.1% of the total gross loan portfolio. A primary concern of management is to reduce the exposure of credit loss within the portfolio. The Company maintains a residential loan portfolio of approximately $98.8 million and a commercial real estate portfolio of approximately $25 million accounting for 65% and 16.5%, respectively, of the total loan portfolio. This large loan volume together with the low historical loan loss experience helps to support our basis for loan loss coverage. Non-Performing assets for the company are made up of three different types of loans, "90 Days or More Past Due", "Other Real Estate Owned" (OREO), and "Non-Accruing Loans". A comparison of these non-performing assets reveals a decrease in non-accruing loans of $647,499 or 27.5%, and an increase of $109,752 or 20.3% in our OREO portfolio as well as an increase in loans 90 days or more past due of $276,626 or 69%. The portfolio of on-accruing loans makes up the biggest portion of the non- performing assets and consists of $1.6 million or 93.8% of real estate secured mortgage loans for the first nine months of 1999, thereby reducing our exposure to loss. Additionally, included in the loans past due 90 days or more is a loan totaling $118,879 carrying a 90% guarantee, further decreasing the exposure to loss by $106,991. GRAPHICS GRAPHICS Non-performing assets as of September 30, 1999 and December 31, 1998 were as follows: 09/30/1999 12/31/1998 Non-Accruing loans $1,706,124 $2,353,623 Loans past due 90 day or more and still accruing 677,927 401,301 Other real estate owned 651,655 541,903 Total $3,035,706 $3,296,827 Other real estate owned is made up of property that the Company owns 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 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 appraised value of the property, or book value of the loan. A write-down may be deemed necessary to bring the book value of the loan equal to the appraised value. Appraisals are then done periodically thereafter charging any additional write-downs to the appropriate expense account. Market Risk and Asset and Liability Management - 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's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Company does not have any market risk sensitive instruments acquired for trading purposes. The Company attempts to structure its balance sheet to maximize net interest income while controlling its exposure to interest rate risk. The Company's Asset/Liability Committee 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 Asset/Liability Committee's methods for evaluating interest rate risk include 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, and a simulation analysis which calculates projected net interest income based on alternative balance sheet and interest rate scenarios, including "rate shock" scenarios involving immediate substantial increases or decreases in market rates of interest. Interest Rate Sensitivity "Gap" Analysis - An interest rate sensitivity "gap" is defined as the difference between the interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market interest rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category. The following tables set forth the estimated maturity or repricing of the Company's interest-earning assets and interest-bearing liabilities at September 30, 1999, and December 31, 1998. The Company prepares its interest rate sensitivity "gap" analysis by scheduling assets and liabilities into periods based upon the next date on which such assets and liabilities could mature or reprice. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual term of the assets and liabilities, except that: * Adjustable-rate loans and certificates of deposit are included in the period when they are first scheduled to adjust and not in the period in which they mature; * Fixed-rate loans reflect scheduled contractual amortization, with no estimated prepayments; and * NOW, money markets, and savings deposits, which do not have contractual maturities, reflect estimated levels of attrition, which are based on detailed studies by the Company of the sensitivity of each such category of deposit, to changes in interest rates. Management believes that these assumptions approximate actual experience and considers them reasonable. However, the interest rate sensitivity of the Company's assets and liabilities in the tables could vary substantially if different assumptions were used or actual experience differs from the historical experiences on which the assumptions are based. GAP ANALYSYS Community Bancorp. & Subsidiaries September 30, 1999 Cumulative repriced within: Dollars in thousands, 3 Months 4 to 12 1 to 3 3 to 5 Over 5 by repricing date or less Months Years Years Years Total Interest sensitive assets: Federal funds sold 1,725 0 0 0 0 1,725 Overnight deposits 3,353 0 0 0 0 3,353 Investments - Available for Sale(1) 0 6,029 20,228 3,003 0 29,260 Held to Maturity 11,651 7,041 13,948 2,581 1,916 37,137 Restricted equity securities 0 0 0 0 1,142 1,142 Loans(2) 23,290 52,366 42,250 7,746 24,424 150,076 Total interest sensitive assets 40,019 65,436 76,426 13,330 27,482 222,693 Interest sensitive liabilities: Certificates of deposit 21,998 58,568 12,094 1,512 0 94,172 Money markets 35,642 0 0 0 0 35,642 Regular savings 2,752 0 0 0 31,652 34,404 Now accounts 0 0 0 0 19,143 19,143 Borrowed funds 0 5 0 15 4,040 4,060 Repurchase agreements 1,459 0 0 0 0 1,459 Subordinated debentures 0 0 0 20 0 20 Total interest sensitive liabilities 61,851 58,573 12,094 1,547 54,835 188,900 Net interest rate sensitivity gap (21,832) 6,863 64,332 11,783 (27,353) Cumulative net interest rate	sensitivity gap (21,832) (14,969) 49,363 61,146 33,793 Cumulative net interest rate sensitivity gap as a percentage of total assets -9.20% -6.31% 20.81% 25.77% 14.24% Cumulative interest Sensitivity gap as a percentage of total interest-earning assets-9.80% -6.72% 22.17% 27.46% 15.17% Cumulative interest earning assets as a percentage of cumulative interest-bearing liabilities 64.70% 87.57% 137.25% 145.61% 117.89% <FN> <f01> The Company may sell investments available for sale with a fair value of $29,260,313 at any time. <f02> Loan totals exclude non-accruing loans amounting to $1,706,124. GAP ANALYSYS Community Bancorp. & Subsidiaries December 31, 1998 Cumulative repriced within: Dollars in thousands, 3 Months 4 to 12 1 to 3 3 to 5 Over 5 by repricing date or less Months Years Years Years Total Interest sensitive assets: Federal funds sold 7,025 0 0 0 0 7,025 Overnight deposits 8,502 0 0 0 0 8,502 Investments - Available for Sale(1) 0 0 19,546 1,044 0 20,590 Held to Maturity 5,860 15,246 4,068 1,482 1,741 28,397 Restricted equity securities 0 0 0 0 1,142 1,142 Loans(2) 22,240 56,570 46,124 6,146 14,901 145,981 Total interest sensitive asset 43,627 71,816 69,738 8,672 17,784 211,637 Interest sensitive liabilities: Certificates of deposit 18,044 62,790 13,486 1,283 0 95,603 Money markets 30,817 0 0 0 0 30,817 Regular savings 2,512 0 0 0 28,000 30,512 Now accounts 0 0 0 0 19,122 19,122 Borrowed funds 0 5 0 15 4,040 4,060 Repurchase agreements 288 0 0 0 0 288 Subordinated debentures 0 0 0 0 20 20 Total interest sensitive liabilities 51,661 62,795 13,486 1,298 51,182 180,422 Net interest rate sensitivity gap (8,034) 9,021 56,252 7,374 (33,398) Cumulative net interest rate sensitivity gap (8,034) 987 57,239 64,613 31,215 Cumulative net interest rate sensitivity gap as a percentage of total assets -3.57% 0.44% 25.43% 28.71% 13.87% Cumulative interest Sensitivity gap as a percentage of total interest-earning assets -3.80% 0.47% 27.05% 30.53% 14.75% Cumulative interest earning assets as a percentage of cumulative interest-bearing liabilities 84.45% 100.86% 144.74% 149.99% 117.30% <FN> <f01> The Company may sell investments available for sale with a fair value of $20,233,371 at any time. <f02> Loan totals exclude non-accruing loans amounting to $2,353,623. OTHER OPERATING INCOME AND EXPENSES Total other operating income for the third quarter of 1999 was $404,616 compared to $382,194 for the third quarter of 1998 and $351,586 for the third quarter of 1997, an increase of $22,422 or 5.9% for 1999 versus 1998 and $30,608 or 8.7% for 1998 versus 1997. Trust department income reported the biggest increase at $18,568 for the third quarter of 1999 versus 1998. Other income reported the only increase for the same 1999 versus 1998 comparison period while reporting the biggest increase at $26,822 for 1998 versus 1997. Income from sold loans for the third quarter of 1998 was $30,033, contributing to the increase in other income for the third quarter of 1998 versus 1997. Total other operating income for the first nine months of 1999 ended at $1.23 million compared to $1.19 million for the same period in 1998 and $1.26 million for the same period in 1997. The results are an increase of $35,449 or 3% for 1999 versus 1998, and a decrease of $71,981 or 5.7% for 1998 versus 1997. Trust department again reported the biggest increase ending at $167,563 the first nine months of 1999 versus $109,326 for the same period in 1998. Other income reported the biggest decrease for the 1998 versus 1997 comparison periods reporting $580,099 for the first nine months of 1998 compared to $659,266 for the first nine months of 1997. A substantial gain was recognized in 1997 through the sale of inventory associated with an OREO property contributing to most of the decrease for 1998 versus 1997. Total other operating expenses followed a different path for the third quarter comparisons with figures of $1.83 million for 1999, an increase of $58,558 over the 1998 figure of $1.77 million which decreased $47,313 over the 1997 figure of $1.82 million. Expenses associated with the Company's non-performing assets were higher for the third quarter of 1999 compared to the same quarter in 1998, contributing $46,085 to the increase in other expenses for this comparison period. All major components of other operating expenses were lower for the third quarter of 1998 compared to 1997, clearly supporting the decrease from 1997 to 1998. Total other operating expense for the nine month comparison periods increased from $5.28 million for 1997 to $5.34 million for 1998, and then increased to $5.5 million for 1999, resulting in increases of 1.1% for 1998 versus 1997 and 3.1% for 1999 versus 1998. Expenses totaling $176,175 on non-performing loans for the first nine months of 1999 supported the increase in other expenses for the 1999 versus 1998 period, while occupancy expenses reported an increase of $34,208, or 3.7% helping to support the overall increase for 1998 versus 1997. An increase in the expense for depreciation and taxes on bank property was a primary reason for this increase. Management monitors all components of other operating expenses; however, a quarterly review is performed on crucial components to assure that the accruals for these expenses are accurate. This helps alleviate the need to make drastic adjustments to these accounts that in turn effect the net income of the Company. APPLICABLE INCOME TAXES Income before taxes increased from $575,894 for the third quarter of 1997 to $743,983 for the third quarter of 1998, and then increased to $813,739 for the third quarter of 1999, an increase of $168,089 or 29.2% for 1998 versus 1997 and $69,756 or 9.4% for 1999 versus 1998. As a result, provisions for income taxes increased $57,119 for the third quarter of 1998 compared to the third quarter of 1997 and $27,989 or 15.4% for the 1999 versus 1998 comparison period ending the third quarter period of 1999 at $209,833. Income before taxes for the first nine months decreased from $2.1 million for 1997 to just over $2 million for 1998 and then increased to $2.2 million as of September 30, 1999, with income taxes calculated at $519,536, $484,698, and $572,069, respectively. EFFECTS OF INFLATION Rates of inflation affect the reported financial condition and results of operations of all industries, including the banking industry. The effect of monetary inflation is generally magnified in bank financial and operating statements. As costs and prices rise during periods of monetary inflation, cash and credit demands of individuals and businesses increase, and the purchasing power of net monetary assets declines. The Company depends primarily on a strong net interest income to enable their purchasing power to remain aggressive. CAPITAL RESOURCES The Company's stockholders' equity, which started the year at $22,002,059, was increased through earnings of $1,581,191 and sales of common stock of $712,584 through dividend reinvestment. It was decreased by dividends of $1,553,648, purchase of treasury stock of $2,831 and adjustment of $328,866 for valuation of allowance for securities to end the first nine months of 1999 at $22,410,489 with a book value of $6.73 per share. All stockholders' equity is unrestricted. Additionally, it is noted that the net unrealized gain on valuation allowance for securities has decreased since the beginning of the year. A review of this activity shows that as the maturity date of the investments gets closer, the market price becomes favorably better, therefore, material loss is greatly reduced. The Company is required to maintain minimum amounts of capital to "risk weighted" assets, as defined by the banking regulators. The minimum requirements for Tier I and Total Capital are 4% and 8%, respectively. As of September 30, 1999, the Company continued to maintain ratios far above the minimum requirements with reported ratios of approximately 20% for Tier I and 21% for Total Capital. The Company intends to continue 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 its subsidiaries, Community National Bank and Liberty Savings Bank. At present, regulatory authorities have made no demand on the Company to make additional capital contributions to either Bank's capital. YEAR 2000 The Company is currently working to resolve the potential impact of the year 2000 (Y2K) on the processing of date-sensitive information by the Company's computerized information systems. The Y2K problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's systems that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000 which could result in miscalculations or systems failures. The Federal Reserve Board and other federal banking regulators (together known as the Federal Financial Institutions Examination Council, or "FFEIC") have developed joint guidelines and benchmarks for assessing Y2K risk, remediation of non-compliant systems and components and post- remediation testing and implementation. In an effort to correctly assess the effect of Y2K on the financial position of the Company and assess our readiness for Y2K, a Y2K committee was organized which meets on a regular basis to keep executive management and the Board of Directors informed of our progress towards Y2K compliance. The committee has developed strategic, customer awareness, customer risk assessment, test and contingency plans. In accordance with FFEIC guidelines, the Y2K committee has defined five phases in the Y2K project management: Phase I - Awareness Phase In this phase we defined the problem and gained executive level commitment. The Y2K committee developed an overall strategy. This phase has been completed. Phase II - Assessment Phase During this phase, we assessed the size and complexity of the Y2K issues and identified both information technology (IT) and non-IT systems that could be affected by the change. At this time, we also identified mission-critical and non-mission-critical systems. We define mission-critical systems as vital to the successful continuation of our core business activities. Our core business activities include servicing deposits, servicing loans, item processing and accounting, originating deposits, originating loans, investments, and trust. The mission- critical systems that support our core business activities include our AS/400 (mainframe computer) and operating system; check processing software; check sorters; loan, deposit and account origination software; Fedline (interface to the Federal Reserve Bank); and trust accounting software. Other systems not deemed mission-critical, but important, include human resources; payroll; ATM networks; voice banking system; heating and faxes. We also evaluated the Y2K effect on strategic business initiatives. We assessed the risk exposure of our customers as funds providers, funds takers, and capital market/asset counter-parties. This phase has been completed, however, we continue to monitor our exposure on an on-going basis. Phase III - Renovation Phase This phase includes hardware and software upgrades or replacements and other changes. No mission-critical hardware or software needed to be replaced. All our software applications are provided by vendors and these applications were already Y2K compliant when we began the renovation phase. We are however replacing several PCs supporting non-mission critical applications. This phase has been completed. Phase IV - Validation Phase This is the testing phase. During this phase, the systems identified in Phase II (Assessment) were tested for Y2K compliance. Systems that were deemed mission-critical were tested first. We have finished testing the remaining systems. All mission-critical systems were tested by 12/31/98 and were in compliance. Non-mission-critical systems were tested by 6/30/99 and were in compliance. Phase V - Implementation Phase January 1, 2000 will be a processing day. If we detect any failures of our mission-critical systems, we will implement our contingency plans as appropriate. The Company does not write any source programming code and is therefore dependent upon external vendors and service providers to alter their programs to become Y2K compliant. We have received certification from our vendors as to their product compliance, however, we tested all mission-critical and non- mission-critical systems identified in Phase II. The following timetable identifies the testing phases: 12/31/98 testing of internal mission-critical systems completed 03/31/99 testing with service providers for mission-critical systems completed 06/30/99 testing of non-mission-critical systems completed We do not anticipate any major upgrades to existing systems before year 2000. The costs involved in addressing potential problems are not currently expected to have a material impact on the Company's financial position, results of operations, or cash flows in future periods. During 1998, we budgeted $63,750 and actually spent $67,000 for Y2K testing and upgrades. The costs included testing of our contingency site, replacement of 10 PCs not Y2K compliant, and proxy testing of some of our mission-critical systems. We have not calculated the personnel costs relating to Y2K, however, we did not have to hire additional personnel in our Y2K efforts. For 1999, we have budgeted $77,000. As of the end of the third quarter of 1999, total expenses of approximately $70,000 were reported. Projected expenses include the replacement of additional PCs, PC software upgrades, consulting services, testing, travel and education. Y2K costs are expensed from current earnings. No new projects have been deferred due to the Y2K effort. The yearly software update to our core system provided by one of our vendors has been postponed by the vendor until 2000 in an effort to minimize changes to an already compliant system. This will not have an effect on our operations. We have reviewed the credit risk our commercial borrowers may pose to us if they are not Y2K compliant. At this time, we have no customers deemed as high risk. The worst case scenario relating to Y2K is that we would not have electrical power. In an effort to mitigate this risk, as well as to protect us in the event of other power outages, a generator has been purchased for the main office in Derby, and will be installed during November. Our contingency plan is to operate all branch offices in a manual mode if we are without power. We have plans for hiring temporary help in this situation. The next worst case scenario is that telephones would be unavailable. If this were the case, the Derby branch could be fully operational. Other branches would need to service deposits in an off-line mode. Requests for account and loan origination could be directed to the Derby branch. Assuming we have electricity and telephones, we anticipate our core systems to be functional. Our Y2K contingency plan is based on our disaster recovery plan written to respond to a complete core system outage. Our contingency plan also outlines manual processes in the event of individual component failures. During the second quarter of 1999, outside consultants reviewed the feasibility of our contingency plans. This review did not constitute a 3rd party review as outlined by the FFIEC guidelines. After reviewing our plan, they made recommendations that, if implemented, would further enhance our Business Resumption Contingency Plan (BRCP). The 3rd party review as outlined by the FFIEC guidelines was performed by an officer of Community National Bank who was not involved with developing the plan. PART II. Item 1 Legal Proceedings Community National Bank is currently involved in a lawsuit against the State of Vermont. The issue involves OREO property that is on "filled land" on the shores of Lake Memphremagog in the City of Newport. According to a so-called "public trust doctrine", the State of Vermont might have ownership of any lands created by filling any portion of the navigable waters of the state. The result of this is that the Bank has been unable to sell these properties because some attorneys will not clear title to the property. The suit filed is an attempt to clear title to said properties by seeking judicial clarification of the public trust doctrine. The outcome of the suit is not likely to have a material impact on the financial statements of the Bank or consolidated Company. There are no pending legal proceedings to which the Company is a party or of which any of its property is the subject, other than routine litigation incidental to its banking business. Item 4 Submission of Matters to a Vote of Security Holders 	NONE Item 5 Other Information 	NONE Item 6 Exhibits and Reports on Form 8-K 	NONE 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: November 10, 1999 By: /s/ Richard C. White Richard C. White, President DATED: November 10, 1999 By: /s/ Stephen P. Marsh Stephen P. Marsh, Vice President & Treasurer