CONFORMED COPY SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission File No. 000-16435 COMMUNITY BANCORP. (Exact name of registrant as specified in its charter) Vermont 03-0284070 (State of Incorporation) (IRS Employer Identification No.) Derby Road, Derby, Vermont 05829 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (802) 334-7915 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of each exchange on which registered NONE NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock - $2.50 par value per share 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 such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ( X ) NO ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) As of March 11, 1999, the date of the latest known sale of the registrant's stock, the aggregate market value of the voting stock held by non-affiliates of the registrant, based on the per share sale price of the stock on that date, was $36,244,513. There were 3,289,067 shares outstanding of the issuer's class of common stock as of the close of business on March 11, 1999. DOCUMENTS INCORPORATED BY REFERENCE Report of Independent Public Accountants Financial Statements: Consolidated Statements of Condition as of December 31, 1998 and 1997 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Financial Position for the Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Condensed Financial Information (Parent Company Only) Portions of the Annual Report to Shareholders for fiscal year 1998 incorporated by reference to Part II. Portions of the Proxy Statement for the Annual Meeting to be held May 4, 1999 are incorporated by reference to Part III. Total Number of Pages - 31 Exhibit Index Begins on Page 25 FORM 10-K ANNUAL REPORT Table of Contents PART I Page Item I The Business 4 Organization and Operation 4 Distribution of Assets, Liabilities & Stockholders' Investment 7 Interest Income, Interest Expense and Interest Differential 8 Rate Volume Analysis 9 Investment Portfolio 10 Loan Portfolio 11 Summary of Loan Loss Experience 12 Non-Accrual, Past Due, and Restructured Loans 13 Deposits, Return on Equity and Assets 14 Item 2 Properties 15 Item 3 Legal Proceedings 16 Item 4 Submission of Matters to a Vote of Security Holders 16 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 16 Item 6 Selected Financial Data 16 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 8 Financial Statements and Supplementary Data 24 Item 9 Disagreements on Accounting and Financial Disclosures 24 PART III Item 10 Directors and Executive Officers of the Registrant 24 Item 11 Executive Compensation 24 Item 12 Security Ownership of Certain Beneficial Owners and Management 24 Item 13 Certain Relationships and Related Transactions 24 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 25 Signatures 31 PART I Item 1. The Business Organization and Operation Community Bancorp. (The Corporation) was organized under the laws of the State of Vermont in 1982 and became a registered bank holding company under the Bank Holding Company Act of 1956, as amended, in October 1983 when it acquired all of the voting shares of Community National Bank (the Bank). The Bank is one of two subsidiaries of the Corporation and principally all of the Corporation's business operations are presently conducted through it. Liberty Savings Bank (Liberty), a New Hampshire guaranty savings bank, is the other subsidiary of Community Bancorp., and is presently inactive. On December 31, 1997, Community Bancorp. acquired all of the outstanding stock of Liberty Savings Bank, as well as the assets consisting of a U.S. Treasury Strip and a small amount of cash. Currently, since no building was purchased at the time of acquisition, the main office of Community National Bank serves as the mailing address for this bank. Community National Bank was organized in 1851 as the Peoples Bank, and was subsequently reorganized as the National Bank of Derby Line in 1865. In 1975, after 110 continuous years of operation as the National Bank of Derby Line, the Bank acquired the Island Pond National Bank and changed its name to "Community National Bank." Community National Bank provides a complete range of retail banking services to the residents and businesses in northeastern Vermont. These services include checking, savings and time deposit accounts, mortgage, consumer and commercial loans, safe deposit and night deposit services, automatic teller machine (ATM) facilities, credit card services, 24 hour telephone banking and a full line of personal fiduciary services. The Bank is in the process of testing internet banking. This service was first offered to employees in order for them to become more familiar with it, test the different uses, and work out any potential problems. The Bank plans to extend the service to customers by the end of the first quarter of 1999. Competition The Bank has five offices located in Orleans County, one office in Essex County, and one office in Caledonia County, all in northeastern Vermont. Its primary service area is in the towns of Derby and Newport, Vermont, with approximately 61% of its total deposits as of December 31, 1998 derived from that area. The Bank competes in all aspects of its business with other banks and credit unions in northern Vermont, including two of the largest banks in the state, which maintain branch offices throughout the Bank's service area. Historically, competition in Orleans and Essex Counties has come from The Chittenden Trust Company and The Howard Bank, N.A., a subsidiary of Banknorth Group, Inc., based in Burlington, Vermont. The Chittenden Trust Company maintains a branch office in Newport, and The Howard Bank maintains one office in Barton, one office in Orleans, and one office in St. Johnsbury. Competition in Caledonia County comprises of the Passumpsic Savings Bank and Citizens Savings Bank, both based in St. Johnsbury, Lyndonville Savings Bank and Trust Company, based in Lyndonville, The Merchants Bank based in Burlington, and with two local credit unions for deposits and consumer loans. With recent changes in the regulatory framework of the banking industry, the competition for deposits and loans has broadened to include not only traditional rivals such as the mutual savings banks and stock savings banks, but also several non-traditional rivals such as insurance companies, brokerage firms, mutual funds and consumer finance companies. Employees As of December 31, 1998, the Bank employed 95 full-time employees and 31 part-time employees. Management of the Bank considers its employee relations to be good. Regulation and Supervision As a registered bank holding company, the Corporation is subject to on- going regulation supervision and examination by the Board of Governors of the Federal Reserve System, under the Bank Holding Company Act of 1956, as amended (the "Act"). A bank holding company for example, must obtain the prior approval of the Board before it acquires all or substantially all of the assets of any bank, or acquires ownership or control of more than 5% of the voting shares of a bank. Prior Federal Reserve Board approval is also required before a bank holding company may acquire more than 5% of any outstanding class of voting securities of a company other than a bank or a more than 5% interest in its property. The Act limits the activity in which the Corporation and its subsidiaries may engage to certain specified activities, including those activities which the Federal Reserve Board may find, by order or regulation, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve Board has determined by regulation to be closely related to banking are: (1) making, and servicing loans that could be made by mortgage, finance, credit card or factoring companies; (2) performing the functions of a trust company; (3) certain leasing of real or personal property; (4) providing certain financial, banking or economic data processing services; (5) except as otherwise prohibited by law, acting as an insurance agent or broker with respect to insurance that is directly related to the extension of credit or the provision of other financial services or, under certain circumstances, with respect to insurance that is sold in certain small communities in which the bank holding company system maintains banking offices; (6) acting as an underwriter for credit life insurance and credit health and accident insurance directly related to extensions of credit by the holding company system; (7) providing certain kinds of management consulting advice to unaffiliated banks and non-bank depository institutions; (8) performing real estate appraisals; (9) issuing and selling money order and similar instruments and travelers checks and selling U.S. Savings Bonds; (10) providing certain securities brokerage and related services for the account of bank customers; (11) underwriting and dealing in certain government obligations and other obligations such as bankers' acceptances and certificates of deposit; (12) providing consumer financial counseling; (13) providing tax planning and preparation services; (14) providing check guarantee services to merchants; (15) operating a collection agency; and (16) operating a credit bureau. The Corporation does not presently engage, directly or indirectly, in any non-banking activities, with the exception of an onsite office occupied by Linsco Private Ledgers, a financial investment company, offering a variety of non-deposit investment and retirement options. A bank holding company must also obtain prior Federal Reserve approval in order to purchase or redeem its own stock if the gross consideration to be paid, when added to the net consideration paid by the company for all purchases or redemptions by the company of its equity securities within the preceding 12 months, will equal 10% or more of the company's consolidated net worth. The Corporation is required to file with the Federal Reserve Board an annual report and such additional information as the Board may require pursuant to the Act. The Board may also make examinations of the Corporation and any direct or indirect subsidiary of the Corporation. The Corporation has registered its Common Stock under Section 12(g) of the Securities Exchange Act of 1934 and is required to file annual and periodic reports and proxy statements and other information with the Securities and Exchange Commission. Community Bancorp. and its subsidiaries, Community National Bank and Liberty Savings Bank, are considered "affiliates" for the purposes of Section 18(j) of the Federal Deposit Insurance Act, as amended, and Section 23A of the Federal Reserve Act, as amended. Accordingly, they are subject to limitations with respect to the Bank's ability to make loans and other extensions of credit to or investments in the Corporation or in any other subsidiaries that the Corporation may acquire. The Company is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or lease or sale of any property of the furnishing of services. The Bank is a national banking association and subject to the provisions of the National Bank Act and federal and state statutes and rules and regulations applicable to national banks. The primary supervisory authority for the Bank is the Comptroller of the Currency. The Comptroller's examinations are designed for the protection of the Bank's depositors and not for its shareholders. The Bank is subject to periodic examination by the Comptroller and must file periodic reports with the Comptroller containing a full and accurate statement of its affairs. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). Accordingly, the Bank is also subject to regulation by the FDIC. Liberty is subject to similar regulations and provisions in the state of New Hampshire. Effects of Government Monetary Policy The earnings of the Company affected by general and local economic conditions and by the policies of various governmental regulatory authorities. In particular, the Federal Reserve Board regulates money and credit conditions and interest rates in order to influence general economic conditions, primarily through open market operations and United States Government Securities, varying the discount rate on member bank borrowings, setting reserve requirements against member and nonmember bank deposits, and regulating interest rates payable by member banks on time and savings deposits. Federal Reserve Board monetary policies have had a significant effect on the operating results of commercial banks, including the Company, in the past and are expected to continue to do so in the future. <TABLE> DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY The following tables summarize various consolidated information and provides a three year comparison relating to the average assets, liabilities, and stockholders' equity. (Dollars in Thousands) <CAPTION> Year ended December 31, 1998 1997 1996 ASSETS Balance % Balance % Balance % <S> <C> <C> <C> <C> <C> <C> Cash and Due from Banks Non-Interest Bearing 4,522 2.05% 4,979 2.37% 4,765 2.31% Taxable Investment Securities(1) 38,784 17.56% 35,649 17.00% 35,754 17.31% Tax-exempt Investment Securities(1) 13,060 5.91% 12,140 5.79% 14,179 6.87% Other Securities(1) 1,270 0.57% 1,168 0.56% 1,168 0.57% Total Investment Securities 53,114 24.04% 48,957 23.35% 51,101 24.74% Overnight Deposits(2) 3,339 1.51% 0 0.00% 0 0.00% Federal Funds Sold 4,928 2.23% 2,583 1.23% 4,711 2.28% Loans, Net 147,830 66.92% 145,778 69.53% 138,635 67.13% Premises and Equipment 3,135 1.42% 3,328 1.59% 3,431 1.66% Other Real Estate Owned 660 0.30% 997 0.48% 767 0.37% Other Assets 3,368 1.53% 3,026 1.45% 3,107 1.50% Total Assets 220,896 100% 209,648 100% 206,517 100% LIABILITIES Demand Deposits 20,857 9.44% 18,694 8.92% 17,493 8.47% Now and Money Market Accounts 44,916 20.33% 39,337 18.76% 41,383 20.04% Savings Accounts 30,840 13.96% 31,907 15.22% 32,320 15.65% Time Deposits 98,181 44.45% 94,751 45.20% 96,227 46.60% Total Deposits 194,794 88.18% 184,689 88.10% 187,423 90.75% Other Borrowed Funds 4,060 1.84% 4,061 1.94% 99 0.05% Repurchase Agreements(3) 93 0.04% 0 0.00% 0 0.00% Other Liabilities 1,020 0.46% 734 0.35% 522 0.25% Subordinated Debentures 48 0.02% 107 0.05% 216 0.10% Total Liabilities 200,015 90.55% 189,591 90.43% 188,260 91.16% STOCKHOLDERS' EQUITY Common Stock 6,174 2.79% 3,814 1.82% 3,466 1.68% Surplus 8,293 3.75% 7,769 3.71% 5,948 2.88% Retained Earnings 6,649 3.01% 8,916 4.25% 9,273 4.49% Less: Treasury Stock (445) -0.20% (445) -0.21% (440) -0.21% Accumulated Other Comprehensive Income(1) 210 0.10% 3 0.00% 10 0.00% Total Stockholders' Equity 20,881 9.45% 20,057 9.57% 18,257 8.84% Total Liabilities and Stockholders' Equity 220,896 100% 209,648 100% 206,517 100% <FN> <F01> FASB No. 115, an accounting method in which securities classified as Held to Maturity are carried at book value and securities classified as Available for Sale are carried at fair value with the unrealized gain (loss), net of applicable income taxes, reported as a net amount in accumulated other comprehensive income. The Company does not carry, nor does it intend to carry, securities classified as Trading Securities. <F02> Overnight deposits refers to the Bank of Boston sweep account established during the first half of 1998 as another means of selling funds overnight. <F03> Repurchase agreements were introduced during the second part of 1998 in an effort to attract new business customers. </TABLE> <TABLE> AVERAGE BALANCES AND INTEREST RATES The table below presents the following information: average earning assets (including non-accrual loans) and average interest bearing liabilities supporting earning assets; and interest income and interest expense as a rate/yield. (Dollars in Thousands) <CAPTION> 1998 1997 1996 AVE. INC./ RATE/ AVE. INC./ RATE/ AVE. INC./ RATE/ BAL. EXP. YIELD BAL. EXP. YIELD BAL. EXP. YIELD EARNING ASSETS <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Loans(net)(1) 147,830 13,758 9.31% 145,778 13,868 9.51% 138,635 13,376 9.65% Taxable Investment Securities 38,784 2,196 5.66% 35,649 2,117 5.94% 35,754 2,095 5.86% Tax-exempt Investment Securities(2) 13,060 930 7.12% 12,140 929 7.65% 14,179 1,114 7.86% Federal Funds Sold 4,928 237 4.81% 2,583 140 5.42% 4,711 246 5.22% Overnight Deposits(3) 3,339 185 5.54% N/A N/A Other Securities(4) 1,270 82 6.46% 1,168 79 6.76% 1,168 78 6.68% TOTA L 209,211 17,388 8.31% 197,318 17,133 8.68% 194,447 16,909 8.70% INTEREST BEARING LIABILITIES Savings Deposits 30,840 807 2.62% 31,907 877 2.75% 32,320 944 2.92% NOW & Money Market Funds 44,916 1,565 3.48% 39,337 1,397 3.55% 41,383 1,523 3.68% Time Deposits 98,181 5,496 5.60% 94,751 5,304 5.60% 96,227 5,681 5.90% Other Borrowed Funds 4,060 198 4.88% 4,061 245 6.03% 99 7 7.07% Repurchase Agreements(5 ) 93 4 4.30% N/A N/A Subordinated Debentures 48 5 10.42% 107 11 10.28% 216 21 9.72% TOTAL 178,138 8,075 4.53% 170,163 7,834 4.60% 170,245 8,176 4.80% Net Interest Income 9,313 9,299 8,733 Net Interest Spread(6) 3.78% 4.08% 3.90% Interest Differential(7) 4.45% 4.71% 4.49% <FN> <F01> Included in net loans are non-accrual loans with an average balance of $2,004,438 for 1998, $1,750,037 for 1997, and $1,655,907 for 1996. <F02> Income on investment securities of state and political subdivisions is stated on a tax equivalent basis (assuming a 34% rate). The amount of adjustment was $316,232 in 1998, $315,855 in 1997, and $378,873 in 1996. <F03> Overnight deposits refers to the Bank of Boston sweep account established during the first half of 1998 as another means of selling funds overnight. <F04> Included in other securities are taxable industrial development bonds (VIDA), with income of $7,549 for 1998, $8,440 for 1997, $8,381 for 1996. <F05> Repurchase agreements were introduced during the second part of 1998 in an effort to attract new business customers. <F06> Net interest spread is the difference between the yield on earning assets and the rate paid on interest-bearing liabilities. <F07> Interest differential is net interest income divided by average earning assets. </TABLE> <TABLE> CHANGES IN INTEREST INCOME AND INTEREST EXPENSE The following table summarizes the variances in income for the years 1998, 1997, 1996, and 1995 resulting from volume changes in assets and liabilities and fluctuations in rates earned and paid. (Dollars in Thousands) <CAPTION> 1998 vs. 1997 1997 vs. 1996 1996 vs. 1995 RATE VOLUME Variance(1) Variance(1) Variance(1) Due to Total Due to Total Due to Total Rate Volume Variance Rate Volume Variance Rate Volume Variance Income Earning Assets <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Loans(2) (305) 195 (110) (197) 689 492 287 638 925 Taxable Investment Securities (107) 186 79 28 (6) 22 45 292 337 Tax-Exempt Investment Securities(3) (69) 70 1 (29)(156) (185) (51) (252) (303) Federal Funds Sold (30) 127 97 9 (115) (106) (20) 86 66 Overnight Deposits 0 185 185 N/A N/A Other Securities (4) 7 3 1 0 1 (4) 0 (4) Total Interest Earnings (515) 770 255 (188) 412 224 257 764 1,021 Interest Bearing Liabilities Savings Deposits (42) (28) (70) (56) (11) (67) (24) (35) (59) NOW & Money Market Funds (30) 198 168 (53) (73) (126) (50) 225 175 Time Deposits 0 192 192 (294) (83) (377) (360) 183 (177) Other Borrowed Funds (47) 0 (47) (42) 280 238 1 (1) 0 Repurchase Agreements 0 4 4 N/A N/A Subordinated Debentures 0 (6) (6) 1 (11) (10) 1 (11) (10) Total Interest Expense (119) 360 241 (444) 102 (342) (432) 361 (71) <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> Total loans are stated net of unearned discount and allowance for loan losses. Interest on non-accrual loans is excluded from income. The principal balances of non-accrual loans are included in calculations of the yield on loans. <F03> Income on tax-exempt securities is stated on a tax equivalent basis. The assumed rate is 34%. </TABLE> <TABLE> INVESTMENT PORTFOLIO The following tables show the classification of the investment portfolio by type of investment security based on book value for Held to Maturity securities and fair value for Available for Sale securities on December 31 for each of the last 3 years. (Dollars in Thousands) <CAPTION> 1998 1997 1996 <S> <C> <C> <C> U.S. Treasury Obligations: Available-for-Sale 20,590 8,039 7,974 Held-to-Maturity 15,562 22,491 28,097 U.S. Agency Obligations 4,582 1,631 1,679 Obligations of State & Political Subdivisions 9,734 10,004 8,192 Restricted Equity Securities 1,142 1,100 1,063 Total Investment Securities 51,610 43,265 47,005 The following is an analysis of the maturities and yields of investment securities as defined: (Available for Sale; fair value, Held to Maturity; book value) <CAPTION> December 31, 1998 1997 1996 U.S. Treasury & Agency Obligations Fair Ave. Fair Ave. Fair Ave. Available for Sale Value Yield Value Yield Value Yield <S> <C> <C> <C> <C> <C> <C> Due within 1 year 0 0.00% 2,993 6.08% 0 0.00% Due after 1 year within 5 years 20,590 6.16% 5,046 6.12% 7,974 5.79% Total 20,590 6.16% 8,039 6.10% 7,974 5.79% <CAPTION> Book Ave. Book Ave. Book Ave. Held to Maturity Value Yield Value Yield Value Yield <S> <C> <C> <C> <C> <C> <C> Due within 1 year 14,634 6.51% 8,965 5.78% 6,956 5.93% Due after 1 year within 5 years 5,510 5.78% 15,157 5.69% 22,820 6.17% Total 20,144 6.31% 24,122 5.72% 29,776 6.12% <CAPTION> Obligations of State & Political Subdivisions (1) Book Ave. Book Ave. Book Ave. Value Yield Value Yield Value Yield <s > <C> <C> <C> <C> <C> <C> Due within 1 year 6,473 6.58% 6,624 7.94% 4,468 7.16% Due after 1 year within 5 years 1,522 7.58% 1,543 7.91% 1,718 7.88% Due after 5 years within 10 years 392 8.03% 363 8.03% 458 7.83% Due after 10 years 1,347 0.10% 1,474 9.67% 1,548 9.61% Total 9,734 7.21% 10,004 8.19% 8,192 7.81% Restricted Equity Securities Total Restricted Equity Securities 1,142 6.00% 1,100 6.76% 1,063 6.60% <FN> <F01> Income on Obligations of State and Political Subdivisions is stated on a tax equivalent basis assuming a 34 percent tax rate. Also included are taxable industrial development bonds (VIDA) with a fair value of $123,546 as of December 31, 1998, and $150,235 as of December 31, 1997, and 1996 with respective yields of 4.76%, 5.55%, and 5.60%. </TABLE> <TABLE> LOAN PORTFOLIO The following table reflects the composition of the Company's loan portfolio for years ended December 31: (Dollars in Thousands) <CAPTION> 1998 1997 1996 1995 1994 TOTAL % OF TOTAL % OF TOTAL % OF TOTAL % OF TOTAL % OF LOANS TOTAL LOANS TOTAL LOANS TOTAL LOANS TOTAL LOANS TOTAL <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Real Estate Loans Construction & Land Development 2,025 1.37% 1,091 0.73% 1,432 0.98% 912 0.66% 587 0.44% Farm Land 2,634 1.78% 2,093 1.39% 2,148 1.48% 1,814 1.32% 1,115 0.84% 1-4 Family Residential 98,407 66.34% 98,743 65.78% 94,393 64.83% 91,104 66.38% 88,967 66.68% Commercial Real Estate 19,555 13.18% 19,992 13.32% 20,602 14.15% 18,646 13.59% 18,094 13.56% Loans to Finance Agricultural Production 829 0.56% 1,354 0.90% 1,222 0.84% 1,127 0.82% 1,305 0.98% Commercial & Industrial 8,767 5.91% 7,759 5.17% 7,084 4.87% 6,749 4.92% 6,719 5.04% Loans to Individuals 16,008 10.79% 18,943 12.62% 18,556 12.74% 16,578 12.08% 16,380 12.28% All Other Loans 110 0.07% 141 0.09% 166 0.11% 310 0.23% 259 0.19% Gross Loans 148,335 100% 150,116 100% 145,603 100% 137,240 100% 133,426 100% Less: Reserve for Loan Losses (1,659)-1.12% (1,502)-1.00% (1,401)-0.96% (1,519)-1.11% (1,708) - -1.28% Deferred Loan Fees (849)-0.57% (867)-0.58% (904)-0.62% (909)-0.66% (924) - -0.69% Net Loans 145,827 98.31% 147,747 98.42% 143,298 98.42% 134,812 98.23% 130,794 98.03% </TABLE> <TABLE> MATURITY OF LOANS The following table shows the estimated maturity of loans (excluding residential properties of 1 - 4 families, installment loans and other loans) outstanding as of December 31, 1998. <CAPTION> Fixed Rate Loans Maturity Schedule Within 1 - 5 After 1 Year Years 5 years Total <S> <C> <C> <C> <C> Real Estate Construction & Land Development 2,025 0 0 2,025 Secured by Farm Land 12 20 172 204 Commercial Real Estate 157 479 2,172 2,808 Loans to Finance Agricultural Production 67 186 0 253 Commercial & Industrial Loan 298 3,994 453 4,745 Total 2,559 4,679 2,797 10,035 <CAPTION> Variable Rate Loans Within 1 - 5 After 1 Year Years 5 years Total Real Estate Construction & Land Development 0 0 0 0 Secured by Farm Land 1,695 735 0 2,430 Commercial Real Estate 10,298 6,449 0 16,747 Loans to Finance Agricultural Production 371 205 0 576 Commercial & Industrial Loans 2,879 1,143 0 4,022 Total 15,243 8,532 0 23,775 </TABLE> <TABLE> SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes the Company's loan loss experience for each of the last five years. (Thousands of Dollars) <CAPTION> December 31, 1998 1997 1996 1995 1994 <S> <C> <C> <C> <C> <C> Loans Outstanding End of Period 148,335 150,116 145,603 137,240 133,426 Ave. Loans Outstanding During Period 147,830 145,778 138,635 131,879 127,394 Loan Loss Reserve, Beginning of Period 1,502 1,401 1,519 1,708 1,872 Loans Charged Off: Real Estate 177 191 116 198 187 Commercial 41 104 86 17 24 Loans to Individuals 487 436 383 238 250 Total 705 731 585 453 461 Recoveries: Real Estate 65 12 18 5 43 Commercial 17 27 16 20 12 Loans to Individuals 120 133 68 119 62 Total 202 172 102 144 117 Net Loans Charged Off 503 559 483 309 344 Provision Charged to Income 660 660 365 120 180 Loan Loss Reserve, End of Period 1,659 1,502 1,401 1,519 1,708 Net Losses as a Percent of Ave. Loans 0.34% 0.38% 0.35% 0.23% 0.27% Provision Charged to Income as a Percent of Average Loans 0.45% 0.45% 0.26% 0.09% 0.14% At End of Period: Loan Loss Reserve as a Percent of Outstanding Loans 1.12% 1.00% 0.96% 1.11% 1.28% </TABLE> Factors considered in the determination of the level of loan loss coverage include, but are not limited to historical loss ratios, composition of the loan portfolio, overall economic conditions as well as future potential losses. The following table shows an allocation of the allowance for loan losses, as well as the percent to the total allowance for the last five years (the corporation has no foreign loans, therefore, allocations for this category are not necessary). <TABLE> <CAPTION> December 31, 1998 % 1997 % 1996 % 1995 % 1994 % <s <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Domestic Residential Real Estate 559 33% 362 24% 490 35% 265 17% 200 12% Commercial 475 29% 645 43% 307 22% 631 42% 950 56% Loans to Individuals 448 27% 487 32% 395 28% 485 32% 400 23% Unallocated 177 11% 8 1% 209 15% 138 9% 158 9% Total 1,659 100% 1,502 100% 1,401 100% 1,519 100% 1,708 100% </TABLE> <TABLE> NON-ACCURAL, PAST DUE, AND RESTRUCTURED LOANS The following table summarizes the bank's past due, non-accrual, and restructured loans: (Dollars in Thousands) <CAPTION> December 31, 1998 1997 1996 1995 1994 <S> <C> <C> <C> <C> <C> Accruing Loans Past Due 90 Days or More: Consumer 53 121 36 28 54 Commercial 119 19 5 15 11 Real Estate 246 211 360 249 271 Total Past Due 90 Days or More 418 351 401 292 336 Non-accrual Loans 2,228 1,486 1,255 1,389 1,791 Restructured Loans (incl. non-accrual) 126 136 506 359 347 Total Non-accrual, Past Due and Restructured Loans 2,772 1,973 2,162 2,040 2,474 Other Real Estate Owned 542 1,089 663 761 918 Total Non Performing Loans 3,314 3,062 2,825 2,801 3,392 Percent of Gross Loans 2.23% 2.04% 1.94% 2.04% 2.08% Reserve Coverage of Non performing Loans 50.06% 49.05% 49.59% 54.23% 71.26% When a loan reaches non-accrual status, it is determined that future collection of interest and principal is doubtful. At this point, the Company's policy is to reverse the accrued interest and to discontinue the accrual of interest until the borrower clearly demonstrates the ability to resume normal payments. Our portfolio of non-accrual loans for the years ended 1998, 1997, 1996, 1995, and 1994 are made up primarily of commercial real estate loans and residential real estate loans. Management does not anticipate any substantial effect to future operations if any of these loans are liquidated. Although interest is included in income only to the extent received by the borrower , deferred taxes are calculated monthly, based on the accrued interest of all non- accrual loans. This accrued interest amounted to $363,713 in 1998, $216,770 in 1997, $309,388 in 1996, $256,754 in 1995, and $181,930 in 1994. The Company had total foreign loans of less than one percent in 1998, and has no concentration in any industrial category. </TABLE> <TABLE> DEPOSITS The average daily amount of deposits and rates paid on such deposits is summarized for the last three years. (Dollars in Thousands) <CAPTION> December 31, 1998 1997 1996 Amount Rate Amount Rate Amount Rate <S> <C> <C> <C> <C> <C> <C> Non-Interest Bearing Demand Deposits 20,857 0.00% 18,694 0.00% 17,493 0.00% NOW & Money Market Funds 44,916 3.48% 39,337 3.55% 41,383 3.68% Savings Deposits 30,840 2.62% 31,907 2.75% 32,320 2.92% Time Deposits 98,181 5.60% 94,751 5.60% 96,227 5.90% Total Deposits 194,794 4.04% 184,689 4.10% 187,423 4.35% Increments of maturity of time certificates of deposit and other time deposits of $100,000 or more issued by domestic offices outstanding on December 31, 1998 are summarized as follows: <CAPTION> Time Certificates Maturity Date of Deposit 3 Months or Less 3,452 Over 3 through 6 Months 4,118 Over 6 through 12 Months 5,192 Over 12 Months 5,112 Total 17,874 RETURN ON EQUITY AND ASSETS The following table shows consolidated operating and capital ratios of the Corporation for each of the last three years. <CAPTION> December 31, 1998 1997 1996 Return on Average Assets 0.99% 1.02% 1.07% Return on Average Equity 10.49% 10.69% 12.16% Dividend Payout Ratio 83.69% 77.02% 63.29% Ave. Equity to Ave. Assets Ratio 9.45% 9.57% 8.84% </TABLE> Item 2. Properties Community Bancorp. does not own or lease real property. The Corporation's offices are located at the main offices of the Bank. All of the Bank's offices are located in Vermont. In addition to the main office in Derby, the Bank maintains facilities located in; City of Newport, Towns of Barton and St. Johnsbury, and Villages of Island Pond, Troy and Derby Line. As mentioned earlier, the newly acquired Liberty Savings Bank shares the same address as the main offices as it does not maintain a facility. The Bank's main offices are located in a two-story brick building on U.S. Route 5 in Derby, Vermont. The main banking lobby and adjacent offices were constructed in 1972, expanded in 1978, and the most recent expansion was completed in July 1993, providing us with a total of 15,000 square feet at this location. The main office is equipped with a drive-up facility as well as an Automated Teller Machine (ATM). Computer and similar support equipment is also located in the main office building. The building previously housing our computer equipment currently houses an office for the Bank's "Special Assets" department, and also serves as a conference center for the Bank as well as various non-profit organizations, free of charge, upon request. The Bank owns the Derby Line office located on Main Street in a renovated bank building. The facility consists of a small banking lobby containing approximately 200 square feet and a walk-up window accessible to pedestrians. Recent renovations to the walk-up window area and updated signs have helped to give this office a fresh new appearance. The Island Pond office is located in the renovated "Railroad Station" acquired by the town of Brighton in 1993. The Bank leases approximately two-thirds of the downstairs including a banking lobby, a drive-up window, and an ATM. The other portion of the downstairs is occupied by an information center, and the upstairs section houses the Island Pond Historical Society. The Barton office is located on Church Street, in a renovated facility. This office is equipped with a banking lobby, a drive-up window, and an ATM, making most deposit and withdrawal transactions possible at this branch 24 hours a day. The facility is leased from Dean M. Comstock, who is a member of the Bank's Barton Advisory Committee. The lease was entered into in 1985 and provides a fifteen-year term. The Bank's Newport office was located in a facility leased from Twin Islands Realty, adjacent to RJ's Friendly Market until mid January 1999. This facility consists of approximately 974 square feet and includes a small banking lobby. This office moved into a condominium space in the state office building on Main Street in Newport during the third week of January. The Bank occupies approximately 3,084 square feet on the first floor of the building for a full service banking facility equipped with a remote drive-up facility and an ATM. In addition, the Bank will own approximately 4,400 square feet on the second floor with immediate plans to house our trust department, marketing department, and an office for our public relations coordinator, with room for future expansion. The Bank's Troy office is located in a new facility, which was leased for a few years and then purchased in 1992 from Tom and Eleanor Watts. The bank currently leases space to one tenant while maintaining approximately 2,200 square feet for their own use. An ATM is available in this office to provide the same type of limited 24-hour accessibility as our Derby, Barton, Island Pond, Newport and St. Johnsbury offices. The St. Johnsbury office is located at the corner of the I-91 Access Road and Route 5 in the town of St. Johnsbury. The Bank occupies approximately 2,250 square feet in the front of the Price Chopper building leased from Murphy Realty of St. Johnsbury. Peter Murphy is President of Murphy Realty, and is a member of the Bank's St. Johnsbury Advisory Committee. Fully equipped with an Automatic Teller Machine and a drive-up window, this office operates as a full service banking facility. Item 3. 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 material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Bank, and the aforementioned to which the Bank is a party or of which any of its property is the subject. Item 4. Submission of Matters to a Vote of Security Holders None. PART II. Item 5. Market for Registrant's Common Stock and Related Stockholder Matters Common Stock Performance by Quarter Incorporated by reference to Page 40 of the Annual Report to Shareholders for fiscal year 1998. Item 6. Selected Financial Data Following pages <TABLE> SELECTED FINANCIAL DATA (Not covered by Report of Independent Public Accountants) (Dollars in thousands, except per share data) <CAPTION> Year Ended December 31, 1998 1997 1996 1995 1994 <S> <C> <C> <C> <C> <C> Total Interest Income 17,072 16,817 16,532 15,406 13,605 Less: Total Interest Expense 8,077 7,834 8,177 8,248 6,807 Net Interest Income 8,995 8,983 8,355 7,158 6,798 Less: Provision for Loan Losses 660 660 365 120 180 Other Operating Income 1,586 1,336 1,281 1,181 1,057 Less: Other Operating Expense 7,021 6,759 6,397 5,943 5,459 Income Before Income Taxes 2,900 2,900 2,874 2,276 2,216 Less: Applicable Income Taxes (1) 710 755 654 324 329 Net Income 2,190 2,145 2,220 1,952 1,887 Per Share Data: (2) Earnings per Share 0.71 0.72 0.78 0.71 0.72 Cash Dividends Declared 0.60 0.56 0.52 0.48 0.44 Weighted Average Number of Common Shares Outstanding 3,075,906 2,976,448 2,862,708 2,744,213 2,629,116 Number of Common Shares Outstanding 3,110,960 3,015,068 2,904,569 2,794,080 2,656,205 Balance Sheet Data: Net Loans 145,827 147,747 143,298 134,812 130,794 Total Assets 225,051 213,001 205,536 197,382 191,315 Total Deposits 197,797 187,580 183,854 178,884 174,676 Total Liabilities 203,049 192,521 186,425 179,801 175,796 Subordinated Debentures 20 104 170 265 551 Total Shareholders' Equity 22,002 20,480 19,111 17,580 15,518 <FN> <F01> Applicable Income Taxes above includes the income tax effect, assuming a 34% tax rate on securities gains (losses), which totaled $0 in 1998, $0 in 1997, ($656) in 1996, $6,272 in 1995, and $7,021 in 1994. <F02> Per share data for the calendar years 1996, 1995, and 1994 restated to reflect 5% stock dividend in first quarter of 1997. Per share data for all calendar years restated to reflect a 100% stock dividend paid on June 1, 1998. </TABLE> <TABLE> QUARTERLY RESULTS OF OPERATIONS The following is an unaudited summary of the quarterly results of Operations for the years ended December 31, 1998, 1997 and 1996. (Dollars in thousands, except per share data) <CAPTION> 1998 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 <S> <C> <C> <C> <C> Interest Income 4,225 4,207 4,325 4,315 Interest Expense 1,990 2,053 2,045 1,989 Net Interest Income 2,235 2,154 2,280 2,326 Provisions For Loan Losses 200 160 150 150 Other Operating Expenses 1,802 1,742 1,758 1,719 Income Before Taxes 522 747 744 888 Applicable Income Taxes 114 189 182 226 Net Income 408 558 562 662 Net Income Per Share(1): 0.14 0.18 0.18 0.21 <CAPTION> 1997 Interest Income 4,040 4,172 4,253 4,352 Interest Expense 1,897 1,924 1,999 2,014 Net Interest Income 2,143 2,248 2,254 2,338 Provisions For Loan Losses 205 105 215 135 Other Operating Expenses 1,523 1,679 1,804 1,752 Income Before Taxes 695 832 576 798 Applicable Income Taxes 175 220 125 236 Net Income 520 612 451 562 Net Income Per Share(1): 0.18 0.21 0.15 0.18 <CAPTION> 1996 Interest Income 4,032 4,145 4,163 4,192 Interest Expense 2,092 2,094 2,041 1,949 Net Interest Income 1,940 2,051 2,122 2,243 Provisions For Loan Losses 38 122 80 125 Securities Gains(Losses) 0 (2) 0 0 Other Operating Expenses 1,546 1,630 1,643 1,578 Income Before Taxes 607 662 721 884 Applicable Income Taxes 140 149 182 184 Net Income 467 513 539 700 Net Income Per Share (1): 0.17 0.18 0.19 0.24 <FN> <F01> Per share data for 1996 restated to reflect 5% stock dividend in first quarter of 1997. Per share data for all quarters restated to reflect 100% stock dividend paid on June 1, 1998. </TABLE> <TABLE> CAPITAL RATIOS Community Bancorp. and Subsidiaries (Dollars in Thousands) <CAPTION> ANNUAL GROWTH RATE At December 31, 1998 1997 1996 '98/'97 '97/'96 <S> <C> <C> <C> <C> <C> Total Assets 225,051 213,001 205,536 5.66% 3.63% LESS: Goodwill(3) 320 343 0 Allowance for Possible Loan Losses 1,659 1,502 1,401 10.45% 7.21% Total Adjusted Assets 226,390 214,160 206,937 5.71% 3.49% Gross Risk-Adjusted Assets 107,450 106,298 102,922 1.08% 3.28% Allowance for Loan Loss over limit(2) 316 173 114 82.66% 51.75% Total Risk-Adjusted Assets 107,134 106,125 102,808 0.95% 3.23% Shareholders' Equity 22,002 20,480 19,111 7.43% 7.16% LESS: Valuation Allowance for Securities 236 34 8 Intangible Assets(3) 339 352 6 Total Adjusted Tier 1 Capital (1) 21,427 20,094 19,097 6.63% 5.22% Eligible Discounted Subordinated Debt 16 42 85-61.90% -50.59% Max. Allowance for Possible Loan Losses (2) 1,343 1,329 1,287 1.05% 3.26% Total Capital (Tier II) 22,786 21,465 20,469 6.15% 4.87% <CAPTION> 1998 1997 1996 <S> <C> <C> <C> Tier l Capital/Total Adjusted Assets 9.46% 9.38% 9.23% Tier ll Capital/Total Adjusted Assets 10.06% 10.02% 9.89% Tier l Capital/Total Risk-Adjusted Assets 20.00% 18.93% 18.58% Tier ll Capital/Total Risk-Adjusted Assets 21.27% 20.23% 19.91% <FN> <F01> Net unrealized holding gains and losses on available-for-sale securities are excluded from common stockholders' equity for regulatory capital purposes. However, National Banks continue to deduct unrealized losses on equity securities in their computation of Tier I Capital. <F02> The maximum allowance for possible loan losses used in calculating primary (Tier ll)capital is the lower of the period end allowance for possible loan losses or 1.25% of gross risk-adjusted assets, as implemented by regulatory capital guidelines in 1992. <F03> Included in the 1998 and 1997 balance of intangible assets is $319,818 and $342,662, respectively, in goodwill associated with the acquisition of Liberty Savings Bank. Excess mortgage servicing rights totaling $18,706, $9,452, and $5,808 for 1998, 1997, and 1996, respectively, comprise the balance of intangible assets. </TABLE> The following table shows the repricing opportunities of the various interest earning assets and interest bearing liabilities of the bank. We assume that all payments on loans will be made as agreed, and that all deposits will mature on schedule. The most important factor in assuring liability liquidity is maintenance of confidence in the Bank by depositors of funds. Such confidence, in turn, is based on performance and reputation. The Company believe that its reputation, its financial strength and numerous long-term customer relationships, should enable it to raise funds as needed in many markets. To that end, the Bank does not place all of it's "core" deposits in the earliest time period presented as suggested, but places more emphasis on the historical experience of the Bank. Funds are primarily generated locally and regionally and the Bank has no brokered deposits. The following table shows the interest sensitivity gaps for four different time intervals as of December 31, 1998. The figures shown are reported in thousands. <TABLE> <CAPTION> 0 - 3 Months 4 - 12 Months 1 - 5 Years Over 5 Years Total Rate Sensitive Assets: <S> <C> <C> <C> <C> <C> Loans $31,750 $62,715 $46,773 $7,097 $148,335 Investments - Taxable 3,000 11,634 26,224 0 40,858 Investments - Tax-exempt 2,822 3,651 1,407 1,730 9,610 Other Investments 0 0 0 1,142 1,142 Federal funds Sold 15,527 0 0 0 15,527 Total $42,684 $73,605 $74,404 $9,969 $199,705 Rate Sensitive Liabilities: NOW & super NOW accounts $ 0 $ 0 $ 0 $19,122 $ 19,122 Savings deposits 0 2,512 0 28,000 30,512 Time deposits(1) 40,471 42,822 18,042 0 101,335 Variable rate time deposits 12,758 12,308 19 0 25,085 Repurchase agreements 288 0 0 0 288 Other borrowed Funds 4,000 5 15 40 4,060 Total $57,517 $57,647 $18,076 $47,162 $180,402 Interest sensitivity Gap $(4,418) $20,353 $56,328 $(37,193) GAP Ratio -2.05% 9.44% 26.14% -17.26% Cumulative interest sensitivity gap $(4,418) $15,935 $72,263 $35,070 Cumulative GAP Ratio -2.05% 7.39% 33.54% 16.27% <FN> <F01> Included in the time deposits category of 0 - 3 months are money market accounts totaling almost $31 million. </TABLE> Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Incorporated by reference to Pages 28-35 of the Annual Report to Shareholders for fiscal year 1998. 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 guide- lines, 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 systems which were mission-critical and non-mission-critical. 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 which support non-mission critical applications. This will be complete by 6/30/99. Phase IV - Validation Phase This is the testing phase. During this phase, the systems identified in Phase II (Assessment) are tested for Y2K compliance. Systems that were deemed mission-critical were tested first. We have now started testing the remaining systems. All mission-critical systems were tested by 12/31/98 and were in compliance. Non-mission-critical systems will be tested by 6/30/99. 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 will still test all mission-critical and non-mission-critical systems identified in Phase II. <TABLE> We have identified the following timetable for the testing phase: <C> <S> 12/31/98 testing of internal mission-critical systems was completed 03/31/99 testing with service providers for mission-critical systems should be complete 06/30/99 testing of non-mission-critical systems should be complete. </TABLE> As of 12/31/98, we had completed the testing of all mission-critical systems and noted only a few minor date formatting errors in loan documentation for which we have received corrections, which will be installed during the first quarter of 1999. These minor errors do not affect any calculations and do not affect our ability to process loans. We will begin testing of the non-mission-critical systems during the first quarter of 1999 and anticipate testing to be completed by 3/31/99. At this time, we expect to have all our mission-critical and non-mission- critical systems Y2K compliant by 6/30/99. 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 which were 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. 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 identified only a small number of customers deemed as high risk customers, and their inability or failure to repay their loans as scheduled would not have a material impact on the Company. The worst case scenario relating to Y2K is that we would not have electrical power. If this were the case, our contingency plan is to operate in a manual mode. 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 which is 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 first quarter of 1999, outside consultants will review and validate our contingency plans. Item 8. Financial Statements and Supplementary Data The financial statements and related notes of Community Bancorp. and Subsidiaries are incorporated herein by reference from the Company's annual report to shareholders for the year ended December 31, 1998, Page 12 through Note 23 on Page 28. Item 9. Disagreements on Accounting and Financial Disclosures Inapplicable. PART III. Item 10. Directors and Executive Officers of the Registrant Incorporated by reference to Pages 4-5 of the Company's Proxy Statement for the Annual Meeting of Shareholders on May 4, 1999. <TABLE> <CAPTION> Position with Has Served As Name, Age and Community Officer/Director Principal Occupation Bancorp. Since <S> <S> <C> Stephen P. Marsh, 51 Vice President 07/01/73 Senior VP & Cashier & Treasurer Community National Bank Rosemary M. Rowe, 57 Secretary 09/08/80 Vice President, Community National Bank Alan A. Wing, 54 Vice President 09/01/71 Sr. Vice President Community National Bank </TABLE> Item 11. Executive Compensation Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders on May 4, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders on May 4, 1999. Item 13. Certain Relationships and Related Transactions Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders on May 4, 1999, and incorporated by reference to the Annual Report to the shareholders for the year ended December 31, 1998, Page 25, Note 16. PART IV. Item 14. Financial Statement Schedules, Exhibits and Reports on Form 8-K (a)(1) and (2) Financial Statements Financial statements are incorporated by reference to the Annual Report to the shareholders for the year ended December 31, 1998. (a)(3) Exhibits The following exhibits are incorporated by reference: Exhibit 3 - Articles of Association and By-laws of Community Bancorp. are incorporated by reference to Community Bancorp.'s Registration Statement dated May 20, 1983 (Registration No.2-83166). Exhibit 4 - Indenture dated August 1, 1984 between Community Bancorp. and Community National Bank as trustee, relating to $750,000 in principal amount of 11% Convertible Subordinated Debentures due 2004 is incorporated by reference to Community Bancorp.'s Registration Statement dated July 11, 1984 (Registration No. 2-92147). Exhibit 5 - Indenture dated August 1, 1986, relating to $500,000 in principal amount of 9% Convertible Subordinated Debentures due 1998 is incorporated by reference to Community Bancorp.'s Registration Statement dated April 15, 1986 (Registration No. 33-4924). Exhibit 13 - Portions of the Annual Report to Shareholders of Community Bancorp. for Year Ended December 31, 1998, specifically mentioned in this report, incorporated by reference. The following exhibits are filed as part of this report: Exhibit 10(i) - Directors Deferred Compensation Plan* Exhibit 10(ii) - Description of Supplemental Retirement Plan* Exhibit 11 - Computation of Per Share Earnings Exhibit 21 - Subsidiaries of Community Bancorp. Exhibit 23 - Consent from A.M. Peisch & Company (b) Reports on Form 8-K None [FN] <F*> Denotes compensatory plan or arrangement. Exhibit 10(i) Directors' Deferred Compensation Plan Under the terms of the Corporation's Deferred Compensation Plan for Directors, directors of the Corporation and/or the Bank may elect to defer current receipt of some or all of their director fees. Deferrals are credited to a cash account, which bears interest at the rate in effect for the Bank's three-year certificate of deposit, as adjusted from time to time. Payments are deferred until the participant's retirement, death or disability, or at an earlier or later date elected by the participant. Amounts deferred and accumulated interest represent a general unsecured obligation of the Corporation and no assets of the Corporation or the Bank have been segregated to satisfy the Corporation's obligations under the Plan. Exhibit 10(ii) Description of Supplemental Retirement Plan In 1998 the Board of Directors authorized the adoption of a Supplemental Retirement Plan for Mr. White and the other Executive Officers of the Bank to replace estimated benefits lost as a result of the previous termination of the Bank's defined benefit pension plan. The plan is intended to provide an annual benefit at retirement approximating 75% of the average annual bonus received by the officer. It is estimated that this benefit, combined with the projected benefits under the Bank's 401(k) plan, will be approximately equal to the benefit that would have been provided to the Executive Officers under the terminated defined benefit pension plan. Benefit payments will be funded by annual contributions to a rabbi trust. <TABLE> Exhibit 11 COMMUNITY BANCORP. PRIMARY EARNINGS PER SHARE <CAPTION> For the Fourth Quarter Ended December 31, 1998 1997 1996 <S> <C> <C> <C> Net Income $662,615 $562,499 $700,246 Average Number of Common Shares Outstanding. 3,110,961 3,014,935 2,901,980 Earnings Per Common Share $0.21 $0.19 $0.24 <CAPTION> For The Twelve Months Ended December 31, 1998 1997 1996 Net Income $2,190,374 $2,145,395 $2,219,804 Average Number of Common Shares Outstanding. 3,075,906 2,976,448 2,862,708 Earnings Per Common Share $0.71 $0.72 $0.78 Per share data restated to reflect 100% stock dividend paid on June 1, 1998. </TABLE> <TABLE> Exhibit 11 (Cont'd) COMMUNITY BANCORP. FULLY DILUTED EARNINGS PER SHARE <CAPTION> For The Fourth Quarter Ended December 31, 1998 1997 1996 <S> <C> <C> <C> Net Income $662,615 $562,499 $700,246 Adjustments to Net Income (Assuming Conversion of Subordinated Convertible Debentures). 363 1,639 2,857 Adjusted Net Income $662,978 $564,138 $703,103 Average Number of Common Shares Outstanding. 3,110,961 3,014,935 2,901,980 Increase in Shares(Assuming Conversion of Subordinated Convertible Debentures). 8,150 26,825 50,266 Average Number of Common Share Outstanding (Fully Diluted). 3,119,111 3,041,760 2,952,246 Earnings Per Common Share Assuming Full Dilution. $0.21 $0.19 $0.24 <CAPTION> For The Twelve Months Ended December 31, 1998 1997 1996 Net Income $2,190,374 $2,145,395 $2,219,804 Adjustments to Net Income (Assuming Conversion of Subordinated Convertible Debentures). 3,034 7,583 13,746 Adjusted Net Income $2,193,408 $2,152,978 $2,233,550 Average Number of Common Shares Outstanding. 3,075,906 2,976,448 2,862,708 Increase in Shares(Assuming Conversion of Subordinated Convertible Debentures). 15,896 32,317 55,659 Average Number of Common Share Outstanding (Fully Diluted). 3,091,802 3,008,765 2,918,367 Earnings Per Common Share Assuming Full Dilution. $0.71 $0.72 $0.77 Per share data restated to reflect 100% stock dividend paid on June 1, 1998. </TABLE> Exhibit 21 Community Bancorp.'s subsidiaries include Community National Bank, a banking corporation incorporated under the Banking Laws of The United States, and Liberty Savings Bank, a New Hampshire guaranty savings bank. Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Community Bancorp. of our report dated January 6, 1999, included in the 1998 Annual Report to Shareholders of Community Bancorp. We also consent to the incorporation by reference in the Registration Statement (Form S-3 No. 33-18535) pertaining to the Community Bancorp. Dividend Reinvestment Plan and in the Registration Statement (Form S-8 No. 33-44713) pertaining to the Community Bancorp. Retirement Savings Plan of our report dated January 6, 1999, with respect to the consolidated financial statements incorporated herein by reference of Community Bancorp. included in the Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ A.M. Peisch & Company March 25, 1999 St. Johnsbury, Vermont VT Reg. No. 92-0000102 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. BY: /s/ Richard C. White Date: March 25, 1999 Richard C. White, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. BY: /s/ Stephen P. Marsh Date: March 25, 1999 Stephen P. Marsh, Treasurer and Chief Financial and Accounting Officer COMMUNITY BANCORP. DIRECTORS /s/ Thomas E. Adams Date: March 25, 1999 Thomas E. Adams /s/ Jacques R. Couture Date: March 25, 1999 Jacques R. Couture /s/ Elwood G. Duckless Date: March 25, 1999 Elwood G. Duckless /s/ Michael H. Dunn Date: March 25, 1999 Michael H. Dunn /s/ Rosemary M. Lalime Date: March 25, 1999 Rosemary M. Lalime /s/ Marcel Locke Date: March 25, 1999 Marcel Locke /s/ Stephen P. Marsh Date: March 25, 1999 Stephen P. Marsh /s/ Anne T. Moore Date: March 25, 1999 Anne T. Moore /s/ Dale Wells Date: March 25, 1999 Dale Wells /s/ Richard C. White Date: March 25, 1999 Richard C. White