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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   Form 10-K   þ
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 2004o
    
    Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934for the transition period from
___ to ___.
 Commission File No. 000  51044 COMMUNITY BANCORP (Name of issuer in its charter
 Nevada
    
    01-0668846(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 400 South 4thStreet, Suite 215, Las Vegas, NV
    
    89101(Address of principal executive offices)
    
    (Zip Code)
 Issuers telephone number: (702) 878-0700 Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock, $0.001par value per share
(Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d)
of the Exchange Act during the past 12 months (or 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 þ No o Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K
is not contained in this form, and no disclosure will be contained, to the best of the Company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. o Check whether or not the Company is an accelerated filer as defined in Exchange Rule Act
12b-2. o þ
 As of June 30, 2004, the aggregate market value of the common stock held by non-affiliates of
the Company was: $34,777,132 Number of shares of common stock outstanding as of February 28, 2005: 6,750,257 Portions of the definitive proxy statement for the 2005 Annual Meeting of the Companys
shareholders are incorporated into Part III of this Report by reference.




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TABLE OF CONTENTS PART IITEM 1. BUSINESS
    
    PAGE 3ITEM 2. PROPERTIES
    
    PAGE 24ITEM 3. LEGAL PROCEEDINGS
    
    PAGE 25ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    PAGE 25PART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
    PAGE 25ITEM 6. SELECTED FINANCIAL DATA
    
    PAGE 27ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    PAGE 29ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    PAGE 55ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    PAGE 55ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    PAGE 55ITEM 9A. CONTROLS AND PROCEDURES
    
    PAGE 55ITEM 9B. OTHER INFORMATION
    
    PAGE 55PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    PAGE 56ITEM 11. EXECUTIVE COMPENSATION
    
    PAGE 56ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    PAGE 56ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    PAGE 56ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
    
    PAGE 56PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    PAGE 56SIGNATURES
    
    PAGE 58Exhibit 14.1Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1
  2




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FORWARD-LOOKING INFORMATION Certain statements contained in this Annual Report on Form 10-K (Report), including, without
limitation, statements containing the words believes, anticipates, intends, expects, and
words of similar import, constitute forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward
looking statements involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking statements. Such factors
include, among others, the following: general economic and business conditions in those areas in
which we operate, demographic changes, competition, fluctuations in interest rates, changes in
business strategy or development plans, changes in governmental regulation, credit quality, the
availability of capital to fund the expansion of our business, economic, political and global
changes arising from the war on terrorism, the conflict with Iraq and its aftermath, and other
factors referenced in this Report, including in Item 1.
Business - Factors That May Affect Future
Results of Operations. When relying on forward-looking statements to make decisions with respect
to our Company, investors and others are cautioned to consider these and other risks and
uncertainties. We disclaim any obligation to update any such factors or to publicly announce the
results of any revisions to any of the forward-looking statements contained herein to reflect
future events or developments. This discussion should be read in conjunction with our financial statements, including the
notes thereto, appearing elsewhere in this Report. 
 PART I 
 ITEM 1. BUSINESS WHERE YOU CAN FIND MORE INFORMATION Under the Securities Exchange Act of 1934 Sections 13 and15(d), periodic and current reports
must be filed with the SEC. We electronically file the following reports with the SEC: Form 10-K
(Annual Report),Form 10-Q(Quarterly Report),Form 8-K(Current Report), and Form DEF 14A (Proxy
Statement). We may file additional forms. The SEC maintains an Internet site,
www.sec.gov, in which all forms filed electronically may be accessed. Additionally, all
forms filed with the SEC and additional shareholder information is available free of charge on our
website: www.communitybanknv.com. We post these reports to our website as soon as reasonably
practicable after filing them with the SEC. None of the information on or hyperlinked from our
website is incorporated into this Report. Community Bancorp Community Bancorp is the bank holding company for Community Bank of Nevada, a Nevada chartered
bank headquartered in Las Vegas. We deliver an array of commercial bank products and services with
an emphasis on customer relationships and personalized service. At December 31, 2004, we had total
assets of $574 million, gross loans of $403 million, total deposits of $476 million and
stockholders equity of $78 million. Measured by total assets, we are one of the largest
publicly-traded Nevada community banks. Our holding company was formed in 2002. As a result, Community Bank of Nevada became our
wholly owned subsidiary and shareholders of Community Bank of Nevada became our shareholders.
Community Bank of Nevada was organized in July 1995 by local community leaders and experienced
bankers with the mission of providing superior community banking services to the greater Las Vegas
area. We have five full service branches, four located in Las Vegas and one located in Henderson. In
1995, the first office, now our Rainbow Office, commenced operations. In 1997, the Maryland Parkway
Branch opened in central Las Vegas followed by the opening of the Summerlin Branch in 1999. In
2000, the Green Valley Branch opened marking expansion
into Henderson, a high growth suburb of Las Vegas. In 2002, we opened our City Centre Branch
in downtown Las Vegas. We expect to open our sixth branch at the intersection of Interstate 215 and
Russell Road in the second half of 2005. We focus on meeting the commercial banking needs associated with the population and economic
growth of the greater Las Vegas area. Our customers are generally small- to medium-sized businesses
(generally representing businesses with less than $50 million in annual revenues) that require
highly personalized commercial banking products and services that we deliver with an emphasis on
relationship banking. We believe that our customers prefer locally managed banking institutions
that provide responsive, personalized 3




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service and customized products. A substantial portion of our
business is with customers who have long-standing relationships with our officers or directors or
who have been referred to us by existing customers. Historically, we have focused our lending activities on commercial real estate loans,
construction loans and land acquisition and development loans, which comprised 78% of our loan
portfolio at December 31, 2004. While this continues to be a large part of our business, we see
significant opportunities in growing our commercial and industrial, or C&I, loans, and Small
Business Administration, or SBA, loans. On the deposit side, we have focused on attracting low cost
core deposits, with particular emphasis on growing our non-interest bearing demand deposits.
Non-interest bearing demand deposits were 25.6% of our total deposits at December 31, 2004 compared
to 18.1% at December 31, 2000. Our most recent significant event is the successful conclusion of our initial public offering
(IPO) and concurrent listing of our common stock on the Nasdaq National Market in the fourth
quarter of 2004. In our offering we raised $ 39.3 million, net of expenses, and certain selling
shareholders received net proceeds of $16.5 million. For a discussion of our intended use of the
proceeds of the offering, please see Item 5, Market for Common Equity and related Stockholder
Matters  Use of Proceeds and Item 7, Managements Discussion and Analysis of Financial Condition
and Results of Operations. We have five full service branches, four located in Las Vegas and one located in Henderson.
Our headquarters is located at our downtown branch at 400 South 4th Street, Las Vegas, Nevada 89101
and our telephone number is (702) 878-0700. We maintain a website at www.communitybanknv.com. Management We seek to attract and retain experienced and relationship-oriented employees. We have
structured incentive programs that are intended to reward both superior production as well as
adherence to our business philosophy and strategy. Our management team is focused on creating a
positive work environment for all employees and fostering a productive culture. Our management team
consists of the following individuals:  
    Edward M. Jamison,a founder of Community Bank of Nevada, has been our President and
Chief Executive Officer since our inception. Previously, Mr. Jamison was a founder,
President and Chief Executive Officer of Nevada Community Bank from its inception in 1990
until its sale in 1993 to First Security Corporation. Prior to that Mr. Jamison had been a
Senior Vice President of another First Security Corporation subsidiary in Utah from 1984 to
1989. Mr. Jamison has been involved in the banking industry for over 32 years.
    Lawrence K. Scott,Executive Vice President and Chief Operating Officer joined us in
2002. Prior to 2002, Mr. Scott was an Executive Vice President and Chief Credit Officer at
First Security Bank Nevada from 1994 to 2001. Mr. Scott has over 20 years of experience in
the banking industry, with his entire career spent in the Las Vegas market.
    Cathy Robinson,Executive Vice President and Chief Financial Officer, joined us in 1995
shortly after we commenced operations. With more than 25 years of experience in the banking
industry, she previously served as a Chief Financial Officer for a community bank located in
Southern California.
    Don F. Bigger,Executive Vice President, Credit Administration, joined us in 2002 and has
over 20 years of banking experience in Southern Nevada. Prior to joining us, Mr. Bigger held
lending positions with Washington Mutual Bank, Wells Fargo Bank, First Security Bank and
Valley Bank of Nevada.
    Cassandra Eisinger,Executive Vice President and Director of Operations, joined us in
2004 to oversee operations and our branches. She previously managed the branches of Nevada
State Bank, a Zions Bancorporation subsidiary, and has over 24 years of experience in the
banking industry.
    Bruce Ford,Executive Vice President and Chief Credit Officer, joined us in 2005 and has
over 21 years of banking experience. Prior to joining us, Mr. Ford held the position of
Senior Regional Credit Officer for Wells Fargo Bank. Strategy We strive to be a high performing community bank holding company for the long-term benefit of
our shareholders, customers and employees. The key elements of our strategy are to: 4




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Growth Strategies  
    Expand our franchisethrough acquisition or the establishment of new branches or banks in
high growth markets, such as the greater Las Vegas area, or similar high growth markets in
Arizona and California. We plan on opening our sixth branch in the second half of 2005 in
Las Vegas and our strategic plan currently calls for one additional branch per year through
2009.
    Being a public companywith a common stock that is quoted and traded on a national stock
market. In addition to providing access to growth capital, we believe a public currency
provides flexibility in structuring acquisitions and will allow us to attract and retain
qualified bankers through equity-based compensation. Our IPO and concurrent listing on the
Nasdaq National Market in the fourth quarter of 2004 helped put this strategy into action.
    Expand our commercial and SBA lending portfolioin an effort to diversify our customer
base, increase the average maturity of our loan portfolio and increase our non-interest
income. We expect to diversify our commercial loan portfolio by participating in select
syndicated credits originated by other lenders and to expand our SBA portfolio by expanding
our Las Vegas operation, as well as by opening additional loan production offices in other
high growth markets.
    Continue to grow our real estate lending activitiesby providing competitive commercial
real estate loans, construction loans, and land acquisition and development loans. With the
additional capital provided by our IPO, we have the ability to originate larger loans to new
and existing customers.
    Hire and retain, experienced and qualified employeesto support our planned expansion of
our business activities. In the short term, we are focused on expanding our SBA team. Operating Strategies  
    Maximize revenue opportunitiesby using a pricing model together with specific incentives
that increases the overall profitability of each customer relationship. The pricing model
assists our lenders and business development officers in achieving a hurdle rate that
maximizes return on equity associated with each customer. For loans, the model has placed
added emphasis on risk and return. For deposits, the model has helped drive an increase in
non-interest bearing deposits, as well as focus us to actively manage our certificate of
deposit, or CD, program to decrease the percentage of our deposit mix represented by CDs.
    Enhance our risk management functionsby pro-actively managing sound procedures and
committing experienced human resources to this effort. We seek (i) to identify risks in all
functions of our business, including credit, operations and asset and liability management,
(ii) to evaluate such risks and their trends and (iii) to adopt strategies to manage such
risks based upon our evaluations.
    Maintain high asset qualityby continuing to utilize rigorous loan underwriting standards
and credit risk management practices.
    Continue to actively manage interest rate and market risksby closely matching the volume
and maturity of our rate sensitive assets to our interest sensitive liabilities in order to
mitigate adverse effects of rapid changes in interest rates on either side of our balance
sheet. Market Area We operate in Clark County, Nevada. Clark County is one of the fastest growing areas in the
United States. According to the U.S. Census, between 1990 and 2000 Clark Countys population grew
by 6.4% on an annual basis, from 741,459 persons to 1,375,765 persons, versus the U.S. average of
1.2%. By 2004, Clark County reached a population of 1,715,337, according to the Center for Business
and Economic Research based at the University of Nevada, Las Vegas, or the CBER, making it the
fourth fastest growing county in the United States measured by numerical population growth. This
growth has been driven by a variety of factors including a growth in the service economy associated
with the hospitality and gaming industries, affordable housing, no income taxation, a growing base
of senior or retirement communities and general recreational opportunities associated with a
favorable climate. The following highlights, more specifically, some of the economic opportunities that have
driven the population growth in Clark County. According to CBER, between 1999 and 2004: 5




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
    total gaming revenue in Clark County has risen to revenue of over $8.5 billion dollars in
2004, as compared to revenue of approximately $7.2 billion in 1999;
    visitor volume has increased from approximately 34 million visitors to Las Vegas in 1999
as compared to 37 million in 2004; and
    the number of hotel rooms in Clark County increased from approximately 120,000 in 1999 to
approximately 132,000 in 2004, with an expected increase of an additional 4% in 2005. Complementing the regions expanding economic opportunities has been the availability of
relatively affordable housing. The attraction and retention of a quality labor force to service the
economy depends in part on housing availability. According to CBER, housing permits related to new
homes in Clark County have risen over the last five years, from 26,624 in 1999 to 36,856 in 2004.
Although home prices have recently risen, management believes median housing prices in Nevada are
still below the median price for homes in California, which is the source of three of every five
new Nevada residents. Contributing to the population growth in Clark County has been the recent influx of retirees
and young families to the area. According to CBER, over 20,000 retirees have moved to Clark County
since 2001, factoring into the 2003 total number of 243,500 retirees. In addition to retirees, many
young families have moved to Clark County, driven by the rapid economic growth, as described above,
in the greater Las Vegas area. The Clark County school district is the fastest growing school district in the United States,
according to the Nevada Department of Education. According to the Clark County School District 1998
Building Program, the Clark County School district has opened 14 new schools for the 2004-2005
school year alone. In 1998 Clark County voters approved a bond issue for an additional $3.5 billion
to build a total of 88 new schools (50 elementary schools, 22 middle schools, and 16 high schools)
to accommodate an anticipated 15,980 new students a year, a number that is expected to increase to
18,049 students per year over the next decade. To date, 30 of these schools have already been
built. In addition to schools, population growth has created a need for all types of retail services.
For example, over the past seven years, a national pharmacy chain has built 30 drug stores in Clark
County. Commercial stores, gas stations, storage units, restaurants and bars, and clothing stores
are among the services that have followed the population growth. Three new hospitals are scheduled
to open in 2004 and 2005 in Clark County. As a result, we expect to see an increase in medical
support facilities and doctors offices, especially with the retiree population continuing to grow.
Also, the increase of products and services at the retail level require additions to the wholesale,
warehouse and transportation sectors. We believe that the economic growth in Clark County, the population growth and the
accompanying need for infrastructure presents the following significant opportunities:  
    Deposit Growth Opportunities.According to the FDIC, deposits in Clark County grew from
$11 billion to $29 billion between June 1999 and June 2004, a compound annual growth rate of
20%.
    Loan Growth Opportunities.Increased residential and commercial development as well as
the infrastructure growth in Clark County has offered more and larger lending opportunities
for us. Business Activities We provide banking services throughout our primary market area to small-to medium-sized
businesses (generally representing businesses with annual revenues of less than $50 million). Many
of these small- to medium-sized businesses provide goods and services, directly or indirectly, to
the development of the infrastructure in and around the greater Las Vegas area that services the
growing population. Our customers include developers, contractors, professionals, distribution and
service businesses, local residential home builders and manufacturers. We also provide a broad
range of banking services and products to individuals, including personal checking and savings
accounts and other consumer banking products, including electronic banking. In 2003, we implemented a pricing model that places an equal emphasis on the management of the
pricing of both loans and deposits and measures the overall profitability of a relationship. We
believe that, along with other marketing efforts, the use of this pricing model has made a
significant contribution to the growth of lower cost deposits, and more particularly, the growth of
non-interest bearing deposits. Prior to 2003, we priced almost exclusively according to market
competitive factors. We believe that such a practice did not adequately address risk and return. 6




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Both lending personnel and the business development staff who have a primary emphasis on
deposit growth utilize this program to determine pricing for products. Some of the applications are
summarized below:  
    Lending.Senior management establishes a minimum return on equity hurdle rate for each
particular loan type, which is influenced by the pricing of credit and the revenue derived
from various deposits generated. We pay incentives to our lenders based on maximizing the
relationship return on equity. We have found that the lenders have become far more
conscientious about pricing credit, as well as their ability to secure low cost deposits.
Additionally, the model has placed added emphasis on risk and return. The credit risk rating
influences the costs associated with the credit and therefore influences pricing when
additional risk is assumed.
    Deposits.We have a very active business development culture and have developed a
specific incentive plan for deposit gathering. The pricing model takes into account the
interest expense associated with a deposit relationship and through transfer pricing helps
determine the profitability of a deposit relationship. Since non-interest bearing deposits
have no interest expense associated with them, the return on equity is high for that product
and thus, the payout incentive to the business development staff is high. Management has instructed all lending personnel to utilize variable rate pricing of loans
whenever possible. A small percentage of borrowers have been granted fixed rate pricing. When fixed
rate pricing is extended, two objectives must accompany such a commitment. First, the initial
return on equity of the credit commitment must be greater than what would be expected on a variable
rate commitment, and, secondly, it is deemed highly probable that the relationship will produce
additional revenue opportunities from the utilization of other bank products. We originate a variety of types of loans, including commercial real estate loans, secured and
unsecured C&I loans, residential real estate loans, SBA loans, and to a lesser extent consumer
based loans. In addition to direct loan origination, we also utilize our relationships within the
banking industry to participate in syndicated loans and participation loans that fit our criteria.
The amount of our syndicated loans, at December 31, 2004 constituted less than 2% of our total loan
portfolio and the amount of our participation loans at December 31, 2004 constituted approximately
13% of our total loan portfolio. When we consider the purchase of an interest in a syndicated loan
or a loan participation, we apply our existing policies and procedures to the credit. Proven cash
flow and an independent secondary source of repayment remain as the critical measurements of credit
risk. Once we have booked an interest in a loan syndication or purchased a participation interest in
a loan, we strive to apply the same monitoring and credit quality assessment as we do for credits
that we originate. These monitoring and assessment procedures include review of information
supplied by borrowers pursuant to loan agreements as well as both internal and external loan review
of the credit. To date, we have not suffered any loss on a loan purchased from another originator.
Although we are seeking to expand the amount of syndicated loans in our portfolio, we expect that
our own originations will continue to be the primary source of our loan growth. Our customers are generally comprised of the following groups:  
    Real estate developers in need of land, construction and permanent financing for commercial and residential developments.
    Small- to medium-sized businesses in need of secured and unsecured lines of credit or permanent C&I loans.
    Professionals and professional firms, such as architectural, engineering and law firms in need of operating facilities. We manage our loan portfolio to provide for an adequate return, through our pricing model, but
also to provide a diversification of risk. Historically, we have maintained very high asset
quality. Our lending activities are concentrated in four main categories, as described below. Commercial Real Estate Loans.We have a strong focus in the origination of commercial real
estate loans. Our commercial real estate loans fall into three sub-categories  raw land,
construction and term loans on completed projects. Construction and acquisition and development
lending currently constitutes approximately 27% of total commercial real estate loans at December
31, 2004. Raw land loans and term loans on completed projects constituted approximately 14% and
59%, respectively, of total commercial real estate loans at December 31, 2004. 7




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To manage our concentration of loans in commercial real estate and the inherently higher risk
of construction lending (see Managements Discussion and Analysis of Financial Condition and
Results of Operations  Financial Condition  Allowance for Loan Losses), we seek diversification
through maintaining a broad base of borrowers and by adjusting our exposure to property types based
on overall strength in a particular sector, which includes a variety of factors such as vacancy
trends. During the past several years, the retail segment of the market has been strong, with low
vacancies, while other segments of the CRE market have experienced weaker fundamentals. Currently,
a large portion of our portfolio is in the retail sector. As of December 31, 2004, our CRE loan
portfolio, including construction loans, was comprised of the following property types: % of LoanLoan Type
    
$ Outstanding
    
    
    Portfolio(In million)Retail
    
    $
    109
    
    
    
    27
    %Office
    
    $
    74
    
    
    
    18
    %Industrial
    
    $
    26
    
    
    
    7
    %Hotel/Casino
    
    $
    25
    
    
    
    6
    %Restaurant/Bar
    
    $
    8
    
    
    
    2
    %Other
    
    $
    12
    
    
    
    3
    %Total
    
    $
    254
    
    
    
    63
    %
 We have historically maintained very strong credit quality. We generally underwrite loans with
a minimum equity position of 25% (or a maximum loan to value of 75%) and a minimum debt coverage
ratio of 1.25:1. We also seek to lend to developers who have already entered into leases for the
subject property, however, we are willing to provide loans for speculative development but only if the borrower has the ability to service the debt without
the anticipated success of the subject property and can demonstrate such ability to our
satisfaction. We have also increased our focus on owner occupied real estate. Consistent with our strategic
plan to reduce our cost of funds, we have found this often includes many core business
opportunities with professionals such as attorneys, engineers, architects, doctors and dentists.
These types of businesses also provide reliable depository relationships. We have been active in both the construction lending and permanent financing of our CRE
portfolio. Construction and raw land loans are short term in nature and generally do not exceed 18
months. Permanent commitments are primarily restricted to no greater than 10 year maturities with
rate adjustment periods every 36 months when fixed commitments exist. Commercial and Industrial Loans.We offer a variety of commercial loan products including
lines of credit for working capital, term loans for capital expenditures and commercial stand-by
letters of credit. As of December 31, 2004, we had $60 million of C&I loans outstanding and C&I
commitments of $36 million. Lines of credit typically have a 12 month commitment and will be
secured by the trading asset that is being financed. In cases of larger commitments, a borrowing
base certificate may be required to determine eligible collateral and advance parameters. Term
loans seldom exceed 60 months, but in no case, exceed the depreciable life of the tangible asset
being financed. We are a Preferred Lender with the Small Business Administration, or SBA. Our strategic plan
calls for a much greater future commitment to this product line. We offer both SBA 7a loans and SBA
504 programs. Under the 7a Program, loans up to $150,000 are guaranteed up to 85% by the SBA. Under
current SBA guidelines, 7a loans in excess of $150,000 but not in excess of $2,000,000 are
guaranteed up to 75% by the SBA. Generally, this guarantee may become invalid only if the loan does
not meet the SBA documentation guidelines. We have just recently elected to sell the guaranteed
portion of our 7a loans. Subject to balance sheet needs, we anticipate strong growth in this
product and a continued philosophy to increase non interest income by selling these assets. We will
continue to service the loans for a fee. In 2002, we introduced our Express Loan program. All commercial credits less than $200,000 are
underwritten by this department. We utilize credit scoring software to assist us with the credit
decision process. This has resulted in far greater efficiency. Borrowers realize a 24-hour turn
around time on loan decisions and have been willing to pay a premium for this service. 8




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Residential Real Estate Loans.The majority of new home construction in the greater Las Vegas
area is conducted by the large national/regional home builders that have direct access to capital
markets. We have selectively participated with some of the small local home builders that continue
to have success with in-fill parcels that have demonstrated high demand. As of December 31, 2004,
our residential real estate loan portfolio was comprised of $86 million in loans, including both
acquisition and development loans and new home construction totaling $48 million. These commitments
extend up to 18 months and include both acquisition and development loans and new home
construction. We do not participate in permanent mortgage financing in this segment, because we
consider single family mortgage lending to be a commodity business. Consumer Lending.We have used consumer credit as a complementary product to our primary
product line. Our approach to consumer credit is as a value added product for our business
customers. We offer competitively priced products with an emphasis in the marketing towards the
business owner and the work force of that client. Our product line includes home equity credit
lines, automobile loans, personal lines of credit and home improvement loans. Lending and Credit Policies The Board of Directors of Community Bank of Nevada establishes our lending policies. The three
key principles of our lending policies are (1) debt service coverage, (2) risk rating system and
pricing for risk and (3) managed concentration levels. Debt Service Coverage.Our risk management philosophy is to extend credit only when an
applicant has proven cash flow to service the proposed debt. Additionally, it is generally
necessary for the applicant to demonstrate an independent secondary source of repayment. Risk Rating System and Pricing for Risk.We have a risk rating system of eight categories
that clearly define the fundamentals for each risk rating. At the time of origination, the
underwriter assigns a risk rating and then it is reviewed periodically by credit administration. We
use this system to manage levels of risk, pricing and forward thinking strategy for future
extensions of certain loan categories. We introduced a relationship pricing model in 2003, which
integrates our risk rating system and promotes the origination of highly profitable loans. Managed Concentration Levels.We have established minimum levels of return on equity that
varies by product type and concentration levels. We actively manage our pricing model, so that we
have control over our concentrations in certain types of credits, so that if we near a policy
guideline, we can adjust the hurdle rates based on our perceived concentration risk. If a credit falls outside of the guidelines set forth in our lending policies, the loan is not
approved until it is reviewed by a higher level of credit approval authority. Credit approval
authority has three levels, as listed below from lowest to highest level. Based on the historical
strong emphasis on business development, the Board of Directors of Community Bank of Nevada has
intentionally kept approval authorities low to assure a high degree of secondary review for a
credit consideration. Management believes that the current authority levels provide satisfactory
management and a reasonable percentage of secondary review. Any conditions placed on loans in the
approval process must be satisfied before our credit administration will release loan documentation
for execution. Our credit administration works entirely independent of loan production and has full
responsibility for all loan disbursements.  
    Individual Authorities.Individual loan officers have approval authority up to $750,000
for secured loans and up to $150,000 for unsecured transactions. The Chief Executive
Officer, Chief Operating Officer and the Chief Credit Officer have approval authority of up
to $2,000,000 for secured loans and up to $750,000 for unsecured loans.
    Senior Loan Committee.The Senior Loan Committee consists of the Chairman of the Board,
Chief Executive Officer, the Chief Operating Officer, Chief Credit Officer and the Managers
of Commercial Lending and Commercial Real Estate. It has approval authority up to $6,000,000
for secured loans and up to $1,500,000 for unsecured loans.
    Board Loan Committee.The Board Loan Committee consists of all of the members of the
Board of Directors of Community Bank of Nevada. It has approval authority up to our legal
lending limit, which was approximately $13 million at December 31, 2004. Loan Grading and Loan Review.We seek to quantify the risk in our lending portfolio by
maintaining a loan grading system consisting of eight different categories (Grades 1-8). The
grading system is used to determine, in part, the provision for loan losses. The first four grades
in the system are considered satisfactory. The other four grades range from a Watch/Pass category
to a Doubtful category. These four grades are further discussed below under the section subtitled
Classified Assets. 9




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The originating loan officer initially assigns a grade to each credit as part of the loan
approval process. Such grade may be changed as a loan application moves through the approval
process. In addition to any dollar limitations that may require higher credit approval authority,
each loan that is graded Watch/Pass or worse requires prior approval of the Board of Directors of
Community Bank of Nevada. After funding, all loans of $250,000 or over are reviewed by the executive vice
president/credit administrator who may assign a different grade to the credit. The grade on each
individual loan is reviewed at least annually by the loan officer overseeing the credit. The Board
of Directors of Community Bank of Nevada reviews monthly the aggregate amount of all
loans graded as special mention, substandard or doubtful, and each individual loan over
$200,000 that has a grade within such range. Additionally, changes in the grade for a loan may
occur through any of the following means:  
    random reviews of the loan portfolio conducted by loan administration;
    annual reviews conducted by an outside loan reviewer;
    bank regulatory examinations;
    monthly action plans submitted to loan administration by the responsible lending officers for each credit graded 5-8; or
    at the monthly credit risk managers meeting if a loan is exhibiting certain delinquency tendencies. Loan Delinquencies.When a borrower fails to make a committed payment, we attempt to cure the
deficiency by contacting the borrower to seek payment. Habitual delinquencies and loans delinquent
30 days or more are reviewed at the monthly credit risk managers meeting for possible changes in
grading. Classified Assets.Federal regulations require that each insured bank classify its assets on
a regular basis. In addition, in connection with examinations of insured institutions, examiners
have authority to identify problem assets, and, if appropriate, classify them. We use grades 5-8 of
our loan grading system to identify potential problem assets and consider substandard and doubtful
grades as classified. There were $1.5 million, $3.1 million, $4.3 million and $6.4 million in
classified loans at December 31, 2004, December 31, 2003, December 31, 2002 and December 31, 2001,
respectively. The following describes grades 5-8 of our loan grading system:  
    Watch/Pass  Grade 5.Generally these are assets that display negative trends or other
causes for concern. This grade is regarded as a transition category. We will either upgrade
the credit if meaningful progress is evident within six months, or downgrade the credit to a
more severe grade as appropriate.
    Special Mention  Grade 6.These assets have potential weaknesses that may result in
deterioration of the repayment prospects and, therefore, deserve the attention of
management. Usually, these assets are long-term problems that are likely to remain and
require management action plans. These loans exhibit an increasing reliance on collateral
for repayment.
    Substandard  Grade 7.These assets are inadequately protected by the current worth and
paying capacity of the borrower or of the collateral pledged, if any. Although loss may not
be imminent, if the weaknesses are not corrected, there is a good possibility that we will
sustain some loss.
    Doubtful  Grade 8.These assets have all the weaknesses inherent in an asset classified
as substandard, with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing facts, condition and values, highly
questionable and improbable. At the point where a loss is identified, all or that portion
deemed a loss is immediately classified as Loss and charged off. Risk Management Our strategic plan continues to promote a growth rate commensurate with the rapid growth of
Southern Nevada. We are equally committed to maintaining internal controls to manage the risk
associated with such growth. Our Risk Management Committee has defined our most significant risks
and measures the trends from low to high. The committee has identified credit risk and operational
risk as the two areas that could have the greatest impact on capital. 10




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To mitigate and pro-actively manage these areas of risk, we have established sound procedures
and committed experienced human resources to this effort. We have focused on enhancing three functions:  
    Credit Administration has been significantly enhanced by the recent addition of Bruce
Ford as Chief Credit Officer, who has more than 21 years of banking experience. Further,
Credit Administration has been staffed to maintain all credit policies and procedures, loan
documentation, disbursement of loan proceeds and to review the integrity of the credit risk
rating system.
    Operations support has been significantly enhanced by the addition of an Executive Vice
President with more than 20 years of operations experience. The combined talents of this
team manage the identified risks such as wires, check fraud and identity theft.
Additionally, they have the primary responsibility to assure we are compliant with all
applicable laws and regulations.
    The Audit Department has also been expanded under the direction of the Audit Committee.
This staff of professionals regularly examine all of the areas of known risk and report the
findings to Executive Management and the Audit Committee. We believe that the established organization allows management to maintain an accurate
understanding of risk levels at all times. With this level of understanding, strategic plans are
developed with the necessary risk parameters to adequately protect our capital. Investment Activities Our investment strategy is designed to be complementary to and interactive with our other
activities (i.e. cash position; borrowed funds; quality, maturity, stability and earnings of loans;
nature and stability of deposits; capital and tax planning). The target percentage for our
investment portfolio is between 10% to 25% of total assets. Our general objectives with respect to
our investment portfolio are to:  
    achieve an acceptable asset/liability gap position (based on our separate policy related
to asset/liability management that provides guidance for how investments are to be used to
manage asset/liability gaps);
    provide a suitable balance of quality and diversification to our assets;
    provide liquidity necessary to meet cyclical and long-term changes in the mix of assets and liabilities;
    provide a stable flow of dependable earnings;
    maintain collateral for pledging requirements;
    manage interest rate risk;
    comply with regulatory and accounting standards; and
    provide funds for local community needs. Investment securities consist primarily of US Agency issues, municipal bonds and
mortgage-backed securities. In addition, for bank liquidity purposes, we use Fed Funds Sold which
are temporary overnight sales of excess funds to correspondent banks. All of our investment securities are classified as available for sale or held to maturity
pursuant to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Available for sale securities are reported at fair value, with unrealized gains and losses excluded
from earnings and instead reported as a separate component of stockholders equity. Held to
maturity securities are those securities that we have both the intent and the ability to hold to
maturity. These securities are carried at cost adjusted for amortization of premium and accretion
of discount. Our securities portfolio is managed in accordance with guidelines set by our Investment
Policy. Specific day-to-day transactions affecting the securities portfolio are managed by our
Chief Financial Officer. In accordance with our written
Investment Policy, all executions also require the prior written approval of the President.
These securities activities are reviewed monthly or more often, as needed, by our Investment
Committee and are reported monthly to our Board of Directors. 11




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Our Investment Policy addresses strategies, types and levels of allowable investments and is
reviewed and approved annually by our Board of Directors. Our Investment Policy authorizes us to
invest in a variety of investment securities, subject to various limitations. It also limits the
amount we can invest in various types of securities, places limits on average life and duration of
securities, and limits the securities dealers with whom we can conduct business. Concentrations/Customers No individual or single group of related accounts is considered material in relation to our
assets or deposits or in relation to our overall business. However, approximately 84% of our loan
portfolio at December 31, 2004 consisted of real estate-secured loans, including commercial loans
secured by real estate, construction loans and real estate mortgage loans. Moreover, our business
activities are focused in the greater Las Vegas area. Consequently, our business is dependent on
the trends of this regional economy, and in particular, the commercial and residential real estate
markets. At December 31, 2004, we had 101 loans in excess of $1 million each, totaling $275
million. These loans comprise approximately 10.7% of our loan portfolio by number of loans and
68.1% by total loans outstanding. Not including credit card and consumer overdraft lines and
purchased participation loans, our average loan size is approximately $426,000. Deposit Products and Other Sources of Funds Our primary sources of funds for use in our lending and investing activities consist of:  
    deposits;
    maturities and principal and interest payments on loans and securities;
    other borrowings; and
    funds down streamed into Community Bank of Nevada, from time to time by Community Bancorp. We closely monitor rates and terms of competing sources of funds and utilize those sources we
believe to be the most cost effective, consistent with our asset and liability management policies. Deposits.An important balance sheet component impacting our net interest margin is the
composition and cost of our deposit base. We can improve our net interest margin to the extent that
growth in deposits can be focused in the less volatile and somewhat more traditional core deposits,
or total deposits less CDs greater than $100,000, commonly referred to as Jumbo CDs. We attempt to
price our deposit products in order to promote deposit growth and satisfy our liquidity
requirements and offer a variety of deposit products in order to satisfy our customers needs. We provide a wide array of deposit products. We have historically relied upon, and expect to
continue to rely upon, deposits to satisfy our needs for sources of funds. We offer regular
checking, savings, NOW and money market deposit accounts; fixed-rate, fixed maturity retail CDs
ranging in terms from 30 days to five years; individual retirement accounts and Jumbo CDs. For
business customers, we provide courier service to pick up non-cash deposits, and for those
customers that use large amounts of cash, we arrange for armored car and vault service. Our focus is on attracting lower cost core transaction account deposits. Based on average
balances, as of December 31, 2004, our deposit portfolio was comprised of 27% non-interest bearing
deposits, as compared to 24% at December 31, 2003 and 20% at December 31, 2002. We are not reliant
on escrow deposits which constitute less than 2% of total deposits nor do we run a money desk. At
December 31, 2004, the Company had one customer whose total deposits were $27.5 million 
approximately 6% of total deposits. We intend to continue our efforts at attracting deposits from our business lending
relationships in order to reduce our cost of funds and improve our net interest margin. Also, we
believe that we have the ability to attract sufficient additional
funding by re-pricing the yields on our CDs in order to meet loan demands during times that
growth in core deposits differs from loan demand. 12




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In addition to our traditional marketing methods, we attract new clients and deposits by:  
    expanding long-term business customer relationships, including referrals from our
customers, and
    building deposit relationships through our branch relationship officers who are
compensated based upon the profitability of such relationships. Other Borrowings.We may occasionally use our Fed funds lines of credit to support liquidity
needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan
demand, and for other short-term purposes. We have three Fed funds lines with other financial
institutions pursuant to which we can borrow up to $16 million on an unsecured basis. These lines
may be terminated by the respective lending institutions at any time. We also borrow from the Federal Home Loan Bank, or FHLB, pursuant to an existing commitment
based on the value of the collateral pledged (either loans or securities). FHLB borrowings have
been only occasional and based upon pricing opportunities. Employees We had a total of 104 full-time and 10 part-time employees at December 31, 2004. Competition The banking and financial services business in Clark County, Nevada, generally, and in the
greater Las Vegas area, in particular, is highly competitive. This increasingly competitive
environment is a result primarily of growth in community banks, changes in regulation, changes in
technology and product delivery systems, and the accelerating pace of consolidation among financial
services providers. We compete for loans, deposits and customers with other commercial banks,
savings and loan associations, securities and brokerage companies, mortgage companies, insurance
companies, finance companies, money market funds, credit unions, and other nonbank financial
service providers. Many of these competitors are much larger in total assets and capitalization,
have greater access to capital markets and offer a broader range of financial services than we can
offer. Competition for deposit and loan products remains strong from both banking and non-banking
firms and this competition directly affects the rates of those products and the terms on which they
are offered to consumers. Technological innovation continues to contribute to greater competition in domestic and
international financial services markets. Many customers now expect a choice of several delivery
systems and channels, including telephone, mail, home computer and ATMs. Mergers between financial institutions have placed additional pressure on banks to consolidate
their operations, reduce expenses and increase revenues to remain competitive. In addition,
competition has intensified due to federal and state interstate banking laws, which permit banking
organizations to expand geographically with fewer restrictions than in the past. These laws allow
banks to merge with other banks across state lines, thereby enabling banks to establish or expand
banking operations in our market. The competitive environment is also significantly impacted by
federal and state legislation that make it easier for non-bank financial institutions to compete
with us. Effect of Governmental Policies and Recent Legislation Banking is a business that depends on rate differentials. In general, the difference between
the interest rate we pay on our deposits and our other borrowings and the interest rate we receive
on loans extended to our customers and securities held in our portfolio comprise the major portion
of our earnings. These rates are highly sensitive to many factors that are beyond our control.
Accordingly, our earnings and growth are subject to the influence of domestic and foreign economic
conditions, including inflation, recession and unemployment. The commercial banking business is not only affected by general economic conditions but is
also influenced by monetary and fiscal policies of the federal government and the policies of
regulatory agencies, particularly the Federal Reserve. The Federal Reserve implements national
monetary policies (with objectives such as curbing inflation and combating recession) by its
open-market operations in United States Government securities, by adjusting the required level of
reserves for financial institutions subject to its reserve requirements and by varying the discount
rates applicable to borrowings by depository institutions. The actions of the Federal Reserve in
these areas influence the growth of bank loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and impact of any future changes in
monetary policies cannot be predicted. 13




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From time to time, legislation is enacted which has the effect of increasing the cost of doing
business, limiting or expanding permissible activities or affecting the competitive balance between
banks and other financial institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial institutions are
frequently made in Congress, in the Nevada legislature and before various bank regulatory and other
professional agencies. Supervision and Regulation The following discussion is only intended to provide summaries of significant statutes and
regulations that affect the banking industry and is therefore not complete. Changes in applicable
laws or regulations, and in the policies of regulators, may have a material effect on our business
and prospects. We cannot accurately predict the nature or extent of the effects on our business and
earnings that fiscal or monetary policies, or new federal or state laws, may have in the future. General We are extensively regulated under federal and state law. These laws and regulations are
primarily intended to protect depositors, not shareholders. The discussion below describes and
summarizes certain statutes and regulations. These descriptions and summaries are qualified in
their entirety by reference to the particular statute or regulation. Changes in applicable laws or
regulations may have a material effect on our business and prospects. Our operations may also be
affected by changes in the policies of banking and other government regulators. We cannot
accurately predict the nature or extent of the possible future effects on our business and earnings
of changes in fiscal or monetary policies, or new federal or state laws and regulations. Compliance In order to assure that we are in compliance with the laws and regulations that apply to our
operations, including those summarized below, we employ a compliance officer, and we engage an
independent compliance auditing firm. We are regularly reviewed by the Board of Governors of
Federal Reserve System, or the Federal Reserve, and the Nevada Department of Business and Industry,
Financial Institutions Division, or the Nevada FID, during which reviews such agencies assess our
compliance with applicable laws and regulations. Based on the assessments of our outside compliance
auditors and the Federal Reserve and Nevada FID, we believe that we materially comply with all of
the laws and regulations that apply to our operations. Federal Bank Holding Company Regulation General.Community Bancorp is a registered financial holding company as defined in the Bank
Holding Company Act of 1956, as amended, or the Bank Holding Company Act, and is therefore subject
to regulation, supervision and examination by the Federal Reserve. In general, the Bank Holding
Company Act limits the business of bank holding companies to owning or controlling banks and
engaging in other activities closely related to banking. Community Bancorp must file reports with
the Federal Reserve and must provide it with such additional information as it may require. The Federal Reserve may require Community Bancorp to terminate an activity or terminate
control or liquidate or divest certain subsidiaries, affiliates or investments when the Federal
Reserve believes the activity or the control of the subsidiary or affiliates constitutes a
significant risk to the financial safety, soundness or stability of any of its banking
subsidiaries. The Federal Reserve also has the authority to regulate provisions of certain bank holding
company debt, including the authority to impose interest ceilings and reserve requirements on such
debt. Under certain circumstances, Community Bancorp must file written notice and obtain Federal
Reserve approval prior to purchasing or redeeming its equity securities. Additionally, Community
Bancorp is required by the Federal Reserve to maintain certain levels of capital. See Capital
Adequacy below for a discussion of the applicable federal capital requirements. Financial Holding Company Status.Under the Financial Services Modernization Act of 1999, a
bank holding company may apply to the Federal Reserve to become a financial holding company, and
thereby engage (directly or through a subsidiary) in certain activities deemed financial in nature.
Community Bancorp was approved as a financial holding company on May 5, 2004. 14




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As a financial holding company, Community Bancorp may affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature or are incidental
or complementary to activities that are financial in nature. Financial in nature activities
include:  
    Securities underwriting;
    Dealing and market making;
    Sponsoring mutual funds and investment companies;
    Insurance underwriting and brokerage; merchant banking; and
    Activities that the Federal Reserve, in consultation with the Secretary of the Treasury,
determines from time to time to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. In order to become or remain a financial holding company, Community Bank of Nevada must be
well capitalized, well managed, and, except in limited circumstances, in satisfactory compliance
with the Community Reinvestment Act. Failure to sustain compliance with such requirements or
correct any non- compliance within a fixed time period could lead to divesture of subsidiary banks
or require us to conform all of our activities to those permissible for a bank holding company. A
bank holding company that is not also a financial holding company can only engage in banking and
such other activities determined by the Federal Reserve to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. We do not believe that the Financial Services Modernization Act will negatively affect our
operations in the short term. However, to the extent the legislation permits banks, securities
firms and insurance companies to affiliate, the financial services industry may experience further
consolidation. This consolidation could result in a growing number of larger financial institutions
that offer a wider variety of financial services than we currently offer, and these companies may
be able to aggressively compete in the markets we currently serve. Holding Company Bank Ownership.The Bank Holding Company Act requires every bank holding
company to obtain the prior approval of the Federal Reserve before (1) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank holding company if,
after such acquisition, it would own or control more than 5% of such shares, (2) acquiring all or
substantially all of the assets of another bank or bank holding company, or (3) merging or
consolidating with another bank holding company. Holding Company Control of Nonbanks.With some exceptions, the Bank Holding Company Act also
prohibits a bank holding company from acquiring or retaining direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The principal exceptions
to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve
regulation or order, have been identified as activities closely related to the business of banking
or of managing or controlling banks. Transactions with Affiliates.Subsidiary banks of a bank holding company are subject to
restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or
its subsidiaries, on investments in their securities and on the use of their securities as
collateral for loans to any borrower. These regulations and restrictions may limit Community
Bancorps ability to obtain funds from Community Bank of Nevada for its cash needs, including funds
for payment of dividends, interest and operational expenses. Tying Arrangements.We are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, sale or lease of property or furnishing of services. For
example, with certain exceptions, neither Community Bancorp nor Community Bank of Nevada may
condition an extension of credit to a customer on either (1) a requirement that the customer obtain
additional services provided by us or (2) an agreement by the customer to refrain from obtaining
other services from a competitor. Support of Subsidiary Banks.Under Federal Reserve policy, Community Bancorp is expected to
act as a source of financial and managerial strength to Community Bank of Nevada. This means that
Community Bancorp is required to commit, as necessary, resources to support Community Bank of
Nevada. Any capital loans a bank holding company makes to its subsidiary banks are subordinate to
deposits and to certain other indebtedness of those subsidiary banks. 15




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State Law Restrictions.As a Nevada corporation, Community Bancorp is subject to certain
limitations and restrictions under applicable Nevada corporate law. For example, state law
restrictions in Nevada include limitations and restrictions relating to indemnification of
directors, maintenance of books, records, and minutes, and observance of certain corporate
formalities. Federal and State Regulation of Community Bank of Nevada General.Community Bank of Nevada is a Nevada chartered commercial bank with deposits insured
by the FDIC. The bank is also a member of the Federal Reserve System. As a result, Community Bank
of Nevada is subject to supervision and regulation by the Nevada FID and the Federal Reserve. These
agencies have the authority to prohibit banks from engaging in what they believe constitute unsafe
or unsound banking practices. Lending Limits.State banking law generally limits the amount of funds that a bank may lend
to a single borrower to 25% of stockholders equity plus retained earnings and allowance for loan
and lease losses. Control of Financial Institutions.Nevada banking laws require that changes in ownership of
10% or more of a banks outstanding voting stock must be reported to the Nevada FID within three
business days. If 20% or more of the banks voting power is acquired by a natural person, or 10% or
more is acquired by an entity, then the acquisition may be deemed a change in control requiring
prior approval of the Nevada FID. Community Reinvestment.The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their jurisdiction, the Federal Reserve evaluate the
record of the financial institution in meeting the credit needs of its local communities, including
low and moderate income neighborhoods, consistent with the safe and sound operation of the
institution. These factors are also considered in evaluating mergers, acquisitions and applications
to open a branch or facility. Insider Credit Transactions.Banks are also subject to certain Federal Reserve restrictions
on extensions of credit to executive officers, directors, principal shareholders or any related
interests of such persons (i.e., insiders). Extensions of credit (1) must be made on substantially
the same terms and pursuant to the same credit underwriting procedures as those for comparable
transactions with persons who are neither insiders nor employees, and (2) must not involve more
than the normal risk of repayment or present other unfavorable features. Banks are also subject to
certain lending limits
and restrictions on overdrafts to insiders. A violation of these restrictions may result in
regulatory sanctions on the bank or its insiders. Regulation of Management.Federal law sets forth circumstances under which officers or
directors of a bank may be removed by the institutions federal supervisory agency. Federal law
also prohibits management personnel of a bank from serving as a director or in a management
position of another financial institution whose assets exceed a specified amount or which has an
office within a specified geographic area. Safety and Soundness Standards.Federal law imposes upon banks certain non-capital safety and
soundness standards. These standards cover internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset growth,
compensation and benefits. Additional standards apply to asset quality, earnings and stock
valuation. An institution that fails to meet these standards must develop a plan acceptable to its
regulators, specifying the steps that the institution will take to meet the standards. Failure to
submit or implement such a plan may subject the institution to regulatory sanctions. Under Nevada
state law, if the stockholders equity of a Nevada state-chartered bank becomes impaired, the
Commissioner of the Nevada FID will require the bank to make the impairment good. Failure to make
the impairment good may result in the Commissioners taking possession of the bank and liquidating
it. Dividends.The principal source of Community Bancorps cash reserves will be dividends
received from Community Bank of Nevada. Nevada law imposes certain restrictions on a banks ability
to pay dividends and prohibits a bank from paying dividends if doing so would reduce its
stockholders equity below (i) the initial stockholders equity of the bank, or (ii) 6% of the
total deposit liability of the bank, as determined by the Nevada FID. 16




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Regulations of the Federal Reserve also govern the payment of dividends by a state member
bank. Under Federal Reserve Regulations, dividends may not be paid unless both capital and earnings
limitations have been met. First, no dividend may be paid if it would result in a withdrawal of
capital or exceed the member banks net profits then on hand, after deducting its losses and bad
debts. Exceptions to this limitation are available only upon the prior approval of the Federal
Reserve and the approval of two-thirds of the member banks shareholders which, in the case of
Community Bank of Nevada, would require our approval, as the sole shareholder of Community Bank of
Nevada. Second, a state member bank may not pay a dividend without the prior written approval of
the Federal Reserve if the total of all dividends declared in one calendar year, including the
proposed dividend, exceeds the total of net income for that year plus the preceding two calendar
years less any required transfers to surplus under state or federal law. In addition, a bank may not pay cash dividends if doing so would reduce its capital below
minimum applicable federal capital requirements. See Capital Adequacy below for a discussion of
the applicable federal capital requirements. Predatory Lending The term predatory lending, much like the terms safety and soundness and unfair and
deceptive practices, is far-reaching and covers a potentially broad range of behavior. As such, it
does not lend itself to a concise or a comprehensive definition. But typically predatory lending
involves at least one, and perhaps all three, of the following elements:  
    making unaffordable loans based on the assets of the borrower rather than on the
borrowers ability to repay an obligation, or asset-based lending;
    inducing a borrower to refinance a loan repeatedly in order to charge high points and
fees each time the loan is refinanced, or loan flipping; and
    engaging in fraud or deception to conceal the true nature of the loan obligation from an
unsuspecting or unsophisticated borrower. Federal Reserve Board regulations aimed at curbing such lending significantly widened the pool
of high-cost home-secured loans covered by the Home Ownership and Equity Protection Act of 1994, a
federal law that requires extra disclosures and consumer protections to borrowers. The following
triggers coverage under the Home Ownership and Equity Protection Act of 1994:  
    interest rates for first lien mortgage loans in excess of 8 percentage points above comparable Treasury securities,
    subordinate-lien loans of 10 percentage points above Treasury securities, and
    fees such as optional insurance and similar debt protection costs paid in connection with
the credit transaction, when combined with points and fees if deemed excessive. In addition, the regulation bars loan flipping by the same lender or loan servicer within a
year. Lenders also will be presumed to have violated the law  which says loans shouldnt be made
to people unable to repay them  unless they document that the borrower has the ability to repay.
Lenders that violate the rules face cancellation of loans and penalties equal to the finance
charges paid. We do not expect these rules and potential state action in this area to have a
material impact on our financial condition or results of operation. Privacy Federal banking rules limit the ability of banks and other financial institutions to disclose
non-public information about consumers to nonaffiliated third parties. Pursuant to these rules,
financial institutions must provide:  
    initial notices to customers about their privacy policies, describing the conditions
under which they may disclose nonpublic personal information to nonaffiliated third parties
and affiliates;
    annual notices of their privacy policies to current customers; and
    a reasonable method for customers to opt out of disclosures to nonaffiliated third parties. These privacy provisions affect how consumer information is transmitted through diversified
financial companies and conveyed to outside vendors. We have implemented its privacy policies in
accordance with the law. 17




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Interstate Banking and Branching The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, or the Interstate
Act, generally authorizes interstate branching. Currently, bank holding companies may purchase
banks in any state, and banks may merge with banks in other states, as long as the home state of
neither merging bank has opted out under the legislation. The Interstate Act requires regulators to
consult with community organizations before permitting an interstate institution to close a branch
in a low-income area. Nevada has enacted opting in legislation authorizing interstate mergers pursuant to the
Interstate Act. The Nevada statute permits out-of-state banks and bank holding companies meeting
certain requirements to maintain and operate the Nevada branches of a Nevada bank with which the
out-of-state company engaged in an interstate combination. An out-of-state depository without a
branch in Nevada, or an out-of-state holding company without a depository institution in Nevada,
must first acquire the Nevada institution itself or its charter, before it can establish a de novo
branch or acquire a Nevada branch through merger. Deposit Insurance Community Bank of Nevadas deposits are currently insured to a maximum of $100,000 per
depositor through the Bank Insurance Fund administered by the FDIC. Community Bank of Nevada is
required to pay deposit insurance premiums, which are assessed semiannually and paid quarterly. The
premium amount is based upon a risk classification
system established by the FDIC. Banks with higher levels of capital and a low degree of
supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher
degree of supervisory concern. The FDIC is also empowered to make special assessments on insured depository institutions in
amounts determined by the FDIC to be necessary to give it adequate assessment income to repay
amounts borrowed from the U.S. Treasury and other sources or for any other purpose the FDIC deems
necessary. Capital Adequacy Regulatory Capital Guidelines.Federal bank regulatory agencies use capital adequacy
guidelines in the examination and regulation of bank holding companies and banks. The guidelines
are risk-based, meaning that they are designed to make capital requirements more sensitive to
differences in risk profiles among banks and bank holding companies. Tier I and Tier II Capital.Under the guidelines, an institutions capital is divided into
two broad categories, Tier I capital and Tier II capital. Tier I capital generally consists of
common stockholders equity, surplus and undivided profits. Tier II capital generally consists of
the allowance for loan losses, hybrid capital instruments, and subordinated debt. The sum of Tier I
capital and Tier II capital represents an institutions total capital. The guidelines require that
at least 50% of an institutions total capital consist of Tier I capital. Risk-based Capital Ratios.The adequacy of an institutions capital is gauged primarily with
reference to the institutions risk weighted assets. The guidelines assign risk weightings to an
institutions assets in an effort to quantify the relative risk of each asset and to determine the
minimum capital required to support that risk. An institutions risk weighted assets are then
compared with its Tier I capital and total capital to arrive at a Tier I risk-based ratio and a
total risk-based ratio, respectively. The guidelines provide that an institution must have a
minimum Tier I risk-based ratio of 4% and a minimum total risk-based ratio of 8%. Leverage Ratio.The guidelines also employ a leverage ratio, which is Tier I capital as a
percentage of total assets less intangibles, to be used as a supplement to risk-based guidelines.
The principal objective of the leverage ratio is to constrain the maximum degree to which a bank
holding company may leverage its equity capital base. The minimum leverage ratio is 3%; however,
for all but the most highly rated bank holding companies and for bank holding companies seeking to
expand, regulators generally expect an additional cushion of at least 1% to 2%. Prompt Corrective Action.Under the guidelines, an institution is assigned to one of five
capital categories depending on its total risk-based capital ratio, Tier I risk-based capital
ratio, and leverage ratio, together with certain subjective factors. The categories range from
well capitalized to critically undercapitalized. Institutions that are deemed to be
undercapitalized, depending on the category to which they are assigned, are subject to certain
mandatory supervisory corrective actions. 18




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Corporate Governance and Accounting Legislation Sarbanes-Oxley Act of 2002.On July 30, 2002, the Sarbanes-Oxley Act of 2002, or SOX, was
signed into law to address corporate and accounting fraud. SOX establishes a new accounting
oversight board that will enforce auditing standards and restricts the scope of services that
accounting firms may provide to their public company audit clients. Among other things, SOX also
(i) requires chief executive officers and chief financial officers to certify to the accuracy of
periodic reports filed with the SEC; (ii) imposes new disclosure requirements regarding internal
controls, off-balance-sheet transactions, and pro forma (non-GAAP) disclosures; (iii) accelerates
the time frame for reporting of insider transactions and periodic disclosures by public companies;
and (iv) requires companies to disclose whether or not they have adopted a code of ethics for
senior financial officers and whether the audit committee includes at least one audit committee
financial expert. Under SOX, the SEC is required to regularly and systematically review corporate filings, based
on certain enumerated factors. To deter wrongdoing, SOX: (i) subjects bonuses issued to top
executives to disgorgement if a restatement of a
companys financial statements was due to corporate misconduct; (ii) prohibits an officer or
director from misleading or coercing an auditor; (iii) prohibits insider trades during pension fund
blackout periods; (iv) imposes new criminal penalties for fraud and other wrongful acts; and (v)
extends the period during which certain securities fraud lawsuits can be brought against a company
or its officers. As a public reporting company, we are subject to the requirements of SOX and related rules and
regulations issued by the SEC and Nasdaq. We anticipate that we will incur additional expense as a
result of the Act, but we do not expect that such compliance will have a material impact on our
business. However, other non-interest expense items, including professional expenses and other
costs related to compliance with the reporting requirements of the securities laws and compliance
with the Sarbanes-Oxley Act of 2002, will increase significantly. Anti-terrorism Legislation USA Patriot Act of 2001.On October 26, 2001, President Bush signed the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism,
or the Patriot Act, of 2001. Among other things, the Patriot Act (i) prohibits banks from providing
correspondent accounts directly to foreign shell banks; (ii) imposes due diligence requirements on
banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals
(iii) requires financial institutions to establish an anti-money-laundering compliance program, and
(iv) eliminates civil liability for persons who file suspicious activity reports. The Patriot Act
also increases governmental powers to investigate terrorism, including expanded government access
to account records. The Department of the Treasury is empowered to administer and make rules to
implement the Patriot Act. While we believe the Patriot Act may, to some degree, affect our
recordkeeping and reporting expenses, we do not believe that it will have a material adverse effect
on our business and operations. Nonbank Entity Our non-bank entity, Community Bancorp (NV) Statutory Trust I, a Connecticut statutory trust,
is subject to the laws and regulations of both the federal government and the state in which it
conducts business. Factors that May Affect Future Results of Operations Factors Relating to our Market and to our Business A deterioration in economic conditions and a slow down in growth generally, and a slowdown in
gaming and tourism activities in particular, could adversely affect our business, financial
condition, results of operations and prospects. Such a deterioration could result in a variety of
adverse consequences to us, including a reduction in net income and the following:  
    Loan delinquencies may increase, which would cause us to increase loan loss provisions;
    Problem assets and foreclosures may increase, which could result in higher operating
expenses, as well as possible increases in our loan loss provisions;
    Demand for our products and services may decline including specifically, the demand for
loans, which would cause our revenues, which include net interest income and noninterest
income, to decline; and 19




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
    Collateral for loans made by us may decline in value, reducing a customers borrowing
power, and reducing the value of assets and collateral associated with our loans, which
could cause decreases in net interest income and increasing loan loss provisions. The greater Las Vegas area economy has grown dramatically during the past several years. The
failure of this economy to sustain such growth in the future could seriously affect our ability to
grow and to be profitable. Our assets have enjoyed substantial growth with an annual compounded growth rate of 25.6% for
the five year period ending December 31, 2004. In large part, our growth has been fueled by the
significant growth in the greater Las Vegas area. Diminished growth of this market in the future
could have a significant adverse impact on our continued growth and profitability. While the current economic forecasts prepared by CBER remain optimistic about the future
growth of Las Vegas, albeit at lower growth rates than have recently been experienced, there are
uncertainties in the economy, besides tourism and gaming discussed below, such as limitations on
water, the continued measured availability of land from the Bureau of Land Management,
infrastructure strains, increasing costs of housing, and tax and budgetary pressures, which may
hamper future growth. Our market area is substantially dependent on gaming and tourism revenue, and a downturn in gaming
or tourism could seriously hurt our business and our prospects Our business is currently concentrated in the greater Las Vegas area which has an economy
unique in the United States for its level of dependence on services and industries related to
gaming and tourism. Any event that negatively impacts the tourism or gaming industry will adversely
impact the Las Vegas economy. Gaming and tourism revenue (whether or not such tourism is directly related to gaming) is
vulnerable to various factors. A prolonged downturn in the national economy could have a
significant adverse effect on the economy of the Las Vegas area. Virtually any development or event
that could dissuade travel or spending related to gaming and tourism, whether inside or outside of
Las Vegas, could adversely affect the Las Vegas economy. In this regard, the Las Vegas economy is
more susceptible than the economies of other cities to issues such as higher gasoline and other
fuel prices, increased airfares, unemployment levels, recession, rising interest rates, and other
economic conditions, whether domestic or foreign. Future growth of the greater Las Vegas are is dependent, among other things, on the availability of
water,and any restrictions imposed by the government on water consumption could curtail future
development, which has been a source of growth in our loan portfolio. Future development in the greater Las Vegas area is subject to the availability of water.
According to the Rocky Mountain Institute, Las Vegas has one of the highest per-capita rates of
water consumption in the nation. Based upon an August 2003 U.S. Geological Survey, inflows into
Lake Mead and Lake Powell on the Colorado River have been below average since the start of a
persistent drought in the western United States in 2000. In 2003, Lake Mead, the primary water
supply for Las Vegas, dropped to its lowest level in more than three decades. We cannot assure that
governmental officials will not impose building moratoriums, restrictive building requirements,
water conservation measures, or other measures to address water shortages in the future. Such
restrictions could curtail future development, which has been a source of growth in our loan
portfolio, or make living conditions less desirable than current conditions, which could reduce the
influx of new residents from current levels. The value of real estate in the greater Las Vegas area is influenced by the distribution policies
of the federal Bureau of Land Management. A change in such distribution policies could effect the
value of real estate, which, in turn, could negatively affect our real estate loan portfolio. Land values in Nevada are influenced by the amount of land sold by the federal Bureau of Land
Management, which controls 67% of Nevadas land, according to the Nevada State Office of the Bureau
of Land Management. Changes to the federal Bureau of Land Management distribution policies on
Nevada land could adversely affect the value of Nevada real estate. 20




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We have a high concentration of loans secured by real estate and a downturn in the real estate
market, for any reason, could hurt our business and our prospects. At December 31, 2004, 84% of our loan portfolio was comprised of loans secured by real estate.
Raw land loans, which are included in the categories below, represent approximately 15% of our
total loans secured by real estate. Of the loans secured by real estate, approximately:  
    49% are construction and land development loans, including raw land;
    44% are commercial real estate loans; and
    7% are residential real estate loans. These real estate-secured loans are concentrated in the greater Las Vegas area. A downturn in
the local economy could have a material adverse effect on a borrowers ability to repay these loans
due to either loss of borrowers employment or a reduction in borrowers business. Further, such
reduction in the local economy could severely impair the value of the real property held as
collateral. As a result, the value of real estate collateral securing our loans could be reduced.
Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral
would then be diminished and we would be more likely to suffer losses on defaulted loans. Gaming and tourism are also susceptible to certain political conditions or events, such as
military hostilities and acts of terrorism, whether domestic or foreign. The effects of the
terrorist attacks of September 11, 2001, on gaming and tourism in Las Vegas were substantial for a
few months. Reduced civilian air traffic in large part caused a reduction in revenue and employee
layoffs in many hotels and casinos. This resulted in a substantial loss of revenues for these
businesses. Any direct attack on locations in Las Vegas would likely have an even greater adverse
impact on our local economy. Las Vegas competes with other areas of the country for gaming revenue, and it is possible that
the expansion of gaming operations in other states, as a result of changes in laws or otherwise,
could significantly reduce gaming revenue in the greater Las Vegas area. This is particularly true
of gaming operations in California, a state from which Nevada generally, and Las Vegas in
particular, draw substantial year-round visitors. Agreements negotiated between the State of
California and certain Indian tribes as well as other proposals currently under consideration in
California may result in substantial additional casinos throughout the state. In addition, other
California legislative proposals could permit an expansion of gaming activities allowed in card
clubs, including the addition of slot machines. A dramatic growth in casino gaming in California or
other states could have a substantial adverse effect on gaming revenue in Nevada, including the Las
Vegas area, which would adversely affect the Las Vegas economy and our business. Factors Relating to our Business Our future success involves both our ability to grow and our ability to manage such growth.
Additionally, we must continue to manage the risks inherent in the banking business. We may not be
able to sustain our historical growth rates, be able to grow at all, or successfully manage any
growth, whether or not the greater Las Vegas area economy continues to grow. This could result in a
variety of adverse consequences to us, including the following:  
    Inability to realize any benefit from our investment of resources made to support our future growth;
    Failure to attract or retain experienced commercial bankers or other key employees;
    Inability to maintain adequate controls and systems; and
    Failure to comply with applicable federal, state and local laws, rules and regulations. 21




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We may not be able to continue our growth at the rate we have in the past several years. We have grown from $276 million in total assets, $192 million in gross loans and $255 million
in total deposits at December 31, 2000, to $574 million in total assets, $403 million in gross
loans and $476 million in total deposits at December 31, 2004. Our business strategy calls for,
among other things:  
    continued growth of our assets, loans, deposits and customer base;
    expansion through acquisition or the establishment of new branches or banks in high
growth markets, such as the greater Las Vegas area, or similar high growth markets in
Arizona and California;
    recruitment of experienced commercial bankers and other key employees; and
    effective leveraging of our capital. However, we may encounter unanticipated obstacles in implementing our strategy. If we are
unable to expand our business, as we anticipate based on our strategic plan, we may not be able to
maintain profitability, and there can be no assurance that we will be able to sustain our
historical growth rates. A component of our business strategy is to expand into high growth markets by opening new branches
or organizing new banks and/or acquisitions of other financial institutions. We may not be able to
successfully implement this part of our business strategy, and therefore our market value and
profitability may suffer. Growth through acquisitions of banks represents a component of our business strategy. Any
future acquisitions will be, accompanied by the risks commonly encountered in acquisitions. These
risks include, among other things:  
    difficulty of integrating the operations and personnel of acquired banks and branches;
    potential disruption of our ongoing business;
    inability of our management to maximize our financial and strategic position by the
successful implementation of uniform product offerings and the incorporation of uniform
technology into our product offerings and control systems; and
    inability to maintain uniform standards, controls, procedures and policies and the
impairment of relationships with employees and customers as a result of changes in
management. We cannot assure you that we will be successful in overcoming these risks or any other
problems encountered in connection with acquisitions. Our inability to improve the operating
performance of acquired banks or to integrate successfully their operations could have a material
adverse effect on our business, financial condition, results of operations and cash flows. In
addition, we could incur substantial expenses, including the expenses of integrating the business
of the acquired bank with our existing business. We expect that competition for appropriate candidates may be significant. We may compete with
other banks or financial service companies with similar acquisition strategies, many of which may
be larger or have greater financial and other resources than we have. The purchase price of banks
that might be attractive acquisition candidates for us may significantly exceed the fair values of
their net assets. As a result, material goodwill and other intangible assets would be required to
be recorded. We cannot assure you that we will be able to successfully identify and acquire
suitable banks on acceptable terms and conditions. Depending upon the structure of an acquisition and the consideration we may utilize, we may
not seek your approval as a shareholder. Further, acquisitions may be structured to include cash
consideration that may result in the depletion of a substantial portion of our available cash. 22




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Besides the acquisition of existing financial institutions, we may consider the organization
of new banks in high growth areas, especially in markets outside of the greater Las Vegas area such
as California or Arizona. To date we have not specifically identified any market area where we plan
to organize a new bank. Any organization of a new bank carries with it numerous risks, including
the following:  
    The inability to obtain all required regulatory approvals;
    Significant costs and anticipated operating losses during the application and
organizational phases, and the first years of operations of the new bank;
    The inability to secure the services of qualified senior management;
    The local market may not accept the services of a new bank owned and managed by a bank
holding company headquartered outside of the market area of the new bank; and
    The additional strain on management resources and internal systems and controls. Our growth could be hindered unless we are able to recruit additional, qualified employees. We may
have difficulty attracting additional necessary personnel, which may divert resources and limit our
ability to successfully expand our operations. The greater Las Vegas area is experiencing a period of rapid growth, placing a premium on
highly qualified employees in a number of industries, including the financial services industry.
Our business plan includes, and is dependent upon, our hiring and retaining highly qualified and
motivated executives and employees at every level, including a chief credit officer, SBA management
and support staff, experienced loan originators and branch managers. We expect to experience
substantial competition in our endeavor to identify, hire and retain the top-quality employees. If
we are unable to hire and retain qualified employees in the near term, we may be unable to
successfully execute our business strategy and/or be unable to successfully manage our growth. We believe that we have built our management team and personnel, and established an
infrastructure, to support our current size. Our future success will depend on the ability of our
executives and employees to continue to implement and improve our operational, financial and
management controls and processes, reporting systems and procedures, and to manage a growing number
of client relationships. We may not be able to successfully implement improvements to our
management information and control systems and control procedures and processes in an efficient or
timely manner. In particular, our controls and procedures must be able to accommodate an increase
in expected loan volume and the infrastructure that comes with new branches. We cannot assure you that our growth strategy will not place a strain on our administrative
and operational infrastructure. If we are unable to locate additional personnel and to manage
future expansion in our operations, we may experience compliance and operational issues, have to
slow the pace of growth, or have to incur additional expenditures beyond current projections to
support such growth, any one of which could adversely affect our business. Our business would be harmed if we lost the services of any of our senior management team. We believe that our success to date and our prospects for success in the future are
substantially dependent on our senior management team, which includes our President and Chief
Executive Officer, our Chief Operating Officer, our Chief Financial Officer, our Chief Credit
Officer, our Executive Vice President for Credit Administration and our Executive Vice President,
Director of Operations. The loss of the services of any of these persons could have an adverse
effect on our business. We recently entered into employment agreements with our President and Chief
Executive Officer, our Chief
Operating Officer and our Chief Financial Officer. .In light of the relatively small pool
of persons involved in the greater Las Vegas area banking industry, we could have difficulty
replacing any of our senior management team or senior officers with equally competent persons who
are also familiar with our market area. 23




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As the result of our recent IPO we became a public reporting company subject to significant new
laws and regulations that will increase our compliance costs and may strain our management
resources. We are now a public company and, for the first time in our history, the reporting requirements
of the Securities Exchange Act of 1934, as amended and the Sarbanes-Oxley Act of 2002, or SOX, and
related regulations will be applicable to our operations. Despite our doing business in a highly
regulated environment, these laws and regulations have vastly different requirements for compliance
than we have previously experienced. Our expenses related to services rendered by our accountants,
legal counsel and consultants will increase in order to ensure compliance with these laws and
regulations that we will be subject to as a public company. In addition, it is possible that the
sudden application of these requirements to our business will result in some cultural adjustments
and strain our management resources. To date, we have not conducted a comprehensive review and confirmation of the adequacy of our
existing systems and controls as will be required under Section 404 of SOX. We may discover
deficiencies in existing systems and controls. If that is the case, we intend to take the necessary
steps to correct any deficiencies, and such steps may be costly and may strain our management
resources. There is intense competition in our market area, and we cannot assure you that we will be able to
successfully compete. Commercial banking in the greater Las Vegas area is a highly competitive business. Increased
competition in our market may result in reduced loans and deposits. We compete for loans and
deposits primarily with the local offices of major banks. We compete with other community banks in
our market for customers as well. We also compete with credit unions, small loan companies,
insurance companies, mortgage companies, finance companies, brokerage houses, other financial
institutions and out-of-state financial intermediaries, some of which are not subject to the same
degree of regulation and restriction as us and some of which have financial resources greater than
us. Technological advances continue to contribute to greater competition in domestic and
international products and services. Ultimately, we may not be able to compete successfully against
current and future competitors. Our allowance for loan losses may not be adequate to cover actual losses particularly given our
relatively large individual loan size. A significant source of risk arises from the possibility that losses could be sustained
because borrowers, guarantors and related parties may fail to perform in accordance with the terms
of their loans. The underwriting and credit monitoring policies that we have adopted to address
this risk may not prevent unexpected losses that could have a material adverse affect on our
business. Most of our loans, or approximately 84%, are secured by real estate. Community Bank of
Nevadas legal lending limit is approximately $13 million. At December 31, 2004, we had 101 loans
in excess of $1 million each, totaling $275 million. These loans comprise approximately 10.7% of
our loan portfolio by number of loans and 68.1% by total loans outstanding. Our average loan size
at December 31, 2004 was approximately $426,000 (excluding credit card, overdraft and purchased
participation loans). This relatively large average loan size, while an advantage from a cost
generation standpoint, can adversely impact us if one or more of these larger loans becomes
delinquent, unstable, impaired, uncollectible or inadequately collateralized. Like all financial institutions, we maintain an allowance for loan losses to provide for loan
defaults and non-performance. Our allowance for loan losses may not be adequate to cover actual
loan losses, and future provisions for loan losses could materially and adversely affect our
business. Our allowance for loan losses is based on our prior
experience and peer bank experience, as well as an evaluation of the known risks in the
current portfolio, composition and growth of the loan portfolio and economic factors. The
determination of the appropriate level of loan loss allowance is an inherently difficult process
and is based on numerous assumptions. The amount of future losses is susceptible to changes in
economic, operating and other conditions, including changes in interest rates, that may be beyond
our control and these losses may exceed current estimates. We cannot assure you that we will not
increase the allowance for loan losses further or that regulators will not require us to increase
this allowance. Either of these occurrences could adversely affect our business and prospects. 
 ITEM 2. PROPERTIES We own the buildings and land for four of our offices. These properties are not subject to any
mortgages or encumbrances and consist of the following:  
    Rainbow Branch located at 1400 S. Rainbow, Las Vegas, Nevada, which is 9,600 square feet.
    Maryland Parkway Branch located at 2887 S. Maryland Parkway, Las Vegas, Nevada, which is 5,600 square feet. 24




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
    Summerlin Branch located at 7676 W. Lake Mead Blvd., Las Vegas, Nevada, which is 9,700 square feet.
    Green Valley Branch located at 1441 W. Warm Springs, Henderson, Nevada, which is 5,600 square feet. We lease approximately 10,500 square feet for our City Centre Branch located at 400 South 4th
Street, Las Vegas, Nevada. Our headquarters and administration offices are also located in the City
Centre site. The lease is for a ten-year term, expiring August 31, 2012. Our current monthly rent
is $25,308, which increases to $29,063 by the end of the lease. We have recently finalized a lease for our sixth office to be located at the intersection of
Russell Road and Interstate 215 in Las Vegas, Nevada. We plan on opening our sixth office in the
second half of 2005. The new office will consist of 21,566 rentable square feet at $1.73 sq.ft. per
month. This new office will house our sixth branch, human resources, operation support, audit and
our real estate lending department. Although our strategic plan currently calls for one additional branch per year from 2005
through 2009, management believes that our existing facilities are adequate for our present
purposes. 
 ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which we or Community Bank of Nevada is a
party or to which any of our properties are subject. There are no material proceedings known to us
to be contemplated by any governmental authority. We are involved in a variety of litigation
matters in the ordinary course of our business and anticipate that we will become involved in new
litigation matters from time to time in the future. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2004. 
  ITEM 5.
    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information Our common stock began trading on the NASDAQ National Market under the symbol CBON on
December 10, 2004. Prior to our IPO there had been no public market for our common stock. Our common stock had
been traded, from time to time, by individuals on a negotiated basis between the parties. The
following table sets forth those trades since
January 1, 2003 through December 9, 2004 of which we have knowledge, including the quarter in
which the trades occurred, the aggregate number of shares traded during such quarter and the range
of sales price per share: Quarter of Trade
    
    Number of Shares
    
    
    Price Per Share1st 03
    
    
    114,620
    
    
    $
    7.00  $8.402nd 03
    
    
    N/A
    
    
    
    N/A3rd 03
    
    
    3,165
    
    
    $
    9.004th 03
    
    
    N/A
    
    
    
    N/A1st 04
    
    
    50
    
    
    $
    9.002nd 04
    
    
    3,000
    
    
    $
    9.003rd 04
    
    
    N/A
    
    
    
    N/AOctober 1, 2004  December 9, 2004
    
    
    N/A
    
    
    
    N/A
 25




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In the IPO shares of our common stock were sold for $23.00 per share. The following table sets
forth the low and high closing prices for the period from December 10, 2004 through December 31,
2004. Closing PricesPeriod
    
    Low
    
    HighDecember 10, 2004 -December 31, 2004
    
    $
    27.51
    
    
    $
    33.00
 Holders As of February 24, 2005, there were approximately 1,733 stockholders of record of our common
stock. At such date, our directors and executive officers owned approximately 17% of our
outstanding shares. There are no other classes of common equity outstanding. Dividends We have not declared a cash dividend since 2002 as we have used our current and retained
earnings to support our rapid and continued growth. We do not foresee any circumstances in the
immediate future in which we would consider paying cash dividends on our common stock.
Additionally, we intend to discontinue paying stock dividends which we commenced in 2002. Under Nevada law, a corporation may not pay a dividend if, after giving effect to the
dividend, (i) the corporation would not be able to pay its debts as they become due, or (ii) the
corporations assets would be less than the sum of its total liabilities plus the amount that would
be needed, if the corporations were to be dissolved at the time of distribution, to satisfy the
dissolution rights of any preferred shareholders. Additionally, our junior subordinated debt agreement contains a provision which prohibits our
paying dividends if we have deferred payment of interest on outstanding trust preferred securities.
See Managements Discussion and Analysis of Financial Condition and Results of Operations. We are a legal entity separate and distinct from Community Bank of Nevada. Since we are a
holding company with no significant assets other than Community Bank of Nevada, we will be
dependent upon dividends from Community Bank of
Nevada for cash with which to pay dividends when, and if, our dividend policy changes.
Further, federal and state banking regulations place certain restrictions on dividends paid by
Community Bank of Nevada to Community Bancorp. At December 31, 2004, Community Bank of Nevadas
retained earnings available for the payment of dividends was approximately $16 million. In addition, dividends paid by Community Bank of Nevada to Community Bancorp would be
prohibited if the effect thereof would cause Community Bank of Nevadas capital to be reduced below
applicable minimum capital requirements. For a discussion of the regulatory limitations on
Community Bank of Nevadas ability to pay dividends, see Supervision and Regulation  Federal and
State Regulation of Community Bank of Nevada  Dividends. Use of Proceeds As discussed previously, in the fourth quarter of 2004 we completed our initial public
offering. Our registration statement filed on Form S-1 relating to the offering was declared
effective on December 10, 2004. The offering was made on December 10, 2004, with the underwriters
exercising their over-allotment option on December 21, 2004. The offering terminated after all
securities were sold. The managing underwriter in the offering was Keefe, Bruyette & Woods, Inc.
The sole class of securities sold in the offering was our common stock $0.001 par value. A total
of 2,640,000 shares were registered in the offering, at an offering price of $23.00. Of the total
shares registered in the offering, we sold 1,860,400, and certain selling shareholders sold 779,600
shares, all at $23.00 per share. From December 10, 2004 through December 31, 2004, the total amount of expenses incurred by us
in connection with the issuance
and distribution of the securities registered for underwriting
discounts and commissions, finders
fees, expenses paid to or for underwriters, other expenses and total expense was $3.5 million. No
payments were made to: (i) our directors, officers, general partners or their associates, (ii)
persons owning ten percent or more of any class of our securities, or (iii) our affiliates. All
payments were made to other persons. 26




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The net offering proceeds received by us was $39.3 million. From December 10, 2004 through
December 31, 2004, the amount of net offering proceeds used by us was as follows: Temporary investments in overnight fed funds:
    
    $32.3 millionInvestments in loan participations:
    
    $7.0 million
 No payments for the previous items were made to: (i) our directors, officers, general partners
or their associates, (ii) persons owning ten percent or more of any class of our securities, or
(iii) our affiliates. All payments were made to other persons. There has been no material change in the planned use of proceeds from our IPO as described in
the prospectus for the offering. 
 ITEM 6. SELECTED FINANCIAL DATA Selected Consolidated Financial Data  Community Bancorp The selected financial information in the table below as of and for the years ended December
31, 2004, 2003, 2002, 2001, and 2000 is derived from our audited consolidated financial statements.
Results for past periods are not necessarily indicative of results that may be expected for any
future period. 27




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SUMMARY CONSOLIDATED FINANCIAL DATA AND OTHER DATA At Year-Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001 (1)
    
    
    2000 (1)(Dollars in thousands, except share, per share and percentage data)Consolidated Income Data:Interest income
    
    $
    30,038
    
    
    $
    27,143
    
    
    $
    25,449
    
    
    $
    24,119
    
    
    $
    21,680Interest expense
    
    
    6,862
    
    
    
    7,453
    
    
    
    8,709
    
    
    
    10,737
    
    
    
    8,699Net interest income
    
    
    23,176
    
    
    
    19,690
    
    
    
    16,740
    
    
    
    13,382
    
    
    
    12,981Provision for loan losses
    
    
    922
    
    
    
    1,723
    
    
    
    1,958
    
    
    
    1,909
    
    
    
    1,655Net interest income after provision
for loan losses
    
    
    22,254
    
    
    
    17,967
    
    
    
    14,782
    
    
    
    11,473
    
    
    
    11,326Non-interest income
    
    
    1,489
    
    
    
    1,563
    
    
    
    1,392
    
    
    
    1,670
    
    
    
    970Non-interest expense
    
    
    15,946
    
    
    
    12,020
    
    
    
    9,112
    
    
    
    8,460
    
    
    
    7,122Income before income taxes
    
    
    7,797
    
    
    
    7,510
    
    
    
    7,062
    
    
    
    4,683
    
    
    
    5,174Provision for income taxes
    
    
    2,376
    
    
    
    2,295
    
    
    
    2,337
    
    
    
    1,526
    
    
    
    1,745Net Income
    
    $
    5,421
    
    
    $
    5,215
    
    
    $
    4,725
    
    
    $
    3,157
    
    
    $
    3,429Share data:Earnings per share - basic
    
    $
    1.13
    
    
    $
    1.13
    
    
    $
    1.03
    
    
    $
    0.69
    
    
    $
    0.75Earnings per share - diluted
    
    
    1.10
    
    
    
    1.10
    
    
    
    1.01
    
    
    
    0.68
    
    
    
    0.73Dividend payout ratio (2)
    
    
    5.31
    %
    
    
    7.96
    %
    
    
    5.83
    %
    
    
    8.70
    %
    
    
    8.00
    %Book Value per share
    
    $
    11.49
    
    
    $
    6.96
    
    
    $
    5.91
    
    
    $
    4.87
    
    
    $
    4.23Shares outstanding at period end
    
    
    6,747,673
    
    
    
    4,629,580
    
    
    
    4,607,040
    
    
    
    4,582,040
    
    
    
    4,573,115Weighted average shares
outstanding - basic
    
    
    4,798,922
    
    
    
    4,620,744
    
    
    
    4,591,026
    
    
    
    4,579,653
    
    
    
    4,564,574Weighted average shares
outstanding - diluted
    
    
    4,940,977
    
    
    
    4,729,021
    
    
    
    4,682,486
    
    
    
    4,675,917
    
    
    
    4,666,044Consolidated Balance Sheet Data:Cash and cash equivalents
    
    $
    67,254
    
    
    $
    36,005
    
    
    $
    33,537
    
    
    $
    8,974
    
    
    $
    39,935Investments and other securities
    
    
    86,260
    
    
    
    70,093
    
    
    
    63,596
    
    
    
    39,271
    
    
    
    36,135Gross loans
    
    
    403,270
    
    
    
    350,082
    
    
    
    293,535
    
    
    
    247,182
    
    
    
    192,380Allowance for loan losses
    
    
    6,133
    
    
    
    5,409
    
    
    
    4,688
    
    
    
    3,700
    
    
    
    2,827Assets
    
    
    573,961
    
    
    
    463,431
    
    
    
    400,571
    
    
    
    304,058
    
    
    
    276,077Deposits
    
    
    476,252
    
    
    
    403,713
    
    
    
    351,584
    
    
    
    277,422
    
    
    
    254,976Junior subordinated debt
    
    
    15,464
    
    
    
    15,464
    
    
    
    15,464
    
    
    
    
    
    
    
    Stockholders equity
    
    $
    77,553
    
    
    $
    32,201
    
    
    $
    27,212
    
    
    $
    22,336
    
    
    $
    19,355Selected Other Balance Sheet Data:Average assets
    
    $
    523,766
    
    
    $
    436,843
    
    
    $
    356,097
    
    
    $
    292,866
    
    
    $
    224,303Average earning assets
    
    
    498,578
    
    
    
    416,742
    
    
    
    336,682
    
    
    
    276,228
    
    
    
    208,208Average stockholders equity
    
    $
    35,910
    
    
    $
    29,279
    
    
    $
    24,729
    
    
    $
    21,186
    
    
    $
    17,609Selected Financial Ratios :Return on average assets
    
    
    1.04
    %
    
    
    1.19
    %
    
    
    1.33
    %
    
    
    1.08
    %
    
    
    1.53
    %Return on average stockholders equity
    
    
    15.1
    %
    
    
    17.8
    %
    
    
    19.1
    %
    
    
    14.9
    %
    
    
    19.5
    %Net interest margin (3)
    
    
    4.65
    %
    
    
    4.72
    %
    
    
    4.97
    %
    
    
    4.84
    %
    
    
    6.23
    %Efficiency Ratio(4)
    
    
    64.7
    %
    
    
    56.6
    %
    
    
    50.3
    %
    
    
    56.2
    %
    
    
    51.1
    %Capital Ratios:Average stockholders equity to average assets
    
    
    6.86
    %
    
    
    6.70
    %
    
    
    6.94
    %
    
    
    7.23
    %
    
    
    7.85
    %Leverage Ratio
    
    
    16.91
    %
    
    
    8.96
    %
    
    
    8.84
    %
    
    
    7.06
    %
    
    
    7.53
    %Tier 1 Risk-Based Capital ratio
    
    
    19.66
    %
    
    
    11.18
    %
    
    
    11.03
    %
    
    
    8.58
    %
    
    
    9.04
    %Total Risk-Based Capital ratio
    
    
    20.92
    %
    
    
    13.61
    %
    
    
    14.14
    %
    
    
    9.83
    %
    
    
    10.29
    %Selected Asset Quality Ratios:Non-performing loans to total loans (5)
    
    
    0.24
    %
    
    
    0.66
    %
    
    
    1.10
    %
    
    
    2.26
    %
    
    
    3.11
    %Non-performing assets to total loans and OREO
    
    
    0.78
    %
    
    
    1.00
    %
    
    
    1.99
    %
    
    
    3.29
    %
    
    
    3.11
    %Non-performing assets to total assets(6)
    
    
    0.55
    %
    
    
    0.76
    %
    
    
    1.47
    %
    
    
    2.71
    %
    
    
    2.17
    %Allowance for loan losses to total loans
    
    
    1.52
    %
    
    
    1.55
    %
    
    
    1.60
    %
    
    
    1.50
    %
    
    
    1.47
    %Allowance for loan losses to
non-performing loans
    
    
    634.9
    %
    
    
    233.7
    %
    
    
    145.0
    %
    
    
    66.2
    %
    
    
    47.2
    %Allowance for loan losses to
non-performing assets
    
    
    194.3
    %
    
    
    154.2
    %
    
    
    79.6
    %
    
    
    45.0
    %
    
    
    47.2
    %Net charge-offs(recoveries) to average loans
    
    
    0.05
    %
    
    
    0.31
    %
    
    
    0.36
    %
    
    
    0.47
    %
    
    
    0.40
    %
 28




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##### Table of Contents



(1)
    
    Community Bank of Nevada data only. The holding company reorganization was completed August, 2002.(2)      The
dividend payout ratios for 2004 and 2003 are based on stock
dividends, the ratio for 2002 is based on both stock and cash dividends, the ratios for
years prior to 2002 are based on cash dividends.(3)
    
    Net interest margin represents net interest income as a percentage of average interest-earning assets.(4)
    
    Efficiency ratio represents noninterest expenses, excluding loan loss provision, as a percentage of the aggregate of net interest income and noninterest income.(5)
    
    Non-performing loans are defined as loans that are past due 90 days or more plus loans placed in non-accrual status.(6)
    
    Non-performing assets are defined as assets that are past due 90 days or more plus assets placed in non-accrual status plus other real estate owned. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our consolidated
financial statements and footnotes to the consolidated financial statements included in Item 8 of
this Report. Overview Since we commenced operations in 1995, we have experienced strong growth and profitability.
Our growth is fueled by the significant population and economic growth of the greater Las Vegas
area where we operate. The growth in the greater Las Vegas area has accompanied significant
investments in the gaming and tourism industry. The significant population increase has resulted in
an increase in the acquisition of raw land for residential and commercial development, the
construction of residential communities, shopping centers and office buildings, and the development
and expansion of the businesses and professions that provide essential goods and services to this
expanded population. Our results have been influenced by the following strategies; which we
implemented in order to benefit from these market factors:  
    Provide competitive commercial real estate loans, construction loans and land
acquisition, development loans, and C&I loans to high quality borrowers;
    Focus and commitment to profitable banking relationships;
    Encourage business development of profitable customer relationships with a pay for performance compensation culture;
    Reduce our cost of funds by attracting a higher share of non-interest bearing deposit accounts;
    Maintain disciplined controls over non-interest expense in order to consistently grow on a profitable basis;
    Strengthen our underwriting standards and credit administration functions as well as
increase lending capacity by the growth in capital base; and
    Add seasoned professionals to the staff with banking expertise, local market knowledge
and a network of client relationships. 29




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##### Table of Contents



Key Financial MeasuresAt or for theYears Ended December 31,2004
    
    
    2003
    
    
    2002Net Income
    
    $
    5,421
    
    
    $
    5,215
    
    
    $
    4,725Basic earnings per share
    
    
    1.13
    
    
    
    1.13
    
    
    
    1.03Diluted earnings per share
    
    
    1.10
    
    
    
    1.10
    
    
    
    1.01Total Assets
    
    
    573,961
    
    
    
    463,431
    
    
    
    400,571Gross Loans
    
    
    403,270
    
    
    
    350,082
    
    
    
    293,535Total Deposits
    
    
    476,252
    
    
    
    403,713
    
    
    
    351,584Net interest margin
    
    
    4.65
    %
    
    
    4.72
    %
    
    
    4.97
    %Efficiency Ratio
    
    
    64.7
    %
    
    
    56.6
    %
    
    
    50.3
    %Return on average assets
    
    
    1.04
    %
    
    
    1.19
    %
    
    
    1.33
    %Return on average equity
    
    
    15.1
    %
    
    
    17.8
    %
    
    
    19.1
    %
 Key Factors in Evaluating Financial Condition and Operating Performance On December 10, 2004 we completed our IPO, our stock began trading on Nasdaq and we became subject
to the reporting requirements of the SEC. As a reporting company we will now incur expenses for
compliance with the various SEC and Nasdaq rules and regulations. Impacting our results last year,
we took a significant unusual charge to expense in the fourth quarter of 2004 related to our Stock
Appreciation Rights Plan. Upon completion of the IPO, and thereafter, the expense related to the
Companys Stock Appreciation Plan will be based on the fair value of the Companys common stock.
Based on the fair value of our Common Stock as of December 31, 2004, the Company accrued an
additional $1.9 million of expenses ($1.3 million net of taxes) in the fourth quarter. As a community bank holding company, we focus on several key factors including:  
    Return to Our Shareholders;
    Return on Average Assets;
    Asset Quality;
    Asset Growth; and
    Operating Efficiency. Return to Our Shareholders.Our return to our shareholders is measured in the form of return
on average equity, or ROE. Our net income increased $206 thousand, or 4.0%, to $5.4 million for the
year ended December 31, 2004 from $5.2 million for the same period 2003. Net income increased due
to an increase in net interest income and a decrease in loan loss provision, partially offset by an
increase in operating expenses. Basic EPS as of December 31, 2004 of $1.13 was equivalent to
December 31, 2003. Diluted EPS of $1.10 as of December 31, 2004 was also equivalent to December
31, 2003. With the closing of the IPO and the additional capital our ROE decreased to 15.1% at
December 31, 2004 compared to 17.8% for the same period in 2003. Our average ROE for the three
years ended December 31, 2004 was 17.3%. Return on Average Assets.Our return on average assets, or ROA, is a measure we use to
compare our performance with other banks and bank holding companies. Our ROA at December 31, 2004
was 1.04% compared to 1.19% for the same period 2003. The decrease in ROA is primarily due to the
unusual expense of $1.9 million ($1.3 net of tax effect) in the fourth quarter 2004 relating to the
Companys Stock Appreciation Rights (SARs) Plan. Pursuant to the Plan, prior to the public
offering, the exercise price was based on book value. Upon completion of the IPO, and thereafter,
expense related to the Companys SARs is based on the fair value
of the Companys common stock. See Trends and Developments
Impacting our Recent Results. 30




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##### Table of Contents



Asset Quality.For all banks and bank holding companies, asset quality has a significant
impact on the overall financial condition and results of operations. Asset quality is measured in
terms of non-performing loans and assets as a percentage of total loans and total assets, and net
charge-offs as a percentage of average loans. These measures are key elements in estimating the
future earnings of a company. Non-performing loans totaled $1.0 million as of December 31, 2004
compared to $2.3 million at December 31, 2003. Non-performing loans as a percentage of total loans
decreased to 0.24% as of December 31, 2004 compared to 0.66% at December 31, 2003. Non-performing
assets were $3.2 million as of December 31, 2004 compared to $3.5 million as of December 31, 2003.
Non-performing assets as a percent of total assets were 0.55% as of December 31, 2004 compared to
0.76% at December 31, 2003. Net charge-offs to average loans were 0.05% as of December 31, 2004 as
compared to 0.31% for the same period 2003. The average net charge-offs to average loans for the
three years ended December 31, 2004 was .24%. Asset Growth.As revenues from both net interest income and non-interest income are a
function of asset size, the continued growth in assets has a direct impact on increasing net income
and EPS. The majority of our assets are loans, and the majority of our liabilities are deposits,
and therefore the ability to generate loans and deposits are fundamental to our asset growth. Total
assets increased 23.9% during 2004 from $463 million as of December 31, 2003 to $574 million as of
December 31, 2004 and grew 19.7% on a compound annual growth rate, or CAGR, basis between December
31, 2002 and December 31, 2004. Total deposits increased 18.0% to $476 million as of December 31,
2004 compared to $404 million as of December 31, 2003 and had a CAGR of 16.4% between December 31,
2002 and December 31, 2004. Gross loans increased 15.2% to $403 million as of December 31, 2004
compared to $350 million as of December 31, 2003. Loans had a CAGR of 17.2% between December 31,
2002 and December 31, 2004. Operating Efficiency.Operating efficiency is the measure of how efficiently earnings before
taxes are generated as a percentage of revenue. Our efficiency ratio (operating expenses divided by
net interest income plus non-interest income) increased to 64.7% for 2004 compared to 56.6% for
the same period in 2003. Our average efficiency ratio for the three years ended December 31, 2004
was 57.2%. The decline in the efficiency ratio was caused by the unusual expense related to the
SARs. Critical Accounting Policies Our accounting policies are integral to understanding the financial results reported. Our most
complex accounting policies require managements judgment to ascertain the valuation of assets,
liabilities, commitments and contingencies. We have established detailed policies and control
procedures that are intended to ensure valuation methods are well controlled and applied
consistently from period to period. In addition, the policies and procedures are intended to ensure
that the process for changing methodologies occurs in an appropriate manner. The following is a
brief description of our current accounting policies involving significant management valuation
judgments. Allowance for Loan Losses.The allowance for loan losses represents our best estimate of the
probable losses inherent in the existing loan portfolio. The allowance for loan losses is increased
by the provision for loan losses charged to expense and reduced by loans charged off, net of
recoveries. We evaluate our allowance for loan losses monthly. We believe that the allowance for loan
losses, or ALLL, is a critical accounting estimate because it is based upon managements
assessment of various factors affecting the collectibility of the loans,
including current economic conditions, past credit experience, delinquency status, the value
of the underlying collateral, if any, and a continuing review of the portfolio of loans. For a
discussion of the allowance and our methodology, see Financial Condition  Allowance for Loan
Losses. Like all financial institutions, we maintain an ALLL based on a number of quantitative and
qualitative factors, including levels and trends of past due and non-accrual loans, asset
classifications, loan grades, change in volume and mix of loans, collateral value, historical loss
experience, peer group loss experience, size and complexity of individual credits and economic
conditions. Provisions for loan losses are provided on both a specific and general basis. Specific
allowances are provided for impaired credits for which the expected/anticipated loss is measurable.
General valuation allowances are based on a portfolio segmentation based on risk grading, with a
further evaluation of various quantitative and qualitative factors noted above. We incorporate statistics provided through the FDIC regarding loss percentages experienced by
banks in the western United States, as well as an internal five-year loss history to establish
potential risk based on collateral type securing each loan. As an additional comparison, we examine
local peer group banks to determine the nature and scope of their losses to date. Such examination
provides a geographic-and size-specific flavor for trends in the local banking community. Finally,
we closely examine each credit graded Special Mention and below to individually assess the
appropriate loan loss reserve for a particular credit. See Business  Classified Assets for
further description of our grading system. 31




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##### Table of Contents



We periodically review the assumptions and formulae by which additions are made to the
specific and general valuation allowances for losses in an effort to refine such allowances in
light of the current status of the factors described above. Although we believe the levels of the allowance as of December 31, 2004 and 2003, were
adequate to absorb probable losses in the loan portfolio, a decline in local economic, or other
factors, could result in increasing losses that cannot be reasonably predicted at this time. Available for Sale Securities.Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, requires that available-for-sale
securities be carried at fair value. We believe this is a critical accounting estimate in that
the fair value of a security is based on quoted market prices or if quoted market prices are not
available, fair values are extrapolated from the quoted prices of similar instruments Management
utilizes the services of a reputable third party vendor to assist with the determination of
estimated fair values. Adjustments to the available-for-sale securities fair value impact the
consolidated financial statements by increasing or decreasing assets and stockholders equity. Trends and Developments Impacting Our Recent Results Certain trends emerged and developments have occurred that are important in understanding our
recent results and that are potentially significant in assessing future performance.  
    Diversification of the loan portfolio.After significant loan growth from year to year
since our inception, our loan growth rate of 15.19% for 2004 was lower when compared to
historical results. This occurred despite our generating a high volume of new loans and new
loan commitments. We originated $370 million in new loans during 2004 compared to $249
million during 2003. The decrease in our loan growth rate resulted in part from the
continuation of historically low interest rate levels causing significant borrower
refinancing of commercial real estate and one to four single family residence loans. In
addition, rapidly increasing values for raw land in the greater Las Vegas area motivated
many of our customers to sell their properties and prepay their loans rather than develop
them as initially planned. Historically, we would often finance land acquisition loans,
which in turn would generate construction and permanent financing loans for the same parcel.
As a result of these changes, we made a strategic decision to lower our exposure to land
loans until values stabilize.Additionally, during 2004, we engaged in a campaign to identify and restructure a significant
portion of the loan portfolio in order to slow the pace of refinancing activity to a level
more consistent with desired growth rates, portfolio yields and market risk profile. We
decided to seek greater diversification in the loan portfolio by expanding our commercial loan
portfolio and enhancing our generation of SBA loans. Such actions are expected to expand our
customer base, increase the average maturity of the loan portfolio and diversify our lending
risk.These two strategies did not yet have a material impact on our results for the year ended
December 31, 2004 and we expect that the diversification of our loan portfolio will be a
multi-year task.
    Restructuring of deposit mix.The ratio of our average non-interest-bearing deposits to
average total deposits increased to 26.7% for the year ended December 31, 2004 from 24.4%
for 2003, while our average CDs as a percentage of average total deposits decreased to 27.0%
for the year ended December 31, 2004 from 35.9% in the prior year.During 2003, we began using a new loan and deposit pricing model to attract lower cost
deposits and decrease our reliance on CDs. We also initiated an incentive plan for our
business development officers that rewarded profitable relationships, a key component of which
is attracting non-interest-bearing demand deposits. The result was a broad decline in the
average rates paid on deposit balances, as well as a change in our deposit mix. We expect to
continue to emphasize the growth of demand and other core deposits as part of our pricing
model and as part of our relationship banking emphasis.
    Asset sensitivity.Management uses various modeling strategies to manage the repricing
characteristics of our assets and liabilities. These models contain a number of assumptions
and can not take into account all the various factors that influence the sensitivities of
our assets and liabilities. Despite these limitations, most of our models at December 31,
2004 indicated that our balance sheet was asset sensitive. This means that a larger amount
of our interest sensitive assets will reprice within certain time horizons than will our
interest sensitive liabilities. Being asset sensitive means generally that in times of
rising interest rates, a companys net interest margin will increase. It also means that in
times of falling interest rates, such as we experienced from 2000 to 2003, a companys net
interest margin is generally compacted. We expect that, if market interest rates continue to
rise, our net interest margin and our net interest income will be favorably impacted. See
Quantitative and Qualitative Disclosure about Market Risk. 32




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##### Table of Contents




    Impact of expansion on non-interest expense.We plan on opening our sixth office in the
early part of the second quarter of 2005, at which time we anticipate a significant increase
in occupancy and equipment expense. The new office will consist of 21,566 rentable square
feet at $1.73 sq. ft. per month. The new office will house our sixth branch, human
resources, operation support, audit and our real estate lending department.Additionally, as a result of being a public company, other non-interest expense items,
including professional expenses and other costs related to compliance with the reporting
requirements of the securities laws and compliance with the Sarbanes-Oxley Act of 2002, will
increase significantly.
    Unusual expense associated with SARs. We have 109,673 outstanding SARs as of December
31, 2004. Each right gives the grantee the right to receive a cash payment from us equal to
the excess of the exercise price over the grant price. A significant majority of these
rights were granted in 2000 and fully vest and expire in 2005. Pursuant to the SARs Plan,
upon completion of the public offering the exercise price was converted from book value to
the fair value of the Companys common stock. As of December 31, 2004, the total amount
included in accrued expenses relating to the SARs plan was approximately $2.4 million and is
based on the fair value of the Companys common stock as of December 31, 2004. Of the $2.4
million, $1.9 million was recorded during December, 2004. Future expenses associated with
our SARs plan will be significantly impacted by the value of our common stock. Results of Operations Our results of operations depend primarily on net interest income, which is the difference
between interest income and interest expense. Interest income is the earnings we receive on our
interest earning assets, such as loans and investments, and interest expense is the expense we
incur on our interest bearing liabilities, such as interest bearing deposits and other borrowings.
Factors that determine the level of net income include the volume of earning assets and interest
bearing liabilities, yields earned and rates paid, fee income, non-interest expense, the level of
non-performing loans and other non-earning assets, and the amount of non-interest bearing
liabilities supporting earning assets. Non-interest income includes service charges and other
deposit related fees, and non-interest expense consists primarily of employee compensation and
benefits, occupancy, equipment and depreciation expense, and other operating expenses. Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Year-Ended December 31,Increase2004
    
    
    2003
    
    
    (Decrease)(Dollars in thousands, except per share data)Consolidated Statement of Earnings Data:Interest income
    
    $
    30,038
    
    
    $
    27,143
    
    
    $
    2,895Interest expense
    
    
    6,862
    
    
    
    7,453
    
    
    
    (591
    )Net interest income
    
    
    23,176
    
    
    
    19,690
    
    
    
    3,486Provision for loan losses
    
    
    922
    
    
    
    1,723
    
    
    
    (801
    )Net interest income after provision for loan losses
    
    
    22,254
    
    
    
    17,967
    
    
    
    4,287Non-interest income
    
    
    1,489
    
    
    
    1,563
    
    
    
    (74
    )Non-interest expense
    
    
    15,946
    
    
    
    12,020
    
    
    
    3,926Net income before income taxes
    
    
    7,797
    
    
    
    7,510
    
    
    
    287Provision for income taxes
    
    
    2,376
    
    
    
    2,295
    
    
    
    81Net income
    
    $
    5,421
    
    
    $
    5,215
    
    
    $
    206Earnings per
share - basic
    
    $
    1.13
    
    
    $
    1.13
    
    
    $
    0.00Earnings per
share - diluted
    
    $
    1.10
    
    
    $
    1.10
    
    
    $
    0.00
 33




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##### Table of Contents



Our net income grew by 4.0% to $5.4 million for the year ended December 31, 2004 as
compared to $5.2 million for the year ended December 31, 2003. Our return on average assets was
1.04% and return on average stockholders equity was 15.1% for the year ended December 31, 2004,
compared to 1.19% and 17.8%, respectively for the year ended December 31, 2003. Net Interest Income and Net Interest Margin.The 17.7% increase in our net interest income
for the year ended December 31, 2004 was primarily due to an increase in interest income of $2.9
million, and a decrease of $591 thousand in interest expense. Average interest-earning assets
increased to $499 million during 2004 as compared to $417 million during 2003, reflecting our
continuing growth trend. Total interest expense decreased as a result of ongoing declines in
interest rates throughout the financial marketplace over the course of the year, as well as a
significant shift in our deposit mix. The average yield on our interest-earning assets fell to 6.02% in 2004 from 6.51% in 2003. The
decrease in the average yield on our interest-earning assets resulted from a reduction in market
rates, repricing on our adjustable rate loans, and new loans originated with lower interest rates
because of the lower interest rate environment and the decrease in the percentage of interest
earning assets represented by loans as of December 31, 2004. Average loans as a percentage of
average earning assets declined to 72.7% as of December 31, 2004 compared to 77.0% for the same
period in 2003. The cost of our average interest-bearing liabilities decreased to 1.90% in 2004 from 2.39% in
2003. In addition to broad declines in the average rates paid on deposit balances, the decrease was
the result of actions taken by management to reduce the level of CDs and increase the level of
non-interest bearing deposits in relation to total deposits. Our average rate on our interest-bearing deposits decreased 22.7% from 2.29% as of December
31, 2003 to 1.77% as of December 31, 2004, reflecting reductions in general market rates as well as
managements focus on shifting to lower cost deposit products. Our average rate on total deposits
(including non-interest bearing deposits) decreased to 1.30% as of December 31, 2004 from 1.73% at
December 31, 2003. Our net interest margin as of December 31, 2004 of 4.65% was slightly lower than our net
interest margin at December 31, 2003 of 4.72%. Despite significant lower earning asset yields, we
were able to maintain the net interest margin primarily due to a lower cost of funds. The following table sets forth a summary of average balances with corresponding interest
income and interest expense as well as average yield and cost information for the periods
presented. Average balances are derived from daily balances, and non-accrual loans are included as
interest earning assets for purposes of this table. 34




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##### Table of Contents



Year ended December 31,2004
    
    
    2003Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageAverage
    
    
    Income or
    
    
    Yield or
    
    
    Average
    
    
    Income or
    
    
    Yield orBalance
    
    
    Expense
    
    
    Cost
    
    
    Balance
    
    
    Expense
    
    
    CostAssetsInterest -earning assets:Loans, (1) (2) (3)
    
    $
    362,493
    
    
    $
    26,415
    
    
    
    7.29
    %
    
    $
    320,758
    
    
    $
    24,679
    
    
    
    7.69
    %Investment Securities - Taxable
    
    
    57,515
    
    
    
    1,981
    
    
    
    3.44
    %
    
    
    51,045
    
    
    
    1,331
    
    
    
    2.61
    %Investment Securities - Non-taxable (3)
    
    
    23,593
    
    
    
    874
    
    
    
    3.70
    %
    
    
    21,853
    
    
    
    845
    
    
    
    3.87
    %Federal funds sold
    
    
    52,554
    
    
    
    692
    
    
    
    1.32
    %
    
    
    22,093
    
    
    
    242
    
    
    
    1.10
    %Other investments (4)
    
    
    2,423
    
    
    
    76
    
    
    
    3.14
    %
    
    
    993
    
    
    
    46
    
    
    
    4.63
    %Total interest-earning assets
    
    
    498,578
    
    
    
    30,038
    
    
    
    6.02
    %
    
    
    416,742
    
    
    
    27,143
    
    
    
    6.51
    %Non-earning assets:Cash and due from banks
    
    
    14,338
    
    
    
    
    
    
    
    
    
    
    
    12,727Unearned loan fees
    
    
    (1,726
    )
    
    
    
    
    
    
    
    
    
    
    (1,161
    )Allowance for loan losses
    
    
    (5,639
    )
    
    
    
    
    
    
    
    
    
    
    (4,941
    )Other assets
    
    
    18,215
    
    
    
    
    
    
    
    
    
    
    
    13,476Total assets
    
    $
    523,766
    
    
    
    
    
    
    
    
    
    
    $
    436,843Liabilities and Stockholders EquityInterest-bearing Liabilities:DepositsInterest-bearing demand
    
    $
    19,459
    
    
    $
    92
    
    
    
    0.47
    %
    
    $
    12,617
    
    
    $
    45
    
    
    
    0.36
    %Money Market
    
    
    190,322
    
    
    
    2,891
    
    
    
    1.52
    %
    
    
    136,569
    
    
    
    2,298
    
    
    
    1.68
    %Savings
    
    
    6,069
    
    
    
    14
    
    
    
    0.23
    %
    
    
    4,185
    
    
    
    8
    
    
    
    0.19
    %Time certificates of deposit
    
    
    125,898
    
    
    
    3,057
    
    
    
    2.43
    %
    
    
    138,758
    
    
    
    4,328
    
    
    
    3.12
    %Total interest-bearing deposits
    
    
    341,748
    
    
    
    6,054
    
    
    
    1.77
    %
    
    
    292,129
    
    
    
    6,679
    
    
    
    2.29
    %Short-term borrowings
    
    
    3,555
    
    
    
    44
    
    
    
    1.24
    %
    
    
    4,107
    
    
    
    52
    
    
    
    1.27
    %Junior subordinated debt
    
    
    15,464
    
    
    
    764
    
    
    
    4.94
    %
    
    
    15,464
    
    
    
    722
    
    
    
    4.67
    %Total interest-bearing liabilities
    
    
    360,767
    
    
    
    6,862
    
    
    
    1.90
    %
    
    
    311,700
    
    
    
    7,453
    
    
    
    2.39
    %Non-interest-bearing liabilitiesDemand deposits
    
    
    124,737
    
    
    
    
    
    
    
    
    
    
    
    94,357Other liabilities
    
    
    2,352
    
    
    
    
    
    
    
    
    
    
    
    1,507Total liabilities
    
    
    487,856
    
    
    
    
    
    
    
    
    
    
    
    407,564Stockholders equity
    
    
    35,910
    
    
    
    
    
    
    
    
    
    
    
    29,279Total liabilities and stockholders
equity
    
    $
    523,766
    
    
    
    
    
    
    
    
    
    
    $
    436,843Net interest income
    
    
    
    
    
    $
    23,176
    
    
    
    
    
    
    
    
    
    
    $
    19,690Net interest spread (5)
    
    
    
    
    
    
    
    
    
    
    4.12
    %
    
    
    
    
    
    
    
    
    
    
    4.12
    %Net interest margin (6)
    
    
    
    
    
    
    
    
    
    
    4.65
    %
    
    
    
    
    
    
    
    
    
    
    4.72
    %
   (1)
    
    Includes average non-accrual loans of $2.3 million in 2004 and $2.6 million in 2003.(2)
    
    Net loan fees of $3.4 million and $3.0 million are included in the yield computations for
2004 and 2003, respectively.(3)
    
    Yields on loans and securities have not been adjusted to a tax-equivalent basis(4)
    
    Includes Federal Reserve Bank stock, Federal Home Loan Bank stock and Pacific Coast Bankers
Bank stock.(5)
    
    Net interest spread represents the average yield earned on interest earning assets less the
average rate paid on interest bearing liabilities.(6)
    
    Net interest margin is computed by dividing net interest income by total average earning
assets. 35




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##### Table of Contents



The following table shows the change in interest income and interest expense and the amount of
change attributable to variances in volume, rates and the combination of volume and rates based on
the relative changes of volume and rates. 2004 compared to 2003Increase (decrease) due to change in:Net Change
    
    
    Rate
    
    
    Volume
    
    
    Mix(dollars in thousands)Loans
    
    $
    1,736
    
    
    $
    (1,305
    )
    
    $
    3,211
    
    
    $
    (170
    )Investment Securities- Taxable
    
    
    650
    
    
    
    410
    
    
    
    183
    
    
    
    57Investment Securities- Non-taxable
    
    
    29
    
    
    
    (16
    )
    
    
    45
    
    
    
    Federal funds sold
    
    
    450
    
    
    
    49
    
    
    
    334
    
    
    
    67Other investments
    
    
    30
    
    
    
    (15
    )
    
    
    66
    
    
    
    (21
    )Total interest income
    
    
    2,895
    
    
    
    (877
    )
    
    
    3,839
    
    
    
    (67
    )Interest expense:Interest-bearing demand
    
    
    47
    
    
    
    15
    
    
    
    24
    
    
    
    8Money Market
    
    
    593
    
    
    
    (224
    )
    
    
    905
    
    
    
    (88
    )Savings
    
    
    6
    
    
    
    2
    
    
    
    4
    
    
    
    Time certificates of deposit
    
    
    (1,271
    )
    
    
    (959
    )
    
    
    (401
    )
    
    
    89Short-term borrowings
    
    
    (8
    )
    
    
    (1
    )
    
    
    (7
    )
    
    
    Junior subordinated debt
    
    
    42
    
    
    
    42
    
    
    
    
    
    
    
    Total interest expense
    
    
    (591
    )
    
    
    (1,125
    )
    
    
    525
    
    
    
    9Net interest income
    
    $
    3,486
    
    
    $
    248
    
    
    $
    3,314
    
    
    $
    (76
    )
 Provision for Loan Losses.The provision for loan losses for the year ended December 31,
2004 was $922 thousand compared to $1.7 million in the year ended December 31, 2003. We experienced
net loan charge-offs of $198 thousand in 2004 compared to net loan charge-offs of $1.0 million for
2003. The amount in the provision for loan losses each year relates primarily to the significant
growth in loans. Gross loans increased by $53 million in 2004 and $57 million in 2003. However, the
decrease in the amount of the provision for 2004 primarily relates to the decrease in net charge
offs to total loans from .28% at December 31, 2003 to .05% at December 31, 2004 and non-performing
loans to total loans decreasing from .66% at December 31, 2003 to 0.24% as of December 31, 2004.
See Financial Condition  Loans  Non-Performing Assets. Non-Interest Income.The following table presents, for the periods indicated, the major
categories of non-interest income: Year-EndedDecember 31,
    
    
    Increase2004
    
    
    2003
    
    
    (Decrease)(In thousands)Service charges and other income
    
    $
    991
    
    
    $
    1,050
    
    
    $
    (59
    )Loan brokerage and referral fees
    
    
    184
    
    
    
    446
    
    
    
    (262
    )Income from bank owned life insurance
    
    
    194
    
    
    
    
    
    
    
    194Net gain on sales of loans
    
    
    108
    
    
    
    65
    
    
    
    43Net gain on sales of securities
    
    
    12
    
    
    
    2
    
    
    
    10Total non-interest income
    
    $
    1,489
    
    
    $
    1,563
    
    
    $
    (74
    )
 36




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##### Table of Contents



The $74 thousand, or 4.7% decrease in total non-interest income was primarily due to a
decrease of $262 thousand in loan brokerage and referral fees, partially offset by an increase in
cash surrender value of bank owned life insurance purchased in July 2004. The decline in loan
brokerage and referral fees was caused by an industry wide slow down in the residential mortgage
refinance market. As a result of this trend, we have reduced staff for the residential mortgage
origination business but retained residential mortgage referral capability to generate fees. We
expect that the likely reduction in fee income associated with the reduction in refinance activity
will be offset by a reduction in non-interest expense from our staff reductions in this area. Non-Interest Expense.Non-interest expenses are the costs, other than interest expense and
the provision for loan losses, associated with the providing banking and financial services to
customers and conducting our affairs. The following table presents, for the periods indicated, the major categories of non-interest
expense: Year-EndedYear-Ended December 31,
    
    
    Increase2004
    
    
    2003
    
    
    (Decrease)(In thousands)Salaries, wages and employee benefits
    
    $
    8,619
    
    
    $
    7,157
    
    
    $
    1,462Stock appreciation rights
    
    
    2,095
    
    
    
    149
    
    
    
    1,946Occupancy, equipment and depreciation
    
    
    1,495
    
    
    
    1,417
    
    
    
    78Loan related expense
    
    
    235
    
    
    
    127
    
    
    
    108Data and item processing
    
    
    558
    
    
    
    522
    
    
    
    36Advertising and public relations
    
    
    587
    
    
    
    465
    
    
    
    122Professional fees
    
    
    359
    
    
    
    230
    
    
    
    129Stationery and supplies
    
    
    230
    
    
    
    209
    
    
    
    21Insurance
    
    
    249
    
    
    
    173
    
    
    
    76Telephone and postage
    
    
    198
    
    
    
    232
    
    
    
    (34
    )Director fees
    
    
    172
    
    
    
    104
    
    
    
    68Software maintenance
    
    
    102
    
    
    
    99
    
    
    
    3Foreclosed assets, net
    
    
    117
    
    
    
    103
    
    
    
    14Other
    
    
    930
    
    
    
    1,033
    
    
    
    (103
    )Total non-interest expense
    
    $
    15,946
    
    
    $
    12,020
    
    
    $
    3,926
 The $3.9 million, or 32.7%, increase in total non-interest expense was primarily
attributable to the unusual SARs expense (see Trends and
Developments Impacting our Recent Results) of $1.9 million ($1.3
million after tax effect) and an increase of $1.5 million or 20.4% in salary and employee benefits.
The increase in salary and employee benefit expense can be attributed to an increase in the areas
of lending, operations and human resources. The number of Full Time Equivalent employees increased
to 109 at December 31, 2004 compared to 98 at December 31, 2003. In addition to general staffing
of the various departments, we were successful in recruiting both a Director of Human Resources in
January, 2004 and a Chief Operations Officer in April, 2004. Also contributing to the increase was
a newly imposed payroll tax on Nevada banks at the rate of 2% of wages paid quarterly, which became
effective October 1, 2003. Provision for Income Taxes.We recorded tax provisions of $2.4 million in 2004 and $2.3 in
2003. Our effective tax rates were 30% and 31% for 2004 and 2003, respectively, as compared to the
expected effective tax rate of 34%. The difference from the expected rate in both years was largely
due to the non- taxable nature of income from municipal securities. 37




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##### Table of Contents



Financial Overview for the Years Ended December 31, 2003 and 2002 Year Ended December 31,Increase2003
    
    
    2002
    
    
    (Decrease)(Dollars in thousands,except per share data)Consolidated Statement of Earnings Data:Interest income
    
    $
    27,143
    
    
    $
    25,449
    
    
    $
    1,694Interest expense
    
    
    7,453
    
    
    
    8,709
    
    
    
    (1,256
    )Net interest income
    
    
    19,690
    
    
    
    16,740
    
    
    
    2,950Provision for loan losses
    
    
    1,723
    
    
    
    1,958
    
    
    
    (235
    )Net interest income after provision for loan losses
    
    
    17,967
    
    
    
    14,782
    
    
    
    3,185Non-interest income
    
    
    1,563
    
    
    
    1,392
    
    
    
    171Non-interest expense
    
    
    12,020
    
    
    
    9,112
    
    
    
    2,908Income before income taxes
    
    
    7,510
    
    
    
    7,062
    
    
    
    448Provision for income taxes
    
    
    2,295
    
    
    
    2,337
    
    
    
    (42
    )Net income
    
    $
    5,215
    
    
    $
    4,725
    
    
    $
    490Earnings per share  basic
    
    $
    1.13
    
    
    $
    1.03
    
    
    $
    0.10Earnings per share  diluted
    
    $
    1.10
    
    
    $
    1.01
    
    
    $
    0.09
 Our net income grew by 10.4% to $5.2 million for the year ended December 31, 2003 as compared
to $4.7 million for the year ended December 31, 2002. Our return on average assets was 1.19% and
return on average stockholders equity was 17.8% for the year ended December 31, 2003, compared to
1.33% and 19.1%, respectively for the year ended December 31, 2002. Net Interest Income and Net Interest Margin.The 17.6% increase in our net interest income
for the year ended December 31, 2003 was primarily due to an increase in interest income of $1.7
million, and a decrease of $1.3 million in interest expense. Average interest-earning assets
increased to $417 million during 2003 as compared to $337 million during 2002, reflecting our
continuing growth trend. Total interest expense decreased as a result of ongoing declines in
interest rates throughout the financial marketplace over the course of the year, as well as a
significant shift in our deposit mix. The average yield on our interest-earning assets fell to 6.51% in 2003 from 7.56% in 2002. The
decrease in the average yield on our interest-earning assets resulted from both a general decline
in interest rate levels and the decrease in the percentage of interest-earning assets represented
by loans during 2003 as compared to 2002. The cost of our average interest-bearing liabilities decreased to 2.39% in 2003 from 3.27% in
2002. This decrease was consistent with the introduction of our pricing model in 2003 and our
planned shift in our deposit mix. The 25 basis points decrease in our net interest margin for the year ended December 31, 2003
was due primarily to a lower earning asset yield partially offset by a lower cost of funds. 38




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##### Table of Contents



The following table sets forth a summary of average balances with corresponding interest
income and interest expense as well as average yield and cost information for the periods
presented. Average balances are derived from daily balances, and non-accrual loans are included as
interest earning assets for purposes of this table. Year Ended December 31, 2003
    
    
    Year Ended December 31, 2002Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageAverage
    
    
    Income or
    
    
    Yield or
    
    
    Average
    
    
    Income or
    
    
    Yield orBalance
    
    
    Expense
    
    
    Cost
    
    
    Balance
    
    
    Expense
    
    
    Cost(Dollars in thousands)ASSETSInterest-earning assets:Gross Loans, (1)(2)(3)
    
    $
    320,758
    
    
    $
    24,679
    
    
    
    7.69
    %
    
    $
    272,816
    
    
    $
    23,172
    
    
    
    8.49
    %Investment
Securities  Taxable
    
    
    51,045
    
    
    
    1,331
    
    
    
    2.61
    %
    
    
    30,559
    
    
    
    1,414
    
    
    
    4.63
    %Investment
Securities  Non-taxable(3)
    
    
    21,853
    
    
    
    845
    
    
    
    3.87
    %
    
    
    11,210
    
    
    
    484
    
    
    
    4.32
    %Federal funds sold
    
    
    22,093
    
    
    
    242
    
    
    
    1.10
    %
    
    
    21,501
    
    
    
    339
    
    
    
    1.58
    %Other investments(4)
    
    
    993
    
    
    
    46
    
    
    
    4.63
    %
    
    
    596
    
    
    
    40
    
    
    
    6.71
    %Total interest-earning assets
    
    
    416,742
    
    
    $
    27,143
    
    
    
    6.51
    %
    
    
    336,682
    
    
    $
    25,449
    
    
    
    7.56
    %Non-earning assets:Cash and due from banks
    
    
    12,727
    
    
    
    
    
    
    
    
    
    
    
    10,797Unearned loan fees
    
    
    (1,161
    )
    
    
    
    
    
    
    
    
    
    
    (1,170
    )Allowance for loan losses
    
    
    (4,941
    )
    
    
    
    
    
    
    
    
    
    
    (4,232
    )Other assets
    
    
    13,476
    
    
    
    
    
    
    
    
    
    
    
    14,020Total assets
    
    $
    436,843
    
    
    
    
    
    
    
    
    
    
    $
    356,097LIABILITIES AND STOCKHOLDERS EQUITYInterest-bearing Liabilities:DepositsInterest-bearing demand
    
    $
    12,617
    
    
    $
    45
    
    
    
    0.36
    %
    
    $
    10,825
    
    
    $
    71
    
    
    
    0.66
    %Money Market
    
    
    136,569
    
    
    
    2,298
    
    
    
    1.68
    %
    
    
    96,894
    
    
    
    2,073
    
    
    
    2.14
    %Savings
    
    
    4,185
    
    
    
    8
    
    
    
    0.19
    %
    
    
    3,753
    
    
    
    11
    
    
    
    0.29
    %Time certificates of deposit
    
    
    138,758
    
    
    
    4,328
    
    
    
    3.12
    %
    
    
    147,527
    
    
    
    6,273
    
    
    
    4.25
    %Total interest-bearing deposits
    
    
    292,129
    
    
    
    6,679
    
    
    
    2.29
    %
    
    
    258,999
    
    
    
    8,428
    
    
    
    3.25
    %Short-term borrowings
    
    
    4,107
    
    
    
    52
    
    
    
    1.27
    %
    
    
    3,448
    
    
    
    64
    
    
    
    1.86
    %Junior subordinated debt
    
    
    15,464
    
    
    
    722
    
    
    
    4.67
    %
    
    
    4,081
    
    
    
    217
    
    
    
    5.32
    %Total interest-bearing liabilities
    
    
    311,700
    
    
    
    7,453
    
    
    
    2.39
    %
    
    
    266,528
    
    
    
    8,709
    
    
    
    3.27
    %Non-interest-bearing liabilitiesDemand deposits
    
    
    94,357
    
    
    
    
    
    
    
    
    
    
    
    63,408Other liabilities
    
    
    1,507
    
    
    
    
    
    
    
    
    
    
    
    1,432Total liabilities
    
    
    407,564
    
    
    
    
    
    
    
    
    
    
    
    331,368Stockholders equity
    
    
    29,279
    
    
    
    
    
    
    
    
    
    
    
    24,729Total liabilities and stockholders equity
    
    $
    436,843
    
    
    
    
    
    
    
    
    
    
    $
    356,097Net interest income
    
    
    
    
    
    $
    19,690
    
    
    
    
    
    
    
    
    
    
    $
    16,740Net interest spread(5)
    
    
    
    
    
    
    
    
    
    
    4.12
    %
    
    
    
    
    
    
    
    
    
    
    4.29
    %Net interest margin(6)
    
    
    
    
    
    
    
    
    
    
    4.72
    %
    
    
    
    
    
    
    
    
    
    
    4.97
    %
   (1)
    
    Includes average non-accrual loans of $2.6 million in 2003 and $4.4 million in 2002.(2)
    
    Net loan fees of $3.0 million and $3.0 million are included in the yield computations for
2003 and 2002, respectively.(3)
    
    Yields on loans and securities have not been adjusted to a tax-equivalent basis(4)
    
    Includes Federal Reserve Bank stock, Federal Home Loan Bank stock and Pacific Coast Bankers
Bank stock.(5)
    
    Net interest spread represents the average yield earned on interest earning assets less the
average rate paid on interest bearing liabilities.(6)
    
    Net interest margin is computed by dividing net interest income by total average earning
assets. 39




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##### Table of Contents



The following table shows the change in interest income and interest expense and the amount of
change attributable to variances in volume, rates and the combination of volume and rates based on
the relative changes of volume and rates. Year Ended December 31, 2003 Compared toYear Ended December 31, 2002Net Change
    
    
    Rate
    
    
    Volume
    
    
    Mix(In thousands)Loans
    
    $
    1,507
    
    
    $
    (2,183
    )
    
    $
    4,070
    
    
    $
    (380
    )Investment Securities  Taxable
    
    
    (83
    )
    
    
    (617
    )
    
    
    949
    
    
    
    (415
    )Investment Securities  Non-taxable
    
    
    361
    
    
    
    (50
    )
    
    
    460
    
    
    
    (49
    )Federal funds sold
    
    
    (97
    )
    
    
    (103
    )
    
    
    9
    
    
    
    (3
    )Other investments
    
    
    6
    
    
    
    (12
    )
    
    
    27
    
    
    
    (9
    )Total interest income
    
    
    1,694
    
    
    
    (2,965
    )
    
    
    5,515
    
    
    
    (856
    )Interest expense:Interest-bearing demand
    
    
    (26
    )
    
    
    (33
    )
    
    
    12
    
    
    
    (5
    )Money Market
    
    
    225
    
    
    
    (446
    )
    
    
    849
    
    
    
    (178
    )Savings
    
    
    (3
    )
    
    
    (4
    )
    
    
    1
    
    
    
    Time certificates of deposit
    
    
    (1,945
    )
    
    
    (1,667
    )
    
    
    (373
    )
    
    
    95Short-term borrowings
    
    
    (12
    )
    
    
    (20
    )
    
    
    12
    
    
    
    (4
    )Junior subordinated debt
    
    
    505
    
    
    
    (27
    )
    
    
    606
    
    
    
    (74
    )Total interest expense
    
    
    (1,256
    )
    
    
    (2,197
    )
    
    
    1,107
    
    
    
    (166
    )Net interest income
    
    $
    2,950
    
    
    $
    (768
    )
    
    $
    4,408
    
    
    $
    (690
    )
 Provision for Loan Losses.The provision for loan losses for the year ended December 31, 2003
was $1.7 million compared to $2.0 million in the year ended December 31, 2002. We experienced net
loan charge-offs of $1.0 million in 2003 compared to net loan charge-offs of $970 thousand for
2002. The amount in the provision for loan losses each year relates primarily to the significant
growth in loans. Gross loans increased by $57 million in 2003 and $46 million in 2002. However, the
decrease in the amount of the provision for 2003 primarily reflected that non-performing loans to
total loans decreased from 1.1% at December 31, 2002 to 0.66% as of December 31, 2003. See
Financial Condition  Loans  Non-Performing Assets. Non-Interest Income.The following table presents, for the periods indicated, the major
categories of non-interest income: Year EndedDecember 31,
    
    
    Increase2003
    
    
    2002
    
    
    (Decrease)(In thousands)Service charges and other income
    
    $
    1,050
    
    
    $
    1,030
    
    
    $
    20Loan brokerage and referral fees
    
    
    446
    
    
    
    334
    
    
    
    112Net gain on sale of loans
    
    
    65
    
    
    
    45
    
    
    
    20Net gain/(loss) on sale of securities
    
    
    2
    
    
    
    (17
    )
    
    
    19Total non-interest income
    
    $
    1,563
    
    
    $
    1,392
    
    
    $
    171
 The $171 thousand, or 12.3% increase in total non-interest income was primarily due to an
increase of $112 thousand in loan brokerage and referral fees attributable to an extraordinary
level of residential mortgage refinancing activity. 40




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##### Table of Contents



Non-Interest Expense.The following table presents, for the periods indicated, the major
categories of non-interest expense: Year-EndedDecember 31,
    
    
    Increase2003
    
    
    2002
    
    
    (Decrease)(In thousands)Salaries, wages and employee benefits
    
    $
    7,157
    
    
    $
    5,767
    
    
    $
    1,390Stock appreciation rights
    
    
    149
    
    
    
    40
    
    
    
    109Occupancy, equipment and depreciation
    
    
    1,417
    
    
    
    1,045
    
    
    
    372Loan related expense
    
    
    127
    
    
    
    113
    
    
    
    14Data processing
    
    
    522
    
    
    
    465
    
    
    
    57Advertising and public relations
    
    
    465
    
    
    
    403
    
    
    
    62Professional fees
    
    
    230
    
    
    
    145
    
    
    
    85Stationery and supplies
    
    
    209
    
    
    
    177
    
    
    
    32Insurance
    
    
    173
    
    
    
    150
    
    
    
    23Telephone and postage
    
    
    232
    
    
    
    194
    
    
    
    38Director fees
    
    
    104
    
    
    
    92
    
    
    
    12Software maintenance
    
    
    99
    
    
    
    66
    
    
    
    33Foreclosed assets, net
    
    
    103
    
    
    
    (173
    )
    
    
    276Other
    
    
    1,033
    
    
    
    628
    
    
    
    405Total non-interest expense
    
    $
    12,020
    
    
    $
    9,112
    
    
    $
    2,908
 The $2.9 million, or 31.9%, increase in total non-interest expense was principally the result
of our new corporate headquarters and the opening of our City Centre branch in October 2002, which
had a minimal impact on 2002 expenses. Salary and employee benefit expenses increased to $7.3
million for the year ended December 31, 2003 compared to $5.8 million for the year ended December
31, 2002. The salary and benefit expense increase can be attributed to the opening of the City
Centre branch, increase in personnel and increased performance based incentives, including loan
officer commissions. The number of FTEs increased to 98 at December 31, 2003 compared to 90 at
December 31, 2002. The $372 thousand total increase in occupancy, equipment and depreciation expense was
primarily attributed to the lease of our new corporate headquarters and branch, which accounted for
approximately 62% of the increase, while the other 38% included parking expense, maintenance and
related expenses associated with the new office space. Foreclosed assets expense increased $276 thousand to $103 thousand as two properties were sold
during 2003 generating a net loss of $103 thousand. In 2002 we sold one property with a gain of
approximately $35 thousand. We were receiving lease payments in 2002 on one of the properties sold
in 2003. These lease payments, net of related rental and other foreclosed asset expenses, was
approximately $138 thousand. Other expenses increased $405 thousand, or 64.5%, in 2003 as a result
of the cost to secure our branch servers, e-mail and internet banking services, general expenses
associated with an additional branch and the expense of providing additional training and education
to our employees and officers. Provision for Income Taxes.We recorded tax provisions of $2.3 million in 2003 and in 2002.
Our effective tax rates were 31% and 33% for 2003 and 2002, respectively, as compared to the
expected effective tax rate of 34%. The difference from the expected rate in both years was largely
due to the non- taxable nature of income from municipal securities. Financial Condition Our total assets at December 31, 2004, December 31, 2003 and December 31, 2002 were $574
million, $463 million and $401 million, respectively. Total deposits at December 31, 2004, December
31, 2003 and December 31, 2002 were $476 million, $404 million and $352 million, respectively. 41




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##### Table of Contents



Loans Our gross loans at December 31, 2004, December 31, 2003 and December 31, 2002 were $403
million, $350 million, and $294 million, respectively, an increase of 15.2%, 19.3%, and 18.8% over
the prior period, respectively. Our overall steady growth in loans from 2000 to 2004 is consistent
with our historical focus and strategy to grow our loan portfolio. Since December 31, 2000,
construction loans experienced the highest growth within our portfolio, growing from $47 million to
$167 million at December 31, 2004, followed by commercial real estate loans which grew from $75
million at December 31, 2000 to $148 million at December 31, 2004. While we will continue to focus
on our strong real estate lending portfolio, we expect to diversify the portfolio in future
periods. See Business  Our Strategy and Trends and Developments Impacting Our Recent Results. The following table shows the amounts of loans outstanding at the end of each of the periods
and years indicated. December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Commercial and industrial loans
    
    $
    59,820
    
    
    $
    62,476
    
    
    $
    62,135
    
    
    $
    55,424
    
    
    $
    52,059Constructions loans (1)
    
    
    167,154
    
    
    
    133,875
    
    
    
    114,144
    
    
    
    68,716
    
    
    
    46,521Commercial real estate loans
    
    
    148,411
    
    
    
    122,396
    
    
    
    89,612
    
    
    
    98,701
    
    
    
    74,852Residential real estate loans
    
    
    24,097
    
    
    
    26,987
    
    
    
    23,632
    
    
    
    18,860
    
    
    
    13,507Consumer loans and other
    
    
    3,788
    
    
    
    4,348
    
    
    
    4,012
    
    
    
    5,481
    
    
    
    5,441Gross loans (2)
    
    
    403,270
    
    
    
    350,082
    
    
    
    293,535
    
    
    
    247,182
    
    
    
    192,380Allowance for loan losses
    
    
    (6,133
    )
    
    
    (5,409
    )
    
    
    (4,688
    )
    
    
    (3,700
    )
    
    
    (2,827
    )Deferred loan costs(fees), net
    
    
    (2,126
    )
    
    
    (1,454
    )
    
    
    (1,006
    )
    
    
    (1,267
    )
    
    
    (812
    )Net loans
    
    $
    395,011
    
    
    $
    343,219
    
    
    $
    287,841
    
    
    $
    242,215
    
    
    $
    188,741
   (1)
    
    Includes approximately $105 million in loans at December 31, 2004 relating to raw land,
acquisition and construction loans for commercial real estate projects and approximately $62
million in loans at December 31, 2004 relating to raw land, acquisition and construction loans
for residential real estate projects.(2)
    
    Includes syndicated loans and participation loans which, at December 31, 2004, constituted
less than 2% and approximately 13%, respectively, of total gross loans at such date. The following tables show the amounts of loans outstanding as of December 31, 2004, which,
based on remaining scheduled repayments of principal, were due in one year or less, more than one
year through five years, and more than five years. Lines of credit or other loans having no stated
maturity and no stated schedule of repayments are reported as due in one year or less. In the
tables below, loans are classified as real estate-related if they are collateralized by real
estate, regardless of their classification in the previous table. The tables also present, for
loans with maturities over one year, an analysis with respect to fixed interest rate loans and
floating interest rate loans. Rate Structure forMaturity
    
    
    Loans MaturingOne
    
    
    One
    
    
    
    
    
    
    
    
    

over one yearYear
    
    
    through
    
    
    Over Five
    
    
    
    
    
    
    
    
    
    
    Floatingor less
    
    
    Five Years
    
    
    Years
    
    
    Total
    
    
    Fixed Rate
    
    
    Rate(In thousands)Commercial and industrial
    
    $
    36,132
    
    
    $
    22,690
    
    
    $
    998
    
    
    $
    59,820
    
    
    $
    7,363
    
    
    $
    16,325Construction
    
    
    109,376
    
    
    
    57,527
    
    
    
    251
    
    
    
    167,154
    
    
    
    532
    
    
    
    57,246Commercial real estate
    
    
    13,035
    
    
    
    67,235
    
    
    
    68,141
    
    
    
    148,411
    
    
    
    63,730
    
    
    
    71,646Residential real estate
    
    
    12,770
    
    
    
    4,579
    
    
    
    6,748
    
    
    
    24,097
    
    
    
    1,045
    
    
    
    10,282Consumer and other
    
    
    3,309
    
    
    
    462
    
    
    
    17
    
    
    
    3,788
    
    
    
    459
    
    
    
    20Total
    
    $
    174,622
    
    
    $
    152,493
    
    
    $
    76,155
    
    
    $
    403,270
    
    
    $
    73,129
    
    
    $
    155,519
 42




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##### Table of Contents



Concentrations.As of December 31, 2004, in managements judgment, a concentration of
loans existed in real estate-related loans. At that date, real estate-related loans comprised 84%
of gross loans. Although management believes the loans within this concentration have no more than the normal
risk of collectibility, a substantial decline in the performance of the economy in general or a
decline in real estate values in our primary market areas, in particular, could have an adverse
impact on collectibility, increase the level of real estate-related non-performing loans, or have
other adverse effects which alone or in the aggregate could have a material adverse effect on our
business, financial condition, results of operations and cash flows. Non-Performing Assets.Generally, loans are placed on non-accrual status when they become 90
days or more past due or at such earlier time as management determines timely recognition of
interest to be in doubt. Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts that the borrowers
financial condition is such that collection of interest is doubtful. The following table summarizes
the loans for which the accrual of interest has been discontinued and loans more than 90 days past
due and still accruing interest, including those loans that have been restructured, and other real
estate owned, which we refer to as OREO: At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Non-accrual loans, not restructured
    
    $
    966
    
    
    $
    1,596
    
    
    $
    3,213
    
    
    $
    5,584
    
    
    $
    5,560Accruing loans past due 90 days or more
    
    
    2
    
    
    
    
    
    
    
    21
    
    
    
    4
    
    
    
    429Restructured loans
    
    
    
    
    
    
    719
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing loans (NPLs)
    
    
    968
    
    
    
    2,315
    
    
    
    3,234
    
    
    
    5,588
    
    
    
    5,989OREO
    
    
    2,191
    
    
    
    1,192
    
    
    
    2,655
    
    
    
    2,637
    
    
    
    Total non-performing assets (NPAs)
    
    $
    3,159
    
    
    $
    3,507
    
    
    $
    5,889
    
    
    $
    8,225
    
    
    $
    5,989Selected ratiosNPLs to total loans
    
    
    0.24
    %
    
    
    0.66
    %
    
    
    1.10
    %
    
    
    2.26
    %
    
    
    3.11
    %NPAs to total loans and OREO
    
    
    0.78
    %
    
    
    1.00
    %
    
    
    1.99
    %
    
    
    3.29
    %
    
    
    3.11
    %NPAs to total assets
    
    
    0.55
    %
    
    
    0.76
    %
    
    
    1.47
    %
    
    
    2.71
    %
    
    
    2.17
    %
 Between the years 2000 and 2004, we experienced an improvement in credit quality as measured
by non-performing loans and assets as a percent of total loans and total assets respectively. This
was due to the following factors: (i) the recruitment of a highly experienced Chief Operating
Officer in April 2002 who oversees our lending operations; (ii) the hiring of a Credit
Administrator in
3rd quarter 2002 who has improved credit risk management techniques; and (iii) the continuous
upgrade in the experience and skill-set of our loan underwriters. At December 31, 2004, we had $966 thousand in non-accrual loans, which consisted of loans to 3
borrowers with 91% of the total represented by one loan. The majority of the loans on non-accrual
were originated prior to 2002. The largest credit is a $875,000 SBA loan which is 75% guaranteed by
the SBA. OREO Properties.At December 31, 2004, we had three OREO properties with an aggregate
carrying value of $2.2 million all of which were sold prior to February 28, 2005. Impaired Loans.Impaired loans are loans for which it is probable that we will not be able
to collect all amounts due according to the original contractual terms of the loan agreement. The
category of impaired loans is not coextensive with the category of non-accrual loans, although
the two categories overlap. Non-accrual loans include impaired loans, which are not reviewed on a
collective basis for impairment, and are those loans on which the accrual of interest is
discontinued when collectibility of principal and interest is uncertain or payments of principal or
interest have become contractually past due 90 days. Management may choose to place a loan on
non-accrual status due to payment delinquency or uncertain collectibility, while not classifying
the loan as impaired if it is probable that we will collect all amounts due in accordance with the
original contractual terms of the loan or the loan is not a commercial, commercial real estate or
an individually significant mortgage or consumer loan. 43




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##### Table of Contents



In determining whether or not a loan is impaired, we apply our normal loan review procedures
on a case-by-case basis taking into consideration the circumstances surrounding the loan and
borrower, including the collateral value, the reasons for the delay, the borrowers prior payment
record, the amount of the shortfall in relation to the principal and interest owed and the length
of the delay. We measure impairment on a loan-by-loan basis using either the present value of
expected future cash flows discounted at the loans effective interest rate or at the fair value of
the collateral if the loan is collateral dependent, less estimated selling costs. Loans for which
an insignificant shortfall in amount of payments is anticipated, but where we expect to collect all
amounts due, are not considered impaired. As a separate categorization, any troubled debt restructurings are defined as loans that we
have agreed to modify by accepting below-market terms, either by granting interest rate concessions
or by deferring principal and/or interest payments. Loans aggregating $916 thousand at December 31, 2004, $1.4 million at December 31, 2003 and
$5.2 million at December 31, 2002 were designated as impaired. The total allowance for loan losses
related to these loans was $444 thousand at December 31, 2004, $269 thousand at December 31, 2003
and $1.2 million at December 31, 2002. The amount of interest income that we would have recorded on non-accrual and impaired loans
had the loans been current totaled $93 thousand at December 31, 2004, $128 thousand for 2003 and
$128 thousand for 2002 . All payments received on loans classified as non-accrual are applied to
principal, accordingly, no income on such loans was included in our net income for the years ended
December 31, 2004, 2003 and 2002 . At December 31, 2004, we had no loans not disclosed above as non-accrual loans, as to which we
had serious doubts as to the ability of the borrower to comply with the present loan repayment
terms and which may result in disclosure of these loans as non-accrual loans. Allowance for Loan Losses We must maintain an adequate allowance for loan losses, or ALLL, based on a comprehensive
methodology that assesses the probable losses inherent in the loan portfolio. Like all financial
institutions, we maintain an ALLL based on a number of quantitative and qualitative factors,
including levels and trends of past due and non-accrual loans, asset classifications, loan grades,
change in volume and mix of loans, collateral value, historical loss experience, peer group loss
experience, size and complexity of individual credits and economic conditions. Provisions for loan
losses are provided on both a specific and general basis. Specific allowances are provided for
impaired credits for which the expected/anticipated loss is measurable. General valuation
allowances are based on a portfolio segmentation based on risk grading with a further evaluation of
various quantitative and qualitative factors noted above. We incorporate statistics provided through the FDIC regarding loss percentages experienced by
banks in the western United States, as well as an internal five-year loss history to establish
potential risk based on collateral type securing each loan. As an additional comparison, we examine
local peer group banks to determine the nature and scope of their losses to date. Such examination
provides a
geographic-and size-specific flavor for trends in the local banking community. Finally, we
closely examine each credit graded Special Mention and below to individually assess the appropriate
loan loss reserve for a particular credit. We periodically review the assumptions and formulae by which additions are made to the
specific and general valuation allowances for losses in an effort to refine such allowances in
light of the current status of the factors described above. Specific Allocations.All classified loans are carefully evaluated for loss portions or
potential loss exposure. The evaluation occurs at the time the loan is classified and on a regular
basis thereafter (at least quarterly). This evaluation is documented in a problem asset status
report relating to a specific loan or relationship. Specific allocation of reserves considers the
value of the collateral, the financial condition of the borrower, and industry and current economic
trends. We review the collateral value, cash flow, and tertiary support on each classified credit.
Any deficiency outlined by a real estate collateral evaluation liquidation analysis, or cash flow
shortfall is accounted for through a specific allocation reserve calculation for the loan. For classified loans that are also classified as impaired, an allowance is established when
discounted cash flows (or collateral value or observable market price) of the impaired loan is
lower than the carrying value of the loan pursuant to FASB statement No. 114, Accounting by
Creditors for Impairment of a Loan. 44




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##### Table of Contents



General Allowances.We perform a portfolio segmentation based on risk grading. Credits are
rated into eight different categories (Grades 1-8), with a percentage of the portfolio, based on
grade, allocated to the allowance pursuant to FASB statement No. 5, Accounting for Contingencies.
The loss factors for each risk grade are determined by management based on managements overall
assessment of the overall credit quality at month end taking into account various quantitative and
qualitative factors such as trends of past due and non-accrual loans, asset classifications, loan
grades, collateral value, historical loss experience and economic conditions. The first four grades
are considered satisfactory. The other four grades range from a Watch/Pass category to a
Doubtful category. For a discussion of these four grades, see Business  Classified Assets. The following table sets forth the activity in our allowance for loan losses for the periods
indicated: Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in thousands)Allowance for loan losses:Beginning balance
    
    $
    5,409
    
    
    $
    4,688
    
    
    $
    3,700
    
    
    $
    2,827
    
    
    $
    1,853Loans charged off during period:Commercial
    
    
    367
    
    
    
    617
    
    
    
    751
    
    
    
    899
    
    
    
    497Construction
    
    
    1
    
    
    
    180
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    129Residential real estate
    
    
    
    
    
    
    177
    
    
    
    129
    
    
    
    74
    
    
    
    8Consumer and other
    
    
    15
    
    
    
    59
    
    
    
    153
    
    
    
    64
    
    
    
    67Total
    
    
    383
    
    
    
    1,036
    
    
    
    1,033
    
    
    
    1,037
    
    
    
    701Recoveries:Commercial
    
    
    121
    
    
    
    6
    
    
    
    63
    
    
    
    
    
    
    
    20Construction
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential real estate
    
    
    63
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    Consumer and other
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    Total
    
    
    185
    
    
    
    34
    
    
    
    63
    
    
    
    1
    
    
    
    20Net loans and leases charged off
    
    
    198
    
    
    
    1,002
    
    
    
    970
    
    
    
    1,036
    
    
    
    681Provision for loan losses
    
    
    922
    
    
    
    1,723
    
    
    
    1,958
    
    
    
    1,909
    
    
    
    1,655Ending balance
    
    $
    6,133
    
    
    $
    5,409
    
    
    $
    4,688
    
    
    $
    3,700
    
    
    $
    2,827Gross loans
    
    $
    403,270
    
    
    $
    350,082
    
    
    $
    293,535
    
    
    $
    247,182
    
    
    $
    192,380Average loans
    
    
    362,493
    
    
    
    320,758
    
    
    
    272,816
    
    
    
    219,438
    
    
    
    168,574Non-performing loans
    
    
    966
    
    
    
    2,315
    
    
    
    3,234
    
    
    
    5,588
    
    
    
    5,989Selected ratios:Net charge-offs to average loans
    
    
    0.05
    %
    
    
    0.31
    %
    
    
    0.36
    %
    
    
    0.47
    %
    
    
    0.40
    %Provision for loan losses to
average loans
    
    
    0.25
    %
    
    
    0.54
    %
    
    
    0.72
    %
    
    
    0.87
    %
    
    
    0.98
    %Allowance for loan losses to loans
outstanding at end of period
    
    
    1.52
    %
    
    
    1.55
    %
    
    
    1.60
    %
    
    
    1.50
    %
    
    
    1.47
    %Allowance for loan losses to non-performing loans
    
    
    634.9
    %
    
    
    233.7
    %
    
    
    145.0
    %
    
    
    66.2
    %
    
    
    47.2
    %
 45




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##### Table of Contents



We consider many factors to determine the amount and allocation of the allowance for loan
losses. Loss ranges are based on the losses experienced by comparable banks throughout the United
States, with total assets under $1 billion. We also review the loss experience of peer banks
located in the greater Las Vegas area. These statistics are measured against our current allocation
and our historical loss record (for the previous five-year period) to aid in assessing the adequacy
of our allowance for loan losses. For commercial banks generally, the Commercial and Industrial Loans not secured by real
estate category represents the highest risk category. This category has been the largest
historical source of losses for us. As a result, we make a significant allocation to this category.
The commercial portfolio, which makes up approximately 15% of our total loans as of December 31,
2004, is further segmented by sub categories for allowance for loan losses calculation purposes.
Categories with historical high losses and risk characteristics, such as certain SBA, UCC secured
loans and unsecured loans are provided a higher loss factor. Other categories, such as stock and
bond secured or assignment of cash collateral loans are provided a nominal loss factor based upon a
history of minimal losses. While the majority of our historical charge offs have occurred in the
commercial portfolio, we believe that the allowance allocation is adequate when considering the
current composition of the categories of the commercial loans and related loss factors that are
utilized. Our construction portfolio reflects some borrower concentration risk, and also carries the
enhanced risks encountered with construction loans generally. Construction activity in the greater
Las Vegas area is currently intense, presenting challenges in the timely completion of projects.
With any unanticipated problems, a project can be delayed for an extended period, as unscheduled
work can be difficult to accomplish due to the high demand for construction workers, and delays
associated with permitting issues. For these reasons, a higher allocation is justified in this loan
category. Our commercial real estate loans are a mixture of new and seasoned properties, retail, office,
warehouse, and some special purpose. Loans on properties are generally underwritten at a loan to
value ratio of less than 75% with a minimum debt coverage ratio of 1.25. Our grading system allows
our loan portfolio, including real estate, to be ranked across four pass risk grades. Generally,
the real estate loan portfolio is risk rated 4  Acceptable Risk. The risk rated reserve factor
increases with each grade increase, and the general real estate portfolio grade of 4 is more
reflective of the various risks inherent in the real estate portfolio, such as large size and
complexity of individual credits, and overall concentration of credit risk. Accordingly, a greater
allowance allocation is provided on commercial real estate loans. The following table indicates managements allocation of the allowance and the percent of
loans in each category to total loans as of each of the following dates: December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percentof
    
    
    
    
    
    
    of
    
    
    
    
    
    
    of
    
    
    
    
    
    
    of
    
    
    
    
    
    
    ofLoans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans inEach
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    EachAllocation
    
    
    Category
    
    
    Allocation
    
    
    Category
    
    
    Allocation
    
    
    Category
    
    
    Allocation
    
    
    Category
    
    
    Allocation
    
    
    Categoryof the
    
    
    to Total
    
    
    of the
    
    
    to Total
    
    
    of the
    
    
    to Total
    
    
    of the
    
    
    to Total
    
    
    of the
    
    
    to TotalAllowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans
    
    
    Allowance
    
    
    LoansCommercial
    
    $
    4,409
    
    
    
    14.8
    %
    
    $
    3,772
    
    
    
    17.8
    %
    
    $
    3,319
    
    
    
    21.2
    %
    
    $
    2,657
    
    
    
    22.4
    %
    
    $
    2,051
    
    
    
    27.1
    %Construction
    
    
    237
    
    
    
    41.4
    %
    
    
    228
    
    
    
    38.2
    %
    
    
    190
    
    
    
    38.8
    %
    
    
    140
    
    
    
    27.8
    %
    
    
    103
    
    
    
    24.2
    %Commercial real estate
    
    
    893
    
    
    
    36.9
    %
    
    
    858
    
    
    
    35.0
    %
    
    
    715
    
    
    
    30.5
    %
    
    
    561
    
    
    
    40.0
    %
    
    
    420
    
    
    
    38.9
    %Residential real estate
    
    
    238
    
    
    
    6.0
    %
    
    
    228
    
    
    
    7.7
    %
    
    
    190
    
    
    
    8.1
    %
    
    
    142
    
    
    
    7.6
    %
    
    
    107
    
    
    
    7.0
    %Consumer and Other
    
    
    356
    
    
    
    0.9
    %
    
    
    323
    
    
    
    1.3
    %
    
    
    274
    
    
    
    1.4
    %
    
    
    200
    
    
    
    2.2
    %
    
    
    146
    
    
    
    2.8
    %Total
    
    $
    6,133
    
    
    
    100.0
    %
    
    $
    5,409
    
    
    
    100.0
    %
    
    $
    4,688
    
    
    
    100.0
    %
    
    $
    3,700
    
    
    
    100.0
    %
    
    $
    2,827
    
    
    
    100.0
    %
 46




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##### Table of Contents



Investments The carrying value of our investment securities at December 31, 2004 totaled $84 million,
compared to $69 million at December 31, 2003, $63 million at December 31, 2002 . The increases
experienced year over year, are a result of growth in deposits. Our portfolio of investment
securities during 2004, 2003, and 2002 consisted primarily of U.S. Government agencies, agency
mortgage-backed securities and obligations of states and political subdivisions. The carrying value of our portfolio of investment securities at December 31, 2004, December
31, 2003,and 2002 was as follows: Carrying ValueAt December 31, 20042004
    
    
    2003
    
    
    2002(In thousands)U.S. Treasury securities
    
    $
    
    
    
    $
    1,009
    
    
    $
    2,443U.S. Government agencies
    
    
    14,866
    
    
    
    14,397
    
    
    
    8,555Obligations of states and political
subdivisions
    
    
    23,590
    
    
    
    24,516
    
    
    
    19,062Mortgage-backed securities
    
    
    45,064
    
    
    
    27,328
    
    
    
    25,231Other securities
    
    
    521
    
    
    
    1,603
    
    
    
    2,580Mutual fund
    
    
    
    
    
    
    
    
    
    
    5,010Total investment securities
    
    $
    84,041
    
    
    $
    68,853
    
    
    $
    62,881
 The following tables show the maturities of investment securities at December 31, 2004,
and the weighted average yields of such securities, excluding the benefit of tax-exempt securities: December 31, 2004After One Yearbut within
    
    
    After Five YearsWithin One Year
    
    
    Five Years
    
    
    but within Ten Years
    
    
    After Ten YearsAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield(Dollars in thousands)U.S. Government agencies
    
    $
    10,607
    
    
    
    2.92
    %
    
    $
    4,259
    
    
    
    3.10
    %
    
    $
    0
    
    
    
    
    
    
    $
    0Obligations of states and
political subdivisions
    
    
    750
    
    
    
    5.21
    %
    
    
    11,401
    
    
    
    5.39
    %
    
    
    10,996
    
    
    
    5.90
    %
    
    
    443
    
    
    
    6.40
    %Mortgage-backed securities
    
    
    752
    
    
    
    3.78
    %
    
    
    44,312
    
    
    
    3.89
    %
    
    
    0
    
    
    
    
    
    
    
    0Other securities
    
    
    0
    
    
    
    2.53
    %
    
    
    0
    
    
    
    2.63
    %
    
    
    521
    
    
    
    6.97
    %
    
    
    0Total investment securities
    
    $
    12,109
    
    
    
    3.11
    %
    
    $
    59,972
    
    
    
    4.12
    %
    
    $
    11,517
    
    
    
    5.95
    %
    
    $
    443
    
    
    
    6.40
    %
 47




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##### Table of Contents



Deposits Total deposits were $476 million at December 31, 2004 compared to $404 million at December 31,
2003 . The increase in total deposits since December 31, 2003 is attributed primarily to our
commitment to relationship banking and the focus on core deposits along with increased performance
based incentives. Non-interest-bearing demand deposits increased to $122 million, or 25.6% of
total deposits, at December 31, 2004, from $99 million, or 24.4% of total deposits, at December 31,
2003. Interest-bearing deposits are comprised of money market accounts, regular savings accounts,
CDs of under $100,000 and CDs of $100,000 or more. The following table shows the average amount and average rate paid on the categories of
deposits for each of the years indicated: Year ended December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate(Dollars in thousands)Interest-bearing demand
    
    $
    19,459
    
    
    
    0.47
    %
    
    $
    12,617
    
    
    
    0.36
    %
    
    $
    10,825
    
    
    
    0.66
    %Money market
    
    
    190,322
    
    
    
    1.52
    %
    
    
    136,569
    
    
    
    1.68
    %
    
    
    96,894
    
    
    
    2.14
    %Savings
    
    
    6,069
    
    
    
    0.23
    %
    
    
    4,185
    
    
    
    0.19
    %
    
    
    3,753
    
    
    
    0.29
    %Time
    
    
    125,898
    
    
    
    2.43
    %
    
    
    138,758
    
    
    
    3.12
    %
    
    
    147,527
    
    
    
    4.25
    %Non-interest bearing deposits
    
    
    124,737
    
    
    
    0.00
    %
    
    
    94,357
    
    
    
    0.00
    %
    
    
    63,408
    
    
    
    0.00
    %Total
    
    $
    466,485
    
    
    
    1.30
    %
    
    $
    386,486
    
    
    
    1.73
    %
    
    $
    322,407
    
    
    
    2.61
    %
 Additionally, the following table shows the maturities of CDs of $100,000 or more at
December 31, 2004: Due in three months or less
    
    $
    7,533Due in over three months through six months
    
    
    17,239Due in over six months through twelve months
    
    
    27,090Due in over twelve months
    
    
    8,960Total
    
    $
    60,822
 Capital Resources and Subordinated Debt Current risk-based regulatory capital standards generally require banks and bank holding
companies to maintain a minimum ratio of core or Tier I capital (consisting principally of
common equity) to risk-weighted assets of at least 4%, a ratio of Tier I capital to adjusted total
assets (leverage ratio) of at least 4% and a ratio of total capital (which includes Tier I capital
plus certain forms of subordinated debt, a portion of the allowance for loan losses and preferred
stock) to risk-weighted assets of at least 8%. Risk-weighted assets are calculated by multiplying
the balance in each category of assets by a risk factor, which ranges from zero for cash assets and
certain government obligations to 100% for some types of loans, and adding the products together. Regulatory Requirements(Greater than or equal to stated percentage)
    
    Actual at December 31, 2004Adequately
    
    Well
    
    Community Bank
    
    CommunityCapitalized
    
    Capitalized
    
    of Nevada
    
    BancorpTier 1 leverage capital ratio
    
    
    4.0
    %
    
    
    5.0
    %
    
    
    8.7
    %
    
    
    16.9
    %Tier 1 risk-based capital
    
    
    4.0
    %
    
    
    6.0
    %
    
    
    10.4
    %
    
    
    19.7
    %Total risk-based capital
    
    
    8.0
    %
    
    
    10.0
    %
    
    
    11.7
    %
    
    
    21.0
    %
 48




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##### Table of Contents



We were well capitalized at both the bank and holding company at December 31, 2004 for
federal regulatory purposes. In order to manage our capital position more efficiently, we formed Community Bancorp (NV)
Statutory Trust I, a Connecticut statutory trust formed with capital of $464 thousand, for the sole
purpose of issuing trust preferred securities. During the fourth quarter of 2002, Community Bancorp
(NV) Statutory Trust I issued 15,000 Floating Rate Capital Trust Pass-Through Securities, or the
trust preferred securities, with liquidation value of $1,000 per security, for gross proceeds of
$15.0 million. The entire proceeds of the issuance were invested by Community Bancorp (NV)
Statutory Trust I in $15.5 million of Floating Rate Junior Subordinated Deferrable Interest
Debentures, or the subordinated debentures, issued by us, with identical maturity, repricing and
payment terms as the trust preferred securities. The subordinated debentures represent the sole
assets of Community Bancorp (NV) Statutory Trust I. The subordinated debentures mature on September
26, 2032, and bear an interest rate at December 31, 2004 of 5.95% (based on 3-month LIBOR plus
3.40%), with repricing occurring and interest payments due quarterly. We injected $8 million of the
net proceeds from the sale of the subordinated debentures into Community Bank of Nevada and
retained the remaining proceeds for the needs of Community Bancorp. The subordinated debentures are redeemable by us, subject to our receipt of prior approval
from the Federal Reserve Bank of San Francisco, on any March 26 or December 26 on or after December
26, 2007. The redemption price is par plus accrued and unpaid interest, except in the case of redemption
under a special event which is defined in the debenture occurring prior to December 26, 2006. The
trust preferred securities are subject to mandatory redemption to the extent of any early
redemption of the subordinated debentures and upon maturity of the subordinated debentures on
December 26, 2032. Holders of the trust preferred securities are entitled to a cumulative cash distribution on
the liquidation amount of $1,000 per security at an interest rate at December 31, 2004 of 5.95%.
For each successive period beginning on March 26 of each year, the rate will be adjusted to equal
the 3-month LIBOR plus 3.40%; provided, however, that prior to September 26, 2007, such annual rate
shall not exceed 11.9%. Community Bancorp (NV) Statutory Trust I has the option to defer payment of
the distributions for a period of up to five years, but during any such deferral, we would be
restricted from paying dividends. See Trading History and Dividend Policy. We have guaranteed, on
a subordinated basis, distributions and other payments due on the trust preferred securities. For
financial reporting purposes, our investment in the trust is accounted for under the equity method
and is included in other assets on the accompanying consolidated balance sheet. The subordinated
debentures issued and guaranteed by us and held by the trust are reflected on our consolidated
balance sheet in accordance with provisions of Interpretation No. 46 issued by the Financial
Accounting Standards Board, or FASB, No. 46, Consolidation of Variable Interest Entities. Under
applicable regulatory guidelines, all of the trust preferred securities currently qualify as Tier 1
capital, although this classification may be subject to future change. Contractual Obligations and Off-Balance Sheet Arrangements Community Bancorp and Community Bank of Nevada, in the conduct of ordinary business operations
routinely enter into contracts for services. These contracts may require payment for services to be
provided in the future and may also contain penalty clauses for the early termination of the
contracts. Community Bancorp and Community Bank of Nevada are also parties to financial instruments
with off-balance sheet risk in the normal course of business to meet the financing needs of their
customers. These financial instruments include commitments to extend credit and standby letters of
credit. In addition, in connection with the issuance of the trust preferred securities, Community
Bancorp has committed to irrevocably and unconditionally guarantee the following payments or
distributions with respect to the preferred securities to the holders thereof to the extent that
Community Bancorp (NV) Statutory Trust I has not made such payments or distributions and has the
funds therefore: (i) accrued and unpaid distributions, (ii) the redemption price, and (iii) upon a
dissolution or termination of the trust, the lesser of the liquidation amount and all accrued and
unpaid distributions and the amount of assets of the trust remaining available for distribution.
Management does not believe that these off-balance sheet arrangements have a material current
effect on Community Bancorps and Community Bank of Nevadas financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures,
or capital resources, but there can be no assurance that such arrangements will not have a future
effect. See our Financial Statements for more information regarding our commitments. 49




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##### Table of Contents



The following table sets forth our significant contractual obligations at December 31, 2004: Less ThanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    After 5 YearsContractual ObligationsJunior subordinated
deferrable interest
debentures
    
    $
    15,464
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    15,464Operating lease obligations
    
    
    7,397
    
    
    
    565
    
    
    
    1,530
    
    
    
    1,610
    
    
    
    3,692Total
    
    $
    22,861
    
    
    $
    565
    
    
    $
    1,530
    
    
    $
    1,610
    
    
    $
    19,156
 The following table sets forth our other significant commitments at December 31, 2004: Amount of Commitment Expiration Per PeriodTotalAmounts
    
    
    Less ThanCommitted
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    After 5 years(In thousands)Other CommitmentsCommitments to extend credit
    
    $
    126,550
    
    
    $
    81,099
    
    
    $
    37,069
    
    
    $
    3,256
    
    
    $
    5,126Credit cards
    
    
    1,471
    
    
    
    
    
    
    
    1,471
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    1,583
    
    
    
    1,583
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    129,604
    
    
    $
    82,682
    
    
    $
    38,540
    
    
    $
    3,256
    
    
    $
    5,126
 Liquidity The ability to have readily available funds sufficient to repay fully maturing liabilities is
of primary importance to depositors, creditors and regulators. Our liquidity, represented by cash
and due from banks, federal funds sold and available-for-sale securities, is a result of our
operating, investing and financing activities and related cash flows. In order to ensure funds are
available at all times, we devote resources to projecting on a monthly basis the amount of funds
that will be required and maintains relationships with a diversified customer base so funds are
accessible. Liquidity requirements can also be met through short-term borrowings or the disposition
of short-term assets. We have borrowing lines at correspondent banks totaling $16.6 million. In
addition, loans and securities are pledged to the FHLB totaling $26 million as of December 31, 2004
and $4 million securities pledged to the FRB Discount window. As of December 31, 2004 we had $66
million in securities available to be sold or pledged to the FHLB and/or FRB Discount Window. We have a formal liquidity policy, and in the opinion of management, our liquid assets are
considered adequate to meet our cash flow needs for loan funding and deposit cash withdrawal for
the next 60-90 days. At December 31, 2004, we had $149 million in liquid assets comprised of $67
million in cash and cash equivalents (including fed funds sold of $62 million) and $82 million in
available-for-sale securities. 50




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##### Table of Contents



On a long term basis, our liquidity will be met by changing the relative distribution of our
asset portfolios, i.e., reducing investment or loan volumes, or selling or encumbering assets.
Further, we will increase liquidity by soliciting higher levels of deposit accounts through
promotional activities and/or borrowing from our correspondent banks as well as the Federal Home
Loan Bank of San Francisco. At the current time, our long-term liquidity needs primarily relate to
funds required to support loan originations and commitments and deposit withdrawals. All of these
needs can currently be met by cash flows from investment payments and maturities, and investment
sales if the need arises. Our liquidity is comprised of three primary classifications: cash flows from operating
activities; cash flows used in investing activities; and cash flows provided by financing
activities. Net cash provided by operating activities has consisted primarily of net income
adjusted for changes in certain other asset and liability accounts and certain non-cash income and
expense items such as the loan loss provision, investment and other amortizations and depreciation.
At December 31, 2004 net cash provided by operating activities was $9.0 million, compared to net
cash provided by operating activities of $9.1 million for the same period of 2003. For the years
ended December 31, 2002, net cash provided by operating activities was $6.9 million. Our primary investing activities are the origination of real estate, commercial and consumer
loans and purchase and sale of securities. Our net cash provided by and used in investing
activities has been primarily influenced by our loan activity. Net increases in loans for the years
ended December 31, 2004, 2003 and 2002, were $55 million, $59 million, and $48 million,
respectively. Net cash used in all investing activities for the years ended December 31, 2004, 2003 and 2002
was $80 million, $64 million, and $74 million, respectively. At December 31, 2004 we had
outstanding loan commitments of $128 million and outstanding letters of credit of $2 million. We
anticipate that we will have sufficient funds available to meet current loan commitments. Net cash provided by financing activities has been impacted significantly by both increases
in deposit levels and proceeds received from the sale of common stock. For the years ended December
31, 2004, 2003, and 2002, deposits increased by $73 million, $52 million, and $74 million,
respectively. During the month of December, 2004, proceeds from our IPO provided an additional $39
million in cash. During the year ended December 31, 2002, proceeds from the issuance of cumulative
trust preferred securities provided an additional $15 million cash. Federal and state banking regulations place certain restrictions on dividends paid by
Community Bank of Nevada to Community Bancorp. The total amount of dividends which may be paid at
any date is generally limited to the retained earnings of Community Bank of Nevada. At December 31,
2004, Community Bank of Nevadas retained earnings available for the payment of dividends was
approximately $16 million. Accordingly, $31 million of Community Bancorps equity in net assets of
Community Bank of Nevada was restricted at December 31, 2004. In addition, dividends paid by
Community Bank of Nevada to Community Bancorp would be prohibited if the effect thereof would cause
Community Bank of Nevadas capital to be reduced below applicable minimum capital requirements. Quantitative and Qualitative Disclosures About Market Risk Market risk is the risk of loss in a financial instrument arising from adverse changes in
market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Our
market risk arises primarily from interest rate risk inherent in our lending and deposit taking
activities. To that end, management actively monitors and manages our interest rate risk exposure.
We do not have any market risk sensitive instruments entered into for trading purposes. We manage
our interest rate sensitivity by matching the re-pricing opportunities on our earning assets to
those on our funding liabilities. Management uses various asset/liability strategies to manage the re-pricing characteristics of
our assets and liabilities designed to ensure that exposure to interest rate fluctuations is
limited within our guidelines of acceptable levels of risk-taking. Hedging strategies, including
the terms and pricing of loans and deposits, and managing the deployment of our securities are used
to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their
funding sources. Interest rate risk is addressed by our Asset Liability Management Committee, or the ALCO,
which is comprised of all the executive officers of the bank. The ALCO monitors interest rate risk
by analyzing the potential impact on the net portfolio of equity value and net interest income from
potential changes in interest rates, and considers the impact of alternative strategies or changes
in balance sheet structure. The ALCO manages our balance sheet in part to maintain the potential
impact on net portfolio value and net interest income within acceptable ranges despite changes in
interest rates. 51




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##### Table of Contents



Our exposure to interest rate risk is reviewed on at least a quarterly basis by the ALCO and
our Board of Directors. Interest rate risk exposure is measured using interest rate sensitivity
analysis to determine our change in net portfolio value in the event of hypothetical changes in
interest rates. If potential changes to net portfolio value and net interest income resulting from
hypothetical interest rate changes are not within the limits established by our Board of Directors,
the Board of Directors may direct management to adjust the asset and liability mix to bring
interest rate risk within board-approved limits. Market Value of Portfolio Equity.We measure the impact of market interest rate changes on
the net present value of estimated cash flows from our assets, liabilities and off-balance sheet
items, defined as market value of portfolio equity, using a simulation model. This simulation model
assesses the changes in the market value of interest rate sensitive financial instruments that
would occur in response to an instantaneous and sustained increase or decrease (shock) in market
interest rates of 100 and 200 basis points. At December 31, 2004, our market value of portfolio equity exposure related to these
hypothetical changes in market interest rates was within the current guidelines established by us.
The following table shows our projected change in market value of portfolio equity for this set of
rate shocks as of December 31, 2004. Market Value of Portfolio Equity
(Dollars in thousands) Percentage
    
    
    Percentage
    
    
    Percentage ofChange
    
    
    of Total
    
    
    Portfolio EquityInterest Rate Scenario
    
    Market Value
    
    
    from Base
    
    
    Assets
    
    
    Book ValueUp 200 basis points
    
    $
    70,148
    
    
    
    (10.49
    )%
    
    
    12.22
    %
    
    
    90.45
    %Up 100 basis points
    
    
    74,081
    
    
    
    (5.47
    )
    
    
    12.91
    
    
    
    95.53BASE
    
    
    78,367
    
    
    
    
    
    
    
    13.65
    
    
    
    101.05Down 100 basis points
    
    
    83,559
    
    
    
    6.63
    
    
    
    14.56
    
    
    
    107.75Down 200 basis points
    
    
    91,941
    
    
    
    17.32
    
    
    
    16.02
    
    
    
    118.55
 The computation of prospective effects of hypothetical interest rate changes are based on
numerous assumptions, including relative levels of market interest rates, asset prepayments and
deposit decay, and should not be relied upon as indicative of actual results. Further, the
computations do not contemplate any actions we may undertake in response to changes in interest
rates. Actual amounts may differ from the projections set forth above should market conditions vary
from the underlying assumptions. Net Interest Income Simulation.In order to measure interest rate risk at December 31, 2004,
we used a simulation model to project changes in net interest income that result from forecasted
changes in interest rates. This analysis calculates the difference between net interest income
forecasted using a rising and a falling interest rate scenario and a net interest income forecast
using a base market interest rate derived from the current treasury yield curve. The income
simulation model includes various assumptions regarding the re-pricing relationships for each of
our products. Many of our assets are floating rate loans, which are assumed to re-price
immediately, and to the same extent as the change in market rates according to their contracted
index. Some loans and investment vehicles include the opportunity of prepayment (embedded options),
and accordingly the simulation model uses national indexes to estimate these prepayments and
reinvest their proceeds at current yields. Our non-term deposit products re-price more slowly,
usually changing less than the change in market rates and at our discretion. This analysis indicates the impact of changes in net interest income for the given set of rate
changes and assumptions. It assumes the balance sheet grows modestly, but that its structure will
remain similar to the structure at year-end. It does not account for all factors that impact this
analysis, including changes by management to mitigate the impact of interest rate changes or
secondary impacts such as changes to our credit risk profile as interest rates change. Furthermore, loan prepayment rate estimates and spread relationships change regularly.
Interest rate changes create changes in actual loan prepayment rates that will differ from the
market estimates incorporated in this analysis. Changes that vary significantly from the
assumptions may have significant effects on our net interest income. For the rising and falling interest rate scenarios, the base market interest rate forecast was
increased or decreased, on an instantaneous and sustained basis, by 100 and 200 basis points. At
December 31, 2004, our net interest margin exposure related to these hypothetical changes in market
interest rates was within the current guidelines established by us. 52




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##### Table of Contents



Sensitivity of Net Interest Income
(Dollars in thousands) Net InterestMarginAdjusted Net
    
    
    Percentage
    
    
    Net Interest
    
    
    Change (in basisInterest Rate Scenario
    
    Interest Income (1)
    
    
    Change from Base
    
    
    Margin Percent (2)
    
    
    points)Up 200 basis points
    
    $
    24,709
    
    
    
    8.89
    %
    
    
    4.49
    %
    
    
    37Up 100 basis points
    
    
    23,846
    
    
    
    5.08
    
    
    
    4.33
    %
    
    
    21BASE
    
    
    22,692
    
    
    
    
    
    
    
    4.12
    %
    
    
    Down 100 basis points
    
    
    21,500
    
    
    
    (5.26
    )
    
    
    3.90
    %
    
    
    (22
    )Down 200 basis points
    
    
    20,393
    
    
    
    (10.13
    )
    
    
    3.70
    %
    
    
    (42
    )
    (2) These percentages are not comparable to other information discussing the percent of net
interest margin since the income simulation does not take into account
loan fees. Gap Analysis.Another way to measure the impact that future changes in interest rates
will have on net interest income is through a cumulative gap measure. The gap represents the net
position of assets and liabilities subject to re-pricing in specified time periods. The following table sets forth the distribution of re-pricing opportunities of our
interest-earning assets and interest-bearing liabilities, the interest rate sensitivity gap (that
is, interest rate sensitive assets less interest rate sensitive liabilities), cumulative
interest-earning assets and interest-bearing liabilities, the cumulative interest rate sensitivity
gap, the ratio of cumulative interest-earning assets to cumulative interest-bearing liabilities and
the cumulative gap as a percentage of total assets and total interest-earning assets as of
December 31, 2004. The table also sets forth the time periods during which interest-earning assets
and interest-bearing liabilities will mature or may re-price in accordance with their contractual
terms. The interest rate relationships between the re-priceable assets and re-priceable liabilities
are not necessarily constant and may be affected by many factors, including the behavior of
customers in response to changes in interest rates. This table should, therefore, be used only as a
guide as to the possible effect changes in interest rates might have on our net interest margins. 53




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##### Table of Contents



December 31, 2004Amounts Maturing or Re-pricing in3 Months
    
    
    Over 3 Months
    
    
    Over 1 Year
    
    
    Over 4or Less
    
    
    to 12 Months
    
    
    to 4 Years
    
    
    Years
    
    
    Non-Sensitive (1)
    
    
    TotalASSETSCash and due from banks
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    

    
    
    $
    5,328
    
    
    $
    5,328Federal funds sold
    
    
    61,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,926Investment securities
    
    
    6,325
    
    
    
    19,157
    
    
    
    34,448
    
    
    
    23,847
    
    
    
    264
    
    
    
    84,041Loans
    
    
    269,608
    
    
    
    32,127
    
    
    
    47,611
    
    
    
    51,798
    
    
    
    (6,133
    )
    
    
    395,011Other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,655
    
    
    
    27,655Total assets
    
    $
    337,859
    
    
    $
    51,284
    
    
    $
    82,059
    
    
    $
    75,645
    
    
    $
    27,114
    
    
    $
    573,961LIABILITIES AND SHAREHOLDERS EQUITYNon-interest-bearing demand deposits
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    122,148
    
    
    $
    122,148Interest-bearing demand, money market and savings
    
    
    227,371
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    227,371Time certificates of deposit
    
    
    17,142
    
    
    
    87,788
    
    
    
    21,803
    
    
    
    
    
    
    
    
    
    
    
    126,733Short-term debt
    
    
    
    
    
    
    350
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350Long-term debt
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464
    
    
    
    15,464Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,342
    
    
    
    4,342Shareholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    77,553
    
    
    
    77,553Total liabilities and shareholders equity
    
    $
    259,513
    
    
    $
    88,138
    
    
    $
    21,803
    
    
    $
    
    
    
    $
    204,507
    
    
    $
    573,961Period gap
    
    $
    78,346
    
    
    $
    (36,854
    )
    
    $
    60,256
    
    
    $
    75,645Cumulative interest-earning assets
    
    
    337,859
    
    
    
    389,143
    
    
    
    471,202
    
    
    
    546,847Cumulative interest-bearing liabilities
    
    
    259,513
    
    
    
    347,651
    
    
    
    369,454
    
    
    
    369,454Cumulative gap
    
    
    78,346
    
    
    
    41,492
    
    
    
    101,748
    
    
    
    177,393Cumulative interest-earning assets to
cumulative interest-bearing liabilities
    
    
    130.2
    %
    
    
    111.9
    %
    
    
    127.5
    %
    
    
    148.0
    %Cumulative gap as a percent of:Total assets
    
    
    13.7
    %
    
    
    7.2
    %
    
    
    17.7
    %
    
    
    30.9
    %Interest-earning assets
    
    
    14.3
    %
    
    
    7.6
    %
    
    
    18.6
    %
    
    
    32.4
    %
    At December 31, 2004, we had $389 million in assets and $348 million in liabilities re-pricing
within one year. This means that $41 million more of our interest rate sensitive assets than our
interest rate sensitive liabilities will change to the then current rate (changes occur due to the
instruments being at a variable rate or because the maturity of the instrument requires its
replacement at the then current rate). The ratio of interest-earning assets to interest-bearing
liabilities maturing or re-pricing within one year at December 31, 2004 is 111.9%. This analysis
indicates that at December 31, 2004, if interest rates were to increase, the gap would result in a
slightly higher net interest margin. However, changes in the mix of earning assets or supporting
liabilities can either increase or decrease the net interest margin without affecting interest rate
sensitivity. In addition, the interest rate spread between an asset and its supporting liability
can vary significantly while the timing of re-pricing of both the asset and its supporting
liability can remain the same, thus impacting net interest income. This characteristic is referred
to as basis risk, and generally relates to the re-pricing characteristics of short-term funding
sources such as certificates of deposit. Gap analysis has certain limitations. Measuring the volume of re-pricing or maturing assets
and liabilities does not always measure the full impact on the portfolio value of equity or net
interest income. Gap analysis does not account for rate caps on products; dynamic changes such as
increasing prepayment speeds as interest rates decrease, basis risk, embedded options or the
benefit of no-rate funding sources. The relation between product rate re-pricing and market rate
changes (basis risk) is not the same for all products. 54




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##### Table of Contents



The majority of interest-earning assets generally re-price along with a movement in market
rates, while non-term deposit rates in general move more slowly and usually incorporate only a
fraction of the change in market rates. Products categorized as non-rate sensitive, such as our
non-interest-bearing demand deposits, in the gap analysis behave like long term fixed rate funding
sources. Management uses income simulation, net interest income rate shocks and market value of
portfolio equity as its primary interest rate risk management tools. Recent Accounting Pronouncements FAS 123(R), Share-Based Payment In December 2004, the Financial Accounting Standards Board (FASB) published FASB Statement No.
123 (revised 2004), Share-Based Payment (FAS 123(R) or the Statement). FAS 123(R) requires
that the compensation cost relating to share-based payment transactions, including grants of
employee stock options, be recognized in financial statements. That cost will be measured based on
the fair value of the equity or liability instruments issued. FAS 123(R) permits entities to use
any option-pricing model that meets the fair value objective in the Statement. The Statement is effective at the beginning of the third quarter of 2005. As of the effective
date, the Company will apply the Statement using a modified version of the prospective application.
Under that transition method, compensation cost will be recognized for (1) all awards granted
after the required effective date and to awards modified, cancelled, or repurchased after that date
and (2) the portion of awards granted subsequent to the completion of our IPO and prior to the
effective date for which the requisite service has not yet been rendered, based on the grant-date
fair value of those awards calculated for pro forma disclosures under SFAS 123. The impact of this Statement on the Company in 2005 and beyond will depend upon various factors,
among them being the Companys future compensation strategy. The pro forma compensation costs
presented in these and prior financial statements of the Company have been calculated using a
minimum value method and may not be indicative of amounts which should be expected in future
periods. 
  ITEM 7A.
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a discussion of quantitative and qualitative disclosures about market risk, please
see Item 7 Managements Discussion and Analysis of Financial Condition and results of
Operations  Quantitative and Qualitative Disclosure about Market Risk on page 52. 
  ITEM 8.
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements and supplementary data included in this annual
report are listed in Item 15 and begin at page F-1 immediately following the signature page. 
  ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 
  ITEM 9A.
    CONTROLS AND PROCEDURES The Companys management, including the Chief Executive Officer and Chief Financial Officer
evaluated the Companys disclosure controls and procedures as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended (the Exchange Act) as of December 31, 2004.
Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures are effective. There were no significant
changes in the Companys internal controls over financial reporting that occurred during the
quarter ending December 31, 2004 that have materially affected or are reasonably likely to
materially affect the Companys internal control over financial reporting. 
  ITEM 9B.
    OTHER INFORMATION Not applicable. 55




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##### Table of Contents



PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 of Form 10-K is incorporated by reference from the
information contained in the Companys Proxy Statement for the 2005 Annual Meeting of Shareholders
which will be filed pursuant to Regulation 14A. The Company has adopted a Code of Conduct applicable to all of our directors and employees,
including the principal executive officer, principal financial officer and principal accounting
officer. A copy of the Code of Conduct is filed as Exhibit 14.1 to this Report. 
 ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 of Form 10-K is incorporated by reference from the
information contained in the Companys Proxy Statement for the 2005 Annual Meeting of Shareholders
which will be filed pursuant to Regulation 14A. 
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
 The information required by Item 12 of Form 10-K is incorporated by reference from the
information contained in the Companys Proxy Statement for the 2005 Annual Meeting of Shareholders
which will be filed pursuant to Regulation 14A. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 of Form 10-K is incorporated by reference from the
information contained in the Companys Proxy Statement for the 2005 Annual Meeting of Shareholders
which will be filed pursuant to Regulation 14A. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by Item 14 of Form 10-K is incorporated by reference from the
information contained in the Companys Proxy Statement for the 2005 Annual Meeting of Shareholders
which will be filed pursuant to Regulation 14A. 
 ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  (a)
    Documents Filed as Part of this Report  (1)
    The following financial statements are incorporated by reference from Item 8 hereto: Consolidated Balance Sheet as of December 31, 2004 and 2003.
    
    Page F-1Consolidated Statements of Income and Comprehensive Income for Each of the
Years in the Three-Year Period Ended December 31, 2004.
    
    Page F-2Consolidated Statements of Stockholders Equity for Each of the
Years in the Three-Year Period Ended December 31, 2004.
    
    Page F-3Consolidated Statements of Cash Flows for Each of the Years in the Three-Year
Period Ended December 31, 2004.
    
    Page F-4Notes to Consolidated Financial Statements for Each of the
Years in the Three-Year Period Ended December 31, 2004.
    
    Page F-6Report of Independent Registered Public Accounting Firm.
    
    Page F-38
 56




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##### Table of Contents



(2)
    Financial Statement SchedulesNot applicable.  (b)
    Exhibits  3.1
    Certificate of Incorporation, as amended, of Community Bancorp13.1.1 Amendment to Certificate of Incorporation13.2
    Bylaws of Community Bancorp14.1
    Specimen Share Certificate for Common Stock110.1
    1995 Stock Option and Award Plan110.2
    Form of 1995 Stock Option and Award Plan Option Agreement110.3
    2000 Stock Appreciation Rights Plan110.4
    Lease Agreement, City Centre branch and administrative office lease, dated April 5, 2002, as amended110.5
    Agreement for Information Technology Services between Community Bank of Nevada
and Aurum Technology, Inc., dated August 15, 2001, as amended110.6
    Community Bank of Nevada 401(k) Profit Sharing Plan110.7
    Employment Agreement with Edward M. Jamison110.8
    Employment Agreement with Cathy Robinson110.9
    Employment Agreement with Lawrence Scott114.1
    Code of Conduct21.1 The subsidiaries of the registrant are Community Bank of Nevada, a Nevada
state-chartered bank, and Community Bancorp (NV) Statutory Trust I, a Connecticut statutory
trust23.1
    Consent of Independent Registered Public Accounting Firm31.1
    Rule 13a-14(a) Certification by Chief Executive Officer31.2
    Rule 13a-14(a) Certification by Chief Financial Officer32.1
    Section 1350 Certifications   1
    
    Incorporated by reference from the Companys S-1 Registration Statements and amendments thereto
(333-119395), originally filed September 30, 2004, as amended on November 15 and 24, 2004, 57




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized. COMMUNITY BANCORP By:
    
    /S/ Edward M. JamisonEDWARD M. JAMISONPresident and Chief Executive OfficerDated: March 24, 2005By:
    
    /S/ Cathy RobinsonCATHY ROBINSONExecutive Vice President and Chief Financial Officer
 Dated: March 24, 2005 58




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##### Table of Contents



Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been
signed by the following persons on behalf of the Company and in the capacities and on March 24,
2005. Signature
    
    
    
    Capacity/s/ EDWARD M. JAMISON
    
    
    
    President, Chief Executive Officer and DirectorEdward M. Jamison
    
    
    
    (Principal Executive Officer)/s/ CATHY ROBINSON
    
    
    
    Chief Financial Officer andCathy Robinson
    
    
    
    Executive Vice President(Principal Financial and Accounting Officer)/s/ NOALL J. BENNETT
    
    
    
    Director, Chairman of BoardNoall J. Bennett/s/ CHARLES R. NORTON
    
    
    
    DirectorCharles R. Norton/s/ GARY W. STEWART
    
    
    
    DirectorGary W. Stewart/s/ RUSSELL C. TAYLOR
    
    
    
    DirectorRussell C. Taylor/s/ JACOB BINGHAM
    
    
    
    DirectorJacob Bingham
 59




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##### Table of Contents



Contents Financial StatementsConsolidated balance sheets
    
    
    F-1Consolidated statements of income
    
    
    F-2Consolidated statements of stockholders equity
    
    
    F-3Consolidated statements of cash flows
    
    
    F-4Notes to consolidated financial statements
    
    
    F-6
 60




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##### Table of Contents



Community Bancorp and Subsidiary 
 Consolidated Balance Sheets December 31, 2004 and 2003
 2004
    
    
    2003(dollars in thousands)AssetsCash and due from banks
    
    $
    5,328
    
    
    $
    11,828Federal funds sold
    
    
    61,926
    
    
    
    24,177Cash and cash equivalents
    
    
    67,254
    
    
    
    36,005Securities available for sale
    
    
    82,083
    
    
    
    66,702Securities held to maturity (fair market value approximates
$2,041 and $2,249)
    
    
    1,958
    
    
    
    2,151Investment in Federal Home Loan Bank (FHLB), Federal Reserve
Bank (FRB)
and Pacific Coast Bankers Bank (PCBB) stock
    
    
    2,219
    
    
    
    1,240Loans, net of allowance for loan losses of $6,133 and $5,409
    
    
    395,011
    
    
    
    343,219Premises and equipment, net
    
    
    8,243
    
    
    
    8,612Other real estate owned
    
    
    2,191
    
    
    
    1,192Accrued interest receivable
    
    
    2,003
    
    
    
    1,702Deferred tax assets, net
    
    
    2,112
    
    
    
    1,103Bank owned life insurance
    
    
    9,194
    
    
    
    Other assets
    
    
    1,693
    
    
    
    1,505Total assets
    
    $
    573,961
    
    
    $
    463,431Liabilities and Stockholders EquityDeposits:Non-interest bearing demand
    
    $
    122,148
    
    
    $
    98,544Interest bearing:Demand
    
    
    221,542
    
    
    
    158,273Savings
    
    
    5,829
    
    
    
    4,773Time, $100,000 or more
    
    
    60,822
    
    
    
    58,862Other time
    
    
    65,911
    
    
    
    83,261Total deposits
    
    
    476,252
    
    
    
    403,713Short term borrowings
    
    
    350
    
    
    
    10,000Accrued stock appreciation rights
    
    
    2,414
    
    
    
    320Accrued interest payable and other liabilities
    
    
    1,928
    
    
    
    1,733Junior subordinated debt
    
    
    15,464
    
    
    
    15,46420,156
    
    
    
    27,517Commitments and Contingencies (Note 8)Stockholders EquityCommon stock, par value: December 31, 2004: $0.001;
December 31, 2003: no par value, shares authorized: 10,000,000;
shares issued: 2004: 6,782,048; 2003: 4,663,955
    
    
    7
    
    
    
    10,258Additional paid-in capital
    
    
    51,245
    
    
    
    Retained earnings
    
    
    26,698
    
    
    
    21,558Stock dividends distributable
    
    
    
    
    
    
    278Accumulated other comprehensive income
    
    
    174
    
    
    
    39278,124
    
    
    
    32,486Less cost of treasury stock, 34,375 shares
    
    
    (285
    )
    
    
    (285
    )Less notes receivable arising from the exercise of common
stock options
    
    
    (286
    )
    
    
    Total stockholders equity
    
    
    77,553
    
    
    
    32,201Total liabilities and stockholders equity
    
    $
    573,961
    
    
    $
    463,431
 See Notes to Consolidated Financial Statements. F-1




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##### Table of Contents



Community Bancorp and Subsidiary 
 Consolidated Statements of Income For the years ended December 31, 2004, 2003 and 2002
 2004
    
    
    2003
    
    
    2002(dollars in thousands, except per share information)Interest and dividend income:Loans, including fees
    
    $
    26,415
    
    
    $
    24,679
    
    
    $
    23,172Securities:Taxable
    
    
    1,981
    
    
    
    1,331
    
    
    
    1,414Non-Taxable
    
    
    874
    
    
    
    845
    
    
    
    484Federal funds sold
    
    
    692
    
    
    
    242
    
    
    
    339Dividends
    
    
    76
    
    
    

    46
    
    
    
    34Other
    
    
    
    
    
    
    
    
    
    
    6Total interest and dividend income
    
    
    30,038
    
    
    
    27,143
    
    
    
    25,449Interest expense on:Deposits
    
    
    6,054
    
    
    
    6,679
    
    
    
    8,428Short term borrowings
    
    
    44
    
    
    
    52
    
    
    
    64Junior subordinated debt
    
    
    764
    
    
    
    722
    
    
    
    2176,862
    
    
    
    7,453
    
    
    
    8,709Net interest income
    
    
    23,176
    
    
    
    19,690
    
    
    
    16,740Provision for loan losses
    
    
    922
    
    
    
    1,723
    
    
    
    1,958Net interest income after provision for loan losses
    
    
    22,254
    
    
    
    17,967
    
    
    
    14,782Other income:Service charges and other income
    
    
    991
    
    
    
    1,050
    
    
    
    1,030Loan brokerage and referral fees
    
    
    184
    
    
    
    446
    
    
    
    334Income from bank owned life insurance
    
    
    194
    
    
    
    
    
    
    
    Net gain on sales of loans
    
    
    108
    
    
    
    65
    
    
    
    45Net gain (loss) on sales of securities
    
    
    12
    
    
    
    2
    
    
    
    (17
    )1,489
    
    
    
    1,563
    
    
    
    1,392Other expenses:Salaries, wages and employee benefits
    
    
    8,619
    
    
    
    7,157
    
    
    
    5,767Stock appreciation rights
    
    
    2,095
    
    
    
    149
    
    
    
    40Occupancy, equipment & depreciation
    
    
    1,495
    
    
    
    1,417
    
    
    
    1,045Data processing
    
    
    558
    
    
    
    522
    
    
    
    465Advertising and public relations
    
    
    587
    
    
    
    465
    
    
    
    403Professional fees
    
    
    359
    
    
    
    230
    
    
    
    145Telephone and postage
    
    
    198
    
    
    
    232
    
    
    
    194Stationery and supplies
    
    
    230
    
    
    
    209
    
    
    
    177Insurance
    
    
    249
    
    
    
    173
    
    
    
    150Loan related
    
    
    235
    
    
    
    127
    
    
    
    113Director fees
    
    
    172
    
    
    
    104
    
    
    
    92Foreclosed assets, net
    
    
    117
    
    
    
    103
    
    
    
    (173
    )Software maintenance
    
    
    102
    
    
    
    99
    
    
    
    66Other
    
    
    930
    
    
    
    1,033
    
    
    
    62815,946
    
    
    
    12,020
    
    
    
    9,112Income before income taxes
    
    
    7,797
    
    
    
    7,510
    
    
    
    7,062Income tax expense
    
    
    2,376
    
    
    
    2,295
    
    
    
    2,337Net income
    
    $
    5,421
    
    
    $
    5,215
    
    
    $
    4,725Earnings per share:Basic
    
    $
    1.13
    
    
    $
    1.13
    
    
    $
    1.03Diluted
    
    $
    1.10
    
    
    $
    1.10
    
    
    $
    1.01
 See Notes to Consolidated Financial Statements. F-2




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##### Table of Contents



Community Bancorp and Subsidiary 
 Consolidated Statements of Stockholders Equity Years Ended December 31, 2004, 2003 and 2002
  AccumulatedCommon Stock
    
    
    Additional
    
    
    
    
    
    
    Stock
    
    
    OtherComprehensive
    
    
    Outstanding
    
    
    
    
    
    
    Paid-in
    
    
    Retained
    
    
    Dividends
    
    
    Comprehensive
    
    
    Treasury
    
    
    NotesDescription
    
    Income
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Distributable
    
    
    Income
    
    
    Stock
    
    
    Receivable
    
    
    TotalBalance, December 31, 2001
    
    
    
    
    
    
    4,582,040
    
    
    $
    9,820
    
    
    $
    
    
    
    $
    12,310
    
    
    $
    
    
    
    $
    206
    
    
    $
    
    
    
    $
    
    
    
    $
    22,336Comprehensive income:Net income
    
    $
    4,725
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,725
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,725Other comprehensive income:Unrealized holding gains on securities available for sale arising
during the period, net of taxes of $106
    
    
    207
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207
    
    
    
    
    
    
    
    
    
    
    
    207Reclassification adjustment for realized losses, net of taxes
of $6
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    11$
    4,943Stock options exercised
    
    
    
    
    
    
    25,000
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70Stock dividends declared on common stock, $0.03 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (138
    )
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends on common stock, $0.03 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137
    )Balance, December 31, 2002
    
    
    
    
    
    
    4,607,040
    
    
    
    9,890
    
    
    
    
    
    
    
    16,760
    
    
    
    138
    
    
    
    424
    
    
    
    
    
    
    
    
    
    
    
    27,212Distribution of stock dividends declared in 2002
    
    
    
    
    
    
    15,915
    
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    (138
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive income:Net income
    
    $
    5,215
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,215
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,215Other comprehensive income:Unrealized holding losses on securities available for sale arising
during the period, net of taxes of ($16)
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    (32
    )$
    5,183Stock options exercised
    
    
    
    
    
    
    25,000
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70Tax benefit related to the exercise of stock options
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Stock dividends on common stock, $0.03 per share
    
    
    
    
    
    
    16,000
    
    
    
    130
    
    
    
    
    
    
    
    (130
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends on common stock (in lieu of fractional shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )Treasury stock acquired in partial payment of loan
    
    
    
    
    
    
    (26,515
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (223
    )
    
    
    
    
    
    
    (223
    )Purchase of treasury stock
    
    
    
    
    
    
    (7,860
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    (62
    )Stock dividends declared on common stock, $0.06 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (278
    )
    
    
    278
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2003
    
    
    
    
    
    
    4,629,580
    
    
    
    10,258
    
    
    
    
    
    
    
    21,558
    
    
    
    278
    
    
    
    392
    
    
    
    (285
    )
    
    
    
    
    
    
    32,201Distribution of stock dividends declared in 2003
    
    
    
    
    
    
    30,405
    
    
    
    274
    
    
    
    
    
    
    
    
    
    
    
    (274
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive income:Net income
    
    $
    5,421
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,421
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,421Other comprehensive income:Unrealized holding losses on securities available for sale arising
during the period, net of taxes of ($108)
    
    
    (210
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (210
    )
    
    
    
    
    
    
    
    
    
    
    (210
    )Reclassification adjustment for realized gains, net of taxes of ($4)
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    (8
    )$
    5,203Stock options exercised
    
    
    
    
    
    
    196,663
    
    
    
    84
    
    
    
    606
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (286
    )
    
    
    404Tax benefit related to the exercise of stock options
    
    
    
    
    
    
    
    
    
    
    94
    
    
    
    380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    474Stock dividends on common stock, $0.06 per share
    
    
    
    
    
    
    30,625
    
    
    
    276
    
    
    
    
    
    
    
    (276
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash
dividends on common stock (in lieu of fractional shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )Proceeds from sale of common stock
    
    
    
    
    
    
    1,860,400
    
    
    
    2
    
    
    
    39,278
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,280Change in par value from no par value to $0.001
    
    
    
    
    
    
    
    
    
    
    (10,981
    )
    
    
    10,981
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2004
    
    
    
    
    
    
    6,747,673
    
    
    $
    7
    
    
    $
    51,245
    
    
    $
    26,698
    
    
    $
    
    
    
    $
    174
    
    
    $
    (285
    )
    
    $
    (286
    )
    
    $
    77,553
 Total dividends per share was $0.06, $0.09, and $0.06 for the years ended December 31, 2004, 2003, and 2002, respectively.
See Notes to Consolidated Financial Statements. F-3




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##### Table of Contents



Community Bancorp and Subsidiary 
 Consolidated Statements of Cash Flows For the years ended December 31, 2004, 2003 and 2002
 2004
    
    
    2003
    
    
    2002(dollars in thousands)Cash Flows from Operating Activities:Net income
    
    $
    5,421
    
    
    $
    5,215
    
    
    $
    4,725Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation of premises and equipment
    
    
    715
    
    
    
    706
    
    
    
    569(Gain) loss on foreclosed assets
    
    
    87
    
    
    
    103
    
    
    
    (35
    )(Income) from bank owned life insurance
    
    
    (194
    )
    
    
    
    
    
    
    Realized (gains) on sales of loans
    
    
    (108
    )
    
    
    (65
    )
    
    
    (45
    )Proceeds from sales of loans held for sale
    
    
    1,898
    
    
    
    904
    
    
    
    2,826Originations of loans held for sale
    
    
    (1,790
    )
    
    
    (839
    )
    
    
    (2,533
    )(Gain) loss on sale of securities available for sale
    
    
    (12
    )
    
    
    (2
    )
    
    
    17Deferred taxes
    
    
    (897
    )
    
    
    (281
    )
    
    
    (223
    )Provision for loan losses
    
    
    922
    
    
    
    1,723
    
    
    
    1,958Tax benefit related to exercise of stock options
    
    
    474
    
    
    
    30
    
    
    
    Net amortization of investment premium and discount
    
    
    695
    
    
    
    1,049
    
    
    
    412(Increase) decrease in accrued interest receivable
    
    
    (301
    )
    
    
    30
    
    
    
    (205
    )(Increase) in other assets
    
    
    (188
    )
    
    
    (192
    )
    
    
    (457
    )Increase (decrease) in accrued interest payable and other liabilities
    
    
    2,289
    
    
    
    742
    
    
    
    (86
    )Net cash provided by operating activities
    
    
    9,011
    
    
    
    9,123
    
    
    
    6,923Cash Flows from Investing Activities:Proceeds from maturities of and principal paydowns on
securities held to maturity
    
    
    191
    
    
    
    266
    
    
    
    504Purchase of securities available for sale
    
    
    (46,574
    )
    
    
    (48,866
    )
    
    
    (47,596
    )Proceeds from maturities of and principal paydowns on
securities available for sale
    
    
    18,806
    
    
    
    30,585
    
    
    
    17,233Proceeds from sales of securities available for sale
    
    
    11,376
    
    
    
    10,958
    
    
    
    5,591Investment in FHLB, FRB and PCBB stock
    
    
    (979
    )
    
    
    (525
    )
    
    
    (167
    )Purchase of premises and equipment
    
    
    (346
    )
    
    
    (237
    )
    
    
    (1,303
    )Proceeds from sale of foreclosed assets
    
    
    1,105
    
    
    
    2,552
    
    
    
    675Improvements made to foreclosed assets
    
    
    
    
    
    
    
    
    
    
    (18
    )Investment in bank owned life insurance
    
    
    (9,000
    )
    
    
    
    
    
    
    Net (increase) in loans
    
    
    (54,555
    )
    
    
    (58,516
    )
    
    
    (48,472
    )Net cash (used in) investing activities
    
    
    (79,976
    )
    
    
    (63,783
    )
    
    
    (73,553
    )Cash Flows from Financing Activities:Cash dividends paid for fractional shares
    
    
    (9
    )
    
    
    (9
    )
    
    
    (275
    )Net increase (decrease) in short term borrowings
    
    
    (10,000
    )
    
    
    5,000
    
    
    
    2,236Net increase in deposits
    
    
    72,539
    
    
    
    52,129
    
    
    
    74,162Purchase of treasury stock
    
    
    
    
    
    
    (62
    )
    
    
    Proceeds from issuance of junior subordinated debt
    
    
    
    
    
    
    
    
    
    
    15,000Proceeds from sale of common stock
    
    
    39,280
    
    
    
    
    
    
    
    Proceeds from exercise of common stock options
    
    
    404
    
    
    
    70
    
    
    
    70Net cash provided by financing activities
    
    
    102,214
    
    
    
    57,128
    
    
    
    91,193Increase in cash and cash equivalents
    
    
    31,249
    
    
    
    2,468
    
    
    
    24,563Cash and cash equivalents, beginning of period
    
    
    36,005
    
    
    
    33,537
    
    
    
    8,974Cash and cash equivalents, end of period
    
    $
    67,254
    
    
    $
    36,005
    
    
    $
    33,537
 See Notes to Consolidated Financial Statements. F-4




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##### Table of Contents



Community Bancorp and Subsidiary Consolidated Statements of Cash Flows (continued)
For the years ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002(dollars in thousands)Supplemental Disclosures of Cash Flow Information:Cash payments for interest
    
    $
    6,986
    
    
    $
    7,657
    
    
    $
    8,835Cash payments for taxes
    
    $
    3,180
    
    
    $
    2,435
    
    
    $
    2,626Supplemental Schedule of Noncash Investing and Financing Activities:Other real estate acquired through foreclosure
    
    $
    2,191
    
    
    $
    1,192
    
    
    $
    640Treasury stock acquired in partial payment of loan
    
    $
    
    
    
    $
    223
    
    
    $
    Changes in cash dividends payable
    
    $
    
    
    
    $
    
    
    
    $
    (138
    )Notes receivable arising from exercise of stock options
    
    $
    286
    
    
    $
    
    
    
    $
    Short-term borrowing arising from other real estate acquired through
foreclosure subject to an existing deed of trust
    
    $
    350
    
    
    $
    
    
    
    $
    
 See Notes to Consolidated Financial Statements. F-5




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##### Table of Contents



Community Bancorp and Subsidiary 
 Notes to Consolidated Financial Statements 
 Note 1. Nature of Business and Summary of Significant Accounting Policies
 Nature of business Community Bancorp (the Bancorp) is a holding company whose subsidiary, Community Bank of Nevada, is a Nevada state chartered bank that provides a full range of banking services to commercial and consumer customers through five branches located in the Las Vegas Metropolitan area. The Companys business is concentrated in southern Nevada and is subject to the general economic conditions of this area. Segment information is not presented since all of the Companys revenues are attributable to one operating segment. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and general industry practice. A summary of the significant accounting policies used by the Bancorp and its subsidiary are as follows: Principles of Consolidation During the year ended December 31, 2002, stockholders of Community Bank of Nevada exchanged their common stock in Community Bank of Nevada for common stock in the newly formed holding company, Community Bancorp. The transaction was accounted for at historical cost. The consolidated financial statements include the accounts of Community Bancorp and its wholly owned subsidiary, Community Bank of Nevada (the Bank), collectively referred to herein as the Company. Significant intercompany accounts and transactions are eliminated in consolidation. Use of estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses. Cash and cash equivalents For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, amounts due from banks (including cash items in process of clearing) and federal funds sold. Cash flows from loans originated by the Company, deposits and federal funds purchased are reported net. The Company maintains amounts due from banks that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. F-6




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##### Table of Contents



Community Bancorp and Subsidiary Notes to Consolidated Financial Statements 
 Note 1. Nature of Business and Summary of Significant Accounting Policies (continued)
 Securities Securities classified as available for sale are those debt securities the Company intends to
hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a
security classified as available for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Companys assets and liabilities,
liquidity needs, regulatory capital considerations and other similar factors. Securities available
for sale are reported at fair value with unrealized gains or losses reported as other comprehensive
income (loss), net of the related deferred taxes. The amortization of premiums and accretion of
discounts, computed by the interest method over their contractual lives, are recognized in interest
income. Realized gains or losses, determined on the basis of the cost of specific securities sold,
are included in earnings. Securities classified as held to maturity are those debt securities that the Company has both the
intent and the ability to hold to maturity, regardless of changes in market conditions, liquidity
needs or changes in general economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by the interest method over their
contractual lives. The sale of a security within three months of its maturity date or after at
least 85% of the principal outstanding has been collected is considered a maturity for purposes of
classification and disclosure. Declines in the fair value of individual securities below their amortized cost that are determined
to be other than temporary result in write-downs of the individual securities to their fair value
with the resulting write-downs included in current earnings as realized losses. In determining
other-than-temporary losses, management considers (1) the length of time and the extent to which
the fair value has been less than cost, (2) the financial condition and near-term prospects of the
issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair value. Federal Home Loan Bank, Federal Reserve Bank stock, and Pacific Coast Bankers Bank
stock The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is required to maintain an
investment in capital stock of the FHLB in an amount equal to the greater of 1% of its outstanding
home loans or 5% of advances from the FHLB. Likewise, as a member of the Federal Reserve Bank (FRB)
system, the Bank must maintain an investment in the FRB. The FHLB, FRB, and PCBB stock is
recorded at cost that equals its redemption value. Loans Loans are stated at the amount of unpaid principal, reduced by net deferred loan fees and an
allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged to
expense. Loans are charged against the allowance for loan losses when management believes that
collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the
allowance. F-7




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##### Table of Contents



Community Bancorp and Subsidiary Notes to Consolidated Financial Statements 
 Note 1. Nature of Business and Summary of Significant Accounting Policies (continued)
 Loans (continued) The allowance is an amount that management believes will be adequate to absorb estimated
losses relating to specifically identified loans, as well as probable credit losses inherent in the
balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and
prior loss experience and peer bank experience. This evaluation also takes into consideration such
factors as changes in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions that may affect the borrowers
ability to pay. Due to the credit concentration of the Companys loan portfolio in real estate
secured loans, the value of collateral is heavily dependent on real estate values in Southern
Nevada. This evaluation is inherently subjective, as it requires estimates that are susceptible to
significant revision as more information becomes available. In addition, regulatory agencies, as
an integral part of their examination process, periodically review the Companys allowance for loan
losses, and may require the Company to make additions to the allowance based on their judgment
about information available to them at the time of their examinations. The allowance consists of specific and general components. The specific component relates to
loans that are classified as either doubtful, substandard or special mention. For such loans that
are also classified as impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than the carrying value
of that loan pursuant to FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan.
The general component covers non-classified loans and is based on historical loss experience
adjusted for qualitative and environmental factors pursuant to FASB Statement No. 5, Accounting for
Contingencies. A loan is impaired when it is probable, based on current information and events, the Company
will be unable to collect all contractual principal and interest payments due in accordance with
the terms of the loan agreement. Impaired loans are measured on an individual basis for commercial
and construction loans based on the present value of expected future cash flows discounted at the
loans effective interest rate or, as a practical expedient, at the loans observable market price
or the fair value of the collateral if the loan is collateral dependent. The amount of impairment,
if any, and any subsequent changes are included in the allowance for loan losses. F-8




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##### Table of Contents



Community Bancorp and Subsidiary Notes to Consolidated Financial Statements 
 Note 1. Nature of Business and Summary of Significant Accounting Policies (continued)
 Loans Held for Sale Loans held for sale are those loans that the Company has the intent to sell in the foreseeable
future. They are reported at the lower of aggregate cost or fair value. Gains or losses on the
sale of loans are recognized pursuant to Financial Accounting Standards Board (FASB) Statement No.
140, Accounting for Transfers and Servicing Financial Assets and Extinguishments of Liabilities.
All sales are made without recourse. The Company issues various representations and warranties
associated with the sale of loans. The Company has not incurred any significant losses resulting
from these provisions. There was not a significant amount of loans held for sale at December 31,
2004 or 2003. Earnings Per Common Share Basic earnings per share (EPS) represents income available to common stockholders divided by
the weighted-average number of common shares outstanding during the period. Diluted EPS reflects
additional common shares that would have been outstanding if dilutive potential common shares had
been issued, as well as any adjustment to income that would result from assumed issuance.
Potential common shares that may be issued by the Company relate solely to outstanding options, and
are determined using the treasury stock method. Earnings per common share have been computed based on the following: 2004
    
    
    2003
    
    
    2002(dollars in thousands, except per share data)Net income
    
    $
    5,421
    
    
    $
    5,215
    
    
    $
    4,725Average number of common shares outstanding
    
    
    4,798,922
    
    
    
    4,620,744
    
    
    
    4,591,026Effect of dilutive options
    
    
    142,055
    
    
    
    108,277
    
    
    
    91,460Average number of common shares outstanding
used to calculate diluted earnings per common share
    
    
    4,940,977
    
    
    
    4,729,021
    
    
    
    4,682,486Basic EPS
    
    $
    1.13
    
    
    $
    1.13
    
    
    $
    1.03Diluted EPS
    
    $
    1.10
    
    
    $
    1.10
    
    
    $
    1.01
 F-9




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##### Table of Contents



Community Bancorp and
Subsidiary
Notes to Consolidated Financial Statements
 
 Note 1. Nature of Business and Summary of Significant Accounting Policies (continued)
 Interest and fees on loans Interest on loans is recognized over the terms of the loans and is calculated using the
effective interest method. The accrual of interest on impaired loans is discontinued when, in
managements opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed. Cash collections on
impaired loans are generally credited to the loan receivable balance and no interest income is
recognized on these loans until the principal balance has been collected, unless the Company
determines that collection of the remaining principal balance is reasonably assured. The Company determines a loan to be delinquent when payments have not been made according to the
contractual terms, typically evidenced by nonpayment of a monthly installment by the due date. The
accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the
credit is well secured and in the process of collection. Credit card loans and other personal
loans are typically charged off no later than 180 days delinquent. All interest accrued and not collected for loans that are placed on nonaccrual is reversed against
interest income. The interest income on these loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status
when all the principal and interest amounts contractually due are brought current and future
payments are reasonably assured. Loan origination and commitment fees and certain direct loan origination costs are deferred and the
net amount amortized as an adjustment of the related loans yield. The Company is generally
amortizing these amounts over the contractual life of the loan. Commitment fees based upon a
percentage of a customers unused line of credit and fees related to standby letters of credit are
generally recognized over the commitment period. Loan brokerage and referral fees As a service for customers, the Company has entered into agreements with unaffiliated
mortgage companies to complete applications, loan documents and perform pre-underwriting activities
for long-term residential mortgages. The fees from these agreements are recognized as income when
earned. Transfers of financial assets Transfers of financial assets are accounted for as sales, when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets
have been isolated from the Company, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and
(3) the Company does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity. Premises and equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the following estimated useful lives: buildings and
improvements - 15 to 39 years, and equipment, furniture and automobiles - 5 to 10 years. Leasehold
improvements are depreciated over the lesser of their useful lives or the lease term. F-10




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##### Table of Contents



Community Bancorp and Subsidiary
Notes to Consolidated Financial Statements
 
 Note 1. Nature of Business and Summary of Significant Accounting Policies (continued)
 Other real estate owned Other real estate owned (OREO) is held for sale and is carried at the lower of cost or fair
value less estimated costs of disposal. Any write-down to fair value at the time of transfer to
OREO is charged to the allowance for loan losses. Property is evaluated regularly to ensure the
recorded amount is supported by its current fair value and valuation allowances to reduce the
carrying amount to fair value less estimated costs to dispose are recorded as necessary.
Management has determined that no valuation allowance was necessary as of December 31, 2004.
Revenue and expense from the operations of OREO and charges to the valuation allowance are included
in other expense. Income taxes Deferred taxes are provided on an asset and liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax credit carry forwards
and deferred tax liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets will not
be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax
laws and rates on the date of enactment. Off-balance-sheet instruments In the ordinary course of business, the Company has entered into off-balance-sheet financial
instruments consisting of commitments to extend credit, commercial letters of credit and standby
letters of credit. Such financial instruments are recorded in the financial statements when they
are funded. Reclassifications Certain amounts in the 2003 and 2002 consolidated financial statements were reclassified to
conform to the 2004 presentation, with no effect on previously reported net income or stockholders
equity. F-11




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##### Table of Contents



Community Bancorp and
Subsidiary
Notes to Consolidated Financial Statements
 
 Note 1.
    Nature of Business and Summary of Significant Accounting Policies
(continued) Employee Stock Plans At December 31, 2004, the Company has a stock-based compensation plan, which is described more
fully in Note 9. The Company accounts for the plan under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,and related
interpretations. Accordingly, no stock-based employee compensation cost has been recognized, as
all options granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates the effect on net
income and earnings per share had compensation cost for all of the stock-based compensation plans
been determined based on the minimum value approach: 2004
    
    
    2003
    
    
    2002(dollars in thousands, except per share data)Net income:As reported
    
    $
    5,421
    
    
    $
    5,215
    
    
    $
    4,725Deduct total stock-based employee compensation expense
determined under minimum value method for all awards,
net of related tax effects
    
    
    (247
    )
    
    
    (53
    )
    
    
    (58
    )Proforma
    
    $
    5,174
    
    
    $
    5,162
    
    
    $
    4,667Earnings per share:As reportedBasic
    
    $
    1.13
    
    
    $
    1.13
    
    
    $
    1.03Diluted
    
    $
    1.10
    
    
    $
    1.10
    
    
    $
    1.01Proforma:Basic
    
    $
    1.08
    
    
    $
    1.12
    
    
    $
    1.02Diluted
    
    $
    1.05
    
    
    $
    1.09
    
    
    $
    1.00
 The proforma compensation cost for options granted in 2004, 2003, and 2002 is recognized for
the fair value of the stock options granted. Management estimated the fair value of the stock
options granted using the minimum value approach. The following assumptions were used: 2004
    
    
    2003
    
    
    2002Expected life in years
    
    
    7
    
    
    
    10
    
    
    
    10Risk-free interest rate
    
    
    4
    %
    
    
    4
    %
    
    
    3
    %Dividends
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Fair value per optional share
    
    $
    3.40
    
    
    $
    2.20
    
    
    $
    1.91
 F-12




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##### Table of Contents



Community Bancorp and
Subsidiary
Notes to Consolidated Financial Statements
 
 Note 1.
    Nature of Business and Summary of Significant Accounting Policies (continued) Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and liabilities, such as unrealized
gains and losses on available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are components of
comprehensive income. Gains and losses on available-for-sale securities are reclassified to net
income as the gains or losses are realized upon sale of the securities. Other-than-temporary
impairment charges are reclassified to net income at the time of the charge. Fair value of financial instruments FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments,requires
disclosure of fair value information about financial instruments, whether or not recognized in the
balance sheets, for which it is practicable to estimate that value. Management uses its best judgment in estimating the fair value of the Companys financial
instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for
substantially all financial instruments, the fair value estimates presented herein are not
necessarily indicative of the amounts the Company could have realized in a sales transaction at
December 31, 2004 or 2003. The estimated fair value amounts for 2004 and 2003 have been measured
as of year-end, and have not been reevaluated or updated for purposes of these financial statements
subsequent to those dates. As such, the estimated fair values of these financial instruments
subsequent to the reporting date may be different than the amounts reported at year-end. The information in Note 16 should not be interpreted as an estimate of the fair value of the entire
Company since a fair value calculation is only required for a limited portion of the Companys
assets. Due to the wide range of valuation techniques and the degree of subjectivity used in making the
estimate, comparisons between the Companys disclosures and those of other companies or banks may
not be meaningful. The following methods and assumptions were used by the Company in estimating the fair value of its
financial instruments: Cash and cash equivalents The carrying amounts reported in the balance sheets for cash and due from banks and
federal funds sold approximate their fair value. Securities Fair value for securities is based on quoted market prices where available or on quoted
markets for similar securities in the absence of quoted prices on the specific security. F-13




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##### Table of Contents



Community Bancorp and
Subsidiary
Notes to Consolidated Financial Statements
 
 Note 1.
    Nature of Business and Summary of Significant Accounting Policies (continued) Fair value of financial instruments (continued) Loans For variable rate loans that reprice frequently and that have experienced no significant
change in credit risk, fair value is based on carrying value. Variable rate loans comprised
approximately 74% and 70% of the total loan portfolio at December 31, 2004 and 2003. Fair value of
all other loans is estimated based on discounted cash flows using interest rates currently being
offered for loans with similar terms to borrowers with similar credit quality. Prepayments prior
to the repricing date are not expected to be significant. Loans are expected to be held to
maturity and any unrealized gains or losses are not expected to be realized. Accrued interest receivable and payable The carrying amounts reported in the consolidated balance sheets for accrued interest
receivable and payable approximate their fair values. Deposit liabilities The fair value disclosed for demand and savings deposits approximate their carrying
amounts which represent the amount payable on demand. The carrying amounts for variable rate money
market accounts and certificates of deposit approximate their fair value at the reporting date.
Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates of deposit to a
schedule of aggregated expected monthly maturities on time deposits. Early withdrawals of fixed
rate certificates of deposit are not expected to be significant. Junior subordinated debt The carrying amounts reported in the consolidated balance sheets for junior subordinated
debt approximate their fair value because the interest rate is variable. F-14




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##### Table of Contents



Community Bancorp and
Subsidiary
Notes to Consolidated Financial Statements
 
 Note 1.
    Nature of Business and Summary of Significant Accounting Policies
(continued) Fair value of financial instruments (continued) Short term borrowings The carrying amounts reported in the consolidated balance sheets for short term
borrowings approximate their fair value because of the short term nature of these advances. Off-balance sheet instruments Fair value for off-balance-sheet instruments (lending commitments and standby letters of
credit) are based on quoted fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties credit standing. Stock Split The Companys Board of Directors approved a 5-for-1 common stock split for shareholders of record
on September 17, 2004. The stock split resulted in the issuance of 3,761,488 additional shares,
and increased the number of authorized shares from 2,000,000 to 10,000,000. All share and per
share information has been retroactively adjusted to reflect this stock split. In conjunction with
the stock split, the par value of common stock changed from no par value to a par value of $0.001.
This resulted in a reclassification of $10,981,000 from common stock to additional paid-in capital
in September 2004. Stock Dividends and Stock Dividends Distributable Stock dividends are recorded at estimated fair value by transferring an amount from retained
earnings to common stock. Stock dividends declared before but payable after a period-end are
recorded at estimated fair value when declared by charging retained earnings and are reflected as
stock dividends distributable in the accompanying financial statements. Stock options and stock
appreciation rights have been adjusted for the stock dividends. F-15




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##### Table of Contents



Community Bancorp and Subsidiary
Notes to Consolidated Financial Statements
  Note 1.
    Nature of Business and Summary of Significant Accounting Policies
(continued) Current Accounting Developments In December 2004, the Financial Accounting Standards Board (FASB published FASB Statement
No. 123 (revised 2004), Share-Based Payment (FAS
123(R) or the Statement. FAS 123(R)
requires that the compensation cost relating to share-based payment transactions, including grants
of employee stock options, be recognized in financial statements. That cost will be measured based
on the fair value of the equity or liability instruments issued. FAS 123(R) permits entities to
use any option-pricing model that meets the fair value objective in the Statement. The Statement is effective at the beginning of the third quarter of 2005 for the Company. As of
the effective date, the Company will apply the Statement using a modified version of prospective
application. Under that transition method, compensation cost will be recognized for (1) all awards
granted after the required effective date and to awards modified, cancelled, or repurchased after
that date and (2) the portion of awards granted subsequent to the completion of the Companys IPO
and prior to the effective date for which the requisite service has not yet been rendered, based on
the grant-date fair value of those awards calculated for pro forma disclosures under SFAS 123. The impact of this Statement on the Company in 2005 and beyond will depend upon various factors,
among them being the Companys future compensation strategy. The pro forma compensation costs
presented in these and prior financial statements of the Company have been calculated using a
minimum value method and may not be indicative of amounts which should be expected in future
periods.  Note 2.
    Restrictions on Cash and Due from Banks The Company is required to maintain reserve balances in cash or on deposit with the Federal
Reserve Bank. The total of these reserve balances was approximately $1,870,000 and $1,059,000 at
December 31, 2004 and 2003, respectively. F-16




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##### Table of Contents



Community Bancorp and Subsidiary
Notes to Consolidated Financial Statements
  Note 3.
    Securities Carrying amounts and estimated fair values of securities available for sale as of December 31
are summarized as follows: 2004Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    Values(dollars in thousands)U. S. Government-sponsored agencies
    
    $
    14,597
    
    
    $
    16
    
    
    $
    (95
    )
    
    $
    14,518Municipal bonds
    
    
    21,342
    
    
    
    666
    
    
    
    (28
    )
    
    
    21,980Other debt securities
    
    
    500
    
    
    
    21
    
    
    
    
    
    
    
    521Mortgage-backed securities
    
    
    45,380
    
    
    
    57
    
    
    
    (373
    )
    
    
    45,064$
    81,819
    
    
    $
    760
    
    
    $
    (496
    )
    
    $
    82,083
 2003Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    Values(dollars in thousands)U. S. Treasury securities
    
    $
    1,006
    
    
    $
    3
    
    
    $
    
    
    
    $
    1,009U. S. Government-sponsored agencies
    
    
    13,927
    
    
    
    39
    
    
    
    (49
    )
    
    
    13,917Municipal bonds
    
    
    22,229
    
    
    
    688
    
    
    
    (72
    )
    
    
    22,845Other debt securities
    
    
    1,507
    
    
    
    96
    
    
    
    
    
    
    
    1,603Mortgage-backed securities
    
    
    27,439
    
    
    
    132
    
    
    
    (243
    )
    
    
    27,328$
    66,108
    
    
    $
    958
    
    
    $
    (364
    )
    
    $
    66,702
 F-17




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##### Table of Contents



Community Bancorp and Subsidiary
Notes to Consolidated Financial Statements
  Note 3.
    Securities (continued) Carrying amounts and estimated fair values of securities held to maturity as of December 31
are summarized as follows: 2004Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    Values(dollars in thousands)Municipal bonds
    
    $
    1,610
    
    
    $
    84
    
    
    $
    
    
    
    $
    1,694SBA pools
    
    
    348
    
    
    
    1
    
    
    
    (2
    )
    
    
    347$
    1,958
    
    
    $
    85
    
    
    $
    (2
    )
    
    $
    2,041
 2003Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    Values(dollars in thousands)Municipal bonds
    
    $
    1,671
    
    
    $
    96
    
    
    $
    
    
    
    $
    1,767SBA pools
    
    
    480
    
    
    
    2
    
    
    
    
    
    
    
    482$
    2,151
    
    
    $
    98
    
    
    $
    
    
    
    $
    2,249
 The amortized cost and fair value of securities available for sale and held to maturity as of
December 31, 2004 by contractual maturities are shown below. Maturities may differ from
contractual maturities in mortgage-backed securities and SBA loan pools because the mortgages
underlying the securities may be called or repaid without any penalties. Therefore, these
securities are also not included in the maturity categories in the following summary: Available for Sale
    
    
    Held to MaturityAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    Value(dollars in thousands)Due within one year
    
    $
    11,305
    
    
    $
    11,317
    
    
    $
    
    
    
    $
    Due after one year through five years
    
    
    14,249
    
    
    
    14,410
    
    
    
    942
    
    
    
    985Due after five years through ten years
    
    
    10,457
    
    
    
    10,849
    
    
    
    668
    
    
    
    709Due after ten years
    
    
    428
    
    
    
    443
    
    
    
    
    
    
    
    Mortgage-backed securities
and SBA loan pools
    
    
    45,380
    
    
    
    45,064
    
    
    
    348
    
    
    
    347$
    81,819
    
    
    $
    82,083
    
    
    $
    1,958
    
    
    $
    2,041
 Gross realized gains and (losses) on sales of securities during the years ended December 31,
2004, 2003, and 2002 were $82,000, $2,000 and $55,000 and $(70,000), $(0) and $(72,000)
respectively. Securities available for sale with carrying amounts of approximately $15,097,000 and
$18,389,000 at December 31, 2004 and 2003, respectively, were pledged to secure public deposits,
the advance from the Federal Home Loan Bank (see Note 10), and for other purposes required or
permitted by law. F-18




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##### Table of Contents



Community Bancorp and Subsidiary
Notes to Consolidated Financial Statements
  Note 3.
    Securities (continued) Information pertaining to available for sale securities with gross unrealized losses at
December 31, 2004, aggregated by investment category and length of time that individual securities
have been in a continuous loss position follows: Less than Twelve Months
    
    
    Over Twelve MonthsGross
    
    
    
    
    
    
    GrossUnrealized
    
    
    Fair
    
    
    Unrealized
    
    
    FairLosses
    
    
    Value
    
    
    Losses
    
    
    Value(dollars in thousands)U. S. Government-sponsored agencies
    
    $
    95
    
    
    $
    7,965
    
    
    $
    
    
    
    $
    Municipal bonds
    
    
    16
    
    
    
    2,312
    
    
    
    12
    
    
    
    547Mortgage-backed securities
    
    
    191
    
    
    
    21,811
    
    
    
    182
    
    
    
    8,802$
    302
    
    
    $
    32,088
    
    
    $
    194
    
    
    $
    9,349
 As of December 31, 2003, no investments had material continuous losses existing greater than
twelve months. At December 31, 2004, forty-five available for sale debt securities have unrealized losses with
aggregate depreciation of approximately 1% from the Companys amortized cost-basis. These
unrealized losses relate primarily to fluctuations in the current interest rate environment. In
analyzing an issuers financial condition, management considers whether the securities are issued
by the Federal government or its agencies, whether downgrades by bond rating agencies have
occurred, and industry analysts reports. At December 31, 2004, four held to maturity securities have unrealized losses with aggregate
depreciation of approximately 1% from the Companys amortized cost basis. None of these losses
have existed for more than twelve consecutive months. Management evaluates securities for other-than-temporary impairment on at least a quarterly basis,
and more frequently when economic or market concerns warrant such evaluation. Consideration is
given to (1) the length of time and the extent to which the fair value has been less than cost, (2)
the financial condition and near term prospects of the issuer, and (3) the intent and ability of
the Company to retain its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. As management has the ability and intent to hold debt
securities for the foreseeable future, no declines are deemed to be other than temporary. F-19




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##### Table of Contents



Community Bancorp and Subsidiary
Notes to Consolidated Financial Statements
  Note 4.
    Loans The composition of the Companys loan portfolio as of December 31 is as follows: 2004
    
    
    2003(dollars in thousands)Commercial and industrial
    
    $
    59,820
    
    
    $
    62,476Real estate:Commercial
    
    
    148,411
    
    
    
    122,396Residential
    
    
    24,097
    
    
    
    26,987Construction and land development, including raw land of
approximately $50,157 for 2004 and $47,267 for 2003
    
    
    167,154
    
    
    
    133,875Consumer and other
    
    
    3,788
    
    
    
    4,348403,270
    
    
    
    350,082Less:Allowance for loan losses
    
    
    6,133
    
    
    
    5,409Net unearned loan fees and discounts
    
    
    2,126
    
    
    
    1,454$
    395,011
    
    
    $
    343,219
 Changes in the allowance for loan losses for the years ended December 31 are as follows: 2004
    
    
    2003
    
    
    2002(dollars in thousands)Balance, beginning
    
    $
    5,409
    
    
    $
    4,688
    
    
    $
    3,700Provision for loan losses
    
    
    922
    
    
    
    1,723
    
    
    
    1,958Less amounts charged off
    
    
    (383
    )
    
    
    (1,036
    )
    
    
    (1,033
    )Recoveries of amounts charged off
    
    
    185
    
    
    
    34
    
    
    
    63Balance, ending
    
    $
    6,133
    
    
    $
    5,409
    
    
    $
    4,688
 Loans with a balance of approximately $18,647,000 and $42,207,000 were pledged as collateral
on advances from the Federal Home Loan Bank at December 31, 2004 and 2003, respectively (see Note
10). F-20




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##### Table of Contents



Community Bancorp and Subsidiary
Notes to Consolidated Financial Statements
  Note 4.
    Loans (continued) Information about impaired and nonaccrual loans as of and for the years ended December 31,
2004, 2003 and 2002 is as follows: 2004
    
    
    2003
    
    
    2002(dollars in thousands)Impaired loans with a valuation allowance
    
    $
    916
    
    
    $
    1,070
    
    
    $
    5,152Impaired loans without a valuation allowance
    
    
    
    
    
    
    293
    
    
    
    Total impaired loans
    
    $
    916
    
    
    $
    1,363
    
    
    $
    5,152Average balance of impaired loans
    
    $
    965
    
    
    $
    1,776
    
    
    $
    5,357Related allowance for credit losses
    
    $
    444
    
    
    $
    269
    
    
    $
    1,164Nonaccrual loans
    
    $
    966
    
    
    $
    1,596
    
    
    $
    3,213Loans past due 90 days or more and still accruing
    
    $
    2
    
    
    $
    
    
    
    $
    21Interest income recognized on impaired loans
    
    $
    
    
    
    $
    
    
    
    $
    311Interest income recognized on a cash basis on impaired loans
    
    $
    
    
    
    $
    
    
    
    $
    311
 In 2003, the Company accepted 26,515 shares of its own stock in partial payment on an
impaired loan. Based on an agreed upon fair value of $8.40 per share, the Company reduced the
outstanding balance on the loan by $223,000. The loan has been restructured and is now paying
according to the restructured repayment terms and thus is not included as an impaired loan at
December 31, 2004 or 2003. F-21




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##### Table of Contents



Community Bancorp and Subsidiary
Notes to Consolidated Financial Statements
  Note 5.
    Premises and Equipment The major classes of premises and equipment and the total accumulated depreciation at
December 31 are as follows: 2004
    
    
    2003(dollars in thousands)Land
    
    $
    2,695
    
    
    $
    2,695Buildings and improvements
    
    
    5,365
    
    
    
    5,267Equipment and furniture
    
    
    3,637
    
    
    
    3,407Automobiles
    
    
    212
    
    
    
    19411,909
    
    
    
    11,563Less accumulated depreciation
    
    
    (3,666
    )
    
    
    (2,951
    )$
    8,243
    
    
    $
    8,612
  Note 6.
    Deposits At December 31, 2004, the scheduled maturities of time deposits are as follows (dollars in
thousands): 2005
    
    $
    104,7772006
    
    
    21,956$
    126,733
 At December 31, 2004, the Company had one customer whose total deposits were $27,513,000 or
approximately 6% of total deposits. F-22




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##### Table of Contents



Community Bancorp and Subsidiary
Notes to Consolidated Financial Statements
  Note 7.
    Income Tax Matters The cumulative tax effects of the primary temporary differences that created deferred tax assets
and liabilities at December 31 are as follows: 2004
    
    
    2003(dollars in thousands)Deferred tax assets:Allowance for loan losses
    
    $
    1,906
    
    
    $
    1,570Stock Appreciation Rights
    
    
    821
    
    
    
    109Other
    
    
    26
    
    
    
    Total deferred tax assets
    
    
    2,753
    
    
    
    1,679Deferred tax liabilities:Unrealized gain on securities available for sale
    
    
    (90
    )
    
    
    (202
    )Premises and equipment
    
    
    (252
    )
    
    
    (274
    )Deferred loan costs
    
    
    (155
    )
    
    
    (68
    )Other
    
    
    (144
    )
    
    
    (32
    )Total deferred tax liabilities
    
    
    (641
    )
    
    
    (576
    )Net deferred tax assets
    
    $
    2,112
    
    
    $
    1,103
 At December 31, 2004 and 2003, no valuation reserve was considered necessary as management believes
it is more likely than not that the deferred tax assets will be realized due to taxes paid in prior
years or future operations. The provision for federal income taxes is comprised of the following for the years ended
December 31: 2004
    
    
    2003
    
    
    2002(dollars in thousands)Current
    
    $
    3,273
    
    
    $
    2,576
    
    
    $
    2,560Deferred
    
    
    (897
    )
    
    
    (281
    )
    
    
    (223
    )$
    2,376
    
    
    $
    2,295
    
    
    $
    2,337
 F-23




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##### Table of Contents



Community Bancorp and
Subsidiary

Notes to Consolidated Financial Statements
 
 Note 7.
    Income Tax Matters (continued) The income tax provision differs from the amount of income tax determined by applying the US
federal income tax rate to pretax income for the years ended December 31, 2004, 2003 and 2002 due
to the following: 2004
    
    
    2003
    
    
    2002(dollars in thousands)Computed expected tax expense
    
    $
    2,729
    
    
    
    35
    %
    
    $
    2,628
    
    
    
    35
    %
    
    $
    2,472
    
    
    
    35
    %Increase (decrease) in income tax
resulting from:Tax-exempt interest income
    
    
    (297
    )
    
    
    (4
    %)
    
    
    (287
    )
    
    
    (4
    %)
    
    
    (165
    )
    
    
    (2
    %)Other
    
    
    (56
    )
    
    
    (1
    %)
    
    
    (46
    )
    
    
    
    
    
    
    30
    
    
    
    $
    2,376
    
    
    
    30
    %
    
    $
    2,295
    
    
    
    31
    %
    
    $
    2,337
    
    
    
    33
    %
 F-24




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##### Table of Contents



Community Bancorp and
Subsidiary

Notes to Consolidated Financial Statements
 
 Note 8.
    Commitments and Contingencies Financial instruments with off-balance-sheet risk The Company is party to financial instruments with off-balance-sheet risk in the normal course
of business to meet the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. They involve, to varying degrees,
elements of credit risk in excess of amounts recognized in the balance sheets. The Companys exposure to credit loss in the event of nonperformance by the other parties to the
financial instruments for these commitments is represented by the contractual amounts of those
instruments. The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. F-25




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##### Table of Contents



Community Bancorp and
Subsidiary

Notes to Consolidated Financial Statements
 Note 8. Commitments and Contingencies (continued)
 Financial instruments with off-balance-sheet risk (continued)
A summary of the contract amount of the Companys exposure to off-balance-sheet risk as of December
31 is as follows: 2004
    
    
    2003(dollars in thousands)Commitments to extend credit, including unsecured commitments
of $17,136 for 2004, $19,422 for 2003
    
    $
    126,550
    
    
    $
    81,516Credit card commitments, including unsecured amounts of
$1,441 for 2004 and $1,508 for 2003
    
    
    1,471
    
    
    
    1,584Standby letters of credit, including unsecured commitments of
$1,122 for 2004 and $25 for 2003
    
    
    1,583
    
    
    
    1,215$
    129,604
    
    
    $
    84,315
 Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customers creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on managements credit evaluation of the party. Collateral held
varies, but may include accounts receivable, inventory, property and equipment, residential real
estate and income-producing commercial properties. The Company has approximately $444,000 and
$286,000 reflected in other liabilities for off-balance sheet risk associated with commitments to
extend credit at December 31, 2004 and 2003 respectively. Standby letters of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to customers. Collateral
held varies as specified above and is required as the Company deems necessary. Essentially all
letters of credit issued have expiration dates within one year. Upon entering into letters of
credit, the Company records the related liability at fair value pursuant to FASB Interpretation 45
(FIN 45). Thereafter, the liability is evaluated pursuant to FASB Statement No. 5 Accounting for
Contingencies. As of December 31, 2004 and 2003, the amount of the liability related to guarantees
was approximately $6,000 and $4,000 respectively. In connection with standby letters of credit, the Company recognizes the related commitment
fee received from the third party as a liability at the inception of the guarantee arrangement
pursuant to FASB Interpretation 45 (FIN 45). Commitment fees where the likelihood of exercise of
the commitment is remote, are generally recognized as service fee income on a straight line basis
over the commitment period. All other commitment fees are deferred over the entire commitment
period and are not recognized as service fee income until the expiration of the commitment period.   F-26




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##### Table of Contents



Community Bancorp and
Subsidiary

Notes to Consolidated Financial Statements
  Note 8. Commitments and Contingencies (continued)
 Financial instruments with concentrations of credit risk The Company makes commercial, commercial real estate, residential real estate and consumer
loans to customers primarily in southern Nevada. At December 31, 2004, real estate loans accounted
for approximately 84% of the total loans. Substantially all of these loans are secured by first
liens with an initial loan to value ratio of generally not more than 75%. The Companys policy for
requiring collateral is to obtain collateral whenever it is available or desirable, depending upon
the degree of risk the Company is willing to take. In addition, approximately 3% of total loans
are unsecured. The Companys loans are expected to be repaid from cash flow or from proceeds from
the sale of selected assets of the borrowers. A substantial portion of the Companys customers ability to honor their contracts is dependent on
the economy in the area. The Companys goal is to continue to maintain a diversified loan
portfolio that requires the loans to be well collateralized and supported by cash flows. Lease Commitments During 2002, the Company entered into a lease agreement for its corporate office under an
operating lease with an unrelated third party that expires on August 31, 2012. In August 2004 the
Company entered into a lease agreement with an unrelated party for approximately 22,000 square feet
of rentable office space located in southwest Las Vegas. The lease term is for ten years with an
estimated commencement date of June 2005. Future minimum rental payments due under these two
leases are (dollars in thousands): 2005
    
    $
    5652006
    
    
    7562007
    
    
    7742008
    
    
    8002009
    
    
    810Thereafter
    
    
    3,692$
    7,397
 Total rent expense was $ 312,000, $304,000 and $95,000 for the years ended December 31, 2004,
2003 and 2002 respectively. F-27




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##### Table of Contents



Community Bancorp and Subsidiary
 
Notes to Consolidated Financial Statements
 Note 9. Stock Options and Stock Appreciation Rights
 Stock options The Company has adopted the 1995 Stock Option and Award Plan (the Plan) under which options
to acquire common stock of the Company may be granted to employees, officers or directors at the
discretion of the Board of Directors. The Plan allows for the granting of incentive and
nonqualifying stock options as those terms are defined in the Internal Revenue Code. The Plan, as
amended, authorized up to 755,762 shares of common stock be provided by shares authorized but not
outstanding. The Plan provides for the exercise price and term of each option to be determined by
the Board at the date of grant, provided that no incentive option shall have a term greater than 10
years. The Plan also provides for the granting, at the discretion of the Board, of stock
appreciation rights or other tandem rights with respect to the granting of the stock options. A summary of stock option activity during the years ended December 31 is as follows: 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding options, beginning
of year
    
    
    279,958
    
    
    $
    3.76
    
    
    
    317,475
    
    
    $
    3.73
    
    
    
    298,475
    
    
    $
    3.06Granted
    
    
    195,000
    
    
    
    14.45
    
    
    
    8,000
    
    
    
    7.35
    
    
    
    46,500
    
    
    
    7.64Adjustment due to stock dividends
    
    
    3,701
    
    
    
    3.91
    
    
    
    2,061
    
    
    
    3.69
    
    
    
    
    
    
    
    Exercised (Note 13)
    
    
    (196,663
    )
    
    
    3.50
    
    
    
    (25,000
    )
    
    
    2.79
    
    
    
    (25,000
    )
    
    
    2.80Forfeited
    
    
    (45,662
    )
    
    
    9.19
    
    
    
    (22,578
    )
    
    
    5.23
    
    
    
    (2,500
    )
    
    
    5.60Outstanding options, end
of period
    
    
    236,334
    
    
    
    11.69
    
    
    
    279,958
    
    
    
    3.76
    
    
    
    317,475
    
    
    
    3.73Options exercisable, end
of period
    
    
    107,974
    
    
    
    11.08
    
    
    
    222,398
    
    
    
    3.10
    
    
    
    239,770
    
    
    
    2.84Options available to grant, end
of period
    
    
    59,515
    
    
    
    
    
    
    
    208,853
    
    
    
    
    
    
    
    194,275Weighted-average remaining life
(in years)
    
    
    9
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    5
 During 2004, the Company initially granted 20,000 stock options. These options had a weighted
average exercise price of $9.60 and vest over three years, 30% in year one and two, and 40% in year
three. Effective September 27, 2004, the Company approved the granting of an additional 175,000 stock
options to certain employees and members of the Board of Directors. The exercise price of $15 for
these options was determined by an independent valuation specialist. 95,000 of these options vest
over five years, and 80,000 vested immediately.   F-28




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##### Table of Contents



Community Bancorp and
Subsidiary
Notes to Consolidated Financial Statements
  Note 9. Stock Options and Stock Appreciation Rights (continued)
 Stock options (continued) A further summary of stock options outstanding at December 31, 2004 is as follows: Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    Number
    
    
    Remaining
    
    
    Exercise
    
    
    Number
    
    
    ExercisePrices
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$1.95-$2.00
    
    
    4,369
    
    
    1 year
    
    $
    1.96
    
    
    
    4,369
    
    
    $
    1.96$3.92-$5.60
    
    
    32,079
    
    
    5 years
    
    
    4.99
    
    
    
    12,090
    
    
    
    4.17$7.44-$10.40
    
    
    59,886
    
    
    8 years
    
    
    8.25
    
    
    
    31,515
    
    
    
    7.52$15
    
    
    140,000
    
    
    10 years
    
    
    15.00
    
    
    
    60,000
    
    
    
    15.00
   F-29




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##### Table of Contents



Community Bancorp and
Subsidiary
Notes to Consolidated Financial Statements
  Note 9. Stock Options and Stock Appreciation Rights (continued)
 Stock appreciation rights On July 20, 2000, the Companys Board of Directors approved the 2000 Stock Appreciation Rights
Plan (SAR Plan). The SAR Plan authorized 252,605 rights to be granted to certain directors,
officers and key employees at the discretion of the Board of Directors. Each right gives the
grantee the right to receive cash payment from the Company equal to the excess of (a) the exercise
price of the SAR over the (b) grant price of the SAR. Rights granted under the SAR Plan vest in
five years. Pursuant to the plan, prior to an initial public offering the exercise price is equal
to the book value. Also pursuant to the plan, each right gives the grantee the right to receive a
cash payment from the Company equal to the excess of the fair value of the Companys common stock
over the grant price if the Company completes an initial public offering. The Company closed on
its IPO in December of 2004. The Company accounts for the outstanding rights pursuant to FASB
Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans.The expense related to the SAR plan was approximately $2,095,000, $149,000 and
$40,000 for the years ended December 31, 2004, 2003 and 2002, respectively. The total amount in
accrued expenses was $2,414,000 and $320,000 at December 31, 2004 and 2003 respectively. Activity during the years ended December 31 is as follows: 2004
    
    
    2003
    
    
    2002Rights outstanding, beginning of year
    
    
    126,696
    
    
    
    147,500
    
    
    
    130,000Granted
    
    
    
    
    
    
    
    
    
    
    17,500Adjustment due to stock dividends
    
    
    831
    
    
    
    1,696
    
    
    
    Forfeited
    
    
    (17,854
    )
    
    
    (22,500
    )
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Rights outstanding, end of year
    
    
    109,673
    
    
    
    126,696
    
    
    
    147,500Rights exercisable, end of year
    
    
    
    
    
    
    
    
    
    
    Available to grant, end of year
    
    
    142,932
    
    
    
    125,078
    
    
    
    102,500
 The weighted average grant price for the rights outstanding at December 31, 2004 was $3.96. The
weighted average contractual life of the rights outstanding at December 31, 2004 is less than one
year. F-30




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##### Table of Contents



Community Bancorp and
Subsidiary
Notes to Consolidated Financial Statements
 Note 10. Short Term Borrowings
 The Company has a commitment from the Federal Home Loan Bank (FHLB) for advances. Borrowing
capacity is determined based on collateral pledged, generally consisting of loans and securities,
at the time of the advance. Advances from the FHLB at December 31, 2004 and 2003 were $0 and
$10,000,000, respectively. The Company has entered into three agreements with other lending institutions under which it
can purchase up to $16,600,000 of federal funds. The interest rate charged on borrowings is
determined by the lending institutions at the time of borrowings. Each line is unsecured. The
agreements can be terminated by the lending institutions at any time. There were no balances
outstanding under these agreements at December 31, 2004 and 2003. At December 31, 2004, short term borrowings reflects a loan on foreclosed assets that was repaid
subsequent to year end. Note 11. Junior Subordinated Debt In September 2002, Community Bancorp (NV) Statutory Trust I was formed to issue floating rate
(three-month LIBOR +3.4%) Cumulative Trust Preferred Securities which is reflected in the
accompanying balance sheet as junior subordinated debt in the amount of $15,464,000. The funds
raised from the issuance of these securities were all passed through to the Bancorp. Three-month
LIBOR was 2.558% at December 31, 2004. The sole asset of the Capital Trust is a note receivable
from the Bancorp. These securities require semi-annual interest payments and mature in 2032.
These securities may be redeemed beginning in September 2007 as outlined in the Indenture
Agreement. In the event of certain changes or amendments to regulatory requirements or federal tax rules, the
debt is redeemable in whole. The obligation under this instrument is fully and unconditionally
guaranteed by the Company and rank subordinate and junior in right of payment to all other
liabilities of the Company. The trust preferred securities qualify as Tier 1 Capital for the
Company, subject to certain limitations, with the excess being included in Total Capital for
regulatory purposes. Note 12. Stockholders Equity During the year ended December 31, 2004, the Company issued 1,860,400 shares (including the
over-allotment option) of its $0.001 par value common stock in an underwritten public offering at a
price to the public of $23.00 per share. The proceeds after discounts, commissions, and other
costs totaling approximately $3,509,000 were approximately $39,280,000. F-31




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##### Table of Contents



Community Bancorp and Subsidiary

Notes to Consolidated Financial Statements
 Note 13. Transactions with Related Parties
 The Company has had, and may be expected to have in the future, banking transactions in the
ordinary course of business with directors, significant stockholders, principal officers, their
immediate families and affiliated companies in which they are principal stockholders (commonly
referred to as related parties). In managements opinion, these loans and transactions were on the
same terms as those for comparable loans and transactions with non-related parties. Aggregate loan transactions with related parties for the years ended December 31 were as follows: 2004
    
    
    2003
    
    
    2002(dollars in thousands)Balance, beginning
    
    $
    6,750
    
    
    $
    7,180
    
    
    $
    7,623New loans
    
    
    15,995
    
    
    
    9,766
    
    
    
    6,659Repayments
    
    
    (13,165
    )
    
    
    (10,196
    )
    
    
    (7,102
    )Balance, ending
    
    $
    9,580
    
    
    $
    6,750
    
    
    $
    7,180
 In addition to the above amounts, the Company has commitments to extend credit to related parties
of approximately $1,812,000 and $2,881,000 at December 31, 2004 and 2003, respectively. Included in the 2004 related party loan transactions shown above, were two loans made for the
exercise of stock options. The total outstanding balance of these loans at December 31, 2004 was
approximately $286,000, and is reported as a reduction of stockholders equity. These recourse
loans are secured by the Companys stock and were on the same terms as those for comparable loans
with non-related parties. None of these related party loans are past due, on nonaccrual status, or restructured to provide a
reduction or deferral of interest or principal because of deteriorations in the financial position
of the borrower. There were no loans to a related party that were considered classified loans at
December 31, 2004. F-32




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##### Table of Contents



Community Bancorp and Subsidiary
Notes to Consolidated Financial Statements
 Note 14. Regulatory Capital
 The Company (on a consolidated basis) and the Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory  and possibly additional discretionary  actions by
regulators that, if undertaken, could have a direct material effect on the Companys financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that involve qualitative
measures of the Company and the Banks assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk weightings, and other
factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and
the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of December 31, 2004 and
2003, that the Company and the Bank meet all capital adequacy requirements to which they are
subject. As of December 31, 2004 the most recent notification from the FRB categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table below. There are no conditions or events since that notification
that management believes have changed the Banks category. F-33




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##### Table of Contents



Community Bancorp and Subsidiary
Notes to Consolidated Financial Statements
 Note 14. Regulatory Capital (continued)
 The Company and the Banks actual capital amounts and ratios are presented in the following
table: To be WellCapitalized UnderFor Capital
    
    
    Prompt CorrectiveActual
    
    
    Adequacy Purposes
    
    
    Action ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAs of December 31, 2004:
    
    
    
    
    
    
    
    
    
    (dollars in thousands)Bank Total Capital (to Risk-Weighted Assets)
    
    $
    52,962
    
    
    
    11.7
    %
    
    $
    36,374
    
    
    
    8
    %
    
    $
    45,468
    
    
    
    10
    %Company Total Capital (to Risk-Weighted Assets)
    
    $
    98,244
    
    
    
    21.0
    %
    
    $
    37,477
    
    
    
    8
    %
    
    
    N/A
    
    
    
    N/ABank Tier I Capital (to Risk-Weighted Assets)
    
    $
    47,269
    
    
    
    10.4
    %
    
    $
    18,187
    
    
    
    4
    %
    
    $
    27,281
    
    
    
    6
    %Company Tier I Capital (to Risk-Weighted Assets)
    
    $
    92,379
    
    
    
    19.7
    %
    
    $
    18,738
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/ABank Tier I Capital (to Average Assets)
    
    $
    47,269
    
    
    
    8.7
    %
    
    $
    21,731
    
    
    
    4
    %
    
    $
    27,164
    
    
    
    5
    %Company Tier I Capital (to Average Assets)
    
    $
    92,379
    
    
    
    16.9
    %
    
    $
    21,834
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/A
 To be WellCapitalized UnderFor Capital
    
    
    Prompt CorrectiveActual
    
    
    Adequacy Purposes
    
    
    Action ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAs of December 31, 2003:
    
    
    
    
    
    
    
    
    
    (dollars in thousands)Bank Total Capital (to Risk-Weighted Assets)
    
    $
    45,191
    
    
    
    12.1
    %
    
    $
    29,832
    
    
    
    8
    %
    
    $
    37,291
    
    
    
    10
    %Company Total Capital (to Risk-Weighted Assets)
    
    $
    51,218
    
    
    
    13.6
    %
    
    $
    30,101
    
    
    
    8
    %
    
    
    N/A
    
    
    
    N/ABank Tier I Capital (to Risk-Weighted Assets)
    
    $
    40,517
    
    
    
    10.9
    %
    
    $
    14,916
    
    
    
    4
    %
    
    $
    22,374
    
    
    
    6
    %Company Tier I Capital (to Risk-Weighted Assets)
    
    $
    42,059
    
    
    
    11.2
    %
    
    $

    15,050
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/ABank Tier I Capital (to Average Assets)
    
    $
    40,517
    
    
    
    8.8
    %
    
    $
    18,335
    
    
    
    4
    %
    
    $
    22,919
    
    
    
    5
    %Company Tier I Capital (to Average Assets)
    
    $
    42,059

    
    
    
    9.0
    %
    
    $
    18,785
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/A
 Additionally, State of Nevada banking regulations restrict distribution of the net assets of
the Company because such regulations require the sum of the Companys stockholders equity and
allowance for loan losses to be at least 6% of the average of the Companys total daily deposit
liabilities for the preceding 60 days. As a result of these regulations, approximately
$31,300,000 and $24,500,000 of the Companys stockholders equity was restricted at December 31,
2004 and 2003, respectively. F-34




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##### Table of Contents



Community Bancorp and Subsidiary
Notes to Consolidated Financial Statements
 Note 15. Employee Benefit Plan
 The Company has a qualified 401(k) employee benefit plan (the Plan) for all eligible
employees. The Company is required to make matching contributions as outlined in the Plan and may
elect to contribute a discretionary amount each year. The Companys total contributions were
$121,000, $115,000, and $107,000 for the years ended December 31, 2004, 2003 and 2002,
respectively. Note 16. Fair Value of Financial Instruments The estimated fair values of the Companys financial instruments at December 31 are as
follows: 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    Value(dollars in thousands)Financial assets:Cash and due from banks
    
    $
    5,328
    
    
    $
    5,328
    
    
    $
    11,828
    
    
    $
    11,828Federal funds sold
    
    
    61,926
    
    
    
    61,926
    
    
    
    24,177
    
    
    
    24,177Securities available for sale
    
    
    82,083
    
    
    
    82,083
    
    
    
    66,702
    
    
    
    66,702Securities held to maturity
    
    
    1,958
    
    
    
    2,041
    
    
    
    2,151
    
    
    
    2,249Loans, net
    
    
    395,011
    
    
    
    393,219
    
    
    
    343,219
    
    
    
    344,721Accrued interest receivable
    
    
    2,003
    
    
    
    2,003
    
    
    
    1,702
    
    
    
    1,702Investment in FHLB, FRB and PCBB
stock
    
    
    2,219
    
    
    
    2,219
    
    
    
    1,240
    
    
    
    1,240Financial liabilities:Deposits
    
    
    476,252
    
    
    
    476,199
    
    
    
    403,713
    
    
    
    406,026Short term borrowings
    
    
    350
    
    
    
    350
    
    
    
    10,000
    
    
    
    10,000Accrued interest payable
    
    
    333
    
    
    
    333
    
    
    
    457
    
    
    
    457Junior Subordinated Debt
    
    
    15,464
    
    
    
    15,464
    
    
    
    15,464
    
    
    
    15,464
 Interest rate risk The Company assumes interest rate risk (the risk that general interest rate levels will
change) as a result of its normal operations. As a result, the fair values of the Companys
financial instruments will change when interest rate levels change and that change may be either
favorable or unfavorable to the Company. Management attempts to match maturities of assets and
liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are less likely to prepay in a rising rate environment and more likely
to prepay in a falling rate environment. Also, depositors who are receiving fixed rates are more
likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a
falling rate environment. Management monitors rates and maturities of assets and liabilities and
attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by
investing in securities with terms that mitigate the Companys overall interest rate risk. F-35




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##### Table of Contents



Community Bancorp and
Subsidiary
Notes to Consolidated Financial Statements
 Note 16. Fair Value of Financial Instruments (continued)
 Fair value of commitments The estimated fair value of fee income on letters of credit at December 31, 2004 and 2003 is
insignificant. Loan commitments on which the committed fixed interest rate is less than the
current market rate are also insignificant at December 31, 2004 and 2003. F-36




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##### Table of Contents



Community Bancorp and
Subsidiary
Notes to Consolidated Financial Statements
 Note 17. Condensed Financial Statements of Parent Company
 Balance Sheets December 31,2004
    
    
    2003(dollars in thousands)AssetsCash and due from banks
    
    $
    37,138
    
    
    $
    1,662Securities available for sale
    
    
    1,062
    
    
    
    1,512Investment in Community Bank of Nevada Stock
    
    
    47,431
    
    
    
    40,896Investment in Community Bank Statutory Trust Stock
    
    
    464
    
    
    
    464Loans, net of allowance for loan losses of $100 and $33
    
    
    6,888
    
    
    
    2,676Accrued interest receivable
    
    
    18
    
    
    
    24Deferred tax assets, net
    
    
    467
    
    
    
    7Other assets
    
    
    1,169
    
    
    
    436Total assets
    
    $
    94,637
    
    
    $
    47,677Liabilities
and Stockholders EquityAccrued interest payable and other liabilities
    
    $
    233
    
    
    $
    12Accrued stock appreciation rights
    
    
    1,387
    
    
    
    Junior Subordinated Debt
    
    
    15,464
    
    
    
    15,464Total liabilities
    
    
    17,084
    
    
    
    15,476Stockholders Equity
    
    
    77,553
    
    
    
    32,201Total liabilities and stockholders equity
    
    $
    94,637
    
    
    $
    47,677
 Statements of Income Years Ended December 31,2004
    
    
    2003
    
    
    2002(dollars in thousands)Income:Loans, including fees
    
    $
    57
    
    

    $
    208
    
    
    $
    42Securities
    
    
    70
    
    
    
    87
    
    
    
    17Other income
    
    
    
    
    
    
    20
    
    
    
    24Total income
    
    
    127
    
    
    
    315
    
    
    
    83Interest expense on junior subordinated debt
    
    
    764
    
    
    
    722
    
    
    
    217Provision for loan losses
    
    
    67
    
    
    
    33
    
    
    
    Stock appreciation rights expense
    
    
    1,387
    
    
    
    
    
    
    
    Operating expenses
    
    
    259
    
    
    
    185
    
    
    
    37Total expenses
    
    
    2,477
    
    
    
    940
    
    
    
    254Income (loss) before income taxes and equity in
net income of Community Bank of Nevada
    
    
    (2,350
    )
    
    
    (625
    )
    
    
    (171
    )Income tax expense (benefit)
    
    
    (735
    )
    
    
    (170
    )
    
    
    (38
    )(1,615
    )
    
    
    (455
    )
    
    
    (133
    )Equity in net income of Community Bank of Nevada
    
    
    7,036
    
    
    
    5,670
    
    
    
    4,858Net income
    
    $
    5,421
    
    
    $
    5,215
    
    
    $
    4,725
 F-37




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##### Table of Contents



Community Bancorp and Subsidiary Notes to Consolidated Financial Statements 
 Note 17. Condensed Financial Statements of Parent Company (continued)
 Statements of Cash Flows
    
    Years ended December 31,2004
    
    
    2003
    
    
    2002(dollars in thousands)Cash Flows from Operating Activities:Net income
    
    $
    5,421
    
    
    $
    5,215
    
    
    $
    4,725Adjustments to reconcile net income to net cash
(used in) operating activities:Equity in net (income) of Bank
    
    
    (7,036
    )
    
    
    (5,670
    )
    
    
    (4,858
    )Provision for loan losses
    
    
    67
    
    
    
    33
    
    
    
    Deferred taxes
    
    
    (460
    )
    
    
    26
    
    
    
    (20
    )Tax benefit related to the exercise of stock options
    
    
    474
    
    
    
    30
    
    
    
    Net amortization of investment premium and discount
    
    
    18
    
    
    
    43
    
    
    
    (Increase) decrease in accrued interest receivable
    
    
    6
    
    
    
    3
    
    
    
    (27
    )(Increase) decrease in other assets
    
    
    (733
    )
    
    
    14
    
    
    
    (204
    )Increase (decrease) in accrued interest payable and other liabilities
    
    
    1,608
    
    
    
    
    
    
    
    12Net cash (used in) operating activities
    
    
    (635
    )
    
    
    (306
    )
    
    
    (372
    )Cash Flows from Investing Activities:Purchase of securities available for sale
    
    
    
    
    
    
    
    
    
    
    (2,778
    )Proceeds from maturities of and principal paydowns on
securities available for sale
    
    
    429
    
    
    
    1,091
    
    
    
    132Investment in stock of Bank
    
    
    
    
    
    
    (4,000
    )
    
    
    (4,000
    )Dividends distributed by Bank
    
    
    
    
    
    
    
    
    
    
    33Net (increase) decrease in loans
    
    
    (4,279
    )
    
    
    41
    
    
    
    (2,750
    )Net cash provided by (used in) investing activities
    
    
    (3,850
    )
    
    
    (2,868
    )
    
    
    (9,363
    )Cash Flows from Financing Activities:Dividends paid
    
    
    (9
    )
    
    
    (9
    )
    
    
    (275
    )Proceeds from issuance of junior subordinated debt
    
    
    
    
    
    
    
    
    
    
    15,000Purchase of treasury stock
    
    
    
    
    
    
    (285
    )
    
    
    Proceeds from exercise of common stock options
    
    
    690
    
    
    
    70
    
    
    
    70Proceeds from sale of common stock
    
    
    39,280
    
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    39,961
    
    
    
    (224
    )
    
    
    14,795Increase (decrease) in cash and cash equivalents
    
    
    35,476
    
    
    
    (3,398
    )
    
    
    5,060Cash and cash equivalents, beginning of year
    
    
    1,662
    
    
    
    5,060
    
    
    
    Cash and cash equivalents, end of year
    
    $
    37,138
    
    
    $
    1,662
    
    
    $
    5,060
 F-38




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##### Table of Contents



Community Bancorp and Subsidiary Notes to Consolidated Financial Statements 
 Note 18. Quarterly Data (Unaudited)
 (dollars in thousands, except per share data)2004
    
    
    2003Fourth
    
    
    Third
    
    
    Second
    
    
    First
    
    
    Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterInterest and dividend income
    
    $
    8,171
    
    
    $
    7,553
    
    
    $
    7,255
    
    
    $
    7,059
    
    
    $
    7,246
    
    
    $
    6,842
    
    
    $
    6,683
    
    
    $
    6,372Interest Expense
    
    
    1,815
    
    
    
    1,681
    
    
    
    1,744
    
    
    
    1,622
    
    
    
    1,659
    
    
    
    1,804
    
    
    
    2,001
    
    
    
    1,989Net Interest Income
    
    
    6,356
    
    
    
    5,872
    
    
    
    5,511
    
    
    
    5,437
    
    
    
    5,587
    
    
    
    5,038
    
    
    
    4,682
    
    
    
    4,383Provision for loan losses
    
    
    340
    
    
    
    360
    
    
    
    
    
    
    
    222
    
    
    
    490
    
    
    
    654
    
    
    
    171
    
    
    
    408Net interest income, after provision
for loan losses
    
    
    6,016
    
    
    
    5,512
    
    
    
    5,511
    
    
    
    5,215
    
    
    
    5,097
    
    
    
    4,384
    
    
    
    4,511
    
    
    
    3,975Noninterest income
    
    
    392
    
    
    
    378
    
    
    
    346
    
    
    
    373
    
    
    
    375
    
    
    
    394
    
    
    
    395
    
    
    
    399Noninterest expenses (1)
    
    
    5,424
    
    
    
    3,671
    
    
    
    3,425
    
    
    
    3,426
    
    
    
    3,044
    
    
    
    2,937
    
    
    
    2,926
    
    
    
    3,113Income before income taxes
    
    
    984
    
    
    
    2,219
    
    
    
    2,432
    
    
    
    2,162
    
    
    
    2,428
    
    
    
    1,841
    
    
    
    1,980
    
    
    
    1,261Provision for income taxes
    
    
    141
    
    
    
    714
    
    
    
    808
    
    
    
    713
    
    
    
    618
    
    
    
    608
    
    
    
    653
    
    
    
    416Net Income
    
    $
    843
    
    
    $
    1,505
    
    
    $
    1,624
    
    
    $
    1,449
    
    
    $
    1,810
    
    
    $
    1,233
    
    
    $
    1,327
    
    
    $
    845Earnings per common share:Basic
    
    $
    0.16
    
    
    $
    0.32
    
    
    $
    0.35
    
    
    $
    0.31
    
    
    $
    0.39
    
    
    $
    0.27
    
    
    $
    0.29
    
    
    $
    0.18Diluted
    
    $
    0.16
    
    
    $
    0.31
    
    
    $
    0.34
    
    
    $
    0.31
    
    
    $
    0.38
    
    
    $
    0.26
    
    
    $
    0.28
    
    
    $
    0.18
   (1)
    
    Fourth quarter of 2004 includes approximately $1.9 million of expense relating to the stock appreciation rights. See Note 9 of the financial
statements. F-39




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##### Table of Contents



(McGLADREY & PULLEN) Report of Independent Registered Public Accounting Firm To the Board of Directors
Community Bancorp
Las Vegas, Nevada We have audited the consolidated balance sheets of Community Bancorp and subsidiary as of December
31, 2004 and 2003, and the related consolidated statements of income, stockholders equity and cash
flows for each of the three years in the period ended December 31, 2004. These financial statements
are the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provided a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Community Bancorp and subsidiary as of December 31,
2004 and 2003, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. McGLADREY & PULLEN, LLP Las Vegas, Nevada
February 18, 2005




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##### Table of Contents



EXHIBIT INDEX   ExhibitNumber
    Description14.1
    Code of Conduct23.1
    Consent of Independent Registered Public Accounting Firm31.1
    Rule 13a-14(a) Certification by Chief Executive Officer31.2
    Rule 13a-14(a) Certification by Chief Financial Officer32.1
    Section 1350 Certifications